Turnaround Wins Walters Star Billing at Northeast
As chief financial officer of Northeast Savings, Kirk W. Walters succeeded where many have failed. He shrank the balance sheet of a thrift that seemed headed for extinction, restoring profitability while keeping capital on an even keel.
His creativity and good timing helped elevate him this month to the No. 2 post at the $4 billion-asset institution in Hartford, Conn.
"His financial acumen has been invaluable in returning this company to profitability, and will continue to [stand] our shareholders in good stead in the future," chairman George P. Rutland said in announcing Mr. Walters' appointment as president and chief operating officer.
Holdings Included Junk Bonds
Two years ago, Mr. Walters said, the company was in "a very difficult position." The thrift was burdened with junk bonds and other nontraditional assets funded with high-cost borrowings from a Home Loan bank. Northeast was making only 60 basis points more on earning assets than it was paying for money.
Now that spread has widened to 178 basis points, even as the surrounding economy has collapsed, and Northeast has enjoyed five consecutive quarters of profits.
As chief financial officer, Mr. Walters executed Mr. Rutland's strategy of shrinking the balance sheet by half and transforming a specialist in wholesale mortgage banking and junk bonds back into a traditional retail thrift.
Mr. Walters "showed ingenuity" in moving two issues of the thrift's preferred stock to its holding company, said Henry Peltz, a former thrift analyst for Keefe, Bruyette & Woods Inc. who now is a vice president of the financial institutions advisory division at Nationar Inc.
The maneuver enabled the thrift to add $100 million to capital, Mr. Peltz pointed out. Mr. Walters downplayed this, however, saying he merely did what commercial bankers had been doing for some time.
He explained that the 1989 thrift legislation changed the rules, prohibiting convertible preferred stock from counting as capital. The way around that, he said, is to transfer the preferred stock to the holding company, which in turn holds common stock in the thrift that may be counted as capital.
Also, Mr. Walters helped to get the company out of its junk bond investments and paid down brokered deposits and jumbo certificates of deposit that had been a big part of Northeast's funding base, Mr. Peltz said.
Northeast made these moves without taking the kinds of losses experienced by such institutions as Columbia Savings and Loan Association, or the big charges that are often associated with layoffs and restructuring.
Staying Abreast of Changes
Mr. Walters said his success was less a matter of financial wizardry than a result of staying on top of changing laws and regulations.
"By April of 1989, there was a pretty good indication of what was coming down" from Congress, he said. "We realized we would have to be a different kind of company."
The thrift had a substantial amount of goodwill on its books, representing the premium it had paid in an acquisition. But the 1989 law threatened to force the company to write down the goodwill much faster than envisioned in the acquisition agreement.
Northeast's response was a lawsuit challenging the government's about-face on accounting for goodwill, a case that is still pending.
The new law required thrifts to get out of a number of investments, including junk bonds, Mr. Walters noted. By responding early, Northeast was able to minimize losses on its bond sales before others liquidated their holdings into a glutted market.