What I learned from buying a troubled bank

Andy Schornack

EDITOR’S NOTE: Andy Schornack is CEO of Flagship Bank Minnesota, based in Wayzata, and president of Security Bank & Trust Co., Glencoe, Minn. He is part of an ownership group which purchased Flagship at the end of the Great Recession. A 2016 BankBeat Rising Star in Banking, Schornack recently described the journey from buying the troubled Flagship to where the bank is today and the lessons he’s gained since the acquisition. This piece was adapted from a Twitter thread he posted in July.

 

At the end of July 2013, we invested $1.8 million to buy 49 percent of Flagship Financial Group, Inc. This was the start of one fun journey that continues today. The primary asset of the organization was Flagship Bank Minnesota, which had two locations in the Twin Cities metro area. 

The bank was under a cease and desist order and struggling with a high level of troubled assets. However, it had a great group of employees and was in a market that I knew very well. At the time, Flagship Bank Minnesota had $94 million in assets and $62.8 million in loans in the two locations. In June 2021, we were up to six locations, $327.6 million in assets and $233.7 million in loans. 

Here are some lessons I learned along the way: 

Employees in a service business like ours are key. Many of those original employees are still with us. We have added many more along the way, but we have found the line is true that people do business with people they like and know. Good people helping good people, always. 

Good customers drive good businesses; invest in improving your client base. You don’t have to be all things to all people. Focus efforts on building clients with high lifetime values. Know their tenure and their services and product needs. Invest in what is important to them. In our bank, one of these client bases was 1-4 family rental properties. In 2013, we had around $11.5 million in total 1-4 family loans, most of which were not investment properties. In 2021, we are up to more than $70 million, mostly investment properties. It is a niche that has only grown over time and one that has shown very little net losses since we started making these loans around the University of Minnesota in 2005-06.

Running a bank is not much different than running a small business. A lot of times this is confusing to many, but the basic idea is that sales to a bank are loans. Inventory are deposits.  The key item is that profit is not made on the day of sale but over time. 

For perspective, the net interest income and non-interest income (our revenues for 2012) were a total of $4.2 million. This was not a high level of revenue to handle all the expenses involved with operating a troubled banking organization at the time. A big focus then was to reduce our non-employee related expenses while growing strength in a good client base and reducing our interest expenses by improving our mix of suppliers (changing from non-core funding to core funding of our loans).

This was my charge. Like any small- or mid-size business owner doing a new acquisition, I broke down the expense book. We still catalog every expense to every vendor, and I sign nearly all the checks. The result was that our non-staff expenses have gone from 2012 levels of $2.4 million to $2.7 million in 2020. Our net interest income and non-interest income, in the meantime, has grown from $4.2 million in 2012 to $12.2 million in 2020. 

Strong expense management structures allow small- and mid-size businesses more flexibility to further invest in strong staff and improved client experiences. Good client experiences don’t necessarily mean high expense structures. It’s a matter of investing prudently and managing what, to use a sports term, are called unforced errors, or what I consider to be unnecessary expenses. 

Picking good partners also makes a world of difference. I couldn’t be where I am today without the support of mentors, solid business partners and great co-workers. Brian Wagner, Flagship Bank’s president, and I have worked together for 16 years. Jackie Herman, our chief operating officer, since 2013. They have both played a huge role in growing our bank, executing on two major acquisitions that launch-padded our ability to scale across the metro area.

Acquisitions create uncertainty and most people don’t like uncertainty. The best way to work with existing employees on an acquisition is to be transparent on your plans and your goals. Explain who you are, what your story is, and how it impacts them. I am a banker, so in any SMB acquisition I think it pays to know your numbers. I model everything. The same spreadsheet I used when buying Flagship is the one I use monthly to update my rolling 12-month earnings. Yes, each month, I do the math. The value to me is more than the data entry. It is the process of getting close to the data so that I see where it is coming from and how it flows through our organization. I want to always know my numbers. 

The other item that I fixate around is writing a monthly management report to my board. It covers all the CAMELS components the regulators grade banks on. I have found the process of writing the report to be an important way to organize my thoughts, provide conversation topics, and really guide what the items keeping me up at night are within our banking organization. It covers the high risk clients, the cash flow and capital needs of the organization, our employees, and many other items as they come forward to drive conversation. Writing a report to a board, I believe, is a great exercise to organize and validate your management decisions. 

If we leave them as thoughts, sometimes they aren’t fully explored or maybe something gets missed that is important. In the end, I am extremely proud of what we have built at Flagship Bank and our company. I am proud of my coworkers, my employees, and all the stakeholders. It has been a blast and I look forward to the next eight years — exciting things to come!