The Myth of Efficiency and the Allure of Scale

Supporting most mergers and more recently, bank purchases, is a belief in the importance of getting bigger.

The assumption is that size creates scale resulting in greater efficiency. But the assumption is much less compelling if one were to look at the operating expense or efficiency ratios of the set of credit unions over $ 1 billion. Both ratios are all over the map for the largest credit unions.

The wrong focus?

Efficiency is not unimportant, but it is only a part of the performance requirements needed in a competitive organization.

Today’s financial, economic and competitive uncertainty rewards the ability to traverse the unexpected and the unknown. An efficiency orientation can undercut the ability to adapt and respond to ever changing events.

Where should the emphasis be?

If efficiency can hinder progress, what is the skill set needed by management to succeed? Dealing with new circumstances requires creativity and courage, that is a team that trusts each other.

Technology and especially artificial intelligence applications can force a standardized solution on individual circumstances, that while efficient, may strip a process of its most critical component, human skills and empathy.

When I speak with CEOs with long running, superior track records, they often describe a people centered, process approach, to building their credit union. The priority can be member service, trust or another form of member advocacy or empathy.

This core management process is then reinforced with metrics shared with the entire team.

Member relationships drive scale, not efficiency

The outcome these CEOs single out is “productivity” often measured by average member share and loan relationships, not efficiency. For member relationships are the underlying factor that brings “efficiency” no matter the scale or size of a credit union’s balance sheet.

Top 100 US Co-ops Generated $222 Billion in 2018 Revenue

Each year the National Cooperative Bank compiles the top 100 US co-ops by total revenue. The listing for 2019 is here.

Several observations:

  • The top three serve the farming sector. Co-ops serving agriculture dominate the list.
  • Five credit unions are in the top 100 along with three other financial co-ops.
  • The co-op at number 99, NFO, Inc. lists only $27 million in assets but generated $535 million revenue
  • The Associated Press is the 100th largest co-op and the only co-op under communications.

Not Covered by Mainstream Business Media

Often co-ops fly under the business reporting news sources. No stock price to follow. Few opportunities to buy or sell. As member-owned and focused, there is less “public interest” in their performance and role.

They are most often referenced when they are doing something extraordinary as in a 60 Minutes Report on Land O Lakes, the second largest co-op by revenue. The CBS report provides an illuminating insight into the power of cooperative design and innovation, and its vital role supporting American farmers in a year when over 50% farms are expected to lose money.

The Real Capital Powering Credit Unions

In a recent podcast interview by Robert McGarvey, CEO Randy Karnes summarizes CU*Answers’ approach to strategy. On more than a dozen business issues from culture to market analysis, his concise insights are extraordinary.

At a time when supplemental capital for credit unions is a topic of regulatory review and wide industry interest, his comments on the CUSO’s approach to financial soundness, especially capital planning, are especially relevant.

As he explains, for his CUSO patronage by the owners is more valuable than dollars of capital. The reason is that patronage is “belief, persistence and cash flow.” Capital dollars have to be paid back. Patronage sustains and grows.

The Message for Credit Unions

All of the proposed approaches to supplemental capital will need to be paid back. The real “capital” that has been the source for all credit union’s soundness from day one is the member relationship. Member loyalty, use and trust are the patronage that sustains viability even if net worth ratios fall below well-capitalized.

The reason for 208 assistance in the FCU Act is to allow members to “recapitalize” their credit union over time through their patronage. When PCA or other supervisory actions prevent members and management from recovering from setbacks, the fundamental strength of the cooperative model is compromised.

Almost all credit unions active today, were founded without financial capital. Their financial success is created over years or even decades of member participation.

When the success or status of a credit union is measured by only financial yardsticks, sooner or later, that framework will be found wanting. It overlooks the fundamental difference between a member-owner cooperative and a for-profit financial alternative.

The message for credit unions from this CUSO’s 50-year history may be that all financial capital is supplemental. Longevity requires relationships. That is the cooperative difference and unmatchable advantage.

To listen to Randy’s 34 minute interview by Robert McGarvey’s CU 2.0 Podcast , Episode 47, visit:

Strategy: How Important is Scale?

A common assumption by many working in credit unions is that scale, that is increasing a credit union’s balance sheet size, is critical to competitiveness, and therefore survival. As one CEO wrote:  “Given our market and community field of membership, we believe scale is more important than ever.”

Facts versus Truth

This belief in “scale economies” is often supported by citing average financial performance by peer group size.   These averages do show that larger credit unions tend to grow both members and assets faster than smaller ones.   Also, they generally operate with lower expense ratios, larger dividend payouts, and generally higher ROA’s and loan to share ratios.

However even within the same peer group (over $1 billion in assets) there is a wide variation in these ratios.  Becoming larger does not automatically create these outcomes.

The logic that data confirms the necessity for scale, does not hold true across all situations.  Facts alone may not reveal underlying truths about successful cooperative performance.

Moreover, the facts used may rely on an assumption or mindset, that itself is debatable.

The Scarcity Mindset

Scale matters in a competitive market, some argue, because it can lead to larger market share and therefore greater economic power.

Scale is achieved by growth, that often means out running competitors.  This can be done organically or more recently, by some credit unions soliciting mergers or buying out bank competitors.

Growth thus becomes the primary objective, if not the mission of the credit union.  It is driven by an assumption of limited resources (or members) and that an institution must get their “share” before someone else takes it away.

I call this the “scarcity mindset” myth.   Credit unions think of strategy as a struggle to get more and more, and can never slow down, because ultimate scale is always unreachable.  The end point keeps growing from $100 million, to $1 billion to $10 billion in assets.  No asset size is ever enough.

The Cooperative Abundance Assumption

Credit union were founded on belief in the power and resources of community.  That by working together we can mobilize savers (those with more) to help borrowers (those with less).

By institutionalizing this process, members become empowered and the well-being of all is improved.  It is not the amount of resources that matter, but rather how they are managed for the common welfare.

This approach created by self-help and collaboration rests on the assumption of abundance. Credit unions are motivated by relationships and mission.  This focus creates trust that underwrites the inevitable cycles of economic fortune that will occur either individually or organizationally.

Instead of a scarcity mindset that focuses on getting whatever one can to grow an institution, credit union design rests on a belief in commerce organized around neighborliness and community.  In my individual capacity, I may not have what I need; but in my collective contributions, there is enough for all.

A Fork in the Strategic Road

The vast majority of credit unions have never had a major merger.  Most credit unions do not seek to buy out their financial competitors.

However, there is a commercial motivation promulgated by self-interested brokers, consultants and growth-oriented CEO’s and boards that assert survival depends on outmaneuvering the competition through size.  This market driven ideology of institutional success subverts the cooperative focus on purpose.

The cooperative model was created to give member-owners the opportunity to create and manage their own financial options in a market dominated by firms that make a profit from relationships.

The cooperative goal is to transform individual options and bring the resources of like-minded persons to build an institution using the resources available, that is a belief in an “economy of abundance.”

The credit union approach is sustained by a community of shared values, not just more plentiful resources.

Questions to Consider

As boards consider strategy, it may be helpful to ask the following:

  • How do we measure our scale, if that is an objective: institutional outcomes or member relationships?
  • Is our motivation for growth from fear or confidence? If it is fear from uncertainty, will we survive by doubling down on the familiar?
  • If scale is critical, what is the plateau we are aiming for? How is it determined?

As I look across the multiple examples of success among all credit union asset groups, I note that those who possess less are less possessed by motives for scale.   And instead of intending to be sustained by their savings from scale, they rely instead on the member’s trust and loyalty.

Why the Appeals Court Ruling on NCUA’s FOM Rule Is Irrelevant

According to the US Census Bureau’s population clock, the estimated 2018 United States population (February 2018) is 327.16 million.

This is a bit lower than the 329.06 million estimated by the United Nations.

As reported in Pentagon FCU’s June 30, 2019 quarterly call report, every one in the US is eligible to become a member. The data submitted by  the credit union is as follows:

2. Number of current members (not number of accounts) 1,788,610 083
3. Number of potential members 329,152,485 084


When Credit Unions Aligned with Communities of Faith for Social Progress

Catholic Energies is a non-profit, five-person organization that helps churches and schools convert to solar energy. Based in the District, the key capability they offer is collaboration with church owned properties, solar companies and investors seeking solar tax credits

In D.C. the group worked with the Catholic Charities of the Archdiocese of Washington to build a solar array on a church owned field that will light 260 homes by feeding into the local power grid. The energy credits will offset the costs of electricity across twelve of the charities’ properties in the district.

Catholic Energies is a subgroup of the non-profit Catholic Climate Covenant. This national initiative was launched to educate and engage US Catholics in caring for the environment. The sub group, Catholic Energies, was also responding to Pope Francis’ release in 2015 of Laudate Si, which argued for partnerships between religion and science to respond to climate change.

A Credit Union Social Action Precedent

The Catholic church’s involvement in issues of social progress embraced the credit union movement in the past. According to an article in the Grand Rapids Press from December 20, 1926, the National Catholic Welfare Conference intends to establish “a nationwide system of credit unions to lend money to wage earners. These short term loans will be extended to the 36 states with credit union laws.”

The article described the “parish credit union as a cooperative savings and loan society. Depositors buy shares at the par value, usually $5, and get a 6% a year interest. The capital thus obtained is loaned out at 8%.”

To understand the importance of this organizational effort, one need scan an alphabetical listing in any state in the following 50 years to see all the credit unions starting with “St.” followed by the parish name. In Massachusetts today there are still nine credit unions listed by parish names.

And like solar energy today, this effort had formal church support. Fr. Otto Thiel wrote an article in the December 1941 issue of Franciscan Studies explaining the church’s involvement.

It begins: “The religious and economic are the two predominant influences which have moulded man’s character and the world’s history. Religious motives are more intense than economic, but their direct actions seldom extends over so large a part of life (as do the economic ones).” After surveying the history of pawnbrokers or usurers to meet the economic needs of people of small means, he continues, “a way was discovered by which honest and responsible working people could supply themselves credit from within their own ranks. That discovery properly marked the origins of the movement which has produced the credit union of our day. . . It is neither a purely charitable nor a mere business organization, but one of self-help or co-operation. Its origins might be traced back to the Mons Pietatis of the later Middle ages, an organization to provide credit facilities for poor borrowers.”

More Than Catholics

Even prior to this national effort, other faiths promoted the credit union solution. In the January 1920 Annals of the American Academy of Political and Social Science, an article described multiple efforts to create new thrift organizations to serve the needs of both rural and urban borrowers.

As reported in the article The New American Thrift Loan: “According to the latest report of the Jewish Agricultural and Industrial Aid Society, several of the rural credit unions in New York have been obliged to wind up their affairs. In place of the eight credit unions among farmers reported in 1916, only three now exist. . . and no mention is made regarding the present status of credit unions among Jewish farmers in the states of Connecticut and Massachusetts. “

A Current Day Example

In June I met Greg Truex, the manager of the two year old, $16 million ELCA FCU. It is remarkably successful as a new startup relying on a largely virtual operating model. The credit union is sponsored by Evangelical Lutheran Church in America. The mission statement : God’s Work. Our Hands.

To succeed credit unions need more than capital. The hundreds if not thousands of credit unions sponsored by religious organizations, show the importance of both purpose and collaboration. And that heritage is still an invaluable coop advantage in today’s ever more crowded financial arena.

A Modest Proposal for Secondary Capital

NCUA’s June delay in implementing a new risk based capital (RBC) rule was in part explained by the need to examine whether a secondary capital option should be part of the new capital model.

Cooperative design and history suggest there is an immediate and straightforward additional capital option. This solution can be implemented regardless of the outcome of the RBC discussions.

The 1934 Federal Credit Union Act mandated that the par value “shall be $5 per share,” an amount in the law based on twenty five years of state-chartered credit union practice.

Credit unions had no share insurance funds, state or federal, until the 1970s.  Prior to that all member shares were at risk, that is equity for the institution.   An ongoing consequence of this financial structure, even in the era of deregulation, is that credit union shares are second in payment priority in event of liquidation to all other liabilities. This means that third party lenders to credit unions, such as the FHLB system or banks, know that equity is more than a credit union’s retained earnings. In the event of failure, the insurance fund must pay lenders’ outstanding loans ahead of shares.

The $5 Par Share Value Today

The historical par value of  $5 was often purchased on an installment plan, for example,  25 cents a week. This par value, now a variable amount, was the foundation for all funding and was at risk should the credit union not succeed.  Virtually all FCUs and state charters still active today, were financed with this membership shares-at-risk model. This shared fate meant that the cooperative model was indeed based on common values and purpose.

The value of the $5 initial member share purchase requirement today depends on which index one uses to analyze changes in economic value.   There are at least seven choices from the consumer price index to various efforts that track the cost of labor, to nominal GDP per capita. The range of results from these various indexes shows that the value of the $5 share in 1934 would range from $62.70 (CPI) to $373 (GDP per capita) in 2019.

Reengaging Members in the Cooperative Model

The option to ask members to purchase one at risk (uninsured) capital share with specified minimum par value would provide additional equity but more importantly signify once again the uniqueness of the cooperative model. It would be available only to members, limited in individual amounts, and subject to terms and conditions set by the boards.

There is no need to invent multiple plans for secondary capital sold to third parties creating a potential conflict with member’s returns. Instead the original design that successfully launched tens of thousands of charters could become today’s solution for capital flexibility when that is in the members’ best interest.

Leonardo’s Horse: A Vision Outlasting Its Creator

Sometimes good, well-conceived ideas do not at first succeed. But if they are truly inspiring, sooner or later the vision will be fulfilled.

Leonardo da Vinci was a Renaissance master, a student of almost every area of knowledge being practiced. A painter, architect, designer of war machines, statues and inveterate keeper of notebooks recording every area his curiosity took him.

In 1482 he was commissioned to create a bronze horse statue by the Duke of Milan to be a gift to the Duke’s father, Francessco Sforza. The statue would be the largest ever cast requiring over 70 tons of bronze and standing 26 feet high.

Leonardo prepared by writing a treatise on horses’ movements, their anatomy and how he might balance a figure in motion, with just two of the four legs on the ground. In 1493 he made a full size clay stature of his design. He developed a unique engineering process described in his notes. The statue was to be cast in two halves and then joined together.

Full details of the sculpture.

Unfortunately, his patron gave the bronze collected for the process to the Italian defenders of the city of Milan after it was attacked by an invading French army. The Italians lost, the clay model was used for archery practice by the French, and subsequently destroyed by weathering.

End of Story?

No, 500 years later a United Airlines pilot and art collector Charles C. Dent read about Leonardo’s vision in the September 1977 edition of National Geographic. He founded a non-profit to bring da Vinci’s vision to reality for his hometown of Allentown, PA. He died before the vision could be realized. His nephew took over the foundation and hired an experienced animal sculptor, Nina Akuma, to explore da Vinci’s drawings to create a fully realized instantiation. Two full size casts were made, one placed in Milan, Italy and the second commissioned by Frederik Meijer. (additional details)

It was this second horse I saw two weeks ago on a visit to the Frederik Meijer Gardens and Sculpture Park in Grand Rapids, MI.

Although based on two decades of Leonardo’s artistic work, it is today named the American Horse. The sight is truly majestic with the entire bronze weight supported by only the two opposite hooves. Its monumental standing is emphasized by the grass and tree sheltered green amphitheater which it alone inhabits.

The Promise of a Vision

Today the credit union vision is just over a century old. There have been almost 50,000 state and federal charters issued, of which 5,440 are still active. The challenge as in the artistic effort to recreate Leonardo’s horse, is what is core to the vision today? What is timeless in cooperative design that endures as it evolves in subsequent environments?

And is the design more than a single expression or does it require a “system” (as in Leonardo’s implementation plan) to support individual credit unions?

Leonardo’s commissioned vision inspired long after its creator and sponsor left the scene. However the vision was so well conceived, that new artistic pioneers were motivated to fulfill the work, albeit in a contemporary context.

This example suggests parallels with the vision of cooperative design. It is well conceived by founders, but requires contemporary creators to ensure its relevance and sustainability for ongoing generations.

The Greatest Generation: What They Did for Credit Unions

Tom Brokaw’s characterization of my parent’s generation as the “greatest” is recalled every time a WWII commemoration is presented.

But as the recent celebration of the 75th Anniversary of D-Day is overwhelmed by present events, it is important to remember another vital contribution this same generation made when not fighting a world war.

Children and young adults born of Depression-era parents, also accelerated a self-help movement for economic democracy that continues to thrive today. It is the $1.5 trillion cooperative credit union system which counts almost a third of Americans as member-owners.

The seeds were laid from 1909 to 1934 in states that passed over 25 laws authorizing cooperative charters. That pioneering “proof of concept” provided the credibility to pass the Federal Credit Union Act in 1934. Now credit unions could be formed anywhere in the country.

A Chartering Tsunami

What happened next is as dramatic a change as occurred in any post-war industry in America. For with the encouragement of the Bureau of Credit Unions housed in a small niche of the Department of Agriculture, the credit union option flooded across the US.

From a first-year total in 1934 of 78 new credit unions, the total of active federal charters peaked in 1970 at 12,977. Except for the war years of 1943-45, the net growth of new charters was 300-400 per year, with a high point of 852 new credit unions in 1954.

By 1970 the total of all credit unions was 23,687 of which 10,132 were state-chartered.

How could this dramatic expansion in just one generation have taken place?

Two Who Helped Build the System

Just as the war years produced leaders and heroes, so also did this national chartering effort by those fighting for consumer choice in a financial service industry dominated by for-profit firms.

Many factors aided the dramatic growth of cooperative charters: the need for consumer credit, the support of employer-sponsors, the creation of support organizations for the credit union system, and the post-war economic boom. However, these favorable circumstances still needed cooperative entrepreneurs.

One of Those Was Louise McCarren Herring (1909-1987)

I first met Louise while at NCUA in 1982 where she was escorted by Sam Rizzo, the President of the National Deposit Guarantee Association (now called ASI), a cooperative state-chartered insurance alternative to the NCUSIF.

Her stories about participating in the founding of CUNA in Estes Park, Colorado in 1934 were memorable as she was sole living participant from that event.

But more significant than being present at the beginning, was her role in chartering hundreds of credit unions throughout the state of Ohio, including 17 within the Kroger Company’s grocery store chain  where she had found her first job.

Louise’s contributions were more than chartering. She helped create organizations that were essential to the growth of the emerging credit union support system including leagues, centrals, and alternative deposit insurance. She was an ardent supporter of choice and dual chartering.

Her passion for cooperatives was unabated late in life. She believed everyone should have an opportunity to belong to a credit union. During deregulation when credit unions were arguing whether credit unions could have member overlaps, she defended the opening of the charter and the importance of serving entire communities with the logic: Poverty is not a common bond.

The Organizer

Lance Barden (1896-1967) helped organize 400 to 500 credit unions. After WWI service and college, he joined the US Farm Credit Administration (FCA) in Berkley, Calif. While there he formed a credit union for the employees and served as both manager and treasurer.

A year and a half later he was appointed federal credit union organizer in the FCA’s credit union section for northern California.

In the book The California Story, his wife describes his work as a credit union organizer. “Our entire lives were wrapped up in credit unions. Even our weekends; managers of small credit unions would visit us regularly on Sunday afternoons and Lance taught them bookkeeping and accounting.’’

Lance was sent to Hawaii in 1936 to continue credit union organizing. The plan was to stay two weeks and start a half dozen or so. Instead he stayed the entire winter and organized close to a hundred.

He also helped to form leagues in California and Hawaii. His work became a family vocation and commitment. His son and daughter became credit union CEOs. His granddaughter Sue Longson became CEO of a credit union in her teens and continues as a consultant today.

Lance’s example of hard work, sharing firsthand experiences and an exceptional commitment to the cooperative model demonstrates what one government employee can accomplish. While verifying specific numbers of new charters is difficult, what is clear is that whatever the final count, he helped to found more credit unions than NCUA has chartered in all the years since 1985.

Lance’s wife told a story that illustrates Lance’s belief in the credit union model. When he organized a new credit union, he would ask for the money right on the spot. “Right then and there. There was one time a very poor man had just died. The credit union didn’t even have its books setup, but Lance lent the first nickel he collected to the man’s family for his funeral.” He always said, “When you give your money to a credit union, it will be put to good use immediately.”

The Greatest Generation’s Gift to Us

This phase of credit union history is about more than new organizations and building organizational support. Lance and Louise’s contribution was more than hundreds of new charters. What they “paid forward” was a set of values along with institutions to sustain those ideals.

Recent events have shown how cooperative institutions can be quickly and quietly merged or closed.  The loyalty of generations lost.. Objective accomplishments are overlooked.. Shared values are the foundation that sustains cooperatives.

The greatest generation paid forward an enormous legacy for their children  Can we maintain and extend this inheritance?. Should  we aspire to do anything less?

Credit Unions and Farming: What we can learn about business sustainability

Clichés are frequently based on an element of fact. But that does not mean they are the truth.

One of the most persistent clichés that drives credit union thinking is that bigger is better. That is, only credit unions with $10 million or $100 million or a $ 1 billion in assets will survive. The consequence of this assertion is that many viable, well-run and long-serving credit unions believe their only future is to merge.

The truth is the cooperative model fits all sizes but especially smaller, niche players. Locally managed, focused, relationship-based financial institutions are needed in large and small communities across America. All credit unions start small, some grow and many remain “undersized” versus the largest few. Size doesn’t determine viability. Rather it is leadership’s understanding of the their business model that creates sustainability.

Living in a small farming community

Several recent conversations about farming and the minimum amount of acres needed to make a living echoed this size fixation in credit unions.

Certainly “conventional” or industrial agricultural models dominate farming in America today. A college classmate recently lamented that the 160 acres of southern Illinois farmland his family inherited was just not financially viable. “We would have to have at least 1,000 acres to make a real profit,” he asserted.

In grades one through four, I lived on a five acre farm outside Divernon, Illinois; a town of just over 1,000 population, about 20 miles from Springfield, the state capital.

We had three ponies, played cowboys and Indians all summer long with our homemade bows and arrows from the stand of poplar trees. Every morning my older sister would milk the cows by hand, my mom would pasteurize and bottle the milk and my dad deliver into town. We raised fruits and vegetables which we sold on the roadside in all growing seasons. We bred and raised our own pigs and several times a year would send a hog to be butchered for meat. We kept the meat supply in a frozen locker in town. The rabbits we raised were for eating, rolled in flour and pan fried just like chicken.

My dad wanted to be a farmer and buy more land but America was literally feeding the world in the 1950s. Five acres provided a rich experience, as long as we understood the best way to use our limited resources.

Community Supported Agriculture

Last month I visited Caledonia, Michigan (pop 1,600) for dinner. As we walked down the two block main street I saw a Schuler Farms poster in a store window selling “shares.” The business offer was full shares for $600 or half shares for $400. This Community Supported Agriculture (CSA) farm model is described as a “micro farm with vision and planning:” I went to the web site for more information.

A CSA honors a commitment between the farmer and the share holders. The members pay the grower in advance for a weekly share of the harvest. The shareholder receives a crate of fresh, local, naturally grown produce from a source they know and love.

The 2019 Membership Agreement reads in part:

In the community supported farm structure, every member of the relationship benefits, the share-holders, the farmers, the farms (the earth), and the greater community.

Each member will receive a weekly share of organically grown gourmet produce, that varies throughout the growing season. The product is expected to be available by mid-May and end in October. We farm with all natural organic methods . . . Our vegetable selections are for the most part based on taste and experience with various varieties, as well as trying new varieties all the time. . . .

Our plan is to start small and develop a core group of members that buy into our philosophy and quality. We are looking for families who have a high vegetable intake, culinary skills, and the time to prepare the food and eat within the season.

This locally focused farm model has become more relevant as a broader change is occurring for direct distribution of farmer’s crops. Since 1994, the number of farmers markets has grown from 1,755 to over 8,700 today. Communities large and small are supporting the need for fresh and local produce.

My current hometown Bethesda, MD has a cooperative Women’s Farm Market where Jean Paul sells plantings and vegetables from his 43 acre farm three days a week.

I believe this growing model of local farming has direct meaning for credit unions.

The diversity of credit union size is a source of system strength. Some small credit unions today will be the seed corn for larger ones in the future. But not all firms or farms can be large scale-whatever size that might mean. Credit unions of any size work well when they focus on the needs of their member shareholders. When that connection gets lost, then scale cannot replace relevance and relationship.