Putting “Character” in “Banking”

The somewhat tiresome “debate” of a potential bank invasion of the property and casualty insurance sector in a deregulated financial services environment has taken an ironic turn. Seeing an opportunity under the new Bank Act passed by the federal government last year – which allows for smaller, concentrated ownership enterprises to be licensed for domestic banking activities – Hi-Alta Capital Inc.’s CEO Scott Tannas has filed for a federal bank charter that he hopes will see the creation of a new bank by the first quarter of next year.

Tannas unveiled a new “integrated financial services” business plan at Hi-Alta’s annual general meeting, which was recently held in Calgary. In addition to revealing exceptional financial results for 2001 and the first quarter of this year, Tannas used the AGM to formally launch the western-based broker network’s expansion plans, which includes a “new look”. The network has changed its name to Western Financial Group, and now trades on the Toronto Stock Exchange under the symbol “WES”.

The creation of the new bank will play an integral role in Western’s future growth, Tannas says. While banking activities, including loans, deposits and other saving products are expected to account for significant portion of the company’s future earnings, Tannas is quick to point out, “we are first and foremost insurance people [referring to the network]”. In this respect, he adds that the broker network’s core mission of offering customers as broad a range of competitive products remains unchanged.

COMMUNITY STRENGTH

The key to Tannas’ ambition in taking on the banks on their own turf lies in “putting the character back into banking”. Over recent years, the major banks have withdrawn their “brick and mortar” branches from small communities and replaced these services with long-distance call center operations. This automated efficiency drive has opened up new competitive ground for small regional players to step in, he notes. The “mind set” of the small community is very different to large urban centers, he observes, with emphasis being placed on personal interaction and ethics. “Agency banking” is therefore ideal for this kind of environment, Tannas says, as insurance brokers operating within such small communities already have the kind of personal relationship needed.

“I guess the decision to apply for a bank charter is an extension of our existing business strategy, and type of operations,” Tannas observes. And, the concept of insurance agents/brokers handling bank deposit taking is hardly a new development, this is a practice that has been in place in rural areas for many years, he adds.

In fact, Tannas had been toying with the idea of buying into a bank from about 1997, shortly after Hi-Alta Capital was established as a broker network and became a listed entity. Subsequently, Tannas had entered into negotiations with several banking groups, to look at potential joint ventures. “We looked at joint ventures, and all kinds of situations, but in the end came to the conclusion that, based on our longstanding customer relations, the best way was to start from scratch.”

While Western’s bank will be a “virtual bank” in that it will not have its own branches, Tannas points out that physical representation will exist through the company’s network of insurance offices. In this sense, he compares the Western bank plan to that of the ING group which markets a range of banking and insurance services through agent distribution.

MAKING A BANK

Western’s bank application has been under review by the Office of the Superintendent of Financial Institutions (OSFI) since December of last year, says Tannas. The legislation is new, and the regulator is still coming to full grips with how to deal with applications, he adds, so no “time pressure” has been placed in getting the bank charter through. However, Tannas is hopeful that Western’s bank will be operational by the end of the first quarter of 2003.

Extensive information submissions have been made by Western over recent months to OSFI, and Tannas does foresee any problems with approval of the bank charter. Western has set aside $7.5 million for the establishment of the bank (a minimum of $5 million is required by the regulator). This will enable the new bank to undertake loan business of about $100 million. The bank’s core business will be personal and commercial mortgages, mostly piggybacking off the network’s existing client database. “When we look at our database, there’s about 20,000 customers that have mortgages. In order to achieve necessary profitability, we’re looking at a very small slice of our customer-base moving their mortgages to our bank – less than 2% of the total.”

Hi-Alta, a.k.a. Western, has been involved in the selling of mutual fund and deposit-taking investment instruments for some time, Tannas notes. The network handled approximately $200 million in such investments last year, he adds. In this respect, the “savings side” of banking is not new to its brokers. He concedes, however, that lending activities will be a whole new ballgame for the company, “it’s going to be a learning curve to get into loans”. Western has already begun an extensive training program within the network, and Tannas expects its members and staff will be fully prepared for business when the bank “opens its doors” next year.

Starting a bank does not come without a price, Tannas observes. In this respect, he says Western has incurred “a lot of start up costs” in getting the bank from concept into reality. As such, he does not expect that the bank will make a profit within the first year. He does expect to see a profit return within three years, and for Western to reach $1 billion in assets by 2007. The network’s current assets total about $200 million, which suggests Western will have to achieve an annual compound growth rate of around 60% for the next five years. “We have a long way to go,” Tannas admits, but believes that this target is well within reach in relation to the company’s business strategy. “Our goal five years from now is to have about 40% of total network revenue coming from non-p&c business. Today, non-p&c business is only about 5% of the total.”

SHAREHOLDER SUPPORT

The broker network consolidator currently has six major financial institution investors, including ING, Axa, Royal & SunAlliance, Wawanesa Mutual, Saskatchewan’s SGI and Peace Hills Insurance – accounting for about 35% of the company’s voting stock. Although the decision to apply for a banking license had not required shareholder approval, Tannas says the details of this expansion had been discussed extensively with major shareholders, who provided their support.

“I can’t say that every insurance company was thrilled at the idea [of Western going into banking], but we made a very persuasive case explaining what had to be done to ensure that the network remains strong,” says Tannas. In this respect, he points out that full deregulation of the financial pillars that separate insurance from banking in Canada is something that everyone in the business knows is just around the corner. “We have to be ready for when the banks are allowed into the retailing of [p&c] insurance.”

WEST IS BEST

Western currently operates through 44 brokerage offices located in Alberta, British Columbia and Saskatchewan, serving approximately 140,000 customers. Unlike several of the broker consolidator operations which attempted to expand their networks nationally, Western has always maintained a focus on the western provinces, thus achieving a “home edge” in understanding the needs of the communities being served, says Tannas. This approach has been highly successful for the network, he adds, and the new company has no intention of “messing with the formula”.

As such, Tannas says Western will continue to focus on the west, with growth driven by new product development across the financial services lines rather than through geographic expansion. “We’re happy with staying in the west. We’re comfortable with knowing the communities in the west. There are different cultural dynamics behind the communities of each province/region, so there’s no reason for us to want to move outside of the culture that we know.” In fact, Tannas notes, should the network achieve full saturation of its existing western markets, attention will likely be turned to the western states of the U.S. rather than eastward in Canada. This, however, is a step that is well down the line in terms of the network’s business strategy, he adds.

HOMETOWN BOY

Tannas was born and raised in High River, Alberta. He began his working career in the travel and tourism industry, working for a Calgary-based firm. In 1993, he returned to High River and joined Hi-Alta Agencies, an insurance and real-estate brokerage that his grandfather had worked for during the 1960s/70s. “I was a fourth generation client with Hi-Alta Agencies,” Tannas says, and on his return to his hometown, he decided it was time for a career change.

Tannas subsequently became the managing partner at Hi-Alta Agencies, and formed Hi-Alta Capital Inc. in 1996. The company was listed on the Alberta Stock Exchange in that same year, during which time the operation acquired Hi-Alta Agencies and two other brokerages located in southern Alberta. Hi-Alta listed on the Toronto Stock Exchange as a broker network consolidator in June 1998. The company has since grown through brokerage acquisitions throughout the western provinces to its current status. Tannas continues to live in High River with wife Taryn and their four children.