Stearns Bank in St. Cloud has acquired five institutions in the last year, more than any other buyer, making it the nation's top buyer of failed banks.
Stearns Bank started out as an agricultural bank nearly a century ago. CEO and president Norm Skalicky bought the bank in 1964. More than 40 years later, Skalicky watched the housing bubble and saw nothing but trouble.
As he watched other banks load up on risky loans, he took the steps to get rid of loans he thought could become toxic.
"We needed to make sure that our backyard was clean enough so we could take on other deals," Skalicky said.
Skalicky started to unload bad loans in 2006, but realized that wasn't enough. He thought he still had too much risk on the books.
"The day after Labor Day in '07, I called our lenders and everyone concerned with new loans and we just quit making new loans except some that were totally committed on and thank goodness we did," he said.
Skalicky said that step allowed him to avoid a lot of financial pain and focus his people on preventing big loan losses.
"Everybody went from the production marketing side, literally everyone, to the collection side," he said.
Skalicky said slowing down when he did gave him the financial strength to acquire five failed banks, most in other states, plus a portfolio of loans. The buying spree has brought in $1.5 billion in additional assets. Skalicky won't say how much he paid, but he said he has increased his institution's assets by 60 percent.
He said one of Stearns Bank's longstanding strengths has been collecting loans. A lesson he learned in 2007 was to act fast on a loan that's in trouble.
"So you have to dispose of the property, you probably have to foreclose, get the property in your name, and sell it," he said. "Or there is a chance to sell that loan to somebody because they maybe think they can work it out better than we can."
Skalicky said those collection skills should help him make money from the banks he's bought. He said his bank has been authorized to operate nationally since 1965, so he's familiar with doing business across the country.
Buying a failed bank can be a good move.
When the FDIC tries to sell a failed bank, it tries to make the deal attractive for another bank. FDIC spokesman David Barr said the transactions are structured to buffer the buyer from the bad loans.
"The acquiring bank is protected from really the issues and problems that caused that bank to fail in the first place," Barr said. "So coming and working with the FDIC to buy a troubled institution usually is a good means for a bank such as Stearns or any other that wants to increase its market share or enter into new markets."
But it isn't necessarily easy to buy a failed bank. There can be a lot of competition. Barr said the FDIC has a database of institutions interested in buying failed banks. The agency sends out a confidential email to potential buyers, which can number in the hundreds. Then the FDIC scours the list for banks that meet a variety of criteria.
"So we can whittle it down from 500 to 600 potential bidders down to either 3 or 6 very serious contenders who really want to compete to get this failing institution from the FDIC," he said. "It is a competitive process."
None of the bidding banks know how many others are also competing, so Barr said the winning bidder has to be aggressive. He said the final decision is strictly bottom-line, so the FDIC picks the bid which is most cost effective for the agency.
The FDIC structures its deals in one of two ways. Either it carves out all of the toxic loans completely or the banks take the loans along with a healthy measure of protection against losses from the FDIC.
Those so-called "loss-share agreements" are the kind Norm Skalicky goes for, figuring his collection abilities will help him score big. Skalicky said his bank is still digesting what they've acquired recently, but he intends to acquire more banks in the future.
"We're snooping around a bit, looking at possibilities because there is no end to the possibilities," Skalicky said.
And with several banks failing each month, there's no shortage of possibilities either.