Stearns Bank's foresight lets it seize the moment

Article appeared in the St. Cloud Times, by Britt Johnsen

In the midst of a deep recession, Norm Skalicky’s employees heard the tones of a gong from his office.

Skalicky, chief executive officer of Stearns Bank, would bang the bronze-colored gong on his desk every time the bank unloaded a troubled asset.  “We would bang on that quite a bit in early (2008),” he said.

The nearly 100-year-old St. Cloud bank during this recession has been doing things not all banks can say they’re doing. While Stearns hasn’t changed the way it makes money — still primarily dependent on interest from loans — it has grown significantly.  Stearns has taken over five failed financial institutions in the past year, expanding its name into Georgia and Florida, and across two more cities in Minnesota. And as a result of acquiring new banks, its staff increased 73 percent, with assets increasing 60 to 65 percent.

It’s not just dumb luck that he wound up banging gongs and buying bad banks. Skalicky’s foresight to unload troubled loans, tighten lending and buy failed banks may have been the right combination to put the business in a place other owners wish they could be. “This is not by accident that this is happening,” said the North Dakota native and former Army officer.

Foresight.  Skalicky said he saw the recession coming in 2006 and has worked to improve Stearns, which offers checking and savings accounts and does Small Business Administration lending and equipment financing, among other aspects of its business.  Skalicky saw the problems ahead. So they continued to shake bad loans from their books. Then in 2007 Stearns tightened lending — and tightened its payroll.

Skalicky compares the moves to catching cancer early enough to cure it.

And so the healing continued. The FDIC sends out notices to banks so they can bid on failed financial firms. In March 2008, Stearns won a bid to acquire a $730 million loan portfolio from the Federal Deposit Insurance Corp. The agency had sold $1.45 billion in residential and commercial construction loans it held from a Nevada bank that failed in July. Stearns and another company won the loans.

Decisions. The buying took off from there. In October 2008, Stearns bought Alpha Bank and Trust in Alpharetta, Ga.  In June, Stearns nabbed federally seized bank branches in Pine City and North Branch in Minnesota. August was a particularly busy month for Stearns, too. It acquired deposits and assets of two banks in Florida when regulators closed the institutions. Later that month it picked up more assets and deposits — this time from ebank, a small bank in Atlanta shut down by the FDIC. Branches of these banks have reopened under the Stearns Bank name.

Of course, Skalicky says, he did take some risk in buying these institutions. “There’s always a risk,” he said.

Here’s how the financial agreement works on some of these transactions: The FDIC and Stearns entered what’s called a loss-share agreement. Under this contract, the FDIC absorbs most losses while Stearns picks up some. For example, on certain commercial loans the FDIC will reimburse a bank for 80 percent of its losses. The bank then absorbs 20 percent. But if the business makes money on those loans, the FDIC reaps most of the benefit.

Like any other insurance agency, the FDIC is funded by premiums that banks pay, said David Barr, a spokesman for the FDIC. Barr said usually loss-share agreements are not done in transactions that need to happen quickly. And banks that tend to take them on are those that don’t mind a complex, long-term deal, he said.

Skalicky also had the capital to enter these agreements — which is where the strategic moves paid off. According to a 2008 financial report by Stearns Bank, in 2004 it carried an almost 12 percent capital ratio, a figure that represents a bank’s cushion to absorb losses. For perspective, a healthy bank needs about 10 percent.  But by the end of 2008, Stearns had about 20 percent capital ratio, according to the report.

Since it has bought the failed institutions, Stearns’ capital stands at about 15 percent, Skalicky said.  But he said that’s a good thing for his business. If a bank has much higher capital than that, it’s not leveraging its money wisely. 

That has paid off, he said.  “There’s still banks making good loans,” he said. “We’re one of them.”

An old hand. The 75-year-old Skalicky is a bit of an old hand at buying financial institutions. Before his recent round of buying, he figures he scooped up about 10 banks throughout his career. It started with Stearns County State Bank in Albany when he was 30, he said.

But it’s not just experience that makes him confident. He attributes Stearns’ success to hands-on managers, strong work ethic and loyal staff.  “I mean, we work,” said Skalicky, who gets daily reports from his banks all over the country. “We work.”

Skalicky’s style is straight-forward. He carries a card with 10 rules, including “no busy work” and “no unnecessary anything.” He doesn’t have a computer in his office. He talks of common-sense lending, where people need down payments for houses.

Things may be going well in St. Cloud. But one of the bigger challenges Skalicky and his people face is managing their new banks across the country. He said people from the St. Cloud headquarters have been sent to work at banks in Georgia and Florida to instill the Stearns culture.  “Old habits ... are hard to change,” he said.

As for the economy, he doesn’t buy that the recession is over. With close to 100 FDIC-insured banks that failed so far this year, and more the FDIC expects will buckle, there will be more opportunity to buy others. He’s open to that opportunity.  For now, though, Skalicky said, he’s satisfied with what he’s got.  “We have to digest what we have,” he said.