North Shore Bank in Brookfield, Wis., has hit on a strategy that could let it use other banks to expand its lending statewide without opening any branches or loan production offices.
Last month, the $1.8 billion-asset company kicked off a program that lets small community banks in central and western Wisconsin — Brookfield is in the state’s southeastern corner — market its commercial and commercial real estate loans.
Why would a bank agree to market another’s products?
Richard T. Nadolski, North Shore’s senior vice president for mortgage lending, and the executive who conceived the strategy, says the answer is simple.
The lending limits at most small community banks are too low to let them be effective players in the multifamily, commercial and commercial real estate lending markets, Mr. Nadolski said. Those banks are happy to outsource their loans to a bank in a different part of the state, since doing so saves them from having to refer customers to competitors that might take away the rest of the relationship along with the loan, he said.
Even better, from the community bank’s standpoint, North Shore will pay them for the referral and for servicing the loan, he said. They can also buy pieces of the loans they refer.
Participating banks take loan applications and send them to North Shore over the Internet.
The idea appears to be catching on. Paul Holzem, the vice president of correspondent lending at North Shore, said that so far it has signed up two banks and is in talks with 16 others.
North Shore is targeting banks with less than $250 million of assets. Mr. Nadolski said those banks do not need to worry about North Shore competing with them for retail business, because it has no branches in central or western Wisconsin.
John K. Reinke, the president of the $245 million-asset Stephenson Bank and Trust in Marinette, said the program interests him, because he has customers who want more credit than he can offer. He said manufacturing customers that want to expand need money to make their physical plant bigger, buy new equipment, and finance operations. More often than not, he cannot provide money for all that at once.
“Even though we have a $3.4 million lending limit, there are times when we have a loan customer in the $5 to $10 million lending range — it helps to have a larger bank,” Mr. Reinke said.
Joe Fazio, the president of the $13.8 million-asset Commerce State Bank in West Bend, which opened in August, said its legal lending limit is only $2 million. Many of its business customers are seeking financing for multiple projects, so having a good correspondent relationship is a almost a necessity, he said.
“It allows the bank to handle the needs of clients who are bigger than its regulatory limits and allows us to help customers who are involved in multiple projects,” said Mr. Fazio, who is also mulling the North Shore program.
Mr. Reinke said bankers’ banks offer services that are similar to North Shore’s; community banks could also enter participation arrangements with other community banks, or with larger banks. Even so, he said it is hard for community banks to find the right partner, since in many cases, the pricing is not reasonable.
Also, “it is more relationship-driven from banker to banker than bank to bank,” Mr. Reinke said. “All of a sudden, if you lose your lender at the upstream bank, you have to have this period where you learn each other’s culture again.”
Joe Pigg, a senior counsel for the American Bankers Association, said that North Shore “is on the small end of the spectrum” for correspondent lending, but the business is more dependent on a bank’s expertise than its size.
“If, say, you’re a smaller to mid-sized community bank, or a savings bank that has a lot of expertise … it makes sense that you would go out and make that expertise available to smaller lenders,” he said.
Mr. Nadolski said he got the idea for North Shore’s program by teaching multifamily and commercial lending seminars for America’s Community Bankers. After hearing a number of bankers from small community banks complain that their lending limits were too low, he went to his bosses and suggested North Shore take a look at the correspondent business.
He said he expects the program to grow quickly over the next year or two.
“With the interest rates rising and the margins being squeezed, this outsourcing is going to be more” attractive to community banks, he said. “We open up our entire product line. We pay them a fee for their service, and they don’t have to keep the back office.”
