“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

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)

-

20

40

60

80

100

120

'92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07

Following Current Trends

-

200

400

600

800

1,000

1,200

'92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07

Ave

rage

Ass

ets

per C

redi

t Uni

on

Ave. Assets/CU Average of Smallest 50% Average of Largest 50%

Current Median Asset Size is $100 million

Credit Union Evolution (By Asset Size)

0

5

10

15

20

25

30

35

40

45

50

< $50Mill $50 - $100Mill

$100- $250Mill

$250- $500Mill

$500 Mill- $1Bill

> $1 Bill

Dec-96 Jul-02

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)

50

55

60

65

70

75

80

85

90

95

100

1993 1994 1995 1996 1997 1998 1999 2000 2001

Cen

ts

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

0.00%0.05%0.10%0.15%0.20%0.25%0.30%0.35%0.40%0.45%0.50%

PG1 PG2 PG3 PG4 PG5 PG6 PG7 PG8

Dat

a Pr

oces

sing

as

a P

erce

ntag

e of

Ass

ets

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

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 andMarket 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

0%

5%

10%

15%

20%

25%

30%

<25 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64

Management Staff Non-Management Staff All Employees

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

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!