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Case for Analysis Vancity: Doing Good, Doing Well*

“Amid change and uncertainty, we’re remaining true to our roots. We are Main Street, not Wall Street — independent and local, member-owned and based on cooperative principles.” —Excerpt from message from the CEO and chair, Vancity, 2008

It was a typical cloudy spring day in Vancouver in April 2009. As Vancity chief executive officer (CEO) Tamara Vrooman looked out of the 11th floor window from her Terminal Avenue head office, she wondered if the gloomy weather outside was a fitting backdrop for the difficult decision facing Vancity’s board. Recognized for its community values and commitment to social justice, Vancity was being forced by the ongoing financial crisis to consider repricing its line of credit offerings. Such a move was sure to be unpopular with the organization’s customers, who also happened to be its owners (members) due to Vancity’s structure as a Cooperative. “How could such a decision be implemented,” she wondered, “without breaking the trust that members had in the institution?” If the board decided not to reprice the loans, how would the estimated shortfall of $24 million be covered? In short, how should Vancity balance its own financial viability with its members’ expectations? The immediate problem relating to repricing loans also raised broader questions for Vancity’s strategy going forward: How should Vancity differentiate itself from other financial institutions? To what extent should Vancity stick to its cooperative roots versus focusing on making money that it would then plough back into the community? What should the measures of success be for the institution going forward?

Vancity Background: History and Culture Vancity was founded by a handful of local and former prairie residents following the Second World War, starting off on the corner of a desk in the Dominion Bank building at Victory Square. In a relatively short time, the credit union changed the nature of banking in Greater Vancouver: it was the first to loan money to the postwar wave of immigrants to help them buy their first homes (primarily Italians on Vancouver’s Eastside); it was the first to lend to women without their husbands’ signatures; and, it was the first to employ new technology to provide daily interest. In more recent years, Vancity pioneered social responsibility and environmental sustainability, becoming the first carbon neutral organization in the province and the first financial institution in North America to do so.* When Vrooman took over as CEO of Vancity in September 2007, she joined an institution with a long history in British Columbia (BC)—one that had become Canada’s largest credit union. Formerly the deputy minister of finance in BC, Vrooman had overseen the province’s annual $100 billion borrowings and helped allocate its $36 billion budget. A history graduate from the University of Victoria, Vrooman had not previously run a financial institution; however, she was widely admired for her role in the public sector, and Vancity’s board recognized that her skills and background easily compensated for her lack of direct experience. Net earnings at Vancity had been in decline for four years from 2004 through 2007; however, there was a turnaround in 2008, with earnings increasing at 43 per cent (see Exhibit 1), and Vrooman was committed to building on this positive change. Exhibit 1.

STATEMENT OF EARNINGS (IN THOUSANDS OF DOLLARS)

2008

2007

2006

2005

2004

Total interest income

813,996

729,649

632,258

517,774

466,492

Total interest expense

482,389

448,781

352,826

244,918

211,416

Net interest income

331,607

280,868

279,432

272,856

255,076

Provision for credit losses

−27,108

−16,323

−11,208

−7,525

−9,968

92,747

84,583

89,211

75,823

68,039

Net interest and other income

397,246

349,128

357,435

341,154

313,147

Salaries and employee benefits

187,037

173,746

160,876

146,982

133,330

Other operating expenses

134,653

124,760

124,569

115,771

105,062

Earnings from operations

75,556

50,622

71,990

78,401

74,755

0

0

0

1,359

18,848

Earnings after unusual item

75,556

50,622

71,990

79,760

93,603

Distribution to community and members

16,977

10,822

15,805

16,626

19,578

Provision for income taxes

11,762

7,045

10,885

16,012

16,838

Net earnings

46,817

32,755

45,300

47,122

57,187

0.33%

0.25%

0.38%

0.46%

0.63%

7.2%

5.7%

8.4%

9.6%

13.0%

407,121

387,762

354,663

337,107

302,032

2,564

2,408

2,385

2,340

2,050

Other income

Unusual item

Statistics Return on average assets Return on equity Membership No. of employees Source: Vancity Annual Report, 2008.

Vancity Financial Highlights (for the year ended December 31)

In the face of the financial crisis gripping the world in 2008 and 2009, trust in

traditional financial institutions such as the major banks was eroding. Despite this declining trust Vancity continued to attract new members, with membership increasing from 407,070 to 409,202 in the first quarter of 2009. Vancity was perceived to be different from other financial institutions, and comments from members reflected this perception: “Vancity is the type of organization that one can be proud to be associated with. It sets the bar very high in many areas: diversity, service and respect for its members, community involvement and support.”—Member since 1975. “This is one financial institution that sees things the right way—from the member’s point of view.”—Member since 2008. “They give me all the financial services I need, and they support the community.”—Member since 2004. Over time, traditional financial institutions were also moving toward a greater community focus, but Vancity continued to lead in this area. The company had developed a statement of values out of a highly consultative process involving a broad cross-section of staff, directors, members and representatives of the communities in which it operated (see Exhibit 2). Every two years the organization reported how well it lived up to its values and commitments in an externally verified accountability report. In one of these reports it also listed four short-term goals*: 1. Build on our financial strength: While we continue to show solid growth, we need to respond to the new market dynamics by growing in a more balanced way. Because of the asset-backed commercial paper market failure, capital to fund loans is scarcer and the cost of those funds has increased. To maintain healthy capital we need to balance loan

growth with deposit growth. Serving and deepening relationships with our existing members and clients will be a priority. We will also be monitoring our costs and closely watching the markets and our performance to stay on track. 2. Increase our commitment to community leadership: We are much more than a financial institution with a diverse array of products, competitive rates and convenient access. We also use our resources and expertise to positively change our community and environment in three focus areas: acting on climate change, facing poverty, and growing the social economy. Driving positive change is part of our co-operative roots and we believe it is critical to our future success; it is who we are, and it is what brings many staff and members to the Vancity Group and differentiates us from other financial institutions. We plan to build on this core strength and celebrate our successes more with employees and members. By engaging staff and members, and by embedding community leadership throughout our organization, this differentiator will set us apart and inspire our members, partners and the community. 3. Build operational excellence: We plan to reduce bureaucracy and move decision making closer to where decisions are made. We’ve formed a small task force of senior leaders to lead this work. Process improvements, a technology strategy and other changes to support this goal will begin immediately. 4. Revive our spirit of innovation and entrepreneurial thinking: We know employees have innovative ideas about all aspects of our business. We need to create the culture and tools to tap into that creativity, assess and implement their very best ideas, and truly leverage innovation.

Exhibit 2.

MISSION To be a democratic, ethical, and innovative provider of financial services to our members. Through strong financial performance, we serve as a catalyst for the self-reliance and economic well-being of our membership and community. PURPOSE Working with people and communities to help them thrive and prosper. VALUES Integrity: We act with courage, consistency and respect to do what is honest, fair and trustworthy. Innovation: We anticipate and respond to challenges and changing needs with creativity, enthusiasm and determination. Responsibility: We are accountable to our members, employees, colleagues and communities for the results of our decisions and actions. COMMITMENTS

We make the following commitments in order to live our purpose and values in how we do business. Our aim is to strengthen Vancity’s long term business while contributing to the well-being of our members, staff, communities and the environment. We will be responsible and effective financial managers so Vancity remains strong and prospers. This means we will: make sound business decisions to achieve solid financial results manage risks responsibly to safeguard Vancity’s assets prudently exercise fiduciary responsibility with members’ deposits

We will provide you with outstanding service and help you achieve your financial goals. This means we will: treat you with respect and dignity give you trustworthy advice about your financial options offer products and services that meet your unique needs and provide good value protect your right to privacy ensure that low income and marginalized members have access to necessary financial services

We will provide meaningful opportunities for you to have input in setting the direction of the credit union. This means we will: make it easy and straightforward to vote and provide you with information to make informed decisions offer multiple channels for you to provide us with input and feedback address your concerns in a timely manner

We will ensure, that Vancity is a great place to work. This means we will: create a workplace that is healthy, diverse, stimulating, and rewarding provide the leadership, tools, resources and opportunities for employees to do their best work and achieve their full potential respect and honour employees’ responsibilities to their families, friends and communities

We will lead by example and use our resources and expertise to effect positive change in our communities. This means we will: leverage our unique skills and expertise as a financial institution to create solutions to social, environmental and economic issues model and advocate socially and environmentally responsible business practices seek business partners that practice progressive employee relations, contribute to the wellbeing of their communities and respect the environment invest our dollars responsibly in the communities in which we live and work

We will be accountable for living up to our commitments. This means we will: make continuous and measurable progress in meeting our commitments involve our members, staff and communities in measuring our performance and report the findings in a public, externally verified report.

Source: Vancity Accountability Report, 2006–07.

Vancity Statement of Values and Commitments

Vancity believed that its approach to business was not only the right thing to do from an ethical perspective, but that it also made good business sense. To the extent that its customers (members) subscribed to its values, Vancity was able to attract new members and grow; in addition, to the extent that Vancity’s efforts in the community encouraged social and economic development, they also created a stronger platform for Vancity to operate upon. The benefits of Vancity’s approach were also seen in other ways; for example, its branch in the crime-ridden, downtown Eastside was seen as an integral part of the community and as a result—and in contrast to most of the other businesses in the area—had never been robbed. Cooperative Structure As a cooperative, Vancity’s governance structure was quite different from that of a traditional corporation. Vancity was owned and controlled by its customers (members) and functioned to serve the needs of these members. The members contributed capital to finance the organization and all members, regardless of the amount of capital they invested, had an equal vote in selecting the cooperative’s board of directors. As a financial cooperative, Vancity was committed to the Co-operative Principles of the International Co-operative Alliance. These seven principles were seen as the foundation of its identity as a credit union*: 1. Voluntary and open membership,

2. Democratic member control, 3. Member economic participation, 4. Autonomy and independence, 5. Education, training and information, 6. Co-operation among co-operative, 7. Concern for community.

Vancity was not the only financial cooperative in British Columbia, though it was the largest. As of the end of 2007, there were 49 credit unions in the province with 368 branch locations and approximately 500 automated teller machines (ATMs), serving more than 1.6 million members. Generally, one out of every three British Columbians belonged to a credit union. Together, BC credit unions held more than $42 billion in assets and employed approximately 7,000 British Columbians. BC credit unions returned an average of $35 million annually to members in dividends and patronage refunds.* Social Finance* Vancity had a long history of social engagement and community support: the board was committed to furthering this agenda and was in the process of defining a new strategy for the group built around social finance and a new approach to wealth generation. This new approach was based on principles of social justice, environmental sustainability and community well-being. Partly in reaction to recent market conditions and growing concerns about the role of financial institutions in encouraging speculation and excessive indebtedness, Vancity’s social finance mission had an orientation of enhancing asset building tied to productive uses. This

mission would take established corporate social responsibility (CSR) initiatives and embed them into Vancity’s core business model to generate wealth for Vancity by improving the well-being of its community. Vancity used the following working definition in its operations: “Social Finance is an entrepreneurial and risk-based discipline of investment in enterprises—business, not-for-profit and cooperative— which uses a stable of capital pools and Vancity’s convening power to generate economic, social, and environmental benefits and creates wealth and community well-being.” The social finance strategy would see the development of new products and a focus on different market segments. In commercial real estate, for example, the focus would shift from financing traditional real estate developments to affordable housing and green buildings. New opportunities would be sought in banking the unserved, enhancing food security and fostering the development of clean technologies. Decision-making to implement the new strategy would be guided by the following key principles: 1. We will operate in an atmosphere of trust, transparency and transformational leadership. 2. We will build on our existing legacy of expertise, member relationships and community networks. 3. Social Finance is a profitable business model with metrics on social, environmental and financial outcomes. 4. Social Finance plays a leadership role at Vancity in the journey to our Vision, creating synergies across the Vancity group, and supporting our ethical standards. 5. We will put capital at measured risk for community benefit.

6. We will work to build assets and enhance cash flows for our members to build their sustainability and that of our community through a broad range of financial offerings. 7. Our commitment to research and innovation will allow us to identify and serve underserved markets.

Financial Crisis The financial crisis that hit world markets in late 2008 marked the end of a speculative bubble, driven by ever-increasing real estate prices in major markets. Accompanied by poor lending practices, particularly in the United States, and new forms of financial engineering, the crisis had undermined the stability of the entire financial system. Believing that real estate prices were on a permanent upward slope, some lenders had abandoned their traditionally prudent practices and offered mortgage loans to consumers who could not afford to make the interest payments once initial discounts had been exhausted. So-called NINJA loans were made to people with no income, no jobs and no assets. Other financial institutions repurchased these loans and repackaged them as collateralized debt obligations and, in turn, sold them on to others. The result was an enormous volume of new financial instruments with unknown risk, but which were acutely sensitive to a downturn in the housing markets. Beginning in the fall of 2008, the turmoil in global financial markets started to have effects on economies around the world, and governments hastened to take action. By April 2009, several of the largest financial institutions in the world had ceased to exist as independent entities and many others were surviving due to government bailouts. Canadian banks were in relatively good shape, but the Canadian economy was not immune to global economic pressures. Monetary policy was being used aggressively worldwide as an economic stimulus and the Bank of Canada dropped

its key overnight lending rate six times in six months, down to a historic low of 0.25 per cent. In December 2007, the rate had stood at 4.5 per cent; in announcing another rate reduction on April 21, 2009, Bank of Canada Governor Mark Carney indicated his intention to keep interest rates at this level at least through June of 2010. The Bank of Canada rate was the key lending rate in the economy, and all financial institutions adjusted their own lending rates based on changes in this rate. Prime interest rates in Canada, charged by financial institutions to their best corporate accounts, had accordingly dropped to 2.25 per cent by April 2009. Other lending rates were generally pegged to the prime rate, and Vancity charged interest rates of prime plus or minus certain percentage points on its credit lines. These lines of credit, offered to customers with a good credit rating, were generally, but not always, secured by physical property. To offer these facilities, financial institutions collected deposits from their customers and u...