2017: Jerry Baack

Publisher's note: NorthWestern Financial Review/BankBeat is pleased to partner with Bell Bank to present the 2017 Banker of the Year feature. This is the fifth year in a row that the Fargo, N.D.-based bank has provided its sponsorship. The Banker of the Year program, started in 1989, is one of the most popular regular features appearing annually in NorthWestern Financial Review magazine. Jerry Baack of Bridgewater Bank, Minneapolis, is our 32nd Banker of the Year selection since the start of the program. (Some years we selected more than one.) We appreciate the support of Bell Bank, and congratulate Jerry Baack on being selected our 2017 Banker of the Year..Lending Catalyst.Bridgewater's Jerry Baack takes start-up bank past $1 billion in assets since 2005 launch.Pre-crisis, new banks were being formed at a brisk pace. Across the country between 2000 and 2008, 1,042 banks were chartered – 30 of those were in Minnesota. In 2005, when it seemed as though the good times would last forever, 138 banks were formed in the United States. One of those banks was Bridgewater Bank, which set up shop in Bloomington, Minn. Jerry Baack, who had left his job at Commerce Bank in Edina, Minn., raised $10 million to start a bank that would focus on commercial real estate lending..But the good times did not last, and 133 of those thousand-plus new banks failed by 2014 – eight of the banks were in the Midwest (Iowa, Kansas, Minnesota, Missouri or Nebraska). Another 11 of the start-ups found larger banks to buy them. But Baack and his Bridgewater Bank made it through the turbulence. In fact, Baack and his team kept on lending..While Bridgewater Bank took loan losses like other banks, it maintained the size of its loan portfolio and never suffered an operating loss. It gained customers, lending to folks who had been cut off by other banks that decided to stop lending. When the recession cleared in 2011, Bridgewater Bank found an appetite for credit in its new customers, who helped the bank grow much faster than the industry norm. This year, the bank surpassed the $1 billion mark in assets. It recently attracted investment from private equity firms and it completed its first acquisition..Jerry Baack, who grew the assets of his start-up bank to $1.2 billion in 11 years through the toughest financial crisis since the Great Depression, is NorthWestern Financial Review's Banker of the Year for 2017..Most of the bank's $955 million in loans are secured by real estate. A little more than a third of the loans are related to multifamily residential real estate or one-to-four family residential properties – but not the fancy new buildings going up near Southdale or other expensive areas of the Twin Cities. Bridgewater Bank finances many older buildings in well-established rental areas. "We do B and C properties in good areas," Baack summarized..That's part of the reason he is so excited to establish a foothold in the Uptown neighborhood of Minneapolis, a mecca for Millennials. Bridgewater Bank closed on the purchase of First National Bank of the Lakes in 2016, a bank with an office in the heart of Uptown at 31st Street and Hennepin Avenue. Not only does Baack like the real estate lending possibilities the area offers but he is excited about serving the people who live there, believing his largely Millennial staff will know how to connect with the locals. Bridgewater Bank has been chiefly a commercial bank but Baack said the bank needs to develop its retail business if it hopes to continue to grow. Business from the $75 million First National Bank of the Lakes will help it do that..Real estate is a broad term, and Baack maintains that his bank is not over-concentrated in a single asset. Baack said his management team "slices and dices" the loan portfolio several ways to identify every potential risk factor they take on. Eight of the bank's 13 lenders are shareholders, and Baack says that makes a big difference. The lenders reap rewards when things go well, and suffer the consequences when they don't. During the financial crisis, for example, all the lenders had to handle their own troubled credits. "There was no work-out department," Baack said..Today, the bank has about 100 employees and Executive Vice President Mary Jayne Crocker said everyone at the bank works hard. With a consistently low efficiency ratio, the bank has an entrepreneurial work culture that is implicitly demanding. She said the bank pays top-of-market, and most employees usually arrive early and work late..The bank is also unusually communicative with regulators. Baack and his chief financial officer, Jeff Shellberg, are former examiners with the FDIC. They make it a priority to proactively reach out to regulators at the state, FDIC and Federal Reserve. Four times per year, Baack and Shellberg talk to regulators via conference call to keep them up to date on developments at the bank. When examiners come to the bank, the pair opens each engagement with a PowerPoint presentation on what's happened since their last meeting, and what they expect to happen in the coming months.."We address the concerns we think they are going to have," Shellberg commented. "We gain credibility with them as we say what is going to happen and then within a year or two, it happens.".Experience fueled venture.A Richield, Minn., native, Baack graduated from Mankato State University and got a job with the FDIC in Austin, Texas. After seven years as a regulator, he went to work on the other side of the desk. He worked at three Minnesota banks – First State Bank of Excelsior, Hampton Bank, and Commerce Bank – before deciding he wanted to strike out on his own. He had proven himself as an effective real estate lender and wanted to run his own shop. He saw several other banks opening at the time, and he had a lot of ideas about what would work and what wouldn't..For one thing, he felt it was important for a new bank to be started by someone with banking experience. Some of the new banks opening at the time were headed by investors with no banking experience. At a minimum, this put them at a disadvantage because they had to hire an experienced bank president. Baack had never been a president before but with his experience, he believed he was ready for the promotion. Regulators apparently agreed; the application Baack submitted for Bridgewater Bank quickly was approved with no amendments, he said..Baack put up $550,000 of his own money to launch a capital drive. He wanted to be the largest shareholder, so he went out and attracted several investors – people who typically put in $75,000 or $50,000 – to raise $10 million from 125 people. "The consultants who were helping me said they were confident I would raise the money, but they said I wouldn't do it the way I planned. They thought sure I would take larger sums from fewer people, like 10 parties each at $1 million," Baack recalled. "I wasn't going to go from working for one guy to 10." By the conclusion of the capital campaign, the second-largest shareholder put in $400,000 and the smallest shareholder put in $20,000..The capital raising strategy was also a way to minimize risk. Baack figured that he didn't want any investor putting in so much money that it would be devastating for them if it didn't work out. "Even for me, at the time, I felt there was no down side," he explained. "If I failed, what was the worst that would happen? I'd have to get another job in banking, maybe in another town.".In six months, Baack raised the capital, assembled a board, put together a staff (including Crocker and Shellberg) and on Nov. 2, 2005 opened Bridgewater Bank, named after Bridgewater Township which is located 30 miles south of the Twin Cities, near Northfield. Baack had a soft spot for Bridgewater, an area he came to know managing commercial real estate he had there..Private equity interest.Bridgewater Bank, despite never paying dividends, turned out to be as good at raising capital as it was building its loan portfolio..In June of 2008, the bank raised an additional $5.4 million in capital, money that would prove crucial to the bank surviving through the financial crisis. Ironically, Baack said the money was raised to fuel growth more than it was to help it navigate a crisis. "Even by June of '08, we saw some issues in our real estate portfolio but we, for the most part, thought broader trouble in the economy was related to a subprime issue. We didn't think the trouble was going to lead to a wholesale discount of commercial real estate and residential property," Baack said. "By that fall, it was like, 'wow, I am glad we raised that money.'".Baack noted that all the lenders, as shareholders, had their own money at risk, so "we were all very committed; we were going to work as hard as we could to get through it." Realizing that many of the loans they had made were over-valued by 20 percent to 30 percent, Baack said they had a lot of issues to work through. It took two or more years, but Baack said the bank came through relatively unscathed.."The most significant accomplishments we have had as a bank are getting to $1 billion organically, being profitable by our third month, and never taking an operating loss in any month since," Baack said. The bank wrote off $5.4 million in bad loans in 2008 and another $5.2 million in 2009, but replaced those loans with new commitments. While many banks stopped lending during the crisis, Baack said his lenders made the most of the situation, working with good credits who were cut loose or turned away by other lenders.."We lent during that time frame (2008-2009) and for the most part, our loan portfolio stayed about the same. We had to lend a lot of money during that time in order to keep our loan portfolio where it was because of the payoffs and the workouts," Baack explained. And it paid off. "It was like a rubber band effect coming out of the recession. Once 2011 hit and things started to get better, we were already in front of the curve because, frankly, we had the capital, we hadn't been taking operating losses, and we were in front of clients who knew we were going to lend. And most of those clients have stuck with us six years later.".Growing through a financial crisis attracts attention. Castle Creek Capital, a private equity firm in San Diego, was among those who noticed. They approached Bridgewater in fall of 2014 to inquire about investing in the bank. Some private equity firms had invested in troubled banks and turn-around situations during the crisis but as the economy firmed up, there were fewer of those deals available. So Baack explained, they turned to high-growth companies..Initially, Baack said he was not interested but he stayed in touch with Castle Creek and over several months grew comfortable with the firm. In August of 2015, Castle Creek Capital put $15 million in fresh capital into Bridgewater. The money provides just under 5 percent of the bank's voting shares. Baack said the investors did not require a board seat..The timing was good for Bridgewater, which was finalizing a deal to purchase First National Bank of the Lakes. Baack had known owner David Delaney for a few years as First National Bank had a branch office located across the street from Bridgewaters' downtown Minneapolis office. The acquisition gives Bridgewater Bank a path into a flourishing retail business, as well as branches in prized locations – Uptown and Orono..In June of 2016, Bridgewater Bank announced it had secured an additional $27.5 million in capital from three private equity firms: EJF Capital LLC, Endeavour Capital Advisors Inc., and GCP Capital Partners. Baack said in a press release at the time that the fresh capital "gives Bridgewater the leverage to continue funding the board's strategic growth initiatives. The capital from Castle Creek's investment in 2015 was integral to securing the bank's first acquisition. We don't anticipate any shift in our momentum. This new influx will allow us to consider emerging opportunities to build the brand and serve the needs of a growing client base.".Baack said the bank would consider additional acquisitions should the right opportunity come along. He emphasized the importance of location, noting that the bank's eight offices are located in visible areas – generally on roads with exceptionally high traffic counts. Baack, said however, that acquisitions require resources that make them a more expensive growth strategy than organic growth..Bridgewater's marketing efforts are focused on the niches it serves, so it often sponsors events and runs ads in publications related to the housing industry or the commercial real estate business. The bank's marquee public relations event is its annual 'bash,' started in 2006 when the bank broke the $100 million mark in assets. Held every year at the Nicollet Island Pavilion in downtown Minneapolis, the 2016 edition, called the 'Billion Dollar Bash,' attracted more than 1,000 people on Sept. 7. The guests are customers, and Baack said the bank relishes its opportunity to bring customers together who network and often find ways to work together. With a budget of $150,000, Baack said the event is the bank's way of giving back. "It's a customer appreciation party," Baack said. "It's about them, not us.".Shellberg said the bank fields unavoidable questions about the possibility of going public. While the idea has been discussed, he said no decision has been made. Either way, observers can expect to see the bank work toward continued growth. In its early years, the bank had a goal of achieving $1 billion in assets by 2020. Beating that goal by four years, the bank currently is working toward a goal of $2.5 billion by 2025. -end.EOS helps Bridgewater Bank manage through growth.When a company grows from eight employees to 100 in 11 years, how does the CEO keep everyone on the same page? Bridgewater Bank uses the Entrepreneurial Operating System developed by EOS Worldwide, which is based in Michigan. A handful of banks use the system which helps employees work to their potential in growing organizations..Executive Vice President Mary Jayne Crocker, who has been at Bridgewater Bank since it opened its doors, said there comes a time in any growing organization's life when the staff grows so large that some people "are in the know while others fall out of the loop."."That happened to us when we reached about 20 employees," she said. "Jerry [Baack] read a book called 'Traction' by Gino Wickman which explained EOS. He came back and declared, 'we are doing this.'".The EOS requires an organization to identify values, mission, 10-year goals, and three characteristics which make the organization unique. With that information established, the system helps a business develop an action plan for reaching those goals. It divides the effort into shorter spans of one and three years. It forces the company to articulate its foundational assets, which can be built upon. Roadblocks to goals are identified and employees are tasked with figuring out solutions..Crocker said everything in the plan is measurable, so every employee can look at a chart, or 'dashboard,' that displays numbers representing the organization's progress..Bridgewater Bank implements the system at all levels of the bank, from the senior management team to entry level employees. Three times a year, an EOS facilitator spends a day with the bank to assess progress..Baack said he is a big fan of the system, which helps him manage the bank in pursuit of its goals.