An Interview with Eldon Arnold

Eldon Arnold is the president and CEO of CEFCU, the nation's 10th largest credit union. Arnold was the 37th employee hired by the Credit Union, which had assets of $9 million when he started in 1965. Today, CEFCU has more than 212,000 member/owners, more than 700 employees, and assets nearing $2 billion. Arnold attributes the Credit Union's growth to a history of strong leadership, the continued demand for services from member/owners, and a staff committed to providing excellent service.

Arnold's educational background includes completion of the Executive Development Program at Stanford University, and the National Credit Union Financial Management School at the University of Colorado. He also attended Illinois Central College and Iowa State University. He serves as vice chairman of the Greater Peoria Family YMCA and holds director positions for several organizations, including the OSF College of Nursing, the Peoria Historical Society, and CEFCU. He's also served as an American Heart Association Heartwalk Event chairman, Girl Scout Capital Campaign cabinet member, and Peoria Area Economic Development Council director.

His professional affiliations include membership on the Research Council for the Filene Research Institute (University of Wisconsin), the Credit Union National Association's Payment Systems Subcommittee, the National Association of Federal Credit Union's Legislative Committee, the Filene Research Institute Leadership Circle, and the Central States Credit Union Roundtable. Arnold also serves as a director for the MEMBERS Development Corporation, and CEFCU Financial Services, Inc.

Married to his wife, Bev, for 35 years, they have two children and six grandchildren. Their oldest son, Eric, works for Caterpillar and lives in England. Their youngest son, Brad, works for Bloomington Seating Co.

Tell us about your background, family, etc. How did your background prepare you for your current position?

I'm a native of Galesburg, and came to Peoria at age 20 to work in the shop at Caterpillar Inc. Within a few months, I interviewed for a job with the Caterpillar credit union, where I worked in collections and as a member center manager. While in the credit union, I became interested in Information Systems (I.S.) and served as the I.S. manager. Later, I held numerous jobs at Caterpillar in their I.S. area, including systems manager of the Administration Building Information Center, before returning to CEFCU in 1992.

When I think about how my background prepared me for my current position, three things come to mind: the influence of my parents, my mentors, and athletics. My father, Estill Arnold, owned his own landscaping business and I worked for him. Some older Peorians may remember him, as Dad had many clients in Peoria and the surrounding area in the 1950s and '60s before selling his business. He had a very strong work ethic and high quality standards. His motto and practice was, "If you didn't get it right the first time, you keep doing it until you get it right." I think his influence instilled a sense of urgency in me to try to go beyond others' expectations in everything I do. It also seems my mother always had the right advice, in the form of sound-bites, to keep me on track--including one I believe very strongly, "Life is what you make it."

Another influence that helped prepare me for my position is years of playing team sports. Growing up, I was involved in numerous sports. That helped me learn the importance of teamwork and how to push myself to accomplish things. If you have had the opportunity, and I hope you have, to participate in the accomplishment of seemingly unachievable goals with a great group of people, you will know what I mean when I say, "it doesn't get any better" in sports and the business world. I am very thankful for a number of those opportunities in sports, in business at Caterpillar, and now at CEFCU.

Of course, I've had many mentors along the way in my career. But two people who really stand out are John Nack and John Siefken. Nack, who's now retired from Caterpillar, had a unique ability to sort through business issues very quickly. He knew how to eliminate unimportant things to get to the root cause of problems or opportunities, and build solutions. His leadership helped me focus on the important things, and make sure I was dealing with the problem or opportunity at hand and not just fixing a symptom.

Siefken, CEFCU's retired president/CEO, has always had a strong vision of where the Credit Union should go. I tell people I trained Siefken when he came into the Credit Union many years ago. But seriously, he knew how to make the Credit Union succeed and grow. Years ago, when I had the opportunity to be involved in brainstorming sessions with him on the strategic and philosophical direction of the Credit Union, he coached me on every aspect of the credit union business. His coaching helped me develop a much broader understanding of the functions and opportunities of business 27 years ago, in between my stints at Caterpillar. Fortunately, Caterpillar also provided a lot of training and educational opportunities, too . . . like a 16-week I.S. program that was key to learning I.S. skills. That training led to involvement in a lot of different business issues at Caterpillar.

I am very grateful for the interest and support I received from these two mentors and the many educational and growth opportunities provided by Caterpillar and now CEFCU.

Give a brief history of CEFCU. Why was there a need for a credit union in central Illinois?

CEFCU was founded in 1937 to serve Cat employees. During that period the U.S. was coming out of the Depression, and it was very difficult for most people to get affordable loans. Back then, the philosophy of "people helping people" through a not-for-profit cooperative structure allowed credit unions to offer more affordable loans, and to pay higher savings rates.

The need for affordable loans continues today. As CEFCU membership has extended into the broader community, we've found the majority of our members come from households whose annual income is much less than Cat and other professional employees. These newer members need and deserve a chance to improve their financial well-being, just as the original Cat employees had the opportunity to do many years ago.

Who were your target customers originally? Numbers today/target customers? How many locations? Today? What were your original deposits? Today? To what do you attribute the growth?

The people we work for are the member/owners, and the people we target are those who qualify for CEFCU membership. Originally, our target members we call it ("field of membership") were Caterpillar employees. To join the Credit Union back then, members deposited $5 in their savings account. The $5 represented one share and their ownership right. The maximum share balance was $150, and the maximum amount loaned was $150. Our first "office" was actually a table in Caterpillar's East Peoria cafeteria, and we literally did business out of a cigar box.

Today, CEFCU is open to nine counties. These members are served through 20 member centers, a telephone center, and several 24-hour convenience services like Money Center 24, Touch-Tone Teller, CEFCU On-Line, CEFCU Check+, and Visa cards. Members need to have a minimum of $25 in a savings account, and then they have access to the full range of financial products and services. The Credit Union motto is "Once a member, always a member." So people can continue to be members if they move out of the area or change employers. As for our growth, when I started in the Credit Union in 1965, assets were around $9 million. Now, assets are near $2 billion and CEFCU is the 10th largest credit union in the nation. I attribute our growth to a strong demand for services from our member/owners, and a staff committed to providing excellent service.

Explain CEFCU's ties with Caterpillar in the beginning. When/why did you branch out? Was it for the better? How so? What trends in your industry have forced change?

Until the early 1970s, Caterpillar Employees Credit Union was almost like a department of Caterpillar. Business was conducted inside Cat plants for Cat employees. When membership grew to include Cat employee spouses and children, it was difficult for them to get into plants to transact business. So, in 1972 we opened a branch in the Pekin Mall, and later we talked with Northwoods Mall about placing an office there. Caterpillar was not comfortable with that, and said if we stayed in the malls, we would have to go our separate ways. After getting Caterpillar employees' input about mall offices, the CEFCU volunteer board of directors, all of whom were Caterpillar employees, voted to stay in the malls so we could provide our members the services they wanted. After the vote, we worked out an agreement with Caterpillar that, among other things, included changing our name.

Was this change for the better? Well, we would not be where we are without Caterpillar employees and their families. But in the early 1980s, Cat faced difficult times--during a three-year period they laid off nearly half of their 36,000 local employees. This was a crucial period for CEFCU, as we had 96 percent membership penetration among those employees. We ended up with many foreclosed homes and a lot of used cars to sell. So at that time, Siefken took an innovative approach and told the board he wanted to institute a Total Quality Management (TQM) program. That was a risk for us because TQM meant creating new jobs when the economy was going a different direction. But it was really the only way we could proceed with developing the new services that were necessary to serve members and protect the safety and soundness of the Credit Union.

Clearly, history has proven we made the right decision to serve more members through diversification, and to use TQM in the process of adding new and improving established products and services. In addition to developing improved services, TQM played a major role through its impact on employees. At CEFCU, we encourage employees to use TQM as a way of controlling their own destiny. TQM allows employees to design the structure of their work. It empowers them to improve processes and encourages them to reach out and take more responsibility in the process of serving members and co-workers. TQM results have exceeded our highest expectations and will continue to play a significant role in how we serve members.

In regards to trends in the financial industry, several things have forced change--expansion of products which credit unions can offer, deregulation, new electronic delivery channels, one-stop financial service shopping, and a shift away from interest income to fee income. In my view, all of these trends are evolutionary. Participants who have the resources to compete and are alert, flexible, and forward-thinking will adapt as needed to keep pace with these changes. Credit unions, in general, have not kept pace with banks in the shift away from interest income to fee-based income. At CEFCU, fee-based income is even lower than the average credit union's. This raises the question, "Is this a good approach?" In our case, we think it is very good for CEFCU member/owners. We believe we have the right balance in our return to savers, borrowers, and services provided. The key is to stay alert to these and other trends in our business, and adjust appropriately.

Explain the controversy over government regulations between banks and credit unions.

Fortunately, we live in a society with a government that permits a variety of business ownership forms--from stock-owned companies to sole proprietorships and companies in between, like partnerships, cooperatives, and limited liability companies. As I understand it, there are around 70,000 member-owned cooperatives in the U.S. Many types of businesses can choose to be a member-owned cooperative, including businesses in the financial, health, and agricultural industries. The government rules regarding principles of operation and tax treatment are different for each form of ownership. They have advantages and disadvantages that aren't shared across the board. Therein lies the controversy.

Like most cooperatives, CEFCU is owned by many people. Relative to stock-owned organizations, CEFCU's owners' investment has less risk, and while it is very good, the amount returned to each individual is usually less than the amount returned to the few stock-owners of publicly held companies. In the case of banks, a few stock-owners take greater risk for greater reward. CEFCU member/owners get one vote regardless of their investment. The number of votes a bank stock-owner usually gets is based on the number of shares held. The point is that obviously the bank stock-owners want to maximize the amount of their return. And without the presence of CEFCU, they would have a greater opportunity to do that.

So, the controversy is over the economics of operating our businesses and operating structures. It's not over who supports the community and who doesn't--it's over the difference of ownership roles and the differences in tax treatment between cooperatives and publicly held corporations (C). The Credit Union has a structure that returns everything but capital to its members in the form of higher savings rates, lower loan rates, and convenient, lower-cost services. Banks, on the other hand, have to serve their customers and return a profit to their stock-owners. Ironically, many banks are electing S Corporation status, which does not require payment of federal tax at the corporate level. Pending legislation would expand this option to many more banks by doubling the number of owners a bank can have, and by easing restrictions on trusts and employee ownership plans for S Corporations.

Another issue is the expanded powers of banking reform legislation. Banks can transact financial business at will, anywhere, and can manufacture and sell virtually any financial product they want.

CEFCU has much greater restrictions on investments, loans, loan interest rates, capital accumulation, business loans, mergers and field of membership, and limited powers regarding insurance and security products. Bankers like to paint CEFCU as an entity separate from its member/owners, similar to their stock-owned banks. In reality, CEFCU is its member/owners. So, when anyone says they want to tax CEFCU, they are saying they want to tax the member/owners of CEFCU who abide by the restrictive rules of the Federal Credit Union Act.

I don't want to leave you with the impression that credit unions are in any way tax-free. As in most forms of ownership, dividends are paid and "CEFCU member/owners" pay the taxes on them.

CEFCU owners also pay the so-called "Illinois Sales Tax" for credit union supplies and equipment, local property taxes for credit union buildings and land, and payroll taxes for employees. CEFCU employees pay federal income tax and their payroll taxes for Social Security and Medicare. And, all retained CEFCU earnings since 1937 have been paid into reserves and serve as capital to protect the safety and soundness of CEFCU member/owners' investments

As mentioned earlier, the nice part is that society permits businesses to chose their ownership style. Banks can and do convert to credit unions, and credit unions can and do convert to banks. We all have options, and if one form of ownership is better than another, we have the right to choose.
 
Was CEFCU one of the first to use ATM machines and loans-by-phone in this area?  Was it hard to get people to accept what was "new" technology at the time?  How successful have these programs been?  What new technology will we see in your industry that will improve our everyday lives in the coming years?

I think CEFCU's success with ATMs is very surprising in relationship to what others experienced. We continue to get more deposit money in ATMs than we do withdrawals. I think that says a lot about how much members accept technology and trust CEFCU with their money.

Looking back, ATMs were a difficult and costly technological challenge when we first introduced them. But it has proven over the years to offer a great convenience to CEFCU members. Forward-thinking financial institutions seemed to have grown and thrived more than those who decided to side-step or not actually pursue ATMs.

Our Phone-A-Loan service has also been very successful. Around 75 percent of member loans are taken by phone. While some members feel strongly about talking face-to-face when getting a loan, those that choose to call don't have to get in their car and travel to and from the Credit Union to apply. The phone solution is very convenient and saves a lot of time.

In terms of new or evolving technology, the Internet and the ability to perform financial transactions, including home banking, brokerage services, and even insurance services on-line is on the verge of a breakthrough. In this regard, CEFCU and all credit unions must take a strong forward-thinking position as we redefine ourselves in the "dot.com" era. Also, the U.S. has an opportunity to by-pass the so-called "smart cards" in Europe and advance directly to a telephone-based smart computer that allows for the direct exchange of money in place of cash. Through enhanced phone systems, we'd use the phone to transfer money at the point of purchase, and have "e-cash" instead of money.
Is this technology use one way the credit union can save money, reduce staff, etc?

To some degree. As a result of technology, we serve many more products to many more members at lower cost than we could in older days. E-commerce seems to have increased transactions while reducing the growth of staff, but the impact on employees has not been as great as some of the original computer applications. I remember calculating interest manually and posting the results on ledger cards. Today, those transactions are done at computer speeds in minutes for all of our members' savings and loan accounts. However, in the e-commerce world, the outcome has not been so clear. We'll never be a cashless or checkless service. What we're seeing is that members who use electronic services do more transactions. But that has not resulted in fewer face-to-face visits. Although, over time, we expect today's children and young adults to make a much stronger shift toward electronic transactions and a leveling off or reduction of transactions conducted in-person.

What markets does CEFCU target? How is that different than the founding vision?

CEFCU is focused on serving everyone in our field of membership--our members here in Central Illinois, plus those who live in other parts of the country, and even overseas. We've also had a long-time involvement with business services, and see that as a strong focus for future growth. In 1937, CEFCU was essentially in the savings and loan business. We've maintained that view, but have become even more member-focused by adding services driven by members' needs and technology. We will apply all of our resources to making sure we are relevant to our members across the board in financial services. That includes savings, consumer loans, member business loans, checking and cash management, and insurance and brokerage services. CEFCU's goal has always been to be our member/owners' first choice for their financial needs.

In your opinion, what are the advantages of a credit union versus a bank?

The number one advantage is member/ownership. It creates a much stronger relationship between staff and members. We know our members own the Credit Union and we work for them. Another advantage credit unions have is a strong commitment to service. If you'd compare a bank our size to CEFCU, a bank could have fewer than one-fourth of the customers that we have as member/owners. We have 212,000 members. A bank equivalent in asset size to CEFCU has maybe 50,000 to 60,000 customers. So we've had to focus on and develop convenience services because we have so many members for a financial institution our size. That drive for convenience has given us a big advantage in how we take care of our members.

Another advantage is that credit unions have elected to serve members from all economic backgrounds. For example, credit unions have never been forced to comply with the Community Reinvestment Act (CRA) because our "people helping people" philosophy has resulted in a very good job of reinvesting in the community to serve all members. But because of the nature of our mission, we participate on a voluntary basis and fulfill the intent of CRA. We are willing to put our community reinvestment record against anybody's.
CEFCU also provides a competitive environment that extends well beyond CEFCU members.

Research strongly indicates that traditional banking services are a better deal for non-members who live within CEFCU's field of membership. CEFCU's presence in the marketplace does impact rates and fees offered by other financial institutions. This is possible because credit unions return all net earnings, except for capital accumulation, to member/owners in the form of very competitive rates and service.

How do you see the future of credit unions locally? Nationally?

Locally, there will always be a group of credit unions that do a great job of serving their membership bases--we have many of those in Peoria. But as national statistics indicate, the number of banks and credit unions are declining at a fairly rapid rate. A big portion of that is caused by the regulatory environment (compliance laws) and the economy. From an economic perspective, scale is needed to provide a wide variety of enhanced products and convenience services that member/owners want and demand. So over time, the consolidation that has been taking place will continue. There will be fewer and fewer credit unions and banks. However, the number of credit unions will decline at a slower rate than banks due to much greater restrictions on credit union mergers. As another point of comparison, the 10,000 credit unions in the U.S. have less in combined assets than the single largest bank.

No doubt we'll see more consolidation in the financial services industry. But, there's a strong future for credit unions that meet members' needs both locally and nationally. As I said earlier, there are a lot of credit unions in Peoria that do a great job of taking care of their members.

Will/do you go into the insurance and investment industries? Why/why not?

We have been offering insurance and investment products since 1985 through our subsidiary, CEFCU Financial Services, Inc. As a result of strong member demand, we'll certainly continue to expand these services.

In a tight labor market, how do you recruit and retain employees? How has that changed over the past 10 years?

First of all, good employment practices had to be established long before the tight labor market got here. Companies cannot just turn on a strong focus on employee satisfaction to get through tough times. We feel very good about the position we have in the marketplace. While our employee turnover rate has moved up over the last 10 years as a result of a very strong economy, it is still very low, at six percent for 1999--that's much better than the credit union industry average of 19 percent. In addition to fair employment practices, I think we've also had a history of focusing on challenging projects, including making sure employees have the opportunity to develop the skills needed to meet those challenges.

We have an internal university (University of CEFCU) which offers tuition reimbursement and a wide variety of training programs on a continual basis. We also offer competitive salaries and benefits. We know that if we have satisfied employees we will have satisfied members. The proof is in our member satisfaction ratings, which are at the highest level since we began measuring them. The thing that impresses me most about CEFCU is the commitment of CEFCU employees, not only to serving our owners, but to supporting our community. One final note, as a not-for-profit cooperative, CEFCU is fortunate to have a very strong group of volunteer directors. These directors spend many hours representing the interest of member/owners. In my 35 plus years of business experience, I have not worked with a stronger team-oriented group of employees and volunteers. IBI