’Git r done, Norm

The man behind so many of those failed bank acquisitions is the same person who runs one of the most profitable banks in the country. Norman C. Skalicky, 78, is owner and chief executive officer of Stearns Financial Services, Inc., in St. Cloud, Minn. Since autumn 2008, his organization has acquired through the FDIC nine failed banks with $1.4 billion in assets and $1.5 billion in deposits. Selling some of the loans and integrating the rest into his current operations, his lead bank – Stearns Bank National Association – is reporting eye-popping earnings. Through three quarters of 2012, the bank returned 23.83 percent on equity and 4.36 percent on assets, about four times the industry average for both statistics..Ask Skalicky how he does it and he will point to the culture he has created during the last four decades. It's a get-the-job-done culture where every employee is expected to deliver wow-factor customer service. That mean's fast and accurate. Furthermore, Skalicky says communication at the bank is "open, verbal and often." The bank's 2011 annual report says "rarely does Stearns communicate with its employees through formal memorandums or formal meetings, but relies heavily on open discussions and two-way interaction." The report says that in addition to being assertive, creative and intelligent, Stearns employees rely "heavily on the use of common sense." Everyone performs with a sense of urgency, Skalicky added..Skalicky's no non-sense personality quickly becomes evident; even the bank's web page displays this list of "Top 10 NOs" – No busy work, no top-heavy staff, no overdoing rules, no time wasting meetings, no excuses, no unnecessary anything, no fear of being different, no substituting reams of paper for productivity, no throwing away money and no end to the possibilities.".Perhaps more impressive than the list, which Skalicky derived from a similar list created by his close friend John Gagliardi, the legendary football coach from near-by St. John's University, is the bank's efficiency ratio, which most recently showed the bank spends just $38.25 to earn a dollar. It's among the best ratios for any bank in the county..Just as important as culture, however, is execution and Stearns does seem to have an effective way to 'git r done. Although sized like a large community bank at $1.4 billion in assets, Stearns really operates on a national playing field, soliciting business all over the country. And it is in a variety of businesses – a mix that evolves regularly. Yet, some themes endure like the bank's interest in business with shared down-side risk. All but two of those banks Stearns purchased through the FDIC have come with loss-share agreements that partially protect the bank from loss should some of the acquired loans prove uncollectable..Capital has proven to be one of Skalicky's most important tools. The bank currently holds capital equal to about double the industry average. High levels of capital – which some observers might even say are too high – have been a feature of the bank for years. In the last decade, the low point in the bank's equity capital to assets ratio was in 2004 when it dipped to 11.64 percent. Mostly built with years of retained earnings, the ample capital cushion has given the bank credibility with customers and examiners..Origins.Having grown up in Brocket, N.D., Skalicky graduated from the University of North Dakota in Grand Forks in 1955 and started a career in insurance. A few years later, a rural banker changed Skalicky's life when he encouraged him to put his insurance experience to work in the banking industry. He introduced Skalicky to a correspondent banker from Northwestern National Bank, who helped him get a job with the bank's Lake Street office in Minneapolis. Days prior to Skalicky's start in 1959, the office's insurance agent suffered a heart attack; Skalicky started at the bank, filling in for the recovering agent. Skalicky said his knowledge of insurance gave him an edge over the other new recruits and his salary was $50 per month more than the others..Skalicky soon moved into Northwestern National Bank's credit department but Skalicky said the fit wasn't right. He preferred to work in a smaller shop so he put an ad in Commercial West (the forerunner to NorthWestern Financial Review) seeking a job. When his wife told him he got a reply from a bank in Albany, Minn., he asked "Where's Albany?" The Stearns County State Bank needed an insurance agent and Skalicky took the job. He said he had $425, three kids and a car..Skalicky found it easier to sell insurance from within a bank, so his work paid off; he could see the benefit of a business devoted to both insurance and banking. He was so convinced that in late 1964 he purchased a majority interest in both Stearns County State Bank and First State Bank of Albany. On Dec. 31, 1965 he combined the two charters into one national bank. Skalicky's holding company, which is 20 percent owned by an employee stock ownership program, also includes a bank in Holdingford, Minn., which he bought in 1976, and a bank in Upsla, Minn., which he bought in 1978. In 1997, all the banks adopted the Stearns Bank name. Last year, the organization celebrated its centennial anniversary with the Stearns County State Bank charter having been created in 1912..Key businesses.Leasing quickly became an important part of the Stearns Bank business mix. One of the bank's early customers was National Machine Tool Leasing in the Twin Cities and Stearns bought it in 1976. Renamed Stearns Financial Leasing, the division has a solid reputation among leasing companies across the country. A crowded business with participants the likes of Wells Fargo, U.S. Bank, Citibank and other major financial institutions, Skalicky noted Stearns competes more on service than on price. Clients include Federal Express, Heidelberg Optical and Berkshire Hathaway..It takes years to develop a portfolio of successful leasing clients, Skalicky said, but ultimately success is about hard work. On the Fed Ex account, for example, a Stearns employee approached the company some 15 years ago and obtained a lease on a single vehicle. They liked the service and agreed to finance more vehicles through Stearns. Word got to Fed Ex's Duluth, Minn., office, and they shifted their leasing to Stearns. Finally someone at Fed Ex headquarters in Memphis, Tenn., contacted Stearns and today the bank is one of two companies that finance all of Fed Ex's home delivery trucks..Unlike most leasing operations, Stearns does not pay commissions, nor does it have field agents. Its chief method of prospecting is industry conferences. A team of Stearns employees attends a conference, making new contacts but more importantly following up on contacts made in pre-conference phone conversations and other meetings. They bring applications to the conference and work with prospects to fill them out right on the trade show floor. Colleagues back in Albany process the applications and get back with approvals within hours. Skalicky said his people work harder than anyone. "A lot of people go to conferences to socialize," he said. "We go to them to actually work.".Stearns has carved out another valuable business niche financing deals involving the U.S. Department of Housing and Urban Development's Low Income Housing Tax Credits. Created in 1986, the program leverages Section 42 of the Internal Revenue Code by allowing developers to sell tax credits which investors can redeem against their federal tax liability for 10 years. The money allows a real estate developer to construct a "Section 42" housing project more economically than conventional projects. Skalicky explained there's often a short-term financing need between the time construction begins and when it concludes, which is typically when the developer gets paid. "We do these kinds of construction loans," Skalicky explained. "It is short-term lending, which is what we like. We do a lot of business like this, and have been since the 1980s so we are known for this. We do a lot of business at conferences for developers interested in these kinds of projects.".More recently, Stearns bank has developed another specialized niche financing medical equipment. Many of the largest banks in the world fund equipment purchases that run in the hundreds of millions of dollars. They seek participants and Stearns Bank is a frequent customer. Skalicky likes the participations because they diversify his loan portfolio and, given slightly more risk than other kinds of equipment financing, he likes the yield. A concern, however, is the outlook for the flow of federal money to health care facilities, which some project to decline in coming years..If that happens, Skalicky said the bank will find other niches. Constant evolution, he said, is essential to survival let alone success. Ten years ago, for example, the bank was big into financing motels; today, the bank does little of such business..Always looking for opportunity, Skalicky said the bank does its research and goes after something if it looks promising. The formula typically works but sometimes promising ideas simply fail to materialize. For example, a few years ago Skalicky was interested in financing the purchase of delinquent tax payments. Skalicky thought there would be big business in financing people who buy delinquent tax receivables from counties that have a significant number of residents who fall behind on their taxes. A market that he once thought might be worth $100 million, he said, never panned out for Stearns Bank..Growth during recession.Skalicky grew uneasy with real estate lending as early as 2006. About 10 years prior, the bank had set up shop in Arizona and it had done many loans in the Southwest. But Skalicky could see that prices were rising unrealistically and that the housing bubble was about to burst. "In 2006, I was giving a talk to our crew in Arizona and I told them we won't be doing real estate deals anymore," Skalicky explained. "One of our employees came to me and asked 'you mean we are out of business?' and I answered 'no, we want to stay in business; that's why we are doing this'.".As the economy evolved and events unfolded, it became more apparent to Skalicky that the entire economy – not just the housing market – was headed for trouble. An unusually high percentage of loans in the Stearns Bank portfolio were suffering, although the bank remained stable given its high level of capital. The day after Labor Day in 2007, Skalicky put a moratorium on all new lending. The bank literally stopped making loans. It was a drastic move but looking back, Skalicky said he's glad he did it..Since then, Stearns Bank has acquired failed banks that continued to lend right up to the financial markets crash in September of 2008. Skalicky said some of the banks were very poorly managed, and one bank literally had no one in charge at the time of the failure. Collecting on loans that never should have been made proved difficult for most of the failed banks' existing staffs and Skalicky said most were not retained when Stearns took over..Skalicky said he has people on his team who can evaluate a bank quickly when an opportunity to purchase it comes up. Skalicky, often part of the due diligence team, determines a bid, some including a premium on the deposits and others seeking loss-share provisions from the FDIC. Sixty-nine percent of the $1.394 billion in assets Stearns has acquired in failed bank deals are covered by some form of an FDIC loss-share agreement. "You have to know what you are doing," Skaliky said of the FDIC failed bank bidding process. "It can be real good or it can be real bad if you don't buy it right.".With all its capital, Stearns is likely to remain an acquirer although the loss-share agreements will probably become more difficult to obtain. As the financial crisis recedes into history and the pace of bank failures declines, the FDIC is doing fewer deals with loss-share provisions. While 130 of the 157 failed bank deals in 2010 included loss-share provisions, only 58 of 92 deals included them in 2011, and only 20 of 51 deals included them in 2012. (Two of the three 2012 deals Stearns did included loss-share provisions.).While acquiring banks through the FDIC, Stearns Bank was still humming along. After the September 2007 declaration against additional lending, the bank shed some $300 million in troubled loans. With its loan portfolio strengthened, Skalicky and his team began lending again and by 2011 the bank grew its loan portfolio (excluding assets acquired through acquisition) by 20 percent. While acknowledging soft loan demand, Skalicky said by casting a nationwide net and prospecting diligently in key niches, the bank found ample new loans..Skalicky said the bank has so many things going on that it's "crazy" but he said he wouldn't have it any other way. He and his employees have fun. "I always like a challenge," Skalicky said. "Our people are probably happier than the average people in the workplace. I like being around them.".Skalicky says he won't retire. "I don't know what I would like to do more than what I'm doing now," he said. "We have a lot of fun doing this. It isn't easy necessarily… This is better than retirement."