Donald R. Mengedoth is a determined dealmaker.
His icy-blue eyes shine when he recalls how, as a senior vice president 12 years ago, he convinced First Bank System Inc. to sell him 21 rural branches it no longer wanted in the Upper Midwest.
Two years later, Mr. Mengedoth disproved a lot of doubters when he had finally gathered $55 million from a host of investors and a junk bond offering. The branches were the nucleus of what was to become Community First Bankshares, Fargo, N.D.
"People said, 'When I heard what you were doing, I thought you were crazy,"' said Mr. Mengedoth, Community First's president and chief executive officer.
Since taking his risk on the First Bank rejects, Mr. Mengedoth, 52, has seen Community First grow to $4.2 billion of assets. The bank bases its strategy on the theory that the banker-customer relationship is king in small communities.
"In a metropolitan area, people don't like to go to the bank because it's inconvenient," said Mr. Mengedoth, a Chicago-area native. "In rural areas, the bank is where the chamber of commerce meets, and it stays open late on Friday because everyone comes into the bank then. It's the only community center."
Before being transferred to Fargo from First Bank's Minneapolis headquarters, Mr. Mengedoth said, he didn't understand the importance of community banks in rural areas.
Having previously concentrated on attracting and retaining customers in an urban market-Milwaukee-Mr. Mengedoth said he was shocked when First Bank's Fargo customers were not quick to leave for better interest rates at other institutions.
"Down the street, they could get two to three points more on certificates of deposit, but they stayed at First Bank," he said. "There is a special affinity between customers and the community banks."
Community First works hard to keep customers at banks it acquires. Most of the institutions are ranked first or second in their markets, and Community First minimizes disruption by keeping their managements and staff in place.
John A. Bridgeford, president of Community First's bank in Fargo, said he enjoys the autonomy that the holding company allows.
"Don is of a mind-set that he'll let the banks do their own thing," Mr. Bridgeford said. "They're very sensitive about centralizing."
But Community First does not grant independence at the expense of the bottom line.
"If you're asking for autonomy and you're not performing, then you'll have a lot of explaining to do," Mr. Bridgeford said. "You can be a nice guy as long as you're getting results."
Community First, which keeps separate books for each subsidiary to track the winners and losers, imposes strict lending requirements and has limited its agricultural loans to about 11% of its portfolio.
The company reported only $12.8 million of nonperforming loans out of about $2.1 billion in its portfolio in 1996. It recorded loan growth of 17% that year.
Mr. Mengedoth contends strict credit standards are crucial to long-term success. He said he witnessed two former employers get in financial binds due to bad credit, and he doesn't want Community First to fall into that trap.
Midland National Bank of Milwaukee, for example, had to sell out to First Bank in 1977 after bad lending practices hurt performance. First Bank itself got burned by agricultural loan problems in the early 1980s.
"As an observer of failed banks, I know that credit is key," Mr. Mengedoth said.
In some cases, local managers found Community First lending standards too tough, and they left shortly after their banks were acquired. But Mr. Mengedoth said Community First has little trouble replacing them.
Community First has also made acquisitions a core strategy since purchasing the First Bank branches in 1987. It initially bought small community banks in rural communities throughout the Midwest. Last year, the company made a larger purchase-Mountain Parks Financial Corp. in Colorado, a holding company with $600 million of assets.
Community First topped the Mountain Parks deal last week, completing the purchase of 28 Wyoming branches from KeyCorp of Cleveland. Community First is now in 103 communities in eight states.
With the ink on the Wyoming deal barely dry, Community First is expected soon to announce its intention to acquire another bank in Colorado, and it may announce sometime this summer that it is entering a new state.
Balancing Mr. Mengedoth's growth orientation is Mark A. Anderson, 40, Community First's chief financial officer. They left First Bank together in 1987. Mr. Anderson is a detail man, carefully going over each acquisition, weeding out bad loans, and sometimes seeing to it that proposed deals get scrapped.
"Don's got that dealmaker flair. He likes to push the envelope," said Mr. Bridgeford. "Mark is the other end of the spectrum. He's a real smart numbers guy."
Not that Mr. Mengedoth doesn't buy the numbers: "We have uncovered things that have caused us to walk away during due diligence," he said. "It's always a disappointment."
While Mr. Mengedoth found it challenging to convince investors in 1987 that he knew how to make money in banking, today he has little trouble convincing analysts that Community First is on the right track.
Last Thursday the company reported second-quarter net income of $11.1 million, up 20% from a year earlier. The returns on assets and equity were 1.34% and 17.76%, maintaining the company's stellar record. Loans grew 14% over the year, even without acquisitions.
"Nothing but good," said Daniel Cardenas, a bank analyst at Chicago's Howe Barnes Investments Inc., describing Community First.
One analyst did question the holding company's stay-rural strategy, citing limited opportunities for growth other than by acquisitions.
Ben B. Crabtree of Dain Bosworth Inc. said he applauded Community First's Mountain Parks acquisition in Colorado, but the KeyCorp deal in Wyoming might weigh the company down in a slow-growth state.
Furthermore, other states in Community First's sights also have little growth in the rural areas where the company is most likely to acquire.
Even so, Mr. Mengedoth is sticking to the acquisition strategy. Community First representatives are currently knocking on Kansas bankers' doors.
Mr. Mengedoth also said the Mountain Parks acquisition, which gave Community First a presence in suburban Denver, has taught the company that it can compete in a metropolitan area.
And despite his concerns, Mr. Crabtree admitted he has been wrong about Community First in the past, and he expressed confidence in the company's leadership.
"They are very, very good at what they do," he said. "They won't do dumb deals. They never do."