Commercial Development Stains New Mexico CU’s Balance Sheet
The $353 million First Financial Credit Union, headquartered in Albuquerque, N. M., hopes to find a buyer that can take a multimillion dollar mistake off its balance sheet.
That mistake takes shape as a five-story, almost 66,000-square-foot commercial and office development located at 500 Copper Avenue in Albuquerque. An historic building, the structure began life in 1931 as the copper-hued El Fidel Hotel before being converted into an office building and, finally, into a commercial condominium. The structure boasts a five-story interior atrium, a location close to Albuquerque's downtown business district and access to one of the largest parking areas in the center of town. It has also claimed about $7 million of the credit union's money (so far) and has helped lead to controversy among the credit union’s executive team over how the credit union has been run.
The credit union and the U.S. Attorney for Albuquerque allege First Financial was simply defrauded. The three principal developers who took out the loan, Vincent J. Garcia, David Garcia and Derek Barnhill, have been indicted for bank fraud and money laundering. And one of the three, Barnhill, has already pleaded guilty and is expected to testify against the other two when their legal proceedings get under way again next month.
But critics lay the responsibility for making the Copper Avenue loan at the feet of CEO Ben Heyward, alleging that the loan merely represented the largest example of a "cowboy style" of leadership that, they charged, depended more on Heyward's desire to show off and make a big splash than on due diligence and responsibility that should characterize a safely run credit union.
None of the critics, which included both current and former credit union employees, would speak for the record, citing either having moved on from the organization or Heyward’s inclination to fire executives who have disagreed with him. But all charged that Heyward's determination to make unilateral decisions and a lack of attention to detail led to the Copper Avenue loan and a significant number of poor loans.
For his part, Heyward did not answer detailed questions about the Copper Avenue loan, but reported that the credit union relied on the borrowers’ representations.
"The Copper Square loan was developed by business services at First Financial," Heyward wrote in an e-mailed statement. "The loan was approved based upon their representations and the recommendation of the underwriter with whom they dealt and upon which I relied. It was not until a few months after the loan approval that I learned from business services that they had been informed of the past business practices of the borrower during the development of the loan and prior to funding. We are contemplating litigation at this time," he concluded.
Critics countered that the credit union had questioned the borrowers about elements of their history, including at least one significant prior development project that, according to court documents, had dissolved into a morass of lawsuits over alleged racketeering, misrepresentations and breach of trust. Heyward was the only one at First Financial with the authority to sign off on the Copper Avenue loan, the critics said, and he knew what the CU staff knew and went on to approve it anyway.
The U.S. Attorney alleged in court documents that the Garcias used money from the First Financial loan and other bank loans for trips to Mexico and Las Vegas, improvements on homes and the purchase of at least part of the controlling interest in a casino located in Spokane, Wash.
In court documents, the CU charged that loan payments were late from almost the very beginning and that the developers owed over $75,000 that was over two months late by September.
Six of the credit union's executive team in place in February 2008, when First Financial made the loan, have since left. Heyward has maintained that none were fired, but sources familiar with the credit union said all six were fired or forced out after they raised questions about the credit union's direction.
The critics argued their concern flowed from their observations that the Copper Avenue loan was only the largest in a systemic lending pattern without regard to due diligence, including the purchase business loan participations. At their height in 2008, NCUA records show First Financial, then a $344 million CU, carried roughly $100 million in participation loans on its books.
Critics reported that Heyward bought these loan participations with little or no due diligence from a credit union where he had worked previously and that he defended them by pointing out First Financial had a low-income designation from the NCUA that permitted it to exceed the otherwise statutory 12.25% business loan cap. The critics charged that First Financial did not have this exemption because the CU had never applied for one from the state’s credit union regulator as the NCUA requires.
The New Mexico Regulation and Licensing Department had not commented on whether First Financial applied for a business loan exemption as of press time.
In further support of their allegations, the critics pointed out that the credit union's net worth ratio has dropped steadily since Heyward took the helm at the CU in early 2005. NCUA records show the CU's net worth ratio at the end of 2005 stood at 12.32%, took a brief uptick to 12.37% in 2006 before falling steadily to 9.36% at the end of 2010. Similar numbers can be seen in the CU's return on average assets, which dropped from 1.32% in 2005 down to -0.71% in 2008. It rose to 0.07% in 2009 but plunged again to -1.39% in 2010.
Critics acknowledge that CUs with all sorts of management have lost money in the poor economy since 2008, but maintained that Heyward's management has led First Financial into a significantly deeper hole than it would have been in if Heyward was not CEO.