Publisher’s note: NorthWestern Financial Review is pleased to partner with Bell State Bank & Trust to present the 2014 Banker of the Year feature. This is the second year in a row that the Fargo, N.D.-based bank has provided its sponsorship. The Banker of the Year program, started in 1989, is one of the most popular regular features appearing annually in NorthWestern Financial Review magazine. Sponsorship support provides important resources that we use to maintain the high standards of this unique recognition program.
Charles Funk develops his team, creates one of the most profitable banking organizations in Iowa
Iowa State Bank & Trust of Iowa City acquired the neighboring $789 million MidWestOne Bank in Oskaloosa in March of 2008. The timing could not have been worse.
That year, three of the bank’s locations were destroyed by tornadoes and floods; expenses spiked. Its compliance burden grew, as did its asset quality issues in the wake of the financial crash, resulting in a $27.2 million goodwill impairment charge to the bank. Yet today, the bank is among the state’s net income leaders. It came through the tough years because President and CEO Charles N. Funk had poured so much energy into developing his staff.
Funk, who has made MidWestOne a rewarding place for employees and investors, is NorthWestern Financial Review’s Banker of the Year for 2014. The award is sponsored by Bell State Bank & Trust of Fargo, N.D.
ISB&T’s merger with MidWestOne Bank created a $1.5 billion institution with 29 locations in eastern Iowa. More than doubling in size, ISB&T adopted the MidWestOne name, leveraging brand development work the acquired bank had done before the merger. Having retained ISB&T’s charter, Funk and the rest of the bank’s executive team saw a bright future. “A bigger balance sheet meant more revenue. With the scale we acquired by doubling the size of our company, we were ready to do so many more things,” Funk said.
“What excited me most about the merger were the opportunities it brought our people,” Funk said. “Over the years, a few of our officers left because they had hit a ceiling here. They were doing a good job and they were happy here, but we didn’t have anywhere for them to grow because the bank wasn’t growing fast enough.”
ISB&T purchased MidWestOne Bank for $92.3 million, a 54 percent premium over the market value of the bank’s assets. The price created $30.5 million in goodwill on the bank’s balance sheet. Then the recession began to create credit quality issues in the bank. As a result of an increase in non-performing loans, the fair market value of the bank’s assets declined. Accounting principles required the bank to write off most of the goodwill it created from the merger.
“We created a lot of goodwill as a result of the acquisition,” Funk said. “Typically this is categorized as capital but we all know that a bunch of goodwill isn’t real capital. Real capital is what you charge loans against when you write off losses. It wasn’t actual cash. But still that was a morning I didn’t look forward to.”
By 2008, Funk was nearly 30 years into an accomplished banking career. A graduate of William Jewell College, Funk began his banking career in 1979 at American National Bank, St. Joseph, Mo., in the bank’s management training program. Just as he graduated, the bank’s investment officer left. Management asked Funk to cover the position temporarily. He did so well they gave him the position permanently. “If not for that, I was headed to the commercial loan floor,” said Funk, who has never been a commercial loan officer. “When I accepted the position, my father, who owned a bank in Lancaster, Mo., for nearly 15 years, told me I would never become a bank CEO without commercial loan experience.”
By 1997, Funk was the chief investment officer at Brenton Bank in Des Moines, Iowa. The bank’s chief operating officer asked Funk to take over management of the bank’s struggling branch in Des Moines. Within a year, the Des Moines branch was recognized as the best in the bank for loan growth, deposit growth and referrals. Funk said the most important part of this early success was the team he helped to create. “If not for that opportunity, I’d still be managing bond portfolios,” Funk said. “Once you experience success like that in leadership and teamwork, you crave more.”
By 2000, Wells Fargo was on the verge of buying Brenton Banks. Not wanting to stay after the bank was sold, Funk called Dick Summerwill, then president of Iowa State Bank & Trust, who was looking for his successor. Funk tried to convince Summerwill that he was the person for the job. The two bankers met for lunch but Summerwill turned Funk down. ISB&T already had gone through its hiring process and selected two candidates. “I remember it like it was yesterday. Dick said, ‘If I throw you in there now, it would bastardize the process,’” Funk said with a laugh.
The candidates ISB&T selected, however, didn’t work out. “So, one day I got a call from Dick inviting me to lunch. I pretty much walked away from that meeting with the job,” said Funk, rapping his knuckles on the table of his downtown Iowa City office, the same office Summerwill used when he was president. “I tell people there were 40 candidates for my current job, I wasn’t one of them.”
When Funk joined ISB&T as its president in 2000, Summerwill became the bank’s chairman. The two began a mentoring relationship that continues to this day. “I told Charlie from day one, I considered it my job to make him successful,” Summerwill joked. “It wasn’t more than three years before I told him my job had become easy.”
Similar to his early success at Brenton Bank, Funk drew on his team to grow the bank. Like Summerwill, he took an active interest in developing the bank’s staff. “When he joined ISB&T, the first thing he asked to do was read the performance reviews of the senior officers,” Summerwill said. “When I gave them to him, he went and read them all. I loved that he did it. He wanted to know his key players; he wanted to learn their strengths and weaknesses.”
In 2001, Funk began reading the annual reviews of all the bank’s officers. He followed up with them, either in person or with a note. He thanked them for their contribution and asked them to work on the skills mentioned in their review. In 2001, the bank had 45 officers. Today, Funk maintains this practice, even though his bank now has 100 officers. The exercise takes him the better part of December to complete.
Between 2000 and 2008, ISB&T averaged $5.3 million in net income per year and 13.5 percent return on equity. The bank grew to $600 million in assets by June 2008 with Funk as its president; it was $389 million when he came to the bank.
Investing in talent
After 2008, Funk outlined three goals for the years ahead: to hire and retain excellent employees, to increase non-interest income toward 30 percent of income over several years, and to discipline the bank’s expenses. Funk’s plan to reach these goals was familiar. “People were truly the most important thing. I needed great people in place who I trusted with their authority,” said Funk, who believes that a CEO’s potential is limited only in proportion to his inability to delegate.
During the recession, MidWestOne retained its budget for community involvement and employee training, even as it focused on trimming the bank’s expenses. In 2009, the bank launched its MidWestOne Leadership Institute. Each year management selects 12 employees — generally officers — to participate. It is a nine-class course designed to prepare employees for leadership situations by equipping them with conflict resolution, communication and delegation skills.
One of the people Funk hired was Greg Turner, who came on board in 2009 to run the bank’s wealth management division. As the head of the bank’s trust services, investments and insurance divisions, Turner was tasked with contributing to the bank’s non-interest income goal. “In my 20-year career, never have I worked for anyone who develops people as Charlie does,” said Turner, who just graduated from the Graduate School of Banking in Colorado. “It is not uncommon for him to ask me if I have all I need to lead my division and accomplish my goals. This company spends as much time on employee development as I have ever seen.”
Since Turner joined MidWestOne, assets under management in the bank’s trust and investment services division has nearly doubled to $650 million. In that same time, the division’s non-interest income increased to $1.5 million from $300,000. (Turner was selected a NorthWestern Financial Review Rising Star in 2012.)
Another example is Susan Evans, who was promoted to chief operating officer in 2009; she had been senior vice president of retail banking since 2001. With Evans as COO, MidWestOne focused on overhead expense. The bank had 420 employees after the merger. “We needed to right-size our staff,” Funk said. “In the end, that meant eliminating about 32 jobs.”
The bank lowered its staff size by expanding the responsibilities of some employees, and through attrition. When a position became vacant, managers carefully considered whether to hire a replacement. In many cases, a new hire wasn’t necessary because other employees took on the responsibilities of the person who left. In all, MidWestOne issued just seven severance packages as it reduced staff.
This approach also gave the bank the ability to reward employees who increased their responsibilities. “I could show the salary history of many mid-level officers,” Funk said. “Since the merger they have gone from making $50,000 a year to making $90,000. We like that we can reward them and retain the talent.”
Reaching full potential
By third quarter 2012, Funk shaped MidWestOne into the bank envisioned at the time of the merger. The bank’s earnings hit $18.7 million that year, setting a record for the 78-year-old company and more than tripling the bank’s pre-merger earnings average. For the company’s stockholders the bank also set a record for earnings per share of $1.95. The bank’s non-performing loans fell to 1.03 percent.
MidWestOne has continued its progress in 2013. In the first three quarters, the bank is on track for another record year. It made $15.2 million so far this year, which translates to earnings per share of $1.67. The bank’s non-performing loans decreased to 0.93 percent. That’s better than the average Iowa bank which has 0.97 percent NPAs. The average U.S. bank with less than $2 billion in assets has an efficiency ratio of higher than 70 percent. MidWestOne’s efficiency ratio is 55 percent, according to Funk. The bank was placed in the Top 100 places to work in Iowa by the Des Moines Register in 2013.
One of Summerwill’s early lessons helped him lead the bank to its current success, Funk said. “Dick told me early on, our goal isn’t to be the highest earning bank in the state of Iowa,” Funk said. “It’s too easy as the highest earning bank to shortchange someone; it could be your community, your employees or your customers. That is not what we do. We need to deliver a reasonable and competitive return to our shareholders without sacrificing our principals.”
Funk gave another reason for the bank’s success. “If I walked out of this branch today and got hit by a bus, this bank would run just fine for the next six to nine months,” he said. “Our employees are our most important asset.”
Funk: A lifelong competitor
When Charlie Funk graduated from William Jewell College, Liberty, Mo., in 1976, he was one of the greatest shooters in the history of basketball at the college. His career high of 49 points in one game is still a school record. Funk was also the career scoring leader at the time of his graduation. He is now currently second on the list with 2,077 points. He also scored in double figures for the most consecutive games — 85. Funk was inducted in the college’s Hall of Fame in 2004.
After graduation, Funk tried out for National Basketball Association’s Kansas City Kings. He made it through three days of camp before he was cut from the team. He then played professional basketball in Europe for two years. He played for a team in Liege, a metro area with a population of 750,000 in eastern Belgium. He returned from Europe in 1979 and went to work for American National Bank in St. Joseph, Mo.
Outside basketball, Funk is a lifelong lover of competition. During college, he served as an announcer for football games for the campus radio station. Nine years ago, at age 50, Funk retired from his 23-year hobby of refereeing high school and college basketball. At age 52, he began running marathons and so far has run 11, including three Boston Marathons. He most recently ran the Twin Cities Marathon.
Kareem and Magic
The framed, signed Kareem Abdul-Jabbar jersey on the wall of Funk’s office in downtown Iowa City is a token of the long months spent guiding ISB&T’s merger with MidWestOne to completion. In 2008, at the dinner celebrating the merger, the code names given the two banks in communications between management and the banks’ investment bankers were revealed. In light of Funk’s basketball career, Iowa State Bank & Trust was code-named Kareem, after Kareem Abdul-Jabbar who played for the Milwaukee Bucks and the Los Angeles Lakers. MidWestOne’s code name was Magic, after Earvin “Magic” Johnson, who also played for the Lakers. Kevin O’Keefe, an investment banker with Sandler O’Neill & Partners, Atlanta, presented Funk with the jersey that night. Charlie Howard, who was president of MidWestOne before the merger, received a signed Magic Johnson jersey.
Leading at a critical time
Funk was elected chairman of the Iowa Bankers Association in September 2010, just two months after the 2,385-page Dodd-Frank Act was signed by President Obama. As IBA chairman, Funk attended the American Bankers Association’s spring meeting in Washington, D.C., when FDIC Chairman Sheila Bair told a room full of more than 1,000 community bankers: “I am not and should not be an advocate for the banking industry!” Funk said that was an unforgettable moment.
John Sorensen, IBA president and CEO, said one of Funk’s most important contributions to the industry is his support for developing future leaders. Over the course of his career, Funk taught at ABA’s Stonier Graduate School of Banking for 13 years. He also was an instructor at the Iowa School of Banking for 19 years. He currently teaches “A CEO’s perspective on bank management” at the Graduate School of Banking-Colorado; he has taught the class since 2001.
Funk joined ABA’s board of directors three months ago.
MidWestOne exits Troubled Asset Relief Program
After Iowa State Bank & Trust merged with MidWestOne Bank in 2008, the U.S. economy entered the largest recession in recent history. Funk and the leadership of the bank saw the economy falling apart around them. “We were not sure how deep the rabbit hole was going to go,” Funk recalled.
Then the bank received a call from the U.S. Treasury to inform the bank that a $35 million investment was available to the bank through the Troubled Asset Relief Program. Funk remembers the board meeting that followed.
“We were split; some directors were in favor of not taking any of it, others wanted to take it all,” he said. “Dick and I came up with $16 million. We didn’t need it; it was comfort capital.”
In February 2009, MidWestOne took an investment of $16 million in capital from Treasury. MidWestOne has a good relationship with its regulators, Funk said. But the bank had drawn regulators’ attention when its non-performing loans to total loans reached 1.43 percent in 2008. “After we brought that additional capital into the bank, our examination didn’t go so badly,” Funk said.
Funk said that one of the most bewildering aspects of participating in TARP was paying it off. “We had to fill out a two-page application to get into the program. We were approved in less than a week,” he said. “The form to exit the program was 60 pages long. It took over a month for the payoff to be completed.”
In July 2011, MidWestOne Financial Group, Inc., the holding company for MidWestOne Bank, completed the repurchase of the warrants issued to Treasury. “Our goal was always to pay off the TARP funds from the earnings generated from MidWestOne Bank and not from an additional dilutive capital raise,” Funk said. “We were able to exit TARP without diluting our shareholders.”
There is a place in the market for small banks
At $1.7 billion in assets, MidWestOne is able to do things it could not before the merger, Funk said. “But that doesn’t make us better, it just gives us an advantage,” he said. In fact, Funk said managers of $100 million banks survive and succeed on a much smaller margin of error. “You will really have to be good to run a bank that size,” he said.
Funk said he hears people say $1 billion in assets is the new magic number. “There is no magic number,” he said. “There is a future for smaller banks that have the expertise to run an efficient bank that drives enough revenue growth to support operation.”
Funk also said that while a bank with $1.7 billion in assets can absorb more, the cost of compliance can still be stifling. After the merger, MidWestOne became an advanced filer under the Sarbanes-Oxley Act. “We spent several hundred thousand dollars on consultants to help us get ready for the accelerated filing date. We now have the same reporting requirements as a Bank of America. We only had three months after the merger to get ready for it.”