Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, June 19, 1994 TAG: 9406240003
SECTION: BUSINESS PAGE: D1 EDITION: METRO
SOURCE: By MAG POFF STAFF WRITER
DATELINE: LENGTH: Long
Today, the Bristol-based thrift is called "the miracle in Southwest Virginia" by Arnold Danielson, president of Danielson Associates Inc., a bank industry consulting firm in Rockville, Md.
In a startling turnaround, Charter did more than merely save itself. Through the efforts of its board, a new president and some investors, the thrift transformed itself into a strongly capitalized savings bank.
Their success was, Danielson said, both a miracle and the result of faith and hard work.
Most industry observers thought Charter president Cecil McCullar had no chance to save the thrift, Danielson said, even though it was earning money at the time. "It was one of the most admirable situations, ... an incredibly impressive performance."
McCullar and Charter's management "did an extraordinary job," said James Mabry of Wheat First Butcher Singer in Richmond. "They were truly an underdog." But there was nothing mysterious about the result, said Mabry, who assisted Charter with its new financing. "It's a lot of hard work, that's all."
Warner Dalhouse, who was McCullar's boss as chairman of Dominion Bank and now is chairman of First Union National Bank of Virginia, said he admires the courage of Charter's board in hanging on during Charter's darkest hours and believing it could be recapitalized.
"That was not at all a sure thing," he said.
McCullar and the board, he said, have transformed Charter into "an effective competitor in this marketplace."
The federal Office of Thrift Supervision has released Charter from special surveillance, and Charter is now subject only to normal bank regulations. It underwent a full examination late last year, McCullar said, and was found to be well capitalized. Capitalization refers to the underlying financial strength of a financial institution and its value to its shareholders.
\ McCullar, known as Andy to his friends, spent 26 years with Virginia National Bank, a predecessor of NationsBank, before joining Dominion Bankshares Corp. For nine years he worked in Bassett and ran the Blue Ridge region in Roanoke before being assigned in 1991 to head Dominion's Bristol region.
His job was abolished in March 1993 in Dominion's merger with First Union Corp. Originally asked by Charter's board to help recruit a new president as E.L. Byington Jr. prepared for retirement, McCullar wound up being offered the job of running the bank on a daily basis. The chairman, King College economics professor Robert Bartel, only presides at board meetings.
McCullar came to Charter in a time of crisis. "He took a big chance when he took that job," said Dalhouse, who described McCullar as capable, resilient and persistent, a quick study and a pleasant and effective executive.
It was, McCullar said, "a very conservative-type, old-fashioned savings and loan until the early 1980s," when it began to experience the problems of other thrifts nationwide. It was caught in a rate squeeze, earning interest income from old, long-term mortgages fixed at low rates while the rates it had to pay to lure deposits were rising.
Charter grew out of First Federal Savings and Loan Association of Bristol, which was founded in 1920. The current institution was created in 1982, when it began to take over a string of Virginia and Tennessee thrifts, including Peoples Federal Savings and Loan Association in Roanoke and First Federal of New River Valley. The other thrifts were in more serious difficulties and, as they did with other thrifts nationwide, federal regulators induced healthier thrifts to adopt their less fortunate brethren.
In exchange, regulators gave Charter a gift: supervisory goodwill. It means the government allowed Charter to record an asset of $61 million that for bookkeeping purposes counted toward capital and for some years helped it avoid a deficit position. The thrift also was promised a period of 40 years to recover from taking over the failing thrifts. Charter planned to amortize the goodwill over 25 years.
"It was an accounting gimmick, if you will," McCullar said.
But that very government-authorized credit was nearly Charter's downfall when Congress changed the rules. In 1989 it abruptly eliminated the accounting credit for goodwill, despite the contractual promise, and ordered all thrifts to immediately comply with capital standards.
Starting in 1989, McCullar said, federal regulators "began to beat on Charter a little bit." Others felt the whip as well, as the government began to seize noncomplying thrifts nationwide.
Between 1989 and 1991, McCullar said, Charter lost $26 million "on its own," compounding its problems. The thrift had become heavily engaged in auto leasing, credit cards and other ventures in which it had no experience. It also suffered from the bad publicity of two large embezzlements in Roanoke and Knoxville.
Despite all these problems, McCullar said, "our depositors have been very loyal. As best we could measure, we don't think there was a significant runoff" of desposits or loan business.
In 1991 Charter began to fight back with vigor, filing suit in federal court for enforcement of the government contract that granted goodwill capital accounting for 40 years. The suit was an effort to stave off closure. Even if it could not be won, McCullar said, it could "buy time."
But Charter did win at the trial level, and the government appealed.
When McCullar joined Charter March 15, 1993, he was told that the appeal decision was imminent and the worst was expected. Those fears were realized on March 26 when the appeals court reversed the earlier decision and ordered Charter to comply.
McCullar and Charter's board faced the alternatives of raising capital by selling new stock or accepting seizure of the savings bank. They voted to fight to save the institution.
Charter eliminated from its assets the $41 million that was left of the goodwill. The result was a capital deficit of $12 million.
Charter hired Wheat First Butcher Singer, a Richmond brokerage firm, as its adviser to raise capital. There was no underwriter for sale of the stock.
Wheat First assigned Jim Mabry and two other corporate consultants from Richmond to the effort. Charter's team was McCullar and Richard Buchanan, who was for 17 years its executive vice president for finance and credit administration. This team prepared the rescue plan and traveled as a group to carry it out.
Their plan called for a so-called rights offering to existing stockholders. For each share of stock owned, shareholders received the right to buy 5.95 shares in the new offering. Shareholders could pass up the offer, buy rights and sell them, or buy the rights to trade for shares.
The bank needed $12 million "just to get back to ground zero," McCullar said. Another $31 million would be required to meet government capital standards, and expenses had to be recovered.
The bond issue was set at $44 million, the amount needed to bring Charter back to financial health.
McCullar, Buchanan and the Wheat First team began to travel. They were looking for investors who would be willing to subscribe to the stock, thus assuring success of the drive even before the rights offering to shareholders.
They toured Southwest Virginia and parts of Tennessee. They went to New York, Boston, Baltimore, Pittsburgh and to the Midwest, visiting existing large stockholders and a list of major investors prepared by Wheat First. They put together a 25-minute presentation and prepared to answer questions.
In advance, McCullar said, the situation "looked like the ominous undertaking it was." But, he added, Charter now had one advantage. The bank had turned around and was making money again - $2.2 million at the end of the June 30, 1993, fiscal year. And the regulators were giving Charter a few months to mount its own rescue .
Two of the largest shareholders - United Co. and Electro-Mechanical Co., both of Bristol - agreed to buy rights through newly created partnerships. Between them, McCullar said, they owned 23 percent of the bank. Others on the board and senior managers agreed to buy new stock as well.
Mabry said Charter was "blessed to have some loyal supporters at the board level."
One of the investors was Bassett Furniture Industries Inc., the furniture manufacturer in Henry County. B.M. Brammer, Bassett's executive vice president-financial, said he thought the venture would be a good investment. "I liked the idea that Andy [McCullar] would be CEO" and the concept of recapitalizing through standby investors.
If the rescue effort had fallen short, Brammer said, "it would not have cost us a penny." If it succeeded, he said, Basset Furniture would own stock in a well-capitalized bank.
"It was a good investment. It had very little downside and hopefully plenty of upside."
Bassett, McCullar said, signed up for $1 million, half through the company and half through Brammer Partners, an entity formed for the purpose.
Other large commitments came in from groups in Bristol, New York, Maryland and Indiana.
\ McCullar remembers well the magic day. On July 9, 1993, Charter had enough investors on a standby basis so that the rights offering could not fail even if every other shareholder rejected it.
On July 9, Charter had stock subscriptions worth $44 million; the bank was saved.
The stockholders knew that fact when the rights offering was sent to them. Still, McCullar is proud to say, they subscribed to $20 million worth of stock. The standby investors picked up the other $24 million.
The deal closed Aug. 13, McCullar said, describing the mood on that day as more relief than celebration. No special observance was held.
And, for the first time since he had become president, McCullar "began to sit back" and ask where Charter was headed.
Charter views itself as a locally based community bank serving Southwest Virginia and East Tennessee, McCullar said. It differs from the large banks that serve the same region through its personal service. It seeks to retain employees, who can call customers by name. Charter's customers, on the other hand, are people who "don't want anything fancy" from their bank, he said.
Charter has resumed advertising, which was suspended during the lean years. McCullar is also looking at the areas where Charter had closed nine offices for possible expansion. It now has 27 branches.
Charter has expansion plans in the Roanoke Valley. It recently purchased the former NationsBank office on Williamson Road to upgrade Charter's Crossroads branch. It will replace what McCullar described as "a much inferior office" farther north on Williamson Road.
Charter got out of the disastrous credit card business years ago. It had picked up defective lists; people with poor credit histories were guaranteed cards, resulting in high defaults.
McCullar also has quit auto leasing, indirect auto financing and similar types of business better handled by larger banks. And Charter has stopped commercial real estate lending outside its market area, gradually working down $12 million in bad loans in other states. Charter will sell to other parties $18 million in municipal bond issues it had purchased in Florida and Kansas.
Charter is also reorganizing. Buchanan's role has been expanded to include advertising, products and other areas. It hired Ron Bew away from Crestar Bank in Washington to oversee consumer banking, production and marketing.
McCullar expects to devote the next few years to reshaping Charter to compete in its region. Employee training, for instance, "virtually nonexistent" when he arrived, is now a top priority item.
"We're blessed with a relatively long-term staff who've hung in through tough times," McCullar said. "Now we're beginning to enjoy good times."
He said he regrets that these cutbacks forced layoff of 12 people in two departments.
by CNB