The employees of Western Financial Group may be able to see the lights of the big city twinkling in the distance, but the High River, Alta.-based firm — whose core strength is its network of about 700 insurance salespeople working in roughly 100 branches in more than 80 communities — is staying close to the farm for the time being.

“We’re a small-town company; we’re small-town people,” says Scott Tannas, WFG’s CEO. “So, we’re pretty darned comfortable operating in small cities, towns and villages. That’s the strength on which we’re building our company, the strength of Western Canada.”

For more than a decade, WFG has pursued a strategy of growth based on steadily buying up small independent insurance offices in small communities in the four western provinces. In 2007, WFG took over 20 shops, giving it a total of 78 wholly owned branches and 21 affiliated branches in which the firm holds a minority stake. The rest of the growth, Tannas says, comes organically from its existing customer base of 400,000 small-business owners, farmers and individuals.

WFG agents sell primarily auto, home, small-business and farm insurance. They are able to choose from a wide shelf of third-party products, as well as in-house life products manufactured by subsidiary Western Life Assurance Co. There is also a modest selection of bank products — including guaranteed investment certificates, mortgages, loans and equipment financing — sold through WFG’s five-year-old Bank Westsubsidiary.

So far, WFG’s formula of competitive pricing and “measurable” customer service — it reviews each account after set periods of time — has been a winning one. In calendar and fiscal 2007, the firm posted net income of $12.2 million, up 52.9% from the previous year, on revenue of $114.1 million, an increase of 38.1% from the previous year.

The firm, whose stock trades on the Toronto Stock Exchange, paid its first dividend — a modest 1¢ a share — at the end of the second quarter of 2007; it intends to maintain the “discipline” of issuing a dividend each quarter, Tannas says.

One of WFG’s key goals in 2008 and ’09 will be to continue to add to its footprint in small-town Western Canada, with plans to acquire 20 to 30 new offices or branches in that time frame.

“There are a lot of opportunities for WFG to continue doing acquisitions,” says Brian Pow, vice president of research and an equity analyst at Calgary-based Acumen Capital Partners Ltd. “[Being acquired] is a form of succession planning for a number of these small operators. They might not have many people to whom they can pass the business.”

However, Tannas wonders whether WFG may be reaching the limit of its expansion in small-town Western Canada.

“The branch network by acquisition era — it has been going on for 12 years now — is, in my view, in its last couple of years of existence,” he says. “We will have a very strong geographical footprint, backed by branches in places that are hard to get to, in which there are significant barriers to entry. We can grow the rest of the company on top of that.”

Entering the cities — Vancouver, Calgary, Edmonton and Winnipeg — isn’t on the radar screen yet. But as saturation is reached in small-town Western Canada, WFG will consider whether it can make its value proposition work in urban areas.

“We know our financial services — and even our core business — is sold and serviced differently in metro markets than in rural ones,” Tannas says. “There is less retail focus, more telephone and call-centre activity. I think we would have to approach [the cities] in a different fashion.”

For now, WFG will continue to build on its strengths and widen the range of products and services it can sell to its customers through its agency network. The firm is in the midst of a major initiative to bundle its in-house critical insurance product with general small-business insurance, and to have those customers also consider buying employee benefits from Western Life. WFG is also looking to sell term life policies through direct response.

Despite WFG’s recent focus on developing a lineup of in-house products, Tannas says, the firm has no intention of broadening its shelf to include in-house property and casualty insurance.

@page_break@“We see ourselves and our competitive advantage as steering clear of manufacturing and focusing instead on our power as a broker,” he says. “So, it’s a bit of mix, a bit of a hybrid. [Our agents] are captive sellers in certain products and wide-open sellers in others.”

Tannas takes particular pride at the slow but steady growth of Bank West, which posted its first profit in 2007 — net income of $387,429. The bank, with just one branch and 21 employees, operates as an agent bank, with loans and deposits coming through the agents who belong to the firm’s captive network and through other networks of loan and deposit brokers in arrangements that WFG has built “one at a time” over the years.

In 2007, WFG expanded Bank West by buying the branchless Ubiquity Bank from Abbotsford, B.C.-based Prospera Credit Union. In 2008, the combined Bank West/Ubiquity Bank will be transferred onto the Wealthview Banking information-technology platform, which will eventually allow the banking operation to add a wide variety of new products, such as credit cards and debit cards.

In March, WFG made a hostile takeover bid for Red Deer, Alta.-based Community Savings Credit Union, a financial co-operative with $2.7 billion in assets under administration. Tannas acknowledges the bid was quickly put together and opportunistic — Community Savings was one of three Alberta credit unions that had recently announced they were considering a merger. The bid fizzled when Community Savings’ board chose not to present WFG’s takeover proposal to the credit union’s general meeting. Instead, Community Savings members voted overwhelmingly in favour of a merger with the two other credit unions.

Tannas still believes the acquisition would have been favourable for Community Savings members. “We are in virtually every community [the credit union] is in, and 20% of its customers are our customers,” he says. “We had hoped that maybe with some moral suasion and a little media pressure, that we could persuade its board to put the proposal into members’ hands. But we couldn’t put it past the board. Nothing ventured, nothing gained.”

WFG also owns a stake in Jennings Capital Inc. , a full-service investment dealer based in Calgary. About 2,000 WFG clients use Jennings’ private-client services. Although Jennings doesn’t figure strongly in WFG’s current strategic plans, it may play a larger role in the future as WFG grows.

“It’s not the lowest hanging fruit on our tree,” Tannas says. “So, we’re not heavily focused on it. But, over time, we will put the press on to get WFG customers to consider Jennings investment accounts.”

Tannas admits that a diversified regional financial services firm such as WFG might make a tempting takeover target. The company has received inquiries, he says, but WFG is probably not headed down that road.

“We didn’t set out to build the company to sell it,” Tannas says. “We set out to build — and we’re convinced we’ll be left alone to do this — a broad Western Canadian financial institution that draws its strengths from rural markets, but is ultimately relevant all across the West.” IE