By Ken Musante
Moneris Solutions Inc.
Having recently been president of a company owned by the Federal Deposit Insurance Corp., I have drunk from the fire hydrant of knowledge and have the following cautionary tale to share. It started in 2003 when Humboldt Merchant Services LP was purchased by First National Bank Holding Co. HMS became a small subsidiary within the FNB conglomerate. The workforce of HMS represented only 5 percent of FNB's roster of 2,000 employees. We were a modest, yet profitable, contributor to the company's earnings.
FNB had three banks (one apiece in California, Nevada and Arizona), along with other subsidiary companies in the wealth management, insurance and home owner association industries. The bulk of its earnings came from mortgage services and construction lending. Earnings were good and far superior to those of peer bank holding companies.
Furthermore, FNB's corporate structure was unique. One family, the Lamb family, owned the company, and the patriarch, Ray Lamb, was instrumental in establishing its organizational dynamics. FNB was capitalized through the Lamb family's personal net worth and augmented by trust-preferred securities - a fancy name for a loan that may be counted as bank capital. Because the bank had nontraditional capitalization, additional capital was not available when the economy soured in 2007. FNB could not quickly reach out to the public market for backing, and its individual owners did not have an unlimited supply of funds. Consequently, one way to raise capital was for the Lamb family to sell HMS to Ray Lamb, who would buy out HMS personally and contribute the purchase price to FNB's capital. Unfortunately, as banking conditions deteriorated, Lamb recognized the additional capital from HMS' sale would not keep the holding company afloat.
Instead, FNB sought an investor partner. The investment would be in the holding company, and HMS was to remain a subsidiary of it. But, as we all have seen, the collapse of the banking industry was faster and more severe than expected. Bank investors lost billons of dollars overnight, and the hope of finding an entity to invest in FNB vanished.
In May 2008, Lamb and FNB's board of directors decided to sell HMS, along with other valuable assets, to an independent third party. HMS had discussions with three parties interested in buying the Eureka, Calif.-based processor.
On Fri., July 23, 2008, I was meeting with one of those parties in Eureka. On that same evening, after wrapping up discussions, I received an urgent call from an FDIC executive. FDIC representatives were en route to our office; the executive asked for all HMS managers to attend.
At 7:15 p.m., the FDIC officer - along with three outside consultants - held court and explained that HMS was now owned by the FDIC as a result of the Office of the Comptroller of the Currency declaring FNB insolvent. I later learned the three consultants were necessary because the FDIC did not have sufficient staff to manage all the organizations it shuttered at that time.
Working for the FDIC was an unusual experience. The very first weekend, the FDIC paid all staff overtime and had us track hours on time sheets. I had not received overtime pay since college. Because our health care plan had been administered by our parent organization, it was now cancelled, and a new plan was quickly erected.
The FDIC had no understanding of HMS' value. The first night, I received queries from my new superior, such as, "Do you have a company car?" and "How much cash do you need from the parent organization each month?" For the record, the answers were no and zero. We have a cushion of $40-plus million in cash. But the fact that the FDIC did not realize we were a cash provider for FNB was of concern.
My education continued when I learned the meaning of the word "repudiate." Once the FDIC shutters an institution, it can nullify or repudiate all existing contracts at will. But because we were still a valuable company, and the FDIC wanted to sell HMS to the highest bidder, the agency did not nullify or repudiate any of our contracts. Instead, it worked to ensure our enterprise value was protected and maximized.
However, keeping an organization going was a foreign concept to the FDIC. I attended conference calls and was lectured by an FDIC representative on the "awesome powers of the FDIC." Being accustomed to a management philosophy that says power is earned by individuals' abilities, skills and knowledge, I was sickened by the conqueror's chest pounding.
My own direct boss - an FDIC officer - was more respectful, yet he was overburdened with running the sale process and had little time to oversee the day-to-day operations of the company.
Certain activities, such as pay raises and normal expense reimbursements, were simply prohibited.
I could no longer be reimbursed for purchasing alcohol (which is 30 percent of my normal monthly expense report).
Every expenditure was heavily scrutinized because that is where the FDIC perceived the risk. Merch-ant file approval, regardless of the amount, and our $200 million in monthly settlement and $25 million in reserves, was an afterthought. Those items were not on the "FDIC company checklist."
Another reason HMS' monthly settlement and reserves were not examined more fully is that HMS, as a team, quickly earned the FDIC's respect; very quickly after the takeover, it reduced the number of staff devoted to HMS from four to one. We were left to manage the business as long as we:
Our situation was very difficult. Our sponsor bank had failed. All our merchant contracts listed the name of a failed bank, and the new bank, Mutual of Omaha Bank, did not pick up the sponsorship duties. Any shared contract with FNB, like our health care, courier, telecommunication, travel, insurance, legal and lease agreements, had to be quickly rewritten directly through HMS.
Our staff was extremely uneasy about the rapid takeover and my inability to change certain rules by which our new parent company operated. Customers, partners and vendors all needed attention.
We conducted conference calls, one-on-one meetings and personal phone calls. We continued to work with the three interested buyers and explain to them our current situation. We lost a number of bank leads when FNB ceased attracting new business in order to focus on its own reorganization. This disruption in our normal operations resulted in HMS losing four high-quality, long-time professionals.
Despite all of this, we ensured our partners were paid on time. We ensured our customer needs were met, and we focused on the sale process at the same time. We addressed industry rumors with patience, facts and relentless follow-through. For my part, all my management skills, persuasiveness, good humor and patience were tested. I continually visualized myself leading the HMS team and its partners after the FDIC's occupation had ended; that's how I defined winning. In my mind, our competitors were the doubters and, in many instances, the FDIC was one of them. I was inspired by personal notes from long-time HMS staff and business partners. I printed them out and on particularly tough days I read them aloud.
We were fortunate because buyers saw HMS as more than the holder of a merchant portfolio; they recognized the value of the individuals and partners comprising company. I knew, believed and espoused that, so long as HMS continued doing what it was doing, the ultimate buyer would be a company that valued HMS as a whole.
Therefore, I was, and continue to be, very pleased that Moneris US, a wholly owned subsidiary of Canada's largest processor Moneris Solutions Inc., took over HMS on Nov. 17, 2008. Subsequent to the sale, Moneris has validated my belief in HMS and the quality of its people. Moneris hired nearly all of the existing HMS staff and continues to build on HMS' brand name, its partners and its sales channel.
Linda Grimm is the newly appointed Director of Operations for all of Moneris Solutions. Ann Condon is Director of Software Development US. Xavier Ayala remains charged with serving HMS' contractor sales channel. I am proud that they remain in significant positions with Moneris. For my part, I am Moneris Solutions' Executive Vice President and Chief Sales Officer.
I am now working closely with industry veterans Joe Garza, Director of U.S. Sales, Pat Albright, Director of Business Development, and David Magley, Director of Regional Sales. I report to Moneris US President Greg Cohen - who is a part-time pilot and recreational shark chaser - which increases my possibilities for promotion.
I know the experience I have gained during my tenure as HMS' President will serve me well in my new position. I sincerely appreciate the trust that all our business partners placed in me and HMS during our troubled times. Their encouragement and support was critical to our success. I will always remember that.
Ken Musante is Executive Vice President and Chief Sales Officer for Moneris Solutions Inc. Contact him by e-mail at kmusante@hbms.com or by phone at 707-269-3200.
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