2010: John Morrison, Kurt Weise and Larry Albert

Bankers of the Year: by Tony Telschow and Tom Bengtson .Editor's Note: The FDIC closed 140 banks in 2009, and Stillwater, Minn.-based Central Bank acquired four of them. In the 20 years preceding those acquisitions the bank had focused on growing a one-location bank (itself a formerly failed institution) into a flourishing suburban organization with six locations and more than $400 million in assets. But Central Bank's leadership team understood more than organic growth. It had lived through the 1980s, buying and fixing troubled banks across the region. It saw earlier than most the likely results of the economic collapse of 2008 and it prepared itself. In 2009 Central Bank transformed itself, tripling its number of locations and more than doubling its asset size in a string of acquisitions executed from August onward. Here is the story of what owner John Morrison, chairman Kurt Weise and president/CEO Larry Albert accomplished in the teeth of a great recession—and they might not be done yet. They are NorthWestern Financial Review's Bankers of the Year..As John Morrison and Kurt Weise stood among the bidders for the failed Oak Park Bank in 1988, they didn't know they were headed for a period of relative quiet. Throughout the late 1970s and 1980s Morrison and his Minnesota-based executive team had bought and sold banks in Montana, Colorado and across the Twin Cities metro area. From his first days in banking Morrison's specialty had been buying and fixing troubled banks. But as he and Weise walked away winners in that 1988 bid, conditions in the banking industry began to improve..The number of banks in financial trouble fell and fewer became available for acquisition. It was the right environment for Morrison's team to focus on building what it had. Over the next 20 years, it turned the failed Oak Park Bank into a thriving Central Bank; a one-location, $25-million bank became a suburban Twin Cities competitor with six locations and more than $430 million in assets..Then, late in 2007 a familiar feeling returned. Real estate values began to drop and development lending started to sour. Larry Albert, Central Bank's president and CEO, could see it on the bank's own books. Weise, the bank chairman, "could see the writing on the wall." Morrison, the company's sole owner, told his team to get ready..By February of 2008 Weise had contacted the FDIC, which subsequently gave him access to its confidential, online service providing information about troubled banks. During 2008 and 2009, Weise said it was clear that "things weren't good. There was going to be a number of bank failures, and if we kept a strong financial position we were going to have some opportunities to fill out our banking network.".As the pace of bank failures accelerated in 2009, Central Bank was prepared. On August 28, the bank's first deal of the great recession went into effect when the Minnesota Department of Commerce shut down Mainstreet Bank of Forest Lake, Minn. Central Bank took over more than $450 million in assets, $268 million of which are guaranteed by an 80/20 loss-share agreement with the FDIC. Central Bank paid a 0.10-percent premium to acquire all of the failed bank's $434 million in deposits. On that one Friday night Morrison and his team added seven branch locations around the Twin Cities and one in Hudson, Wis. They had doubled the size of the company in what Weise called "a transforming event.".Two more Minnesota acquisitions followed in October. Jennings State Bank, which had a long history in the southeastern Minnesota town of Spring Grove but had more recently moved into Central Bank's home market of Stillwater, was closed by the state on Oct. 2. Central Bank picked up about $56 million in assets, almost $38 million of which are covered by a loss-share agreement. Albert would now oversee the integration of an additional $52 million in deposits and two more locations. Riverview Community Bank of Otsego failed three weeks later, adding two more locations, $80 million in deposits and $108 million in assets to Albert's list of integration items. ($75 million of the assets are covered by a loss-sharing agreement.).On Nov. 20, Central Bank acquired Commerce Bank of Southwest Florida after state regulators closed the $80 million, single-location bank. Morrison is a Florida resident who has invested in several Florida banks over the years, including Bank of Naples, a growing company with $174 million in assets. He had been looking for a Florida bank to purchase. Commerce Bank, with its $77 million in deposits seemed to answer nicely, and an FDIC loss-share agreement on $61 million of the acquired assets could help to cover the bet..The bank that started 2009 with $431 million in assets and six locations in one state finished the year with more than $1 billion in assets and 19 locations in three states..It had also developed a very timely expertise and a reputation for being able to help the FDIC resolve failed banks..Timely expertise.Morrison is an entrepreneur, what Weise describes as a "24/7" personality. He is connected, he is driven, and Weise (who has worked with him since 1985) says "John's job in the company is to push — to push for excellence, to push for better performance.".Acquisition of a failed bank is successful typically only if the acquirer can swiftly turn nonperforming assets into earning assets. Weise said Central Bank has three advantages in this regard, all of which are closely related: experience, expertise and a culture of speed that comes right from the top.."What we have going for us is that we have people on our staff who are able to go into troubled banks and make a really quick assessment of collectability of loans," Weise said. "When there's one owner, one go-to guy and the buck stops with him, I think it gets quicker action out of people.".That was the organizational endowment Central Bank developed during the last 20 years. But acquisition of failed banks in the 21st century requires some specific skills — "there's a learning curve in this whole process," Albert said — and Morrison's team got up to speed quickly..For instance, Central Bank now has four separate loss-sharing agreements with the FDIC, one for each of its 2009 acquisitions. Each has separate accounting and separate filings. The agreements entail an 80 percent government guaranty on the whole loan portfolio, plus "other real estate" collateral acquired from a failed bank. Morrison notes the guaranty does not accrue interest, and he refers to the "negative carry" — that un-definable period when Central Bank has yet to turn around or dispatch its newly acquired nonperforming assets but is nevertheless paying interest on new deposits.."This is not without risk," Morrison said..Loss-sharing agreements also govern how acquiring banks work through troubled assets. Weise said FDIC categorizes loss-sharing assets as "single-family loans" and "all others." An acquiring bank under a loss-sharing agreement must offer mortgage workouts to single-family loan holders and help those families stay in their homes. It cannot simply foreclose, sell at market value and expect the FDIC to pay the difference.."The FDIC isn't going to let you come in and say, we'll just sell this thing for any price. We go according to our normal lending practices, get appraisals, get evaluations, get different fair-market opinions on properties," Weise said. "Though the FDIC doesn't micro-manage the process, they do come in and look at our files, and they have the right to audit the loss-sharing accounting," he said..Central Bank has therefore introduced a home mortgage modification program that complies with FDIC guidance. The bank has also added two new teams, one to administer the loss-sharing agreements, and another, known as the special assets division, that focuses on nonperforming loans from recent acquisitions..On the deposit side the bank has to strike a balance. Failing institutions tend to pay up for deposits, and the acquiring bank has the right to adjust rates down "to a point no lower than our lowest deposit," Albert said. After one acquisition Central Bank had a bundle of deposits that was carrying a cost of 4 percent but earning 0.25 percent. Albert said a first order of business was to drop those rates..But correcting disparities in liabilities is a delicate business; acquiring banks don't want to damage goodwill, especially in communities to which they're new. For this reason, Central Bank has chosen to accept all deposits in its acquisitions, not just insured deposits. That way, depositors who are over the FDIC-insured limit can keep all their money. Funds beyond insurance limits would be lost in the failure if the acquiring bank accepted only insured deposits..Beside the intricacies of the acquisition agreements there is the intensity of the bank-closing and ownership transfer process. From the moment would-be buyers are notified of an impending closure they are inundated with information. Weise said the FDIC is generally on site at failing institutions, posting information on everything from loan balances to facilities, personnel, securities and data processing systems. If would-be buyers decide to conduct due diligence, the FDIC allows them a two-and-a-half-day visit in the failing bank.."Whether it's $500 million or $50 million, you get two-and-a-half days and five people," Weise said.."The first time, I said, take six over," Morrison said..Weise said when they showed up with six people, the FDIC refused to bend its rules and they had to send the sixth person home..Interested acquirers generally bid on Thursday. The FDIC notifies them the following Tuesday as to whether their bid was accepted or passed over for another. Winning bidders meet the FDIC resolution team two days later at a hotel, where the FDIC's department specialists, including human resources and information technology professionals, start working with their peers from the acquiring bank. Bank executives meet with the receiver in charge. On Friday morning a federal court authorizes the upcoming closing, and that evening the state banking commissioner (or relevant federal regulator) goes in and closes the bank..On four occasions last year Morrison was on hand for such scenes.."You go in at 6 o'clock and they say 'here's the new owner,'" he said. "Then you have time to talk about what you're doing. And then 50 [FDIC] people take over, and you have two state patrolmen at every branch 24/7, all weekend," as the bank changes hands..Weise noted that the resolution team "literally takes the old bank charter off the wall.".Morrison and his team show a sincere respect for the work the FDIC does, not just for the efficiency and professionalism of individual agents but for the FDIC's organizational sensitivity, both to the difficulties of employees at failed banks and to the needs of acquiring institutions..Morrison noted that a long decline at a bank and the inevitable Friday deathwatch "really grind on the employees." The FDIC does a "positive good job making the failed bank employees feel good," he said..Employee health insurance and other benefits are among the first things the FDIC discussed with Central Bank, encouraging Morrison's team to hire all employees from the failed banks for at least one day, so they would be eligible for COBRA coverage. In another sign of respect, the agency orders catered dinner on the night of a closing and insists that bank employees eat first, before the FDIC resolution team..Morrison noted a similar thoughtfulness among state regulators. Kevin Murphy, deputy commissioner of the Minnesota Department of Commerce, asked Central Bank to bid on the failing Jennings State Bank because Murphy didn't want the town of Spring Grove to lose its only bank, with the consequent loss of jobs and community activity.."The people can thank the commissioner for the fact that that bank wasn't closed—point blank, period, end of sentence," Morrison said..Tough market for banks.Although Morrison came from Albert Lea, Minn., and built his main business in his home state (where he was, at one point, an assistant attorney general), his Florida experience—and its effect on his outlook—may be more telling at the moment..First, Florida is an object lesson in land values. Morrison talks about properties that sold for $800,000 two years ago that couldn't fetch $250,000 today.."I know one piece of land on the water that the person paid $600,000 for and got $125,000—and that was a big deal," Morrison said. "You're talking about real economic dislocation in the country on Main Street, and it isn't just conversation. It's real.".Main Street banks are obviously affected by the surrounding economy. Weise talks about bankers making $400,000 loans on $800,000 condos—50-percent loan-to-value deals that were safe by definition. But when the value dropped to $250,000 or $200,000 and borrowers walked away, the whole thing looked bad..This uncertainty makes it harder than ever to sell banks, Morrison said.."You can't value the assets. You don't know that tomorrow a guy who has been with you for 20 years, because of what's going on in the country isn't going to walk in and hand you the keys," he said.."Major banks" aren't making loans, and "you can't borrow money today on a bank," he said. Buyers are scarce too, as they hunker down or watch what is headed for FDIC receivership.."Main Street is not working. The values of real estate are substantially depreciated, there's a huge glut on the market of these kinds of things. You can go down to certain segments of the economy and it will be years before those things come back, if then," Morrison said. "It's going to be a long time. I cannot figure out the [surging] stock market, even though it's always a leader, because everyone I talk to says this is going to be a very long, tough economic road.".Inasmuch as Florida is a microcosm of the national economy, the outlook is challenging. But in the Midwest and Central Bank's home state of Minnesota things may be cycling more quickly and less severely. Some real estate values may have hit bottom already..Single-family homes, "especially at the lower end," will "move right now" if they're priced right, Albert said.."They're moving. They're getting re-priced. We know because we're kind of in the distressed asset business right now," Weise said. But there are still reasons for concern.."There's a lot of property that has not yet gotten into the hands of the lenders. I think what we're still concerned about is development lending on raw land and different things, when you get outside the Twin Cities; I'm not sure if there is a bottom in that yet," Weise said..Morrison said this is the worst economic situation he has seen in his career. But, for his part, he tries to take the long view:."Like anything else, if you can weather the storm…it's really an opportunity to help not only those who you're dealing with but to help the economy, help the people and, obviously, to help yourself, help your company and help your bank."