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St. Joseph CFO Pulls Through Crash of Auction Rate Market, Downturn

In early 2008, St. Joseph Health System’s Darrin Montalvo found himself in the midst of a national financial crisis that would foreshadow the meltdown to come later that fall.

The Orange-based not-for-profit Catholic hospital operator had issued $1.2 billion in auction rate securities—debt with an interest rate that regularly resets in an auction process.

Then the market for auction rate securities suddenly dried up in a portent of the larger credit crisis that rocked Wall Street, bond markets and investments banks in late 2008 and early 2009.

The collapse left investors unable to withdraw money from auction rate investments as banks froze accounts.

The bonds of St. Joseph and other nonprofits and municipalities—the primary users of auction rate securities—still were good. But St. Joseph and others ended up paying higher rates without an auction process to keep rates competitive.

Lawsuits and government probes of investment banks led many of them to settle with investors and regulators.

St. Joseph came through it all a bit bruised and battered but relatively unscathed.

“It was a crazy time,” said Montalvo, St. Joseph’s vice president and chief financial officer. “It seems so far away—that’s so funny—but it really wasn’t.”

Montalvo has overseen not one but two debt refinancings for St. Joseph since 2008.

The hospital operator’s debt now is 75% fixed for 30 years and 25% in short-term variable rate bonds. It pays about $100 million per year on its debt.

St. Joseph, which sees about $4 billion in revenue a year and operates 14 hospitals, closed on its most recent refinance in August.

Achievements

The latest refinancing, along with other achievements during the downturn, earned Montalvo a kudos as the outstanding chief financial officer for a not-for-profit at the Jan. 27 CFO of the Year awards, presented by the Business Journal and the Orange County and Long Beach chapter of the California Society of Certified Public Accountants.

St. Joseph’s strong credit rating, track record and healthy balance sheet saw it through the rough patch, Montalvo said.

This downturn was particularly harsh on hospitals, which typically are immune to economic cycles.

Like others, St. Joseph saw its investment portfolio decline during Wall Street’s late 2008 and early 2009 plunge. By the end of 2008, its portfolio was off by $300 million, according to Montalvo.

At the same time, St. Joseph and other hospitals saw a surge in patients who had lost their jobs and insurance.

The hospital operator’s emergency room visits increased by 4% amid rising unemployment, Montalvo said. Uncompensated costs for treating uninsured patients rose by 14% for the 12 months ended June, he said.

Meanwhile, donations declined by about 10% to $35 million for the 12 months through June, according to Montalvo.

To stem investment losses, Montalvo said he shifted to safer investments while trying to maintain returns.

“We stepped back and evaluated that risk return ratio,” he said.

St. Joseph is up about $150 million on its portfolio since the recent low, Montalvo said.

“We rode the roller coaster,” he said.

St. Joseph delayed new projects, reduced discretionary spending, tapped credit and worked to collect more from insurance companies, Montalvo said.

Compensation from insurers rose by 1% for the 12 months ended June, Montalvo said.

“All those negatives that we were experiencing from the external environment, we were very fortunate to offset those,” he said.

In the past 18 months or so, Montalvo’s day-to-day activities mostly included trying to predict possible scenarios for the hospital operator and how to react to them.

“When the stock market dropped and cash dropped, we knew exactly what we were going to do,” Montalvo said.

On top of it all, the hospital operator also added a fourth local hospital to its operation.

In July, it began running Mission Hospital Laguna, formerly South Coast Medical Center in Laguna Beach.

“Because of the risk associated with the down economy, we really planned for that (takeover),” Montalvo said. “There were a lot of people who worked really hard to account for every area of risk.”

Religious Foundation

As a chief financial officer of a not-for-profit that abides by a higher, religious credo, Montalvo’s position is different than that of your typical finance guy.

St. Joseph dates back to the 1920s, when the Sisters of St. Joseph of Orange started a hospital in Northern California.

The vision set by the nuns—“the healing mission of Jesus”—guides the corporate culture of St. Joseph today.

“I’m privileged and honored to be associated with the sisters of St. Joseph of Orange,” Montalvo said. “It makes what I do a lot easier.”

Montalvo has been with St. Joseph for 20 years—four of them as vice president and chief financial officer.

He is married and has two daughters, who both play competitive softball.

“How did I alleviate stress these past 18 months?” Montalvo said. “By spending time with my wife and two girls. That allowed me to put things into proper perspective.”

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