Leveraging Local Expectations

Steve Daggett leads northern Minnesota bank to become a top performer.When Midwest Bank moved its headquarters to Detroit Lakes in northern Minnesota in 1998, it strove to capitalize on a unique opportunity. The seat of Becker County 45 miles west of Fargo, N.D., Detroit Lakes is surrounded by 412 lakes and just as many farms. It has long enjoyed a strong vacation and ag economy. Furthermore, it has a thriving commercial business sector. Although already heavily banked, no bank prior to 1998 was headquartered in town..Steve Daggett, the bank's then 28-year-old president, was the leader who delivered on the promise of the bank's local charter. Offering a level of service beyond competitors, Daggett led the bank to a new level of performance. Midwest Bank ranked in the top 15 banks in Minnesota for pre-tax ROA as of year-end 2014. In 1998, it ranked 232nd. At $342 million in assets, the bank is more than five times its size 15 years ago..A young leader.Daggett is the first to admit the bank's success is the result of a team effort. Owner Denny Lind says Daggett has assembled a talented team. "But when it comes to bank managers there are caretakers and there are rainmakers," Lind said. "Steve is a rainmaker.".When Daggett came to Midwest Bank in late 1996, its owners wanted growth. But before they could grow, they needed to clean up the bank's assets. Daggett, a former FDIC examiner who had been inside some 100 banks, came prepared. Impressed with his performance, Lind and co-owners promoted the lender twice within 18 months — the second time to president of the then-$25 million bank..A merger in 1998 brought together Farmers State Bank of Waubun, Minn., (the bank that hired Daggett), and Midwest Bank, Parkers Prairie, Minn., to form a $60 million institution. The combined bank could only grow so much in its footprint, which then consisted of five locations in tiny hamlets. Midwest Bank and its new, young leader were ready to move into Detroit Lakes..Loan committee front and center.Detroit Lakes was a new home for Midwest Bank but for Daggett the move was a homecoming. A native of nearby Frazee, Minn., Daggett was connected in Becker County. His grandfather served on the board of the First National Bank of Detroit Lakes (now a Wells Fargo office) and his father, uncle and cousins jointly operate a trucking business. Daggett's mother, Roxann Daggett, represented Becker County in the Minnesota House of Representatives from 1995 to 2002..While his connections were helpful in opening some doors, they were not enough to guarantee success, Daggett said. It was the design and responsiveness of Midwest Bank's loan committee that won business in Detroit Lakes, he said..The strategy is more about common sense than secret sauce. Daggett and the bank's owners decided the loan committee would meet every week in order to respond to loan applications more quickly than competing banks. They also decided to make the committee a platform to teach lenders about credit. Every lender attends loan committee meetings as a non-voting member. The bank also put an emphasis on loan file preparation, a contribution from Daggett's FDIC days, which ensures the committee has all the information it needs to make a decision..Its loan committee strategy paid off in many ways. The first was fast turnaround for customers, including some who grew tired of waiting for responses at other banks. "An example is one of our manufacturing customers who had been waiting for another bank for two months," Daggett said. "I got his info and by noon the next day I had an answer to him.".The detail Daggett brought to the bank's loan files allowed in-depth discussion of proposed credits at committee meetings. Loan committee became a training ground for the bank's lenders who in turn learned how to spot promising loan opportunities..Leaving no stone unturned.The detail and experience of its members gave the loan committee the ability to consider confidently credits that other banks didn't want. Midwest Bank was able to look at each loan on a credit-by-credit basis, rather than giving an answer to customers based on static underwriting requirements.."Anyone can do a deal with a tried and true customer. We have done a pretty good job of looking 360 degrees at our credits," Daggett said. "My favorites are startups or struggling businesses that you help because you know they can succeed. They become very loyal customers.."There are banks that will turn away good business because the customer's collateral is lighter than they'd like," Daggett continued. "Collateral only becomes a factor in about 1 percent of loans. If the customer's collateral is lighter, but everything else makes sense, we don't want to lose a deal just because of collateral," he said..Driving ROA .Midwest Bank's rise to an earnings leader comes from a consistently high loan to deposit ratio, low loan losses and a lower-than-average efficiency ratio, Daggett said..Daggett was clear: Midwest Bank hasn't been exempt from mistakes, and it has been fortunate for the strength of its market in Detroit Lakes and five other locations. "The Twin Cities, for example, have some very sharp bankers who are struggling because the market took such large hits. They made good loans but still couldn't steer clear of the difficulties," he said. "Our portfolio had 30 percent ag, 40 percent commercial and 30 percent in mortgages and consumer loans. As it worked out, the diversification was very good and helped us.".Still, Midwest Bank has performed well when it comes to minimizing loan losses. The bank has averaged 3.75 basis points in net losses to loans over the last four years. Banks between $300 million in assets and $1 billion averaged 36 bps in net loan losses during the same period, Daggett said. "We have really preached asset quality," he said. "That has been a major driver in our operating income." .Midwest Bank's loan to deposit ratio has been above 93 percent for the last 10 years; most of those years it was over 100 percent. At 49.8 percent in 2014, Midwest Bank also is below the average efficiency ratio for a Minnesota bank..A low loan loss ratio moves the needle on its own when it comes to ROA, Daggett said. "There is a 33 bps difference between our average losses and our peer group. Take 33 bps over $300 million in loans and you have an extra $1 million," he said. "And that is just the losses. If you add the personnel and other costs associated with addressing nonperforming loans, you can lose more than double that.".Midwest Bank turns some of the money saved in efficiency and low loan losses into another advantage. "We are able to pay more on deposits and charge less on loans than our peers," Daggett said. "I make a point of telling customers that we are a top performer because we don't do it by charging more and paying less on deposits. We do it on efficiency and on fewer losses.".A staff built on reputation.Building a brand that brings referral business was an essential part of Midwest Bank's strategy. Daggett also built the bank's reputation to attract talent. "We never once hired someone by going out and soliciting another banker," Daggett said. "People came to us because they heard of our philosophy and of ownership's commitment to be in this area long term.".The talent Midwest Bank attracted, combined with the education given in loan committee meetings, made for a very competitive lending team. "Customers don't mind explaining their business but they don't want to do it over and over again," Daggett said. "We have gotten in a lot of doors because of turnover in other banks' lending staffs.."A good bank is never a function of one person," Daggett continued. "There are good leaders but one person cannot do $200 million in loans. Really good businesses have depth. If they lose a person or something happens, it isn't a crisis for them. The banks that had depth did well year in and year out.".Daggett said low turnover on the teller line is one way Midwest Bank has differentiated itself. "Tellers are not a commodity," he said. "New lenders don't know your customers' businesses and new tellers don't know your largest customers when they walk through the door. You don't want your teller asking your largest customers to identify themselves. It is a small thing that can really affect your customer relationships.".Delivering on the promise of its local charter has worked for Midwest Bank. It started from scratch when it entered Detroit Lakes. Today, Detroit Lakes has six banks. Yet, Midwest Bank owns nearly a fourth of the deposit market share; the only larger player is Bremer Bank..Once a little bank from Waubun, Midwest Bank hasn't thrived only because it is in Detroit Lakes. It has thrived because it has been a bank for Detroit Lakes..NOTEBOOK.Humble beginnings.Nearly everything was wrong with Midwest Bank's first location in Detroit Lakes, Minn. It was so close to the railroad that Steve Daggett, the bank's president, had to sign a waiver that the bank would not sue if a train derailed and destroyed the branch. The building had no drive-up, was poorly accessible from the highway and had limited parking. "But one thing was perfect," Daggett said. "It was in Detroit Lakes.".The city was heavily banked when Midwest Bank moved its headquarters to town in 1998. "So, our compromise was to rent instead of buying so we didn't have too much money in," Daggett said. "We decided we'd know after five years. If we didn't have any business built by then, we'd cut bait.".At the five year mark, Midwest Bank had $36 million in Detroit Lakes. So, they built a new headquarters in 2003. "We knew what our goals were and that the largest bank in town had about $100 million in loans, so we built to accommodate an organization of that size," Daggett said..By 2006, Midwest Bank had $120 million in loans in Detroit Lakes and expanded its facilities. In 2014, the bank topped $200 million in loans. Daggett said he is confident Midwest Bank's loan market share in Detroit Lakes is larger than the second- and third-largest players combined..Daggett on regulatory relations.Midwest Bank President Steve Daggett shared insights on regulatory relations from his experience. Daggett is 2014-2015 chair of the Minnesota Bankers Association and was an FDIC field examiner before joining Midwest Bank in 1996..Daggett said Midwest Bank has found a give-and-take approach works best with regulators. "I do not always agree with regulators' decisions," he said. "If it is an issue on which we can compromise or accept the decision we do so. Then when we really do need to push back, they take it seriously.."Our approach is that if you always push back, you lose credibility," he continued. "If you always push back, they also won't be able to tell when you really need them to understand your opinion. We create a culture of valuing the exam process. I tell my employees not to be scared or intimidated. We want to be responsive to them and I think they can see that we respect the process.".Daggett also had a good rule for creating loan files that build the bank's reputation with regulators. "I remember from my days at the FDIC, if you, as the regulator, have a ton of questions about the loan then the file wasn't done correctly," he said..Better documentation in the loan file can mean less time spent on an examination, Daggett said. "We just had an exam; they thought it was going to take three weeks and it took a week," he said..NOTABLE.Building a mountain.In 2010, the Detroit Lakes, Minn., community set out to create a new, top of the line ski hill and recreation area. In 2013, Detroit Mountain, a 200-acre recreation area, opened just two miles from town. With 14 ski runs covering 100 acres, Nordic ski and snow shoe trails, a tubing hill and a biking trail, Detroit Mountains represents a $10 million asset for the community..Steve Daggett, president and CEO of locally-chartered Midwest Bank, played a central role in the project, said Mark Fritz, chair of the Detroit Mountain Recreation Area, the nonprofit group that built and manages the venue..Many people, including business leaders in Detroit Lakes and Fargo, contributed time and money to make Detroit Mountain a reality, Fritz said. Supporters from the banking community were Midwest Bank, Daggett and Midwest Bank Owner Denny Lind. Bell State Bank & Trust, Fargo, N.D., and The Otto Bremer Foundation also were important supporters of the project..Daggett, who also serves as vice chair of the Detroit Mountain Recreation Area, was an early contributor and cheerleader for Detroit Mountain, Fritz said. "He was the one who said we are going to do this," Fritz said. "He helped bring us those few donations that got us rolling. After the folks from Midwest Bank donated, we could approach other people with some legitimate money raised.".Daggett's and Midwest Bank's unique contribution was a funding strategy that resulted in some $700,000 in savings for the project. The Detroit Mountain Recreation Area needed about $9.2 million. In 2013, it had about $2.7 million in funds collected and another $4.8 million pledged..Utilizing the New Market Tax Credit program from the U.S. Treasury, Midwest Bank lent $4.8 million, against pledged donations to the Detroit Mountain Recreation Area. Through the NMTC Program investors then obtained a tax credit by making an additional $1.2 million equity investment. The project then had $8.7 million in funds collected. .Under the NMTC rules, however, Midwest Bank's $4.8 million loan had to remain on interest only payments for seven years. That meant Detroit Mountain Recreation Area would have to pay interest on the loan amounting to some $700,000. "We didn't want that," Daggett said. "So, we created a non-profit which buys participations in the loan from the bank as pledges come in. At the end of the seven years, the nonprofit will forgive all the interest. The interest saved is like finding another $700,000 donor.".Daggett said he had seen the strategy used on another community project completed in Detroit Lakes. Midwest Bank still deserves some credit, Fritz said. The concept wouldn't have worked without a bank that was willing to give up all that interest. "Detroit Lakes has been so very good to us, we feel we have a responsibility to give back," Daggett said..Detroit Mountain opened for business over Thanksgiving weekend in 2014. For its first season, management projected the venture would run profitably if it sold 30,000 ski passes. With 42,000 passes sold since opening day, along with concession sales in the chalet, results have been well beyond management's expectations.