Correspondent powerhouse.

While some big banks have reduced such relationships in recent years, Norwest is strengthening its position with other banks.

MINNEAPOLIS -- When James Campbell was growing up in small-town Minnesota in the 1950s, the day the correspondent banker came around to visit was one of the most important of the year.

Mr. Campbell's father was a banker and the correspondent represented his link with the outside world, filling him in on the industry's latest innovations and trends.

"It was a special relationship," the younger Mr. Campbell recalls. "The correspondent banker helped my father be more successful, and helped him serve his customers better."

Today, as an executive vice president for Norwest Corp., Mr. Campbell is intent on growing the Minneapolis-based superregional into a titan in the correspondent banking business.

So far, at least, the results have been positive. "It's been incredibly successful for our shareholders and... it's a good way to win respect in the industry," he says.

Norwest has 1,886 correspondent banking customers nationwide, including about 900 in the Ninth Federal Reserve District, which covers the northern Midwest. The return on those activities "exceeds the average returns [on both assets and equity] for the company," Mr. Campbell says.

While some big banks have reduced their correspondent activities in recent years, Norwest is among those that have worked to capitalize on the booming bank acquisition market to strengthen its position with other banks.

Its experience shows just how much correspondent banking has evolved from the days of Mr. Campbell's childhood in little Byron, Minn., when check clearing and data processing dominated the business.

"In the old days, the big banks used to do it, because it built their balance sheets," says Ben Crabtree, an analyst for Dain Bosworth in Minneapolis. "But when they began to realize that profits were more important than size, most of them cut back."

Robert Knight, president of Alliance National Bank in Alliance, Neb., has done studies on the correspondent banking business. He says there has been a "feeling of panic" among some correspondent banks. "In the long run, the business has been going downhill, so there has been a tendency to pull back."

Such statements are confirmed by the numbers. In 1993, correspondent balances at the nation's biggest banks dropped Sharply. BankAmerica Corp.'s Bank of America, the largest holder of demand deposits, saw its balances drop by 13%, to $2.5 billion, according to an American Banker study. Fourth-ranked Chase Manhattan's balances fell by 14%.

SouthTrust Corp. executive vice president Fred Crum says the industry's consolidation has forced his Birmingham, Ala. bank to abandon what was once a lucrative business. "We don't even have a correspondent banking department any more: ... There's been a conscious effort on our part to reduce correspondent banking," he says.

Since 1991, SouthTrust's correspondent balances have shrunk from about $140 million to less than $40 million. The main reason: "We either bought them, or we became competitors," Mr. Crum says.

The American Banker study found Norwest's total average balances in six states were about $660 million in 1993, down from $790 million a year earlier.

But Norwest officials say that the wide reach of the business makes correspondent banking tough to quantify. Balances go up and down indiscriminately, as banks merge and new customers come on board.

And besides, they say, Norwest's correspondent role is defined less today by balances, and more by credit capabilities.

"A good correspondent bank takes care of you when there's an acquisition, and you need help." says Frank Farrar, a Norwest customer who owns small banks in five Midwestern states.

Norwest is seeking to expand its correspondent banking business for reasons that are the inverse of what forced SouthTrust out. Past banking laws kept the number of independent banks in the Upper Midwest high, creating opportunity. Minnesota, for instance, has more than 600 banks today nearly the same number as New York and California combined.

Since 1986, Norwest has targeted small and mid-size banks in the Midwest as correspondent customers.

Between then and 1991, it provided 43% of all bank acquisition financing in the Upper Midwest, according to Norwest senior vice president John Sampson.

"We had to find a niche where we had a capability, and we thought credit was it," Mr. Sampson says.

In 1987, Norwest provided $15 million in unsecured debt to help finance the stan-up of Fargo, N.D.-based Community First Bankshares. Today, Community First, which bought a group of small-town banks from First Bank System Inc., is a healthy, $1.4 billion-asset holding company.

Unlike days past, credit is Norwest's biggest correspondent money maker, followed closely by basic operating services: buying and selling bonds, maintaining corporate accounts, and wrong money.

Those roles often open the door to other lucrative opportunities for Norwest. The company's well-established "Instant Cash" ATMs are used by 660 correspondent banks, while about 1,200 use Norwest to safekeep their investments.

"We use as much moral sunsion as we can to get the credit customers to buy their investments from us," Mr. Sampson says.

Mr. Knight says many small banks, including his, still use correspondents to clear some checks, too.

Also important are the intangible benefits Norwest gets from the correspondent business. The bank often finds itself playing the role of adviser to small-town bankers who are looking to sell. Seeing both the buying and selling sides of the market gives Norwest, a big acquirer itself, a good grasp on the market.

More important, Mr. Campbell says, is the peer respect and political pull Norwest earns from its role as big brother to banks in the region. "The relationships we have with bankers ... has helped us with our legislative activities," he explains. "We're friends. We can sit down with them and get their support."

Sometimes those relationships can pay off big. Norwest was the Bank of Montana's correspondent bank until it bought the bank earlier this year.

Mr. Sampson attributes the sale, in part, to the partnership that had been forged from years of working together.

The competition for correspondent business remains steep in this area. In the Upper Midwest, a handful of banks, including First Bank System, American National Bank & Trust and Citibank South Dakota, vie for small banks' business.

Milwaukee-based Firstar has a reputation as a very aggressive correspondent bank, Mr. Crabtree says. The reason: It uses the relationships as a distribution system for a wide array of feegenerating services.

First Bank is strong in Minnesota, where it holds about the same share of the market as Norwest. Citibank South Dakota is the top correspondent bank in that state.

In 1986, Norwest put together a list of about 25 banks whose business it wanted. Since then, it has courted those targets constantly, gaining about half of them.

In July, after nine years of trying, it snagged some of Mr. Farrar's business. The clincher on the deal: An offer to train Mr. Farrar's key employees at Norwest. "We said, 'Frank, we don't do this for hardly anybody, but we'll do it for you, because we want your business,'" Mr. Sampson says.

The Norwest folks also wooed him with computer-generated data showing how his banks rank against others of the same size in the region, along with a promise to give more of the same in the future, all at no extra cost.

"We look at relationshipreturn here," Mr. Campbell says. "If we get an acceptable return and we have to give some stuff away, we'll do it. We don't nickel and dime them [with service charges] ."

But Mr. Farrar says no one bank has a hold on his business. He uses five correspondents for various functions. "Some are good in bonds, some are good in check clearing," he says. "Each one has its own area of expertise."

That, Alliance's Mr. Knight says, illustrates small banker's feeling about correspondents. He, too, uses five correspondents, and says that their role will remain important.

"Checks still need to be cleared, and [small] banks are still going to need a big brother in a major metropolitan area to help them out," Mr. Knight says. "I don't think that will ever change."

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