Correspondent banking update

Northwestern Financial Review, Mar 15-Mar 31, 2003 by Dullum, Justin

New products and technology are giving community banks more muscle

Correspondent banks are only as successful as their community bank customers, who haven't been doing too shabby lately. What have community banks wanted from a correspondent during the last few years? According to bankers from some of the Midwest's key correspondents, a few products are gaining the attention of more community bankers.

The demand for trust preferred securities has increased, said Randy Steig, the Iowa-based executive vice president of Bankers' Bank, headquartered in Madison, Wis. "These are popular for banks that are in a growth mode," said Steig. "Because of the regulations out there now, they allow for a longer maturity at a fixed interest rate and a goodly portion of that can be used as equity capital in fast growing banks."

U.S. Bank has seen a lot of action in the trust preferred area as well. "With low interest rates, it has became a more affordable product in the last couple of years," said Jack Franey of U.S. Bank, which has a correspondent presence in 23 states. Franey said interest in this product has increased throughout the Minneapolis-based bank's market. "The bigger banks have always had the best options at their disposal when it comes to trust preferreds," said Franey. "Community banks are now gaining access to more of those good options and they are responding."

Community banks have been able to participate in trust preferred pools for only three years. LaSalle Bank's correspondent group has seen the number of banks using this tool steadily increase during this time.

"The reason these are more beneficial than the traditional bank stock loan is that it provides capital at the holding company level and the bank level," said Matt Doherty, a capital markets specialist at LaSalle. "What we think LaSalle is doing differently is we're also making loans that qualify as subordinated debt at the holding company level. The difference between subordinated debt and trust preferred is that trust preferred counts as tier one capital and subordinated counts as tier two capital." Doherty said many banks have trouble reaching a targeted tier two capital ratio and use the product specifically to solve that problem.

Security safekeeping, which correspondents such as the Independent Bankers' Bank in Springfield, Ill., has offered for some time, is another product that is catching on. IBB President John Schneider said it's the bank's fastest growing service. "We currently manage $7 billion worth of these assets," he said. "Not seven million seven billion. Now that's a significant number."

Community bankers are increasingly looking at ways to provide trust services. "Because of all the requests for a trust product, we've been looking at ways we can put trust services in the hands of community banks that don't have them," said Schneider. "That will likely become our newest addition, although we do not have a timeframe as to when we will deliver those services."

United Bankers' Bank, Bloomington, Minn., is exploring trust services as well and is considering partnering with customers that already have strong trust departments.

"Why not work with them and give them these new opportunities?" asked UBB President Bill Rosacker. "As a bankers' bank, we never compete with our customers. So if one of my customers has a trust service, why not use that service?"

Some banks with existing trust departments are also looking for help. "Many banks have found it's difficult to maintain a profitable trust department," said Phil Straight, UMB Financial, Kansas City, Mo. "It's difficult to do that with a small department and we've seen more and more banks looking to us to help make those departments more profitable."

Check truncation, imaging and other backroom services also are gaining in popularity. The Federal Reserve notes that check usage is decreasing. Nobody suspects that the check is dying off but it is giving way to electronic transactions. Many correspondent banks are, therefore, focusing on a myriad of third party electronic transaction solutions.

"We're getting more requests in the area of electronic check presentment," Rosacker said. "There is a whole world of change in that area. Right now it's not so much a question of the technology but of questions around the legal structure."

"A lot of bankers are focusing on managing their cost structure by outsourcing different parts of their organization," said Chuck Hokans, UBB's senior vice president. "That's a big part of the movement to electronic transfers."

Correspondent bankers are also providing more consulting services. Thanks to The Sarbanes-Oxley Act, UMB has seen an increase in the demand for compliance consulting. And as competition tightens, Bankers' Bank has had 20 banks in several months sign up for its sales culture training, which it offers through another company. "It's something we've signed up for ourselves," said Steig. "We basically go in and train and set up incentive programs for a bank. Bankers are wanting to get those programs in place."