The consolidation of a handful of business lending niches under one administrative umbrella is churning sizable profits for Norwest Corp.
At first glance, there may not appear to be much in common between asset-based lending, loans for companies recovering from bankruptcy, and equipment leasing.
But the union of these seemingly disparate businesses has created synergies for the Minneapolis-based banking company.
"They're still individual businesses," says Richard C. Westergaard, executive vice president in charge of Norwest's Specialized Financial Services Group.
"But by putting them under one roof and creating a management team that works together, we have found a competitive advantage by offering services that are relatively seamless to the customer."
Formed in 1990 as a way to help Norwest better respond to the borrowing needs of middle-market businesses, the group covers such diverse needs as communications lending, structured finance and loan syndication, and a first-of-its-kind effort at small business loan securitization known as Norwest Loan Partners.
The group of lending businesses has grown at an annual rate of 27%, and is today one of the $72.1 billion-asset bank holding company's high fliers. It is expected to contribute $40 million in profits to Norwest's 1996 bottom line, with returns that are higher than the company average.
"This started out somewhat informally, but now it is beginning to have a significant impact on the results of the entire company," said executive vice president James Campbell, Mr. Westergaard's boss.
Perhaps most surprising, given the risky nature of its lending, is that the group's $2.2 billion loan portfolio has generated fewer chargeoffs and nonperformers over the past two years than Norwest's regular commercial lending business.
"We've proven," Mr. Westergaard asserted, "that if you can segregate these specialized activities, and put experts on them, that you can manage these credits very effectively."
Competition for the small and midsize business market has grown fierce during the past few years, as banks flock to get the higher returns such loans provide.
Today, most regional banks have dipped their toes into asset-based lending and equipment finance, running up against nonbank competitors like GE Capital Corp.
Smaller banks, including Santa Clara, Calif.-based Silicon Valley Bancshares, have attracted increased business by emphasizing asset-based lending over more traditional loans.
But no one has brought such a varied group of risky business-lending activities under one umbrella in the same way as Norwest, although Mr. Westergaard said other banks "are trying to follow our model."
The combination, officials asserted, allows Norwest to focus on meeting customer needs, rather than on selling products - in effect mirroring similar needs-based marketing efforts on the company's retail banking side. It also helps general bankers keep customers they might otherwise have lost.
"In the mind of the customer, all he knows is that he has a financial problem," said Mr. Westergaard. "With these six businesses working together, we can say, 'Look, what you really need is a secured loan combined with a mezzanine loan and an equipment lease.' That's our point of differentiation."
Added Mr. Campbell: "If you have that whole menu when you're diagnosing a nontraditional lending opportunity, it enables you to pick and choose ... to not force-feed the wrong solution."
The group's heavyweights are Norwest Business Credit Inc., which provides asset-based and other loans to at-risk businesses, and Norwest Equipment Finance Inc., which offers equipment purchase and lease financing. Together, those two established units generated 76% of the special lending group's profits in 1995.
But all of the divisions - including newcomer Norwest Debtor In Possession, which opened in 1993 to provide financing for firms emerging from Chapter 11 bankruptcy proceedings, and last year earned $1 million - are performing well.
Mr. Westergaard, a cerebral 51-year-old former J.P. Morgan lender who arrived at Norwest in 1986 to run its national corporate banking department, said that structured and corporate finance are the group's most "intellectually exciting" areas.
Those units grapple with such complex lending issues as subordinated debt, acquisition financing, syndication, and securitization of commercial loans.
"If a customer wants off-balance-sheet financing, securitization is one way to do that," he said. "And it can allow us to provide financing off of our balance sheet as well, by selling them to a nonNorwest entity," while generating origination and servicing fees, much like the securitization of mortgage loan receivables.
About 55% of the loans handled by the group come from referrals by commercial lending officers in the company's 694 retail branches.
Those local banks and branches are the group's primary "customers," Mr. Westergaard said, and the focus of some intense in-house marketing and relationship-building efforts.
"Our role is to be perceived by all of the Norwest bankers as absolutely essential to their own business development," he said. "We're not a competitor. We don't say, 'Hey, that's an asset-based loan, give it to us.' We help them develop their overall relationship with the customer."
Don Marshall, senior vice president in charge of corporate banking for Norwest Colorado, lauded the group's expertise, which he said enables him to offer loans that might otherwise fall "a little too far from our comfort zone. ... It allows us to be more relevant to our clients across a broader risk-return spectrum.
"It is the piece of Norwest that has brought the most value-added to us in Colorado."
Local Norwest banks that tap into this expertise can choose to either hold some of the loans on their own books, and split the origination and servicing fees with Mr. Westergaard's group - which is what Mr. Marshall said his team usually does - or receive credit in the form of a "hard- dollar referral fee" for steering the business its way.
"But most important," Mr. Westergaard said, "is that they keep the customer, and thus can sell (other) products that they wouldn't have been able to sell if that customer had left."
The remaining 45% of the group's business is generated by its own marketing efforts - which often pay off in long-term banking relationships.
One example is Lockermate Corp., a Minnetonka, Minn.-based maker of school locker accessories. After several years of losses caused by a previous management's attempts to expand away from a profitable core business, Lockermate was on the rocks.
By early 1995, the company's board had replaced the CEO, divested its troubled businesses, and created a promising plan to return to profitability. But it lacked the money to build inventories for the back- to-school rush, and its poor track record meant regular bank financing was out of the question.
Enter Norwest Business Credit, which, through a special asset-based lending program aimed at small businesses, agreed to finance the inventories and use them as collateral, switching the security to receivables as sales rolled in.
Pricing on the $750,000 revolving credit line was steep - prime plus 7.5%. But Lockermate CEO George Wood, whose company turned an $85,000 profit last year, said he doesn't mind. "They saved the company," he said of Norwest. "And as we recover, Norwest's size should make the workout from asset-based lending to a regular banking relationship fairly easy."
Before the group's creation in 1990, Mr Westergaard said, Norwest probably wouldn't have gotten involved with such a small-business customer. And even if the loan was large enough to merit the company's efforts, "it would take general bankers out of the market for an extended period of time," he recalled. "We were reinventing the wheel in every community bank and state organization."
In the coming years, Mr. Westergaard anticipates a new round of growth for his group, mirroring Norwest's acquisition-driven expansion in Texas. And he vowed to stay the course, regardless of the economic climate.
"Banks have been in and out of these businesses for a long time. They establish them with a lot of fanfare when times are good, and disband them at the first sign of trouble," he said. "We've been around for a while now, and we're committed to stick with it."
Mr. Engen is a freelance writer based in Minneapolis.
