“Learning From The Past, Preparing For The Future” Wayne Nygren, President and CEO Credit Union Central of British Columbia October 2002 Presentation to the Credit Union Managers Association of Ontario

Agenda  A Vision: What the B.C. Credit Union System May Look Like in 2007  Six Key Trends –Descriptions –Implications for Credit Unions  Checklist: Strategies to Consider  Questions

In 2007 there will be less than 40 credit unions in the province. Half of them will have, on average, less than $85 million in assets, while the other half will be operating with, on average, more than $1.1 billion in assets. Credit union balance sheets will look much different than they do today. Commercial lending will represent a more significant percentage of overall assets (e.g. 30% - 40%). And, balance sheet growth will be leveling off as an increasingly large percentage of activity takes place off-book. What The System May Look Like in 2007

Rural credit unions will be working with their local communities through a prolonged downturn as regional economies shift from resource based to self- employment, small business and tourism. The “retirement industry” will also be flourishing in many regions of our province as the boomers begin settling for their retirement. Credit unions with higher than average operating efficiency ratios will be forced to make decisions about which delivery channels they can support and these decisions will drive how they differentiate themselves in local markets. Meanwhile, competitors have continued to advance in areas of price, variety and service. What The System May Look Like in 2007

Finally, we’ll be missing many familiar faces at Central’s Annual and Semi-Annual General Meetings, as 45% of our system leaders will either have retired, or will be in the midst of planning to do so.

Key Trends 1. Consolidation 2. Commoditization 3. Regional Economic Factors 4. Technology/Channel Conflicts 5. Competition 6. Human Resources

Key Trend #1 - Consolidation  Retail Credit Unions  Service Providers –Centrals –System Affiliates –Other Suppliers  Competitors

B.C. Credit Union Trends (Number of Credit Unions)

Following Current Trends Current Median Asset Size is $100 million

Credit Union Evolution (By Asset Size)

Credit Union Consolidation  Various models of consolidation –Mergers –Alliances –Services Organizations

Centrals and System Affiliates  OPCO/National Central  Project Sunrise/Genesis  Credential/CUMIS/Co-op Trust  Regional credit unions providing regional support services  Interprovincial (C-8) affiliations  National Credit Union

Other Suppliers and Competitors  Credit unions provide an attractive market to external suppliers  Some suppliers provide the flexibility to brand locally  Front-line competitors could become back-office collaborators

Analysis  Wide separation in scale, scope and service needs between large and small credit unions  More choice in service providers

Potential Implications for Credit Unions  The “credit union brand” may be difficult to recognize given the system’s diversity  An overwhelming variety of supplier choices  Some credit unions may begin to feel that they are “paying twice” for centrally provided services

Key Trend # 2 - Commoditization  Reduced earnings from margin business  Off-balance sheet activity  Asset mix diversification

Assets (“Average” B.C. Credit Union Perspective)  Some credit unions now have off-book asset portfolios equivalent to 50% of their on-book assets  Cycling of assets requires increased operating efficiency

Operating Efficiency (Average B.C. Credit Union, Cents Required to Earn a Dollar) Canadian Chartered Banks

Potential Implications for Credit Unions  Movement toward higher yielding on- balance sheet assets and more activity off-book with commodity products  Greater degree of commercial activity  Smaller balance sheets may be more productive (more off-balance)  Higher risk profile on-balance

Key Trend #3 – Regional Economic Factors  Movement toward self and under employment will accelerate in rural B.C.  Slower economic growth in rural B.C. from traditional sources  Growth in the “retirement industry” in various regions of the province  Shifting economic base in rural B.C.

Potential Implications for Credit Unions  Increased demand for small business services in rural/smaller credit unions  Reduced levels of excess liquidity  Potential for increased delinquency and properties being held-for-resale in rural B.C.  Role for community activism/leadership from credit unions

Key Trend #4 - Technology  Member Behaviour  Relentless Pace  Expertise  Investment  Technology as “Enabler”

Member Behaviour  Members continue to adopt on-line banking options, however, this has not resulted in the expected decline in branch based services  Creates potential for channel conflict in terms of credit unions’ ability to support all delivery channel options  Features shopping, using on-line capability, is now the norm (the Global Village)

Relentless Pace and Expertise  How can the typical credit union management team dream of keeping pace with the ongoing advances in technology?  Credit unions require information technology expertise  There is the sense that opportunities are being overlooked

Investment  Information technology systems are one of the highest cost categories for credit unions. Costs within most Peer Groups are increasing  Are we investing wisely? Are today’s technology investment decisions aiding or hindering our future functionality?  Are technology investments being driven by user behaviour or by technologists?

Data Processing Expenses

Technology as Enabler  Many credit unions are adopting the view that technology is not strategic in itself, it is an enabler allowing the institution to meet other,more strategic goals, such as strengthened member relationships and creating competitive convenience

Potential Implications for Credit Unions  Multiple channel investment will become increasingly difficult for all credit unions to afford  Increased investment in information technology education will be required, particularly at leadership levels within credit unions  Increased potential for joint ventures between credit unions

Key Trend #5 - Competition  Alternative Options: –Lower Price –Wider Selection –Superior Service  Member Segmentation  Market Differentiation

Alternative Options  New competitors continue to emerge and existing competitors continue to enhance services  Many credit union members are finding lower priced and/or wider selection and/or superior service options to credit unions

Member Segmentation and Market Differentiation  Recognizing that it is extremely difficult to compete in broad markets, many credit unions are developing specific niche strategies  Operating in a narrow niche allows a credit union to differentiate itself in comparison to competitors – however, this strategy is not without risk

Potential Implications for Credit Unions  As competition increases, credit unions will need strong local brands  Sustainable competitive advantage must be identified and articulated  The competitive advantage must have broad appeal within member segments

Key Trend # 6 - Human Resources  Leadership  Demographic Trends  Competitive Factors  Training and Development

Leadership  Smaller credit unions will continue to require “hands on” general practitioners who can assume a multitude of tasks. It will become increasingly difficult to replace these skill sets  Larger credit unions will require managers that are strong technically, and have the added ability of ensuring motivational leadership to their large employee bases

Demographic Trends  Is it coincidental that many credit union mergers take place near the time of CEO retirement?  45% of the B.C.system’s managers are over the age of 50

B.C. Credit Union Employee Age Distribution

Competitive Factors  Credit unions advise that they are finding it difficult to find good specialty staff. Many people being recruited are juggling multiple job offers creating bidding wars  Credit unions in the Lower Mainland churn employees amongst themselves  Banks and investment houses are stalking our talented wealth management folks

Training and Development  Many credit unions recruit trained commercial lenders from banks rather than train or develop their own in-house. This is not perceived to be a sustainable strategy

Potential Implications for Credit Unions  Training costs within credit unions will accelerate rapidly as the aging management employee base retires  Sustainable training and development strategies will need to be implemented  Would benefit from broad-based succession planning

In 2007 there will be less than 40 credit unions in the province. Half of them will have, on average, less than $85 million in assets, while the other half will be operating with, on average, more than $1.1 billion in assets. Credit union balance sheets will look much different than they do today. Commercial lending will represent a more significant percentage of overall assets (e.g. 30% - 40%). And, balance sheet growth will be leveling off as an increasingly large percentage of activity takes place off-book. A Vision of the B.C. Credit Union System in 2007

Rural credit unions will be working with their local communities through a prolonged downturn as regional economies shift from resource based to self- employment, small business and tourism. The “retirement industry” will also be flourishing in many regions of our province as the boomers begin settling for their retirement. Credit unions with higher than average operating efficiency ratios will be forced to make decisions about which delivery channels they can support and these decisions will drive how they differentiate themselves in local markets. Meanwhile, competitors have continued to advance in areas of price, variety and service. A Vision of the B.C. Credit Union System in 2007

Finally, we’ll be missing many familiar faces at Central’s Annual and Semi-Annual General Meetings, as 45% of our system leaders will either have retired, or will be in the midst of planning to do so. Given this vision of the future, what strategies should credit unions be considering?

Checklist 1. Develop Alliances 2. Ensure stable sources of support service (i.e. OPCO and TradeCo) 3. Build non-financial revenue 4. Ensure that syndication processes are efficient 5. Maintain strong commercial risk management practices

Checklist (continued) 6. Invest in a strong, differentiated local/ regional brand 7. Use technology as an enabler and ensure that the credit union is technologically “literate” 8. Ensure sustainable human resource development and succession plans

Thank You!