Magazine article American Banker

To Fund Growth, Tiny Banks Are Tapping Correspondents

Magazine article American Banker

To Fund Growth, Tiny Banks Are Tapping Correspondents

Article excerpt

More than ever, small banks are turning to special loans from correspondent banks to satisfy their appetite for growth.

In the last year, some large regional banks, particularly in the Midwest, have seen a 20% surge in bank stock loans as community institutions seek financing for costly cash purchases or branch expansion. "For the smaller banks, it's absolutely essential to their expansion efforts," said James W. Kratzer, vice president for correspondent banking at Boatmen's National Bank in St. Louis.

Mimicking the feeding frenzy among the large banks this past year, community banks are seeking to bulk up their size in a race for survival and a search for efficiencies.

But many of the smallest community banks, whether in big cities or rural towns, aren't likely to have a stock strong enough to exchange in a deal and probably lack the visibility needed to go to the market for capital.

That leaves the bank stock loan as one of the few options. In a typical bank stock loan, a community bank holding company borrows money from a correspondent bank, pledging as collateral the wholly owned stock of its subsidiary. Dividends are then sent upstream from the subsidiary to the holding company to pay the interest.

Such lending tends to be more significant in the Midwest, where the landscape is dotted with tiny institutions. By contrast, bank stock loans are rarer elsewhere. In fact, at least one northeastern community banker had never heard of the product.

Currently, Boatmen's has about 35 such loans for about $100 million on its books. …

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