Joe Mirachi
President and CEO
Tucson Old Pueblo Credit Union

Regulatory challenges, bank failures, economic uncertainty and mounting losses are causing many top-level executives to reassess their institution’s current business model. In this environment, the near term has significant strategic implications. The institutions that will prosper in this new environment are the ones that are willing to act quickly to change their thinking and assess their strategies.

One credit union that recognized the need to change was Tucson Old Pueblo Credit Union (TOPCU), a $140-million credit union located in Tucson, Ariz.  The turnaround for this credit union is still under way, but the progress to date has been exceptional.  Just seventeen months ago, the credit union was struggling with loan losses from an overly aggressive indirect lending portfolio.  The credit union’s president and CEO, Joe Mirachi, was just a week in to the job when Raddon Financial Group (RFG) facilitated a pivotal strategic planning session that changed the credit union’s course.  Mirachi offered to discuss the strategic planning process and explain their progress over the past year.

Q): Joe, we conducted our first strategic planning session with TOPCU during a very challenging time for the credit union. What needed to be done to get the credit union pointed in the right direction?

Joe Mirachi: The credit union was really struggling when I joined in September of 2008. We had $74 million in indirect loans — a big portfolio for a credit union our size. The credit quality was bad, and we started getting hit hard with loan losses at the same time the recession deepened and unemployment increased significantly. Our profitability really tanked. We had to take a number of steps very quickly.

1. We cut expenses for the coming year by five percent which included suspending annual merit pay raises, tuition reimbursement, 401(k) matching, and expenses for travel and conferences.
2. At the same time we had to reallocate staff to beef up our collections effort in order to get in front of the loan loss situation.
3. Almost immediately we strengthened our loan underwriting criteria and processes.  For example, we changed our risk based pricing credit tiers to make them much more rigorous while reducing LTV limits on vehicles and real estate loans. The core problem was a lack of integrity in our underwriting process. We had been approving loans that we shouldn’t have approved, so as an additional safeguard, we added a review of loan decisions to monitor underwriting decisions.
4. Next we started being very diligent about reducing our cost of funds, particularly on the certificates which in many cases were from single-service households.
5. Finally, we restructured our organization to provide more member contact personnel with a goal to provide better service and improve cross-sales.

As a result, a year out from our first Raddon strategic planning session, we’ve been pretty successful on a number of these actions.   One of the primary goals was to restructure our balance sheet to reduce our indirect loan portfolio and increase our focus on long-term products that build member loyalty, like first mortgages. Our indirect portfolio is down from $74 million to $45 million and we have increased our real estate portfolio by almost the same amount.

Specifically, based on our CEO Strategies Group report in September of 2008, our loan mix was 49.6 percent in indirect loans and 15.8 percent in held mortgages.  As of September 2009, indirect is now 40.7 percent and held mortgages are 25.7 percent of our loan mix.  We have also been able to lower our average cost of funds by 74 basis points and improve our net interest margin 32 basis points over the same period. We still have a lot of work to do, but we are definitely moving in the right direction as we implement our new strategy.

Q):  You made several significant changes; how did you build consensus and commitment for the plan among your staff and board so you could move quickly on key decisions?

Mirachi: Coming out of our first strategic planning session in September of 2008, our entire business model changed.  

Right from the start, we got consensus and commitment from the senior management team and the board which was critical.  A key was that the planning process was very data-driven.

The data pointed to undeniable strengths and weaknesses, so consensus and commitment flowed naturally from the process.

I then went over the whole strategic plan with our entire staff.  I showed the staff our CEO Strategies Group reports and NCUA peer data.  As I took them through the financials they could see pretty clearly that loan losses were our biggest problem.  So educating the staff was an important step in getting everyone on board with some of the tough financial decisions we needed to make.

We were implementing an entirely new business model for TOPCU.  Instead of attempting to make a lot of money on indirect loans, our new plan was designed around doing a better job of serving our core members to achieve primary financial institution (PFI) status and gain a greater share of their business.  I explained to the staff what their role was and how they can contribute to this new vision.

Q):  You mentioned that the strategic planning process was very data-driven.  Why was that important?

Mirachi: It separated personal opinion and conjecture from reality. [RFG’s] Gee Gee [Kaufman] and Andrew [Vahrenkamp], who facilitated the planning session, used lots of data from CEO Strategies Group reports: benchmarking, peer groups, asset averages, etc.    We followed the data and allowed it to drive the process in several ways.  Going through the data quickly identified where we had issues and opportunities.  The fact the planning process was driven by data got everyone engaged and on board.  It enabled us to come together as a team — from the board to the front-line employees.  The process was very transparent: employees could see the data and ask questions and understand why decisions were made regarding our change in strategic direction.

I must emphasize, however, that ten percent of the work is developing a strategic plan and 90 percent is implementing it.

Execution of the plan requires ongoing measurement and tracking to keep everyone focused and in alignment.  One thing I like is that RFG creates the infrastructure to help keep us on course through a data-driven process and tracking key metrics on the back-end.  Also, between the planning cycles, Gee Gee and Andrew followed-up with recommendations as the data points changed throughout the year.

Q):  During on-site interviews, a rigorous two-day planning session and post-planning tracking, RFG underscores four key questions:  Where are we now? Where are we going? How do we get there? Are we on track?  Joe, are you on track with your statements of strategic direction and action plans?

Mirachi: Overall, yes.  Coming out of our first planning session, we had nine statements of strategic direction.  It was an awful lot, but much work needed to be done.  We’re not finished yet; in particular profitability is still lagging, but culturally and financially, in terms of restructuring our balance sheet, we have accomplished a lot.

We have also improved our service, and that was verified by our member survey conducted in May.  We had a comparatively large percentage of members respond that our service improved in the last year.

During our recently held 2010 planning session, we added a couple more strategic initiatives.  One of the opportunities identified by the facilitators, Gee Gee and Andrew, was improved checking penetration, particularly with the 18-to-35 age segment.  As a result, we developed a checking account that gives a nickel back for every debit card transaction.  It’s called the Nickel-Back Checking™.  The new Fed rules and pending overdraft legislation may impact fee income on this product, but strategically it is the right thing to do because checking accounts remain one of the key drivers of PFI status and higher household profitability.

Q):  As we move into economic recovery, what are the lessons to learn from the past year, and what should we do to maximize our advantages as this recovery unfolds?

Mirachi: Number one, credit quality is critical. Ninety-five percent of credit unions that fail, fail because of credit quality.  When times are good, organizations can get complacent and in some cases even greedy.  So, credit quality is a big lesson that we should not forget after the economy recovers.

Second, as an industry, we need to do a better job with risk management overall. Credit quality is perhaps the most important component of risk management for a credit union, but we need to do a better job of managing the other risks such as interest rate risk, strategic risk, reputation risk, liquidity risk and the various regulatory and operational risks.

At the same time, the industry consolidation has created major opportunities for organizations like ours to grow market share.  The dissatisfaction with big banks has helped us pick up new members and increase our relationships with existing members.  We’ve been able to refinance mortgages that were previously held with BofA, Wells Fargo and Countrywide.  We’ve had some good word of mouth that has let people know that we are still doing mortgages.

Unfortunately for TOPCU, our loan losses have forced us to hunker down.  As a result, we haven’t been able leverage the current opportunity as much as we would have liked to.

Q):  Tell us how you reorganized to provide better service and improve cross-sales.

Mirachi: Our emphasis is on building a stronger service culture. We prefer the term service culture over sales culture. 

The logic is if we do a good job serving the member by asking the right questions and anticipating their needs, the sales will be a by-product of that process.

Another key has been fostering teamwork across the organization so member contact personnel receive better internal service from their co-workers.

During the strategic planning process, we realized that we needed to restructure to have more people available to assist our members if we were going to improve cross-sales and member satisfaction. Previously, we had separate sales and service staff.  Members would get bounced around between different people, so we integrated the team and provided process and product training.  The staff could see things weren’t working, so they were onboard with the reorganization for the most part.  Employees recognized the change was the right move for our members and our credit union.

We are starting to see the benefits of the reorganization, too.  We improved cross-sales to core members by 39 percent this past year, and based on RFG’s Cross-Sold HH Index¹, our credit union moved from the 8^th percentile in September of 2008 to the 65^th percentile this September.  This was a dramatic improvement for us, and we very pleased with the job our team is doing to make it happen because we consider this a key leading indicator of our future financial performance. Once we get beyond our current challenges with loan losses our financial performance will improve nicely as a result of a more viable business model or strategy being implemented.

I consider developing and implementing a sound strategic plan as the single most important part of my job as CEO.  I’m glad to have Gee Gee and Andrew as partners in making this happen for TOPCU, and I look forward to our third annual planning session later this fall.

¹ RFG’s Cross-Sold HH Index evaluates a financial institution’s ability to cross-sell existing customers through a composite measurement of households sold, deposit and loan balance growth and account profit.

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