W16455

MARITIMES CREDIT UNION

Brooke Klassen and Vince Bruni-Bossio wrote this case solely to provide material for class discussion. The authors do not intend to
illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other
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Copyright © 2016, Richard Ivey School of Business Foundation Version: 2016-07-18

In 2015, Frank Mueller glanced up at the building where he had just met with several executives from
Atlantic Seaboard Credit Union (Atlantic), one of the largest credit unions in the region. He rewound their
conversation in his head and wondered, once again, if he was leading his own organization, Maritimes
Credit Union (Maritimes), in the right direction. Atlantic was very interested in pursuing a merger between
the two organizations.

As chief executive officer of Maritimes for seven years, Mueller took a lot of pride in the success his
organization had found over the past few years in its approach to serving members and earning profit. When
the board of directors approved the audited financial statements for FY2014 they applauded Mueller for his
leadership and financial prowess. Word got around about his success; this was not the first time that Mueller
had been approached by a larger credit union interested in partnering with Maritimes.

Atlantic’s head office was impressive and reflective of the growth and profitability the company showcased
during the meeting. Mueller felt the weight of the merger proposal document tucked under his arm and
knew that it would be challenging to make a case to his board of directors as to why they should accept the
proposal.

In order for the board to make a good decision, Mueller would need to develop a comprehensive discussion
on the pros and cons of merging and a cost-benefit analysis on moving forward with the proposal from
Atlantic.

EXTERNAL ENVIRONMENT

The Banking Industry

The Canadian banking industry had become increasingly competitive in the twenty years that Mueller had
worked in the industry. Major banks offered a full range of financial and investment services to satisfy
corporate and individual customers at very competitive rates. Their extensive distribution networks allowed
them to provide fluid and comprehensive services to customers in large urban centres and smaller regional

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communities.1 Credit unions, however, faced fierce competition from these large international financial
institutions.

A major trend in the banking industry was to provide customers with a variety of remote services; they no
longer had to visit a physical location to accomplish tasks such as paying bills, transferring funds, depositing
cheques, and reviewing banking statements.

There was also a trend toward amalgamation, which resulted in the creation of larger financial institutions.
Increased regulatory compliance within the industry required credit unions to have more working capital—
an allocation of resources that did not provide a direct return on investment.

Characteristics of Credit Unions

Credit unions offered many banking services but were different from banks and trust companies in a number
of ways. Credit unions generally started as locally owned, geographically embedded financial service
organizations, typically established to serve a particular group of people. Their member-owners were also
the users of their services. Not unlike banks, credit unions were subject to regulations by provincial
ministries of finance, Credit Union Central, and the provincial deposit insurance corporations.2

Credit unions were traditionally defined by the following traits:

1. not-for-profit entities that could build capital only through retained earnings;
2. owned and operated by members who elected unpaid volunteers and board directors;
3. limited on memberships in the form of a single bond (one group with one common bond), a multiple
common bond (more than one group), or a community-chartered credit union (membership within a
well-defined local community); and
4. exempted from federal income tax as a result of its mission to serve the credit and savings needs of
consumers with modest means.3

Although many credit unions were for-profit entities, they still sought to provide personalized, in-person
services in communities that were often underserved by major banks. However, as online services became
mainstream, the in-person service that credit unions provided became less valuable to younger consumers.
By 2015, many of the existing credit unions in Eastern Canada were considering mergers in order to offer
competitive rates and better services to their members. However, they also had multiple operational
objectives, which made it difficult for them to compete directly with banks.

Competitors

The last time Mueller had checked, there were 53 stand-alone credit unions operating in the Maritimes
region but that number was declining as credit unions merged. Collaboration among credit unions had
increased compared to five years ago, and friendly agreements between local credit unions ensured they

1
“Banks Operating in Canada,” Canadian Bankers Association, July 14, 2015, accessed July 2, 2015,
www.cba.ca/en/component/content/category/61-banks-operating-n-canada.
2
“What is the Difference between a Bank, a Trust Company and a Credit Union?,” Canadian Bankers Association, January
31, 2010, accessed July 5, 2015, www.cba.ca/en?view=article&catid=72%3Ageneral&id=170%3Awhat-is-the-difference-
between-a-bank-a-trust-company-and-a-credit-union&Itemid=0.
3
Robert C. Pozen and Grace Hou, Credit Unions: The Future of the Cooperative Financial Institution (Boston, MA: Harvard
Business Publishing, 2012). Available from Ivey Publishing, product no. 312131.

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did not actively seek clients from neighbouring communities. However, Maritimes faced competition from
a number of financial institutions with local branches, including Bank of Montreal, Canadian Imperial Bank
of Commerce, Sun Life Financial, and the Investors Group.

A large percentage of the residents in the community and the surrounding area had an account with
Maritimes, but many of them also had accounts with other institutions. The investments division was not
able to capture many of the larger investment accounts that Maritimes’ members had at other financial
institutions. However, board members noted that the credit union did not allocate adequate time and
resources to convince members to transfer these accounts to Maritimes.

Local Community

Although Maritimes struggled to maintain its member base because of a lack of industry development in
the region in past decades, there was an influx of people moving back to the area.4 A major reason for the
increase in population was the accelerating demand for labour, partially due to offshore oil exploration, rig
construction in the area, and demand from other industries such as mining.5 The region experienced a
change in demographics with an increase in the number of families and young children (kindergarten to
grade six) moving to the area. Overall, the local community was attractive in terms of size, demographics,
and economic vibrancy. Many of those who came looking for work, particularly in the oil industry, stayed
to become a part of the community.

Regulatory Environment

Mueller noticed that the regulatory environment was rapidly changing since the global recession of 2008,
which resulted in a renewed focus by the Office of the Superintendent of Financial Institutions (OSFI)
around ensuring proper risk management and governance practices.6 Upcoming regulations from OSFI
were influencing the regulatory environment, such that in the future, merging might not be optional. OSFI
had a direct influence on provincially regulated credit unions due to the current governance structure. At
the national level, OSFI regulated the banks. They adopted the standards and regulations advised by the
Basel Committee on Banking Supervision, an international supervisory and advisory committee.

OFSI also provided oversight of the Cooperative Credit Associations (commonly referred to as credit union
centrals).7 In the Maritimes, Atlantic Central managed the liquidity pool for all credit unions in their
territory and backed the deposits at Maritimes. If credit unions were unable to meet the demands of members
to access their funds, a credit union guarantee corporation would back the Cooperative Credit Associations.
Some provincial governments in Canada also provided official support to the credit union guarantee
corporation to secure all deposits.

4
“Economic Outlook Improving in Maritime Provinces,” The Conference Board of Canada, February 23, 2015, accessed
November 25, 2015, www.conferenceboard.ca/press/newsrelease/15-02-
23/economic_outlook_improving_in_maritime_provinces.aspx.
5
Canadian Press, “Atlantic Canada Offshore Regulators Grant $1.2 Billion in Oil Exploration Licenses,” The Star, November
12, 2015, accessed November 25, 2015, www.thestar.com/business/2015/11/12/atlantic-canada-offshore-regulators-grant-
12-billion-in-oil-exploration-licences.html.
6
Canada, Office of the Superintendent of Financial Institutions, “Our History,” June 14, 2013, accessed May 27, 2016,
www.osfi-bsif.gc.ca/Eng/osfi-bsif/Pages/hst.aspx.
7
Canada, Office of the Superintendent of Financial Institutions, “Who We Regulate,” October 23, 2014, accessed May 9,
2016, www.osfi-bsif.gc.ca/eng/wt-ow/Pages/wwr-er.aspx?sc=1&gc=4.

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 Page 4 9B16M127

Mueller knew that OSFI was going to release new rules regarding liquidity that would need to be
implemented in 2016. Prior to this, Credit Union Central of Canada (Canadian Central), the national trade
association for the Canadian credit union system, backed liquidity of provincial credit unions, but in 2015
they served only as an advocate to lobby the federal government.

THE DECISION TO MERGE

The merger discussion was not a new one. Merging was the dominant trend observed internationally in
long-established, progressive credit unions. However, this progress was somewhat at odds with the co-
operative ethos of local credit unions that aimed to meet the needs and wishes of its members. While
restructuring brought with it some benefits, there was a risk that the ideals of the credit union would also
be compromised. Moreover, mergers threatened one of the key sources of competitive advantage of credit
unions—their connection and affinity with their local communities.8

However, the wave of smaller credit union mergers was over. The larger, amalgamated credit unions, which
had previously wanted to merge with as many small credit unions as possible, became much more selective
due to the costs associated with mergers. The largest financial burden was the administrative cost associated
with planning and executing a merger and dealing with duplication of staff and services in the unified
organization. These costs were difficult to estimate, and information from past credit union mergers was
not readily available.

The Maritimes board agreed to continue to be proactive in developing a strategy and a better understanding
of its options going forward. Board members developed a list of four trigger points that signalled when a
credit union should merge, and used them to monitor Maritimes’ situation. The four trigger points were
stagnation in the areas of technology, customer value, customer service, and financial impact. However,
Mueller knew that if it came down to a vote, he could still have trouble convincing enough board members
to support a major restructuring.

Another option would be to develop a strategic partnership with another credit union to pool resources and
provide customer service and support without merging the two organizations into one. The general
consensus was that partnering would allow Maritimes to maintain more autonomy than a merger with a
larger partner. Mueller also identified a few potentially viable partnership opportunities. Eastern Shore
Credit Union was a large firm that might have been open to a partnership instead of a merger after it had
become disenfranchised with previous failed merger attempts. A few of Mueller’s contacts in the industry
had indicated that Eastern Shore Credit Union saw the value in diverting funds, that would have been used
to finance a merger, to engage in other initiatives that were mutually beneficial to both partners. Other mid-
sized credit unions including Cornerbrook, Blue Star, and smaller credit unions located in communities
close to Maritimes might also have made favourable partners, but more research was required before
moving forward.

Another important consideration was whether merging at a time when the organization was successful
would be preferable to attempting a merger when revenues were low. There was the possibility that partners
would favour a merger with a successful credit union over a merger with a credit union that was struggling.

Mueller decided to begin his discussion with the Maritimes board using the trigger points they had already
developed.

8
Carol Power, Ray O’Connor, Olive McCarthy, and Michael Ward, “Merging into the Mainstream? An Empirically Based
Discussion of the Potential Erosion of Competitive Advantage in a Restructured Irish Credit Union Movement,” Journal of
Co-operative Organization and Management 2, no. 2 (October 2014): 56.

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MARITIMES CREDIT UNION

Technology

During his time at Maritimes, Mueller was actively involved in implementing new technology. A few
notable new products were introduced to members during his tenure (e.g., tax-free savings accounts), but
the majority of growth came from the services Maritimes was able to offer. One of Mueller’s major concerns
was the credit union’s ability to keep up with the technology required to provide new services.

 Mobile banking was in high demand from younger members, particularly if they opened an account at
Maritimes and later moved out of the community.
 E-transfer was available to members, but the technology was introduced two years after it became
available at major banks. Late adoption of new technology was a major area of concern because of
growing pressure from members.
 Remote deposit capture technology had been developed by Canadian credit unions. This technology
allowed individuals to make a deposit using their phones. The Maritimes board recognized that
adopting this technology, before the major banks, was a competitive advantage. There were, however,
high risks associated with this technology in the areas of confidentiality protection, transaction tracking,
and identification of possible transaction errors. Nevertheless, there were potential opportunities to
partner with other credit unions to share the technology and the risks.
 Interac Flash was another service available to members, but only for credit cards. Maritimes worked
with its credit/debit card service provider to make this service also available for debit cards, but it
required significant lead time prior to implementation.

Customer Value

Maritimes’ members included long-term residents in the local community, newcomers to Canada, young
people who had parents with Maritimes accounts, and those who moved into the community looking for
new opportunities. According to Maritimes, 25 to 40-year-olds tended to seek the best deals and had lower
loyalty overall. The members of this age group might have had accounts with Maritimes, but they did not
necessarily utilize all of the available services, and their “wallet share”9 was relatively low.

Mueller managed Maritimes with member interests in mind and ensured that all staff employed needs-based
selling techniques to serve members. Maritimes prided itself on solving customer problems rather than
upselling for the sake of pure profit. Unlike traditional banks, Maritimes was not merely seeking to meet
quotas. This focus on its members meant that Maritimes provided a higher level of care than major banks.
It strived to understand its members, anticipate their future challenges, and offer sound advice.

There was also a convenience factor; Maritimes served all major investment needs of customers in a six-
day service week versus the traditional five-day service week offered by most major financial institutions
in rural communities and small urban centres. The members’ survey indicated that these hours of service
were important to members.

9
“Wallet share” or “share of wallet” is a marketing term referring to the amount of the customer's total spending that a business
captures in the products and services that it offers. Increasing the share of a customer's wallet a company receives is often a
cheaper way of boosting revenue than increasing market share; Investopedia, “Share of Wallet Definition,” accessed June 20,
2016, www.investopedia.com/terms/s/share-of-wallet.asp?layout=infini&v=5A&adtest=5A&ato=3000.

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Maritimes was community-oriented and continually strove to make a difference in the community. Under
Mueller’s leadership, it made substantial donations to community initiatives and supported the community
in more ways than other financial institutions in the surrounding area. The mission, vision, and values of
the organization (see Exhibit 1) were displayed in the customer service area of the credit union offices, and
Mueller felt strongly that they helped guide employee conduct and build trust with customers.

Patronage payments were a member’s reward for continued loyalty. Long-term members had an overall
appreciation for this system because they had previously encountered other systems such as feed and farm
supply or energy co-ops. However, younger members did not value patronage payments in the same
capacity. A reason for this was that the financial impact of patronage payments for newer members was not
significant enough (e.g., $90 annually on a $125,000 mortgage).10 These members preferred other
incentives such as a quarter per cent discount on their interest rate.

Many larger credit unions still provided patronage payments; however, Maritimes had reduced patronage
in recent years. Any additional decrease in these payments would force the organization to reconsider
paying patronage payments to its members at all.

Customer Service

In 2015, Maritimes did not have a targeted marketing strategy that effectively communicated the value
proposition (needs-based selling, level of care) to prospective members. Maritimes communicated with
members in a number of ways including newspapers, its website, quarterly newsletter, and social media.
The company launched its Facebook page and used it to disseminate information to members who liked the
page. However, there were approximately 4,000 members at Maritimes but the Facebook page had only 51
“likes.” This revealed that their reach was low, with little engagement from its members.

The company discussed its marketing strategy, including the need to recognize that an effective marketing
and communications plan would guide the efforts of the marketing staff at a more strategic level. Much of
the advertising (e.g., car loan ads) was aimed at specific age groups. These advertisements often involved
a one-time promotion of individual products rather than a coordinated, long-term marketing strategy that
would market products and services to specific demographics.

The Maritimes board discussed the possibility of hiring an employee to provide in-home consultation
services to members of the community, especially those in rural areas. The challenge with this initiative
involved developing an effective approach so that members would build a relationship with Maritimes and
not just the individual employee.

Financial Impacts

As mentioned, Maritimes was experiencing robust financial success, highlighted by the following financial
indicators:

 Asset growth at the end of June 2015 was at 7.5 per cent, but it fell to 3.5 percent by the end of August
2015.
 At the end of August 2015, return on assets before allocations (patronage payments) was 1 per cent
above the target.
10
All currency amounts are in CA$ unless otherwise specified.

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 Page 7 9B16M127

 At the end of August 2015, total performing loan growth exceeded expectations at 12 per cent,
compared to the target of 5 per cent. This increase was positive but it also put a strain on liquidity.
 Account delinquency greater than 90 days was less than half of its target of 2 per cent with actual
delinquency at 0.7 per cent. This was a sign that the economy was strong and borrowers were able to
meet their debt commitments.

The importance of not growing too quickly was reflected in the increasing capital requirements:

 The budgeted asset growth for 2015 was 5 per cent and Maritimes was likely going to hit this target by
the end of the year.

There were also positive indicators of the efficiency in operations:

 Operating costs were just below the target of 2 per cent at the end of August 2015.
 The efficiency ratio was 64 per cent at the end of August 2015, compared to a target of 70 per cent.
One area of concern was the risk-weighted capital, which fell, at the end of August 2015, below the target
of 15 per cent to 13 per cent. However, it was still above the industry average of 12 per cent. Maritimes
also saw an increase in the size of loans approved. This meant there was an increased risk of loan default
with more at stake for the lender and the borrower.

NEXT STEPS

After considering all the information available to him, Mueller started to develop an agenda for his
upcoming session with the board of directors. He knew that the long-term strategy of the organization
needed to be factored into the decision, but he also understood that the board would not consider a merger
without a thorough, balanced discussion, and that they might underestimate the pressure the credit union
could face in the next couple of years.

The analysis of trigger points provided the credit union with a good understanding of the current operational
reality. Cooperation, among smaller credit unions in the area of technology, could potentially be the most
significant reason to merge or partner. At the national level, remote deposit capture technology was
available to all credit unions, but individual credit unions did not run the same systems. Smaller credit
unions had to figure out how to connect their systems to the technology. The members’ survey provided
Maritimes with an understanding of the existing and future needs of the community. Mueller could prove
that Maritimes’ financial situation was strong, but this could change if it was pressured by increased
liquidity requirements.

In his report to the board, Mueller decided that he would make the following recommendations:

 To analyze the current environment using the trigger points;

 To identify the strategic impacts of a merger; and
 To perform an overall cost-benefit analysis of a merger

After developing this framework, Mueller sat back in his chair and thought about the upcoming meeting
with the board. He knew they would be impressed with the updated financials and the results of the
members’ survey. However, the board also made it clear in past discussions that they were not interested
in a merger for the sake of a merger, based on reactionary reasons that were not in the best interest of
community members. The board had a monumental decision ahead of them, and Mueller was excited to
lead them in the right direction.

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EXHIBIT 1: MARITIMES CREDIT UNION

Values

 Quality, Customized Offerings—we offer relevant, innovative products and quality service that meets
our members’ needs.
 Sustainability—we are dedicated to financial growth and long-term prosperity and are flexible in
dealing with change.
 Team Leadership—our management and staff share common values and ideas, and work together as
a cohesive unit.
 Ethical Decision Making—we have a responsibility to member-owners and the local community to
operate with respect and in an honest, professional manner; we are in agreement that decisions have
a significant impact on the vibrancy and health of our community.
 Transparency and Autonomy—we act with transparency within our community to promote and
protect the image of all credit unions while determining our own direction.

Vision

To make an impactful contribution to building a strong community.

Mission Statement

Maritimes Credit Union is a financial co-operative that provides solutions for the benefit of our members,
the community, and the credit union.

Source: Created by the authors.

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