Exploiting thrift failures, Minnesota's Metropolitan hit $7.8 billion.

MINNEAPOLIS -- When Metropolitan Financial Corp. acquired a troubled Moorhead, Minn., thrift in 1985, it appeared the neighborly thing to do. After all, only the Red River separated Moorhead from Fargo, N.D., Metropolitan's former headquarters.

But Norman Jones, Metropolitan's chairman and CEO, had bigger things in mind. His company already was the largest thrift in North Dakota, and he was feeling expansive. Once he crossed the border, his gaze became fixed on a market 300 miles to the southeast.

"We were already serving Moorhead pretty well; we didn't need an office there," Mr. Jones recalls. "It was a stepping stone to the Twin Cities."

The View from Above

Nine years and some 28 acquisitions later, Mr. Jones is sitting in a green marble and granite office tower comfortably situated in Minneapolis' downtown. The bank's name is emblazoned across the building's front.

That Mr. Jones' thrift holding company can occupy such prime space demonstrates how successful it has been at capitalizing on the industry's woes.

Its recently completed purchase of the second-largest banking organization in Wyoming, Rocky Mountain Financial Corp., makes $7.8 billion-asset Metropolitan the 11th-biggest thrift holding company in the nation.

Metropolitan's 211 branches are scattered across nine states, from Wisconsin to Arizona. It also bought one of the nation's largest real estate firms - a unique twist in the financial world - and a title services operation.

All this has contributed to solid - often stellar - finanical performance.

Metropolitan's return on assets for 1993 was a strong 0.98%; its return on average equity, 14%. (Net income for the first quarter was $12.2 million, or 37 cents a share, down from $15.3 million the year before. The company attributes the decline to federal tax credits received in 1993.)

Exploiting Opportunities

"You'd be hard-pressed to find a company that has taken better advantage of the problems in the thrift industry," says Ben Crabtree, a banking analyst at Dain Bosworth Inc., Minneapolis. "They have been great acquirers."

The man responsible for that - and virtually everything else at Metropolitan - is Mr. Jones, who has modified an old-fashioned formula to fit the times, while maintaining a firm grip on the company's leadership.

When Mr. Jones joined his grandfather's building and loan in 1952, it was a tiny, family-run mutual. Total assets were $3.4 million, and the shop's seven employees included Mr. Jones, his father, and grandfather.

Today, many touches of those North Dakota roots remain. But modest size isn't one of them.

As patriarch of the 68-year-old firm, Mr. Jones carries a reputation as a down-to-earth manager. His staid demeanor - like many in the region, Mr. Jones is of Norwegian descent - goes a long way to hide one of the industry's shrewdest acquirers.

Mr. Jones, who wanted the visibility of a larger city for his holding company, maintains his permanent home - and the headquarters of Metropolitan Federal Bank - in Fargo, living out of a Minneapolis condominium during the work week.

"It's really his vision and the leadership he's shown that made this company what it is," says Bill Bartkowski, executive vice president and chief administrative officer.

Today, Metropolitan's corporate culture is infected with Mr. Jones' near-insatiable desire to grow. Officials have openly stated their desire to be a $10 billion company by the end of next year, and they see acquisition as the primary tool for achieving that goal.

"Companies that are stagnant and do not grow are generally not very good investments," Mr. Jones says simply.

Much of the company lore surrounds past acquisitions: There was the day in 1988, for instance, when Metropolitan acquired six insolvent thrifts. "We doubled our assets and doubled our deposits in one afternoon," Mr. Bartkowski recalls.

Key Acquisition

Later that year, Metropolitan bought Edina Realty Inc. and Equity Title Services Co. They were good deals. Edina, the fourth-largest real estate firm in the country, contributed $35 million in noninterest income in 1993, while the title company added close to $14 million.

Indeed, Metropolitan's formula for success stands in stark contrast to that of cross-town thrift rival TCF Financial Corp. and other city banks.

While TCF has focused on urban customers in the Twin Cities and Chicago, Metropolitan has found happiness in smaller packages.

Its branches are scattered across the countryside, in places like Sleepy Eye, Minn., or Eureka, Kan., and vary in size from about $170 million in deposits to just under $2 million. The average branch size is a mere $28 million; the median is $20 million.

"There are people who will tell you that a branch that's under $25 million can't be profitable," Mr. Bartkowski says. "Yet we have many branches smaller than that."

While those rural branches provide a lot of deposits, it's Edina Realty, with its 50 offices and $3.5 billion in annual sales volume, that gives that money a place to go. Last year, Metropolitan captured 38% of the real estate company's transactions.

In the Minneapolis suburb of Burnsville, and several other locales, the combination plays itself out. Amidst a sea of strip malls and fast-food outlets off a nearby interstate highway, a neat, tan-brick building houses both an Edina Realty office and a Metropolitan Federal Bank branch.

A Metropolitan loan officer is stationed in the Edina office. "And if the loan officer in the Edina office is busy, the customer can come to the bank," Mr. Jones explains.

Still, sitting in his modest office on the 10th floor of the newly named Metropolitan Centre, Mr. Jones, who became CEO in 1967, has new challenges to confront.

Norwest Corp., for example, is one of many suitors who have driven the price of bank acquisitions sky high.

An Abortive Strategy

Those soaring prices put a kink in Metropolitan's plans to expand the banking side of its business - and left management with a bit of egg on its face.

Last year, Metropolitan announced that it would spin off Edina Realty in a public offering to raise money for acquisitions. But several months ago, it reversed the decision.

Banks cannot own real estate companies. But as a unitary thrift company, Metropolitan can. The catch is that, as long as it owns Edina, it may only own one banking subsidiary. Thus, every bank it acquires must be folded into its Metropolitan Federal operations.

Company officials had hoped the spinoff would free them to make more creative acquisition deals, including some for commercial banks. But as the market got tighter, they had second thoughts. Banks began selling at two times book value, and Edina's mortgage generating abilities started to look more attractive as a way to build earnings.

Thinking of Denver

"Everybody wants to get into mortgages," Mr. Jones says, shaking his head, "and we were spinning it off." Hence the change of heart.

In fact, officials now tout Edina as a vehicle for growth, with the thrift tagging along behind. "Denver would be a natural market for us if Edina Realty someday bought a real estate company there," Mr. Jones says.

All this is not to say that Metropolitan is going to sit on the sidelines. Mr. Jones says he is actively seeking in-market acquisitions and won't rule out the possibility of moving into states, such as Missouri and Colorado, "that have good market share."

Still, the reality is that, for the first time in recent memory, Metropolitan has no purchases pending. That, analysts say, has caused the company to focus on the expense side of the ledger. Last year, it closed 17 branches and laid off 100 employees.

"The company has generated so much earnings growth through acquisition that it didn't have to worry about cutting expenses," Mr. Crabtree of Dain Bosworth says. "Now, they do."

They also have to save a bit for some legal expenses.

Defeat in a Class Action

Edina Realty recently lost a class-action suit charging that it did not adequately explain to sellers the effect of the company's representing both buyer and seller in home sales.

Edina Realty claims that it acted within the constraints of a 1986 Minnesota law, but a judge ruled that the law was not in sync with common law provisions.

Metropolitan officials emphasize that the problems originated before they bought the real estate agency in 1988, and a tentative settlement in the state case - with an estimated price tag of about $11 million - could halt a similar federal case if it is approved.

"We expect these cases to be resolved without any material effect on the company," Mr. Bartkowski says.

As Metropolitan looks to the future, observers pose one overriding question: Who will succeed the 63-year-old Mr. Jones?

Succession Unresolved

The company has gone through two heirs apparent in the past two years - only to replace each - and appears to be in no hurry to find another. Mr. Jones himself actually retired as CEO in 1990, leaving the post vacant while remaining chairman. Two years later, he reemerged at the helm.

"I just saw the opportunity for the continuation of a lot of merger activity," Mr. Jones says. "And with my 40 years of experience, I had so many acquaintances that it went a lot better when I was CEO."

But such a stance makes some observers uncomfortable. "One of the primary responsibilities of a chief executive is to get a successor in place, and he hasn't done that," says an analyst who asked not to be identified.

Others say it may be a sign that Metropolitan, the ultimate acquirer, is itself now ready to be taken over.

But Mr. Jones doesn't see anything to be concerned about. He says there is not - and for that matter, never really was - an heir apparent.

He admits to viewing the world in a distinctly eat-or-be-eaten fashion and won't rule out the possibility of Metropolitan's being taken over within a few years.

"In the next five years, you're going to see major consolidations," he says. "We hope we can put together enough deals so that we're the long-term survivor."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.