2448 East 81st Street, 55th Floor
We are innovators, enthusiasts--and our business is simple. We buy non-performing loans, those which banks have given up on. Then we turn these "bad" loans into cash by helping those who owe us money develop a workable payment plan. With CFS, everyone truly wins. Financial institutions turn charge-offs into cash for immediate reinvestment. Our investors see a safe and attractive return. Good people pay off debt and restore their credit. And we earn a profit in the process.
Commercial Financial Services, Inc. (CFS) is the leading collector of nonperforming loans in the United States. At the beginning of 1998 its loan portfolio totalled $9 billion, and the company was working with its customers to collect on some four million debts. Since its founding in 1986 CFS grew by acquiring portfolios of bad debts from failed financial institutions through the Federal Deposit Insurance Corporation and the Resolution Trust Corporation. The company also acquired nonperforming loans from healthy banks and either attempted to collect them or to restructure them and sell them back to the banks. It developed a unique marketable security based on pools of loans to finance much of its growth. In a September 1997 profile, Inc. magazine estimated CFS founder William R. Bartmann's net worth to be in the range of $2.4 to $3.5 billion.
Founded in 1986 to Purchase Bad Debts
Commercial Financial Services, Inc. (CFS) was founded in Muskogee, Oklahoma, in 1986 by William R. Bartmann, his wife Kathryn, and business partner Jay L. Jones. At the time, Bartmann was $1 million in debt following the failure of his Muskogee oil pipe manufacturing business, Hawkeye Pipe. Jones had been Hawkeye's chief operating officer.
CFS was established to purchase bad debts and similar nonproductive assets from banks and other financial institutions. It was literally a new industry that was made possible by the high rate of bank failures. At first, most of the firm's acquisitions came through the Federal Deposit Insurance Corporation (FDIC) from defunct or foundering banks. According to founder Bartmann, "In 1986, the FDIC was inundated with closings and just did not have the ability to service the sheer volume of it all." Bartmann noted that most of the businesses coming in to purchase nonproductive assets were out-of-state concerns that simply turned around and resold them for a higher price, rather than try to collect or service the outstanding debt. Bartmann's plan was to service the debt and work out a payment plan with the debtors.
In addition to bank closings, the economic downturn of the mid-1980s had created a pool of unemployed but highly qualified workers. Bartmann and partner Jay L. Jones decided they would take care of the FDIC's overflow, compete with outsiders, and hire displaced personnel. CFS became a full-service debt management company with a staff of appraisers, certified public accountants (CPAs), attorneys, account managers, and energy and real estate professionals.
The company acquired the first package offered by the Tulsa office of the FDIC in 1986 by submitting the winning bid for a portfolio of charged-off loans. To fulfill the contract, CFS had to obtain a hard-to-get $13,000 loan from American Bank of Muskogee, the same bank that held Bartmann's $1 million debt. After successfully collecting $64,000 on the first package of loans, CFS was able to borrow more money to acquire more bad debts. CFS began by acquiring loans that were charged off by banks. Later, it moved into acquiring distressed loans which had not yet been charged off by a financial institution. While distressed loans cost more than charged-off loans, CFS found that it got a better return servicing them. CFS acquired loans in packages, or portfolios, from the FDIC. One large portfolio it acquired had 480 loans.
By 1989 CFS had 71 employees in its Muskogee headquarters and branch office in Houston, Texas. The company would acquire a variety of loans, classified assets, charge-offs, and other assets and service them itself. It would work with each debtholder to restructure the loans by lowering the interest rate, monthly payment, or principal balance as needed. Describing CFS's customers, Bartmann said, "Their lifestyles were induced by an artificially inflated economy, and when the economy started shrinking they got caught in the middle."
Unlike banks and savings and loan institutions, CFS was operating in an unregulated business environment. CFS could service the loans it purchased in any way that the company chose and could carry debts that a regulated financial institution would not be allowed to carry. It was this flexibility that was one of CFS's key strengths. In its first three years CFS acquired more than $100 million in loans. By 1989 CFS was servicing 6,700 loans with a face value of about $75 million. About 90 percent of CFS's purchases were through the FDIC in Oklahoma and Texas. The rest were direct acquisitions from banks. With the rate of bank failures declining in 1989 and 1990, CFS became more aggressive in soliciting nonperforming or underperforming assets directly from banks instead of going through the FDIC. Another source of income for CFS came from the sale of restructured loans back to banks. Once the loans were restructured they often carried a higher yield, making them attractive to banks once again.
Another area that CFS expanded into was total asset purchase and assumption agreements (TAPAs) with banks. Under regulations in effect at the time, a rescuing bank would have to take all of the assets of a failing bank instead of simply plucking the best assets. To reduce the risk for the rescuing bank, CFS would work with it as a joint venture partner and take the less desirable assets, leaving the more desirable assets for the rescuing bank. As a result, the FDIC would be more likely to get a higher bid to handle the failed bank.
Several subsidiaries were established to handle other functions. These included Commercial Financial Collections, Inc., a collection agency for retail merchants; Commercial Financial Information, Inc., a full-service credit bureau; Asset Marketing Inc., which packaged and marketed loan portfolios to financial institutions nationwide; and Commercial Computer Corporation, which designed and sold software and hardware.
Additional opportunities were provided by the shakeout in the savings and loan (S&L) industry in the late 1980s and early 1990s. A new government agency, the Resolution Trust Corporation (RTC), was established in 1989 to dispose of the assets of insolvent savings and loan institutions and CFS was placed on the RTC's bidder list. In 1990 CFS signed its first contract with the RTC, originating out of the RTC office in Eagan, Minnesota.
Downsizing and New Headquarters in the Early 1990s
At the end of 1989 CFS reduced its staff of 70 employees and auctioned off nearly all of the 10,000 loans it had acquired, keeping only some 280 loans. The company, reduced to only 17 employees, moved its headquarters from Muskogee to Tulsa in September 1991. It also obtained a $1 million line of credit from a local bank. At the time of the move, CFS owned 616 loans with a book value of $4.5 million, an estimated collection value of $1.6 million, and a market value of $480,000. Revenues for 1991 were $1.4 million.
In 1992, CFS made a groundbreaking arrangement with the RTC's San Antonio, Texas office to help the government agency liquidate millions of dollars in uncollected judgments and loan charge-offs from nine S&Ls in Texas. Under the agreement, CFS would package the RTC's uncollected accounts and sell them to asset management companies. CFS would receive 27 percent of the total sale price of the assets. The contract between the RTC and CFS, known as the Miscellaneous Asset Servicing and Disposition Agreement (MASDA), was the first such arrangement in the country and would serve as a template for similar contracts in the future.
An RTC spokesperson noted that these particular types of assets--uncollected judgments and loan charge-offs--were "the very dregs of this whole liquidation activity." Typically, these assets had already been worked on by a variety of groups before they were sold. The uncollected judgments often involved loans for which the collateral had already been sold to satisfy the loan, or for which the existing collateral was less than the loan value. Consequently, CFS was assuming considerable risk in acquiring these types of loans.
The RTC contract covered 2,481 assets from nine S&Ls in Texas and had a book value of $197 million. CFS's role was to evaluate the assets, sell them at an RTC-approved price, and attempt to collect payments up to the time of the sale. CFS also processed any payments that were made and did all the reporting and bookkeeping on the assets until they were sold. A similar contract, developed by the RTC's Tulsa office, had approximately $150 million worth of charge-offs and judgments that the agency had inherited by taking over 30 failed S&Ls in Oklahoma and Arkansas.
A National Leader in the Acquisition of Nonperforming Loans in the Mid-1990s
CFS's growth was tied to available financing, and as new methods of financing became available in the 1990s the company began to grow to its full potential. CFS had started with a $13,000 loan in 1986, then obtained a $1 million line of credit in 1991. In 1993 the company repaid a $20 million loan at 32 percent interest within 11 months, convincing its lender to advance CFS $40 million at 18 percent. By 1994 CFS was working with an $80 million revolving line of credit from investment bank J.P. Morgan and Company Inc. For the year, CFS planned to turn over its line of credit about 2.5 times, spending $200 million buying and selling nonperforming loans.
By 1994 CFS had grown to 182 employees and expected to hire another 125 by the end of the year. Approximately 100 employees worked in Tulsa, with the rest working at offices located in Oklahoma City, Dallas, and Phoenix. Many of the company's employees were high-ranking officials from the finance industry who had been laid off by banks and S&Ls because of failures or mergers. Others were former employees of the FDIC, helping the company better understand how the FDIC worked.
The company's loan portfolio had grown to 15,533 loans with a book value of $217 million, an estimated collection value of $30 million, and a market value of $3.3 million. Some analysts considered CFS to be among the top three firms in its industry, and others ranked it number one. The company appeared on Inc. magazine's list of the fastest-growing private companies in the United States. As the banking industry became generally healthier in the mid-1990s, CFS began working with financially sound banks to purchase their bad loans and help them sell their nonperforming assets instead of acquiring most of its loans from failed institutions.
Securitizations As a New Source of Working Capital, 1995
A new source of working capital for CFS came from securitizing its loans. After contacting several banks, CFS convinced BancOne Capital Corporation, a subsidiary of Bank One N.A. in Columbus, Ohio, to take loans that CFS owned and combine them into a pool called a securitization. BancOne would then sell the pool of loans in the form of securities to public or institutional investors, with CFS using the proceeds as working capital. According to Bartmann and Tulsa World, a deal involving this type of innovative security had never been done before.
On May 31, 1995, CFS completed its first securitization with BancOne, pooling some 14,000 nonperforming and restructured consumer loans and selling them in two groups for a combined total of $80 million. The loans were purchased by insurance companies SunAmerica Corporate Finance and Teachers Insurance and Annuity Association (TIAA). In spite of the fact that the loans were nonperforming, Standard & Poor's Corporation gave the marketable securities an "A" rating and created a new category for the unique securities called "loan collector." The security was like a bond, and SunAmerica and TIAA would receive back their principal plus interest. Meanwhile, CFS would try to collect on the debts.
Upon selling the securitizations, CFS realized an immediate profit of $25 million, since it had originally purchased the loans for $55 million. If CFS successfully collected all of the loans, it would receive an estimated $130 million, of which approximately $117 million would have to be paid back as principal and interest to SunAmerican and TIAA. That gave CFS the potential for another $13 million profit. CFS also received a monthly $500,000 servicing fee that was taken off the top of the collections before any principal or interest had to be paid. Collections went so well that CFS collected five months' worth of debts in two months.
For 1996, CFS planned to make similar offerings every six months, then accelerate them to every four months in 1997. For every $100 million securitization, some 15,000 to 20,000 loans would have to be pooled. Bartmann expected no problems finding loans to be pooled, noting that collecting on bad loans was a $100 billion industry. He estimated that after seven such deals, CFS could be self-financing and would no longer have to rely on its line of credit with J.P. Morgan.
Expansion in the Mid-1990s
By April 1996 CFS had 400 employees in Tulsa and Oklahoma City. The company planned to double that number by the end of the year and to hire an additional 700 employees in 1997. The average compensation package per employee was $40,000. Most of the new workers would be account executives with financial and collection experience. This huge staffing increase was necessary to handle the company's growing loan portfolio, which by this time had exceeded $380 million. CFS also received $33 million from the state of Oklahoma under the state's Quality Jobs Act, which provided funds to growing companies out of new state revenues generated by increased employment.
With this new prosperity CFS was able to increase its community involvement. The company announced in April 1996 that it would donate $1 million for college scholarships and economic development, with $250,000 going toward programs of state and local chambers of commerce and $750,000 for 30 scholarships of $5,000 each over the next five years. The scholarships would be given to financially needy students who planned to attend universities in Oklahoma. Students who received scholarships would also be given employment opportunities during the summer while they were in college and full-time jobs once they graduated.
After successfully selling four securitizations for a total of $291.3 million, CFS committed to additional office space in CityPlex Towers in June 1996. The company signed a lease for an additional 18 floors in the Tulsa, Oklahoma building in which it already occupied 10 floors. With CFS planning to add 2,300 new jobs by the end of 1997, new employees were being hired at the rate of 45 to 50 per week. Approximately 1,200 new jobs were created between April 1996 and April 1997.
During the year CFS received several awards and recognitions, including the Franklin E. Bernsen Oklahoma Venture of the Year Award and recognition as a Blue Chip Enterprise by the six-year-old Blue Chip Enterprise Initiative program, a national program that acknowledged businesses for their creative use of resources. In addition, CFS was ranked 31st on Inc. magazine's list of the fastest-growing privately held companies. The ranking was based on performance from 1991 to 1995, during which time CFS sales grew from $1.4 million to more than $65.9 million, an increase of 4,445 percent. In 1996 CFS also began exploring opportunities in Europe and entered into discussions with an unnamed European bank to open offices in each of the 12 European Community (EC) nations.
During 1997 the company practically doubled its loan portfolio, from $4.7 billion in January to around $9 billion in November, and employed more than 3,000 people. Fueling CFS's rapid growth was the size of the debt collection market. By late 1997 delinquent credit card debt in the United States amounted to nearly $5 billion, and outstanding U.S. consumer debt had reached about $1.1 trillion and was expected to grow at an 11 percent rate annually. CFS also faced little competition, because banks were selling more delinquent loans than ever before, finding that it was cheaper to unload these loans than to try to collect them.
Bartmann was often quoted as saying that a lot of employers liked to say that their employees were their most important asset, but that CFS was putting its money where its mouth was. A range of employee benefits helped the company keep turnover lower than industry averages. Perhaps one of the most outstanding benefits was a March 1997 Caribbean cruise for all of CFS's employees and guests, some 2,275 people in all, which the company paid for. Previous company trips included an excursion to Las Vegas and a train ride to a Kansas City Royals baseball game. In 1998 the company reserved 4,000 rooms at Disney World in Orlando, Florida. Other benefits included onsite child care and full health insurance benefits, which helped CFS make Working Mother magazine's list of the best companies to work for in 1998. In 1996 CFS offered a 200 percent match on contributions to the company's 401(k) plan, and an annual profit-sharing bonus in 1996 resulted in an average check worth three weeks' salary.
In mid-1997 collection work involved 1,200 front-line account officers calling to collect debts for eight hours a day. While daily quotas had to be met, the company had a maximum 50-hour work week rule that it enforced to keep workers from working too many hours. The company was receiving 500 to 600 job applicants weekly, of which only 50 to 60 were hired. Following a rigorous screening, new hires had to complete a seven-week training course called CFS University, with about 15 percent dropping out. Employees could be terminated for not meeting their collection quotas as well as for any infractions of the Fair Debt Collections Practices Act. Bartmann was proud of the fact that no CFS employee had ever been cited for any violation of that law.
International Expansion, 1997-98
In November 1997 CFS hired Richard Langstaff to head CFS International Ltd., with headquarters in London, England. Langstaff came to CFS from Beutsche Morgan Grenfell of London, where he was director and global department head responsible for asset securitization. Plans called for the European operation to employ between 500 and 1,000 people within 18 months, with half expected to come from existing staffs in Tulsa and Oklahoma City. The rest would be hired in Europe, but would receive their training in Tulsa. CFS said it would invest between $5 million and $10 million in its European operations. Bartmann's logic was that as a market leader, CFS would eventually consume all the market share available in the United States. "In anticipation of reaching that cap level, we are now expanding into Europe to handle our future growth," he told Tulsa World.
In June 1997 CFS had announced plans to enter the lending business, and by May 1998 Bartmann announced that CFS was in the process of buying a savings and loan charter to enable it to extend credit in the form of credit cards or loans to debtors who had established a history of payment with the company. CFS had relationships with 3.6 million delinquent debt holders, and Bartmann planned to create a new company that would lend exclusively to these consumers. With the help of 20 large banks, CFS planned to offer lines of credit to its customers. CFS would operate the lending enterprise and start it with about $400 million in capitalization.
Bartmann viewed the lending operation as a natural extension of CFS's collection business. He told Tulsa World, "We were the first company to treat customers with respect and dignity." The lending company would help people with damaged credit restore their credit ratings. All they had to do was commit to making three consecutive payments to receive a credit card. Then, gradually, the rewards would be increased as the person began to make more consecutive payments. With 12 consecutive payments, CFS would help the customer obtain a new house.
As part of its strategy to start issuing credit cards, CFS led a campaign to loosen Oklahoma's state regulations on credit card fees. The company wanted more industry-friendly regulations so that it could begin issuing national credit cards from Oklahoma. However, CFS faced opposition from the state's largest association of bankers.
With a 12,277 percent increase in sales from 1993 to 1997, CFS was named Oklahoma's fastest-growing company in May 1998; it was also ranked number eight on Inc.'s 1997 list of fastest-growing private companies. CFS reported $954.75 million in revenue for 1997 and had about 3,000 employees. Net income was $182 million on collections of $954 million, a dramatic increase from 1996 net income of $79 million on collections of $274 million. During 1997 CFS had acquired bad debt with a $6 billion face value, typically paying from five cents to ten cents on the dollar. According to Bartmann, CFS usually collected from 28 cents to 32 cents on the dollar, compared to the collection industry average of 18 cents to 20 cents on the dollar.
Through May 1997, CFS had successfully floated 13 securitizations with about 60 institutional investors, making it unlikely that the company would ever need to go public to raise equity financing. As 1998 drew to a close, it appeared likely that CFS would enjoy another record year as it continued to expand its debt collection operations.
Principal Subsidiaries: Commercial Financial Collections, Inc.; Commercial Financial Information, Inc.; Asset Marketing Inc.; Commercial Computer Corporation.