Several large and midsize banks are scaling back or getting out of correspondent lending business, leaving a void for smaller banks to fill.
In recent months a number of community banks have been hiring lenders and contacting smaller banks that need lines of credit, mortgage servicing or foreign exchange services. Correspondent banking remains a tricky and risky business, but a growing number of bankers believe it can be lucrative.
"We all knew that there was a need, but it was stronger than what I anticipated," says Rodney Rushing, the head of correspondent banking at ServisFirst Bank in Birmingham, Ala. "I have correspondent clients in markets where [the bank] competes for business every day."
ServisFirst's correspondent lending division became profitable five months after it opened for business in March 2011. It has expanded into six nearby states, handling more than 90 accounts and offering operational services, foreign exchange and credit lines for banks or executives. The group recently hired two former bank correspondents to oversee expansion initiatives in Georgia and Tennessee.
"I expected it to succeed," but "I did not know success would come this quickly," says Rushing, a former correspondent banker for BBVA Compass.
Some of the success can be attributed to the retreat of several regional and large lenders, which got out because of liquidity risk and lender-specific regulatory constraints. Lenders such as Citigroup, Bank of America, Ally Financial and PHH have reduced their correspondent lending portfolios in the past year, according to data compiled by National Mortgage News.
Those moves have opened the door for smaller lenders such as BOK Financial Mortgage, a unit of BOK Financial in Tulsa, Okla.
The unit recently hired a former Fannie Mae executive, Elliot Salzman, to help expand correspondent lending in the Midwest and, eventually, nationwide. Management expects more lenders to pull back on correspondent lending when the final Basel III rules on residential loans become clear.
"Mega lenders have tightened on their requirements and have started limiting their customer base," says Ben Cowen, the unit's president. "There's some uncertainty as to whether correspondent bankers are going to be there" when Basel III is implemented.
Cowen says BOK Financial has a competitive edge over other servicers because it pledges not to cross-sell to participating bank's clients. BOK Financial also agrees to keep all of its servicing. "It's not about selling the loan, but truly partnering with the institution," he says.
Since forming last March, about 10% of the company's $12.5 billion mortgage servicing book comes from correspondent lending. Cowen expects the division to account for a quarter of the mortgage portfolio next year.
"There's a sense of healing going on and improved confidence of getting into" correspondent banking and lending, says John Corbett, the president and chief executive of CenterState Bank of Florida in Winter Haven.
CenterState entered the business in 2008. It has about 570 bank clients. Earlier this year the bank started a cash-settlement and clearing service for smaller banks that cannot otherwise go directly through the Federal Reserve. Corbett says 50 banks signed up for the service within the first six months.
Despite growing success, there are regulatory concerns as some bank failures, including so-called bankers' banks, were tied to loan participations that impaired the credit quality of the surviving participants. Shaw Lokey, a correspondent banker at AloStar Bank of Commerce in Birmingham, Ala., knows about that risk firsthand; he worked at Nexity Bank before it failed in April 2011. (AloStar acquired the failed bank.)
"When AloStar took over, much of the [correspondent] business had pretty much gone away," says Lokey, an executive vice president of correspondent banking at AloStar. "We really started from scratch."
AloStar now has about 180 banking relationships; at its peak Nexity had more than 300 clients. Still, Lokey says AloStar is "significantly ahead" of its growth trajectory compared with when Nexity entered correspondent banking.
Despite concerns about risk management, correspondent lenders say that the underwriting has improved. Most concentrate on a specific market niche, such as mortgages or asset-based loans.
"We're looking at loans that the community banks would almost never do anyway, so we see it as a way to assist them with existing or new clients," Lokey says. "We focus on those things we know how to do well. We're not trying to be everything to every bank."
Bankers say that the greatest long-term challenge involves the level of demand, since the number of community banks continues to shrink.
"There's a limited number of prospects out there," Rushing says.
"As you can imagine, we're calling on bankers for banking business, so they're pretty astute," Rushing adds. "Even if we're not the [best] choice … we can just be another phone call when you have a need. Even if we don't get them initially, they will remember that they do have a choice."