Risk Considerations

Every year, competition intensifies in First West’s marketplace. We must compete with fintechs and banks that don’t have the same geographic and regulatory restrictions we do. They can easily operate in B.C., across Canada and beyond.

First West’s provincially tied operations hinder our ability to grow and compete more effectively in Canada’s financial services industry. Declining growth opportunities will challenge our ability to invest effectively in product and service innovation, improved member experiences and community giving.

As a federal credit union, First West will be able to move, grow and expand with its members as they move, grow and expand their personal and commercial enterprises across Canada. First West will retain long-term business members who have grown beyond B.C. and wish to move forward with the financial institution that believes in them and has helped them get where they are. Moreover, First West will be positioned to attract new members outside of B.C.

In today’s marketplace, Canadians expect their financial institutions to deliver the best new technologies— technologies that are expanding and changing at a rapid pace. Like all credit unions, First West is at risk of losing existing members and becoming irrelevant to potential new members, particularly younger ones, if it is unable to stay ahead of the financial technology curve and offer innovative digital tools, services and experiences. The increased scale and efficiency gained by becoming a federal credit union will enable First West to better invest and deliver leading technologies to members.

First West intends to pursue continued growth and expansion within B.C. However, the credit union’s opportunity to grow is limited by market saturation. First West anticipates that the sizeable growth it has achieved in the past 10 years will eventually slow if the credit union’s offerings are restricted solely to B.C.’s population.

Becoming a federal credit union will enable First West to continue to grow by entering new markets through the acquisition of credit unions outside B.C. and by attracting new members through digital solutions. As a result of continued growth, First West will be positioned to invest effectively in product and service innovation, improved member experiences and community giving.

First West’s primary business areas are southern Vancouver Island and the Gulf Islands, the Fraser Valley, Kitimat and the Southern Interior. As such, First West faces a significantly higher degree of concentration risk than financial institutions with assets and operations in multiple provinces because First West’s success depends on a single provincial economy. This makes the credit union more susceptible to the effects of provincial market downturns or corrections, natural disasters or other localized business disruptions. Additionally, having our business provincially tied restricts First West from diversifying its lending to businesses in sectors that may not be well represented in B.C.

Becoming a federally regulated credit union enables First West to lower its concentration risk by diversifying the credit union’s operations and assets. Gathering deposits from members across Canada will increase and diversify First West’s funding sources and expanding to markets in multiple provinces will insulate First West against localized downturns. Federal continuance will provide First West with a more diversified asset portfolio and make it a stronger, more stable credit union for the good of all its members.

Unlike Canada’s federal regulatory bodies, many provincial regulators, including BCFSA, have not yet advanced in implementing leading global regulatory standards like the Basel III International Regulatory Accord. When provincial regulators eventually do adopt these standards, as is very likely to occur, credit unions like First West will face increased regulatory burden in a marketplace with few offsetting growth opportunities.

First West has a longstanding commitment to hiring and retaining local employees. We pride ourselves not only on providing career opportunities spanning B.C.—as a result of our four divisions—allowing employees with choice on where they want to live and work, but also new and expanded roles that foster career development and engagement.

However, as a provincial credit union, both the higher cost of living (especially housing) in First West’s trade areas and the higher concentration of specialized banking talent in Ontario and Quebec present challenges to acquiring and retaining specialized employees.

Continuing as a federal credit union with national growth opportunities will enable First West to recruit from other regions of Canada and retain skilled employees whose lives take them to other parts of the country.

Like all credit unions, First West continually maintains and manages a set percentage of liquid assets so that short-term financial demands and obligations—such as operating expenses, member deposit withdrawals and loans, and unforeseen events—can always be met. A change in deposit insurance coverage may prompt members to withdraw their deposits from First West, which could reduce the credit union’s liquidity and inhibit its ability to meet its financial obligations. A reduction in deposits that is not offset by new deposits or other measures would cause First West’s liquidity to diminish.

To mitigate the risk associated with changes to deposit insurance coverage, First West has a comprehensive strategy including:

• diversifying our deposit base by raising new core deposits that are less affected by deposit insurance changes
• communicating with high-dollar depositors to explain First West’s ability to manage the transition to CDIC
• diversifying our overall funding base and increased liquidity levels by leveraging our short-term and long-term credit agency ratings issued by global credit rating agency DBRS Morningstar (DBRS), and issuing capital markets funding such as commercial paper, short-term notes and subordinated debt
• using securitization as another diversified funding source, which has an overall lower cost base to the credit union
• extending current external borrowing lines, which adds long-term stable funding
• developing a detailed strategy that can be activated should the credit union’s liquidity be affected; this strategy will ensure appropriate liquidity is maintained in a manner that minimizes cost to the organization

First West may also apply to receive the federal loan guarantee provided for transitioning credit unions under the Bank Act.

As a federal credit union, First West will be positioned to serve members as they move, grow and expand their personal and/or business interests across Canada. We intend to invest in technology and digital solutions to serve these members effectively. It may take more time than anticipated to put these solutions in place and attract new members. To mitigate this risk, First West will develop and execute carefully designed business plans that balance cost with the goals of acquiring new personal and business members.

Through the process of becoming a federally regulated financial institution, there is a risk the credit union will be unable to meet regulatory requirements or that meeting regulatory requirements might prove costlier than anticipated. First West continues to deepen its understanding of the elevated statutory and regulatory rigour by which federally regulated financial institutions are bound.

We have completed extensive internal assessments, met with federal regulators, conducted an in-depth legal review of the requirements, consulted experts and talked with other credit unions that are federally regulated (or aspire to be) to develop a thorough understanding of the compliance requirements. The requirements include the following:

• The Bank Act and regulations, including:
  • consumer protection provisions overseen by FCAC
  • guidelines issued by OSFI, which address matters including capital, liquidity, mortgage underwriting, corporate governance, outsourcing, regulatory compliance management and others

• Continued adherence to anti-money laundering and anti-terrorist financing guidelines issued by FINTRAC
• The Canada Deposit Insurance Corporation Act (CDIC Act), the CDIC By-laws and CDIC information bulletins
• Federal employment legislation, including the Canada Labour Code and the Employment Equity Act
• Federal privacy legislation, including Personal Information Protection and Electronic Documents Act (PIPEDA), Canada’s Anti-Spam Law (CASL) and Digital Privacy Act
• Income tax obligations
• First West has planned for the costs incurred by complying with federal regulatory requirements and if these costs prove higher than anticipated, First West is confident it can absorb them

First West has already taken steps in several key areas to move toward OSFI compliance and, in other areas, is developing a detailed plan to ensure full compliance. First West is confident it can meet federal compliance requirements.

First West has also engaged its provincial regulator, BCFSA, to understand and work toward meeting the requirements related to the member and shareholder vote on federal continuance and additional requirements related to receiving permission from BCFSA and CUDIC to exit the provincial regulatory environment.

First West could experience delays in the federal continuance process should compliance with federal and provincial legal and regulatory requirements prove more challenging than anticipated. First West has flexibility in its target date for federal continuance and is well prepared to handle delays in the process.

Operating under federal regulation is new to First West Credit Union. There is a risk that we may not have the organizational capacity or expertise required to successfully transition to becoming a federally regulated credit union.

First West has demonstrated a thoughtful, responsible approach to growing the credit union and delivering on its strategy. Since 2010, First West has demonstrated a consistent history of prudently stewarding assets, growing to more than $15.5 billion in total assets and assets under administration.

First West is equally confident in its leaders: many members of its executive leadership team and Board of Directors have managed and grown national and even international companies. We believe we have the leadership capacity to excel as a federal credit union. We further intend to mitigate this risk through the development and execution of carefully designed business plans that will identify opportunities and barriers to attracting new personal and business members.

Finally, First West has effectively implemented other transitions and projects of equal or greater magnitude in terms of organizational change. Having carefully examined the requirements for successfully managing and growing a national organization, First West has developed a multi-phase strategy that will enable a successful federal transition while ensuring the credit union’s ongoing business operations in B.C. continue to thrive.

To become a federal credit union, First West requires members and holders of Class B Equity Shares to approve two special resolutions. In addition to member approvals, regulatory approvals from the following governing bodies are also required:

• BCFSA
• CUDIC
• OSFI
• Federal Minister of Finance

Should First West fail to obtain any of these approvals, it will continue serving its current membership while remaining within B.C.’s provincial regulatory framework.

To mitigate the risk of not receiving regulatory approvals, First West has carefully examined the criteria and process for federal continuance. We have also initiated consultation and maintained ongoing dialogue with the appropriate regulatory entities to discuss our intentions and objectives.

Additionally, to mitigate the risk of credit union members and holders of Class B Equity Shares not approving the two special resolutions by the required margin, First West has developed a comprehensive member education program and will ensure members and shareholders can access all of the information they require to make an informed vote through a variety of communication channels, including online, print and by phone.