Dr. W. Craig Esrael

CEO of the Year 2013 Winner

(page 2 of 3)


So ignorance was bliss?

“Ignorance is not only bliss but beneficial. They had $31 million in assets at the time and had six consecutive quarters of losses. They had about a million in capital. Turnover was rampant. Everything was outdated. Delinquency was in the stratosphere. Each CEO would fire people and bring in new people. Everyone had a short-term perspective because they thought they were going to be fired or the institution was going to go belly up. They had the regulatory rating that you get just before you fail, just before they liquidate you. They had a letter of understanding with regulators. They were on death’s doorstep, and I wasn’t smart enough to really know that.”

You didn’t have practical knowledge of leading a financial institution and faced a steep learning curve. What did you do that your predecessors didn’t?

“The board trusted me. They were more patient with me because of my age, and they did respect my academic credentials. They knew cognitively I could do the job. I was very naïve and had lots of theory in my quiver. A lot of things I started worked well, and a lot were great theoretically but not practically. But the staff knew I was trying. I worked really long hours and still do. The staff knew when they drove by on the weekends I was there working. They knew I was there before they got there in the morning and I was the last one to leave. I was bound and determined to do everything I could. It was that ethic and dedication that made them understand if I was that committed, they were going to be too.”

Did it take someone who didn’t understand the severity of the situation, who wouldn’t give up on it?

“It probably helped because I wasn’t afraid of it. Now if I looked at an institution in that shape, it would be the scariest thing in the world. I didn’t think that way about it back then.”

What’s a theory you had from college that did work?

“Back then the savings and loan debacle happened, when the whole industry was wiped out because there was a mismatch of assets and liabilities. I spent a lot of time studying it in college. When I started at Navy Federal, there was a tremendous mismatch as well. Back then by hand I modeled the asset-liability matches, looking at what that does to net income and capital when rates change. It was a crazy time and things were changing radically. It killed the S&Ls and was one of the things killing Navy Memphis.

“I got a handle on pricing and priced competitively but smartly. The quality of the lending process was terrible. The delinquency ratio was over 4 percent. I got into the lending process and started modeling it and what impact a certain level of delinquency would have on net income. Also, I started developing a level of quality service to customers and members. I started a profit sharing plan for the staff. If they worked with me to be more efficient, I’d give them a portion of the efficiency of the income we generated. And we still have it in place after all these years. It’s been fundamental in changing the culture. We’ve got a culture obsessed with efficiency.”

How many members did the credit union have back then?

“About 25,000 members. The challenge was that our only market was people on the Navy base. At that time it was a technical training command, and the average age was 18 or 19 years old. They got very small paychecks, and they all wanted a loan for a new car. They’d spend nine months in Millington and then go to another naval facility. The historic loan charge-off ratio was extraordinarily high and it was very labor-intensive. On paydays the lines would go out the door. The young military kids would cash their checks. It was a market that provided a lot of challenge. I tell our board today that even though I didn’t like it at the time, I think it taught me to be very efficient. It prepared us for the hyper-competitive market we’ve transitioned to today.”

Did you move the credit union beyond just serving the Navy or did the Navy scale back its Millington operations first?

“It happened concurrently. We started serving other selective employment groups when regulators started allowing credit unions to go outside of single employers. I was picking up groups to broaden and diversify our market. When the Navy announced it was moving the technical training command to Pensacola, that was still the core of our group.

“I flew to Atlanta and met with the regulator over the region. I took our business plan and told him we were getting calls on when the credit union will be closed down, that our market can’t differentiate between the Navy and us because of our name. I asked, ‘Would you allow us to broaden our market and serve the community?’ He said, ‘The business plan is solid but I can’t do it politically.’ I asked when he thought we could, and he said in two years. I told him, ‘We’ll be out of business in two years.’

“I came back to the board and will never forget the look on their face when I told them. They asked me to call the regulator and ask him to reconsider. I did and he said, ‘No, and if your board would like to fly to Atlanta I’ll explain it to them.’ My board told me, ‘Tell him — and don’t mince any words — tell him to go straight to hell. I called and said, ‘All due respect, my board wanted me to deliver this message to you: You’re supposed to go straight to hell.’ He hung up the phone.

“And the beauty of the banking system is you can be state chartered or federally or nationally. It dawned on me that we do have the potential for a change with the state board. We took the same business plan to them, they said it was viable and would give us this new market. In four to six weeks we went from Navy Memphis Federal Credit Union with a federal or national charter, serving primarily the people on the base, to First South Financial Credit Union, serving the community being a state charter.”

Once again, you were out of your comfort zone.

“I kind of like being out of my comfort zone. It required a whole re-think. It wasn’t a name and a new opportunity, we had to change the whole way we did business. We had a captive market on the base that required a lot of operating horsepower and lots of risk, but it was contained. But now we needed new marketing and strategic plans. We needed to increase our service delivery channels with new branches and technology. If we were going to serve the Memphis MSA, we were going to have to have the wherewithal to do it.”

Compare the credit union at the beginning to today.

“We’re pushing $450 million in assets, and capital is up to $121 million. We’ve gone from the weakest examination rankings to the highest. Every rating organization that ranks financial institutions ranks us in their highest category. We’re in the top 1 percent of all banking institutions in the nation for financial safety and soundness. Financially we’ve traveled very far. We’re proud of that. You see it in our advertising and we talk about it all the time. We’ve worked hard to get where we are. I was looking at a number last week. In 30 years since I’ve been there, we’ve created $300 million in tangible value for our members. That’s not assets, that’s tangible money in their pockets.”

What’s your approach to investing and loaning?

“We want to loan it out. We’re not an investment club or a banking institution. I would just as soon loan out every dollar we take in. But it’s our fiduciary responsibility, that when we loan it out there’s a good chance it’s going to be repaid. You laugh, but after going through this mortgage crisis, even the largest three or four banks in the country weren’t using that philosophy. They were making loans that everybody said there’s no way they can ever be paid back.

“Before, during, and after this recession, our approach to doing business hasn’t changed. We don’t have stockholders. We can run First South Financial for the long-term. I don’t have to worry about the next quarter that we’re going to meet the dividend payout on stock and if we don’t I’m going to be under fire and lose my job. The beauty is that I don’t have to lead the organization quarter to quarter, I literally look ahead to the next generation.

“All of the profits go back in dividends or into capital, which belongs to the members as well. Our form of bank ownership, this cooperative model, is the truest form of democracy. Everyone gets one vote. I get one vote, someone with $25 gets one vote, and someone with $25 million gets one vote in the institution. It’s the banking model our Founding Fathers and probably going back to Plato and Socrates would support. It’s truly the only democratic model of banking.”

What do you like to do when you’re not on the clock?

“I think of myself as a simple person who enjoys the simple pleasures of life. I like the outdoors. I have a great family, a wife and three children. I’ve always been goal oriented and always knew it wouldn’t take much to make me happy in life. It sounds clichéd but it’s very true. I’d characterize myself as the luckiest person in the world. Good things happen and I don’t know why.
“It’s been a wonderful 30 years. I feel so fortunate to still have so much of my career ahead of me. I’m proud of the organization and I’m thankful. Every day I get up I look forward to going to work.”


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