When Bank of America Corp. acquired FleetBoston Financial Corp. last year, Eastern Bank Corp. in Boston figured it would attract a fair amount of runoff business - but it never expected that its new customers would include other community banks.
Timing is everything, though. Eastern got into the correspondent banking business in the spring of 2004, just as Bank of America was completing its deal for Fleet, which owned one of New England's biggest correspondent banking operations.
Eastern's entry gave small community banks an alternative to doing business with a $1 trillion-asset behemoth.
Stephen McQuarrie, Eastern's senior vice president for corporate and government banking services, said it has picked up more than 30 correspondent banking clients in the past 15 months, mostly former Fleet customers. The $6.3 billion-asset company is in talks with about 40 banks and expects to have at least 50 in all as correspondent customers by yearend, he said.
Elizabeth P. Jones, the president and chief executive officer of the $217 million-asset Everett Cooperative Bank in Everett, Mass., said it began looking for a new correspondent banker as soon as Bank of America acquired Fleet.
Everett "really did not give Bank of America much of a try" but has been very pleased with Eastern, Ms. Jones said. Its service has been better than Fleet's, she said.
But John Carusone, the president and CEO of the Bank Analysis Center in Hartford, Conn., said service is not the only reason community banks might be uncomfortable with Bank of America. Many are probably uneasy doing business with such a savvy and prolific marketer, he said.
Because of the nature of the services they provide, correspondent banks get something of a bird's eye view of client banks' operations, Mr. Carusone said. "There are about 300 small institutions in New England that are probably a little reluctant to open themselves up to one of the largest and most aggressive banks in the country," he said.
Bank of America, the nation's third-largest retail bank, is also its largest correspondent bank, according to a 2004 report by Ernst & Young. (The report ranks banks by transaction volume and the size of average daily balances.)
Julie Westermann, a Bank of America spokeswoman, said that though some former Fleet clients have moved their correspondent business elsewhere, B of A has retained the "vast majority" of them.
B of A's correspondent sales team in the Northeast came from Fleet and "has been successful in expanding relationships with existing clients and winning new business," she said, "more than offsetting any business we may have lost.
Eastern decided to get into correspondent banking largely because most of the competition has disappeared through mergers and community banks have shifted their correspondent business to bankers' banks.
In the 1970s, observers said, there were more than a dozen correspondent banks serving New England. Now, they said, the number is down to four, and two of them, B of A and Mellon Financial Corp., are giant outsiders. B of A is based in Charlotte and Mellon in Pittsburgh
The other New England-based provider, the 7-year-old Bankers' Bank Northeast in Glastonbury, Conn., has also picked up customers since Bank of America bought Fleet. It had 127 at the end of 2003 and 138 a year later.
Clearing checks and providing banks with coin and currency are the core of the correspondent banking business, but both Mr. McQuarrie and Mr. Carusone said small banks usually rely on their correspondent bankers for a wide range of other services - from data processing to buying excess liquidity (in the shape of federal funds purchases) to brokering loan participation deals.
Everett's Ms. Jones said, "The correspondent relationship is very important to an institution our size." Mr. Carusone said he would not be surprised if Eastern's correspondent banking business grew well beyond the target it expects to hit by Dec. 31. But even 50 clients is more than enough to produce a healthy profit, he said.
Correspondent banks typically do not charge their customers fees. Instead, they require them to maintain sizeable deposits. Mr. McQuarrie said Eastern asks its customers to deposit from $1 million to $10 million, depending on how many services they use.
Those deposits - hundreds of millions of dollars in Eastern's case - reduce the correspondent bank's funding costs, thus adding to its bottom line, Mr. Carusone explained.
"This is a great niche for a bank like Eastern to be in," he said.
