In 1980, Kenneth Heiser figured he needed two things -- well-trained people and a market to turn them loose on -- to transform the sleepy First National Bank of Hudson into a microcosm of his theories on total quality management and economic development.

It took him 12 years, but he thinks he's finally done it, first by training and generously rewarding his small staff, and second by turning First National, a community bank in the western Wisconsin town of Hudson, a bedroom community to St. Paul, into an economic development tool.

|Beyond the Ordinary'

Mr. Heiser left his big-bank job in Minneapolis in 1979 to become president of tiny First National. At the time, the 120-year-old bank had $18 million of assets, with a customer base of blue-collar retirees and what little commercial business there was in Hudson: mostly Main Street shops and professionals.

Today, Mr. Heiser and his little bank have become the central players in Hudson's pursuit of Minnesota businesses. And community bankers all over the state are visiting Mr. Heiser, trying to find out how he transformed his stodgy, small-town bank into an aggressive, business-hustling machine.

"He's done a lot of creative and unique things in terms of generating new business and creating a vibrant market," said Harry Argue, executive director of the Wisconsin Bankers Association. "It goes way above and beyond the ordinary."

Making Things Happen

In the last 12 years, Mr. Heiser and his boss, bank owner A. John Huss Jr., have steadily and profitably taken First National to $85 million of assets. The bank's holding company, Charter 95 Bancorp, also owns Merchants State Bank across the border in North Branch, Minn., with $32 million of assets.

Mr. Heiser sums up his philosophy on community banking this way: "A lot of things can happen to make a success out of a community bank. The trick is you've got to make them happen. They don't happen by themselves."

Mr. Heiser's career started in 1969, at the First National Bank in St. Paul in the correspondent banking division. During those years, he became familiar with the community banks in the area and with Mr. Huss, who at the time was an assistant general counsel with a large Minneapolis company.

In 1979, Mr. Huss decided to buy a business and, almost by chance, settled on a bank when First National's former owners put it up for sale. Mr. Heiser was one of his first hires.

|Total Quality' Approach

In 1981, Mr. Heiser was promoted to president and set out to instill in his small staff his concepts of quality, picked up in research papers he did at the Stonier Graduate School of Banking. "Total Quality Management," a management approach not often practiced by small community banks, became Mr. Heiser's code, and the preached it in staff meetings like a true believer.

In his years as a banker, Mr. Heiser said, his community bank is the only one he's heard of with a staff position devoted to policing quality.

"When I started here, we did a survey of what our customer base was and what it should be," Mr. Heiser said. "We were like an old time bank, but our community was largely made up of affluent professionals that commuted to St. Paul. We didn't have the kind of staff that could relate to them. It was just a matter of continually upgrading the quality of the staff."

Accolades and Lunches

First National's employees each get an evaluation every month. Every customer that comes in contact with an employee is surveyed at least once on the level of service they've received, with a 40% response rate.

At Friday staff meetings every employee is there, and hears that week's responses from customers. If a customer sends in an unsolicited letter about a positive experience with an employee, Mr. Heiser reaches into his pocket and pulls out a $50 bill and hands it to the employee amid cheers.

If, for any reason, a customer is subject to a "screw-up," as Mr. Heiser puts it, the bank buys the customer lunch.

"We have a lot of meetings here," Mr. Heiser said. "It's probably not as productive as it could be, but they serve to constantly reinforce the standard of quality. We get a lot of input and feedback. There aren't many secrets around here, because we talk about everything."

Not Without Turbulence

Mr. Heiser's quality management looks like it's exhibited itself in the loan portfolio, as well. While First National grew by some $60 million in the last six years, the loan loss during that same period was only 0.76%. The bank so far this year has earned a 1.35% return on its assets and its 17.08% return on average equity puts it in the top 25 percentile in its peer group, according to Sheshunoff Information Services.

Not that there hasn't been trouble. In 1981, Mr. Huss bought a neighboring bank in Hammond, Wis., that nearly failed in 1984. But through the workout stage and until it was eventually merged into First National in 1989, Mr. Heiser was allowed to go about strengthening First National, Mr. Huss said, providing key profits and capital during a rough time.

First National's growth was fueled both internally and externally. On top of the Hammond acquisition, the bank bought a failed S&L branch in Baldwin from the Resolution Trust Corp. and started a de novo branch in Ellsworth, bringing the total branches to four and solidifying First National's dominant market share in St. Croix County.

High Praise

Part of that success stems from the relationships Mr. Heiser has built in the business community. He sits on a host of economic development boards, and founded the Hudson Area Development Corp., which is devoted to attracting small businesses to the area from Minnesota.

Kitty Rhoades, executive director of the Hudson Area Chamber of Commerce and Tourism Bureau, said Mr. Heiser has done more than any other local executive to attract and retain business in St. Croix County.

"He's a saint, she said.

Border Town Banker Drums Up Business

Ken Heiser is a Wisconsin banker. But he sees his future in Minnesota.

The president of the First National Bank of Hudson, Wis., a Minnesota border town on the bank of the St. Croix River, has turned himself and his bank into community's chief economic development tool, according to local business officials.

"You don't often hear of his overt involvement in bringing business prospects to Hudson" said Kitty Rhoades, executive director of the Hudson Area Chamber of Commerce and Tourism Bureau. "But he's had a part in every business relocation to this area in the last 10 years."

Agent of Change

Six years ago, Mr. Heiser took a nonfunctioning quasi-government organization called the Hudson Industrial Development Committee and staffed it with himself. At the time, Ms. Rhoades said, Hudson was getting 100 business relocation prospects a year, but the prospects rarely got an official response and found that Hudson had few industrial or business parks to move into anyway.

Mr. Heiser changed all that.

"First he hired a consultant to prepare packages that every prospect would need," Ms. Rhoades said. "He established a system of introduction and follow-up. He personally followed up on every prospect."

Mr. Rhoades said she knows of at least 10 instances where Mr. Heiser was personally responsible for the relocation of light manufacturing firms to the Hudson area from Minnesota in the last few years, most recently a large commercial bakery.

|A Good Position'

She said he founded the Hudson Area Development Corp., of which he is president, to tout not only Hudson but the whole St. Croix Country area to prospective businesses. He breached the political gap between the more urbane towns in the west of the county and the rural hamlets to the east to present a united front to prospective businesses. He's arranged for the financing of speculative office and industrial space for businesses to move into.

"He's phenomenal," Ms. Rhoades said, adding that First National was elected Small Business of the Year and Small Business Advocate of the Year by the Hudson Chamber.

Mr. Heiser is modest about his contribution, saying Wisconsin sells itself to Minnesota businesses.

"We have a much more attractive workers compensation system and a very proactive governor," he said. "Right across the river, we have high workers comp taxes and high real estate taxes, so the impetus for moving is there. "We've just kind of ridden along for the ride."

He admits, however, that his role in economic development has been profitable.

"It does put us in a good position to get new business," he said.First NationalBank of HudsonAt a GlancePresident Kenneth HeiserAssets $85 millionReturn onassets 1.35%Return onequity 17.08%Offices FourEmployees 52CEO's "A lot of thingsphilosophy can happen to make a success out of a community bank. The trick is you've got to make them happen. They don't happen by themselves."

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