“History is not the past. History is the present. We carry our history with us.” -James Baldwin
Part I ended with the investment manager who engineered the workout at Eglin having to find a new job. (link to Part I)
I am skipping his next workout story to go to the biggest, most difficult challenge: saving a large troubled, insolvent credit union when economic times were relatively stable.
The Challenge: In his Own Words
In early 1990, John Ruffin and Henry Garcia came back into my life by requesting me to interview for the CEO position of San Antonio FCU. John was the NCUA Austin Regional Director and Henry was his Senior Special Actions Officer. This time I asked for three years of Annual Statements of condition and yearly income and expense.
Those financials did not show the TRUE numbers for SAFCU. However, my EGO was tempted to take on another work-out if the rewards were worth it. But I loved living in Chattanooga and my family also loved it. The only concern I had was the private school cost to educate my three children and the future cost of sending them to college.
I turned down Henry G. at least two times and then he told me John Ruffin was in three days going to drive from Atlanta, where he was visiting family, to Chattanooga to interview me. My prep work was to find out what large CU’s CEOs were on average being paid and I found that the top 10% average was $200,000 a year.
So, when John arrived and made his pitch, I was prepared to ask for three things.
- First, If I accepted John and the Regional Office staff would become my and my team’s partners in this SAFCU turnaround.
- Second, in this high-risk challenge I wanted to be paid equal to the top 10% CU CEO’s average annual compensation of $200,000.
- Third, I wanted some “bonus” opportunities if I was successful. I asked if negative equity was improved to zero or positive, I would want a bonus of 1 year’s compensation. If total Capital equaled 4% of risk assets, I wanted a bonus of 1 year’s compensation. Finally, when total capital equaled 6% of total assets, I wanted a bonus of 1 year’s compensation.
John agreed to my requests and I reported to duty July 25th, 1990. It took my first 90 days to identify how bad the pain and the problem really was.
I found $110 million of commercial loans, the worst of the worst, after NCUA’s ALMC purchased at par $75 million. Then we began getting appraisals and to the best of our ability to establish what the allowance for loan losses (ALL) funding should really be. After the completion of this process we determined that SAFCU was $36 million insolvent after funding of the ALL.
The commercial portfolio was the disaster, but I found a jewel in beginnings of a robust indirect lending program that would allow me and my team to grow quality earning assets with short durations.
Working with the Austin Region we began crafting a letter of understanding and agreement (LUA) that included the ability to earn out (retain) $25 million in NCUA capital notes. I can’t recall the thresholds to fund the capital notes but within 18 months we were fully funded and had removed the negative equity.
I noted that in a workout the CU staff always expects the worst to happen. In fact, six months before I was hired, the previous CEO had eliminated and fired over 100 SAFCU staff members. It would take time for the economy, Texas oil prices, and local real estate values to recover for SAFCU to liquidate at a reasonable price the commercial loans and the collateral we had repossessed securing them.
My workout tactic was to take the CU’s financial statements and income and expense and create a Good Cu and a Bad CU financial statements. By doing this I could show progress to my CU staff as well as NCUA Regional and Washington Staffs.
I then challenged my Indirect Lending staffs to increase loan production by an annual 20% increase for the first year and 30% year two and finally by year three, doubling our annual indirect vehicle loan production.
The tactic I used for working out the commercial loans and repossessed real estate was managed by this guidance: “Reduce the commercial loans and repossessed collateral as fast as possible with the least loss.”
I said “No” to sales where the price was extremely low, and I waited for an improving market. Likewise, we saw appraisals per square foot costs were lower than the costs of new construction were per square foot. Simply said, someone wanting office space could buy it cheaper than building it new.
The preceding were the core tactics to encourage the turn around. Add to them hiring freezes, cooperative ventures to share costs, zero based budgeting and extreme cost cutting while not cutting service to members.
Did it work? Well I earned my first capital improvement bonus in 1993; the second capital Improvement bonus in 1994 and the third and final bonus in 1996.
When I retired at the end of 2011, SAFCU’s Capital was $254 million and the total assets $2.9 Billion.
The financial turn arounds success, while great for me, also impacted others. The continuance of the financial health of these credit union meant that their members could be served and provided fair priced and valued financial services If the three credit unions had been liquidated during the time that S&L’s were being closed, I estimate that the losses to the NCUA Share Insurance fund would have been close to $250 million.
My greatest career satisfaction was mentoring nine future credit union CEO’s. Two or three of them after a stint in dealing with Board members switched to other career paths. Also, as of the as of December 2019, four of my mentees have retired, and three are active Credit Union CEO’s.
Footnote: Today San Antonio FCU is renamed Credit Human. It serves 233,110 members with 787 full time equivalent employees, in 20 branches and managing $3.2 billion in assets. The net worth ratio is 11.1%