HIGHLANDS RANCH, Colo. — About two years ago CEO Pat Ahern asked his credit union's board if they could live with the possibility that 73% of the membership might walk out the door with $13 million in assets.
When the board agreed they could take that chance, it opened the door for sweeping changes in Red Rocks CU that dramatically improved its asset growth and profitability.
The $170-million Red Rocks made the tough choice to address unprofitable members — and, indeed, those choices led to many leaving. RRCU's management made other difficult decisions, such as cutting staff by 30% — to totally restructure the credit union and reverse a business model that the credit union knew could not support growth in the future.
"If we were going to survive, we had to reverse the trend of operating expenses outpacing net interest margin and we had to do that in a way that was meaningful to our members," explained Ahern, who said the possibility of merger was also discussed. "'If we could not do this we should not be in business,' I told the board."
The changes, which included emphasizing more member self-service and remote and electronic delivery channels, cut operating expenses in half, going from more than a 4% net-operating-expense ratio to 2.5%, with more reductions expected. The 17,750-member Red Rocks has seen its total number of members fall from 19,300, but has increased assets by more than $35 million, averaging over 20% deposit and loan growth since the changes began to be implemented in January 2008.
All aspects of the credit union's business model were on the table to be examined. What led to the poor efficiency, according to Ahern, was a marked increase in competition, the economy squeezing margins, and the credit union losing its focus on its existing members. The CU was heavily involved in supporting the community — taking those efforts to a level Ahern said Red Rocks knew was not sustainable. The CEO said that was simply one big example of how Red Rocks had lost sight of its mission.
"I went back through the original meeting minutes of the credit union from 1979 to better understand why we were chartered," Ahern said of the CU that was originally formed to serve aerospace employees at Martin Marietta. "The bottom line is that it was a bunch of engineers who wanted a way to better themselves financially."
Ahern proposed to the board that Red Rocks totally restructure with that simple premise in mind, but achieve the goal "in a modern way. We would undo everything we had done. Modernize as much as possible, be as efficient as possible, change our delivery channels, simplify our products and services, and maximize the economic return to our member."
Many of the problems that led to inefficiencies resulted from RRCU being more interested in new members than existing members, Ahern asserted. "And we were very good at attracting new members. Year after year we were business of the year, locally and statewide. But when all was said and done, our existing members were not any better for it."
With overhead "eating up everything" and not leaving a great deal for members, Red Rocks began to institute massive changes. Over time, it cut branches from five to two, emphasized electronic and remote access, chopped products and services by 70%, reduced staff, and closely examined its membership to drive out unprofitable members or persuade them to become profitable. "We had forgotten that in a true cooperative, everyone contributes and everyone participates," Ahern said. "This is not a charity."
Yet despite its recognition it was a not-for-profit and not a non-profit, it also discovered the old 80/20 rule was alive and well, with an analysis showing 73% of its members were unprofitable relationships. Ahern said the credit union segmented the unprofitable members and began talking to them-at teller lines and in letters-asking them to engage or leave the credit union. To make sure that happened, Red Rocks introduced fees and relationship pricing.
About 14,500 members were deemed unprofitable and 700 left within the first few months of the changes. A branch traffic study also showed that through shared branching RRCU was serving as many non-members as members. "We did not feel that is a profitable service," Ahern said. "Why should my members who pay the bills stand in line behind people who don't?"
The credit union brought in self-service kiosks to handle all shared branching transactions. Also, members deemed to be the least profitable, based on their overall relationship with the credit union, could use the kiosks for free or pay $5 per live teller transaction. In addition, this group was charged $3 for paper statements if they chose that option over free electronic statements. "We always give our unprofitable members a free option," Ahern pointed out.
Red Rocks initiated a big push to get members to use remote and electronic access. Today, 60% of all RRCU households take electronic statements. "And virtually 100% of our loans are opened and closed electronically and remotely (Credit Union Journal, July 21, 2008)," Ahern said, who noted that consumer loan applications rose by 115% in 2008. "You open accounts over the phone, and if you come to the branch to open an account we put you on a phone. Members figure out quickly they don't have to come to the branch to do business." Red Rocks added two new call centers to handle the increased phone traffic.
While changes impacting RRCU members were significant, internally the credit union experienced a "huge cultural overhaul," Ahern said. "I said if we are going to get serious about this efficiency push, we have to live this. All of the executives have given up their offices, some sit in cubicles with staff. I took the smallest office in the entire facility to bring this point home."
Along with the staff reduction came redeployment, which included an emphasis on new phone centers and sales. The CU retrained where it could, but didn't hesitate to bring in people with new skills sets, including a new VP of sales. "When you hire new people you don't have to worry about 'untraining' them from doing things the old way," Ahern said.
Front-line staff went from being jacks of all trades to handling a high number of transactions and referring members to the sales team to obtain products and services. "We came to grips with the fact that we should not expect any sales from people in certain positions," Ahern said. "We think segmenting these tasks makes everyone's jobs a lot simpler, and people are more confident in what they do."
A greater emphasis was put on variable pay, such as bonuses. "Previously we were driven by base compensation," Ahern explained. "We held base pay and increased variable pay to drive performance around our efficiency and cost-cutting metrics." Despite reducing staff to 34 from 52, RRCU has increased variable compensation and bonuses by 78%.
The benefit to members from of all the moves is clear in their returns, said Ahern. A 48-month auto loan is 4%, and deposit products compete nationally with banks and investment firms like ING. Red Rocks' capital ratio is 9.1%. "We said since we are going to more self-service we have to pay attention to national rates." At press time, RRCU's High-Yield savings paid 1.61%, 20 basis points above ING, Ahern pointed out. A one-year CD returned 2.12%."
"It's all about hard choices," Ahern asserted. "I think a lot of times CEOs — and I speak for myself — buy into the latest concept, the latest consultant pitch, and run off and pretend to be something we are not. For so many years Red Rocks forgot that it was a credit union and wanted to become more like a retail community bank. We are not significantly big enough — and I would say most of us aren't — to do that and do it well. I used to believe that bigger is better and there was such a thing as too big to fail — which has proven to be a fallacy. As I said, we had forgotten who we are."
