Spokane-based Sterling Savings Bank is expanding its correspondent banking department, which lends money to other banks and provides services to them.


Sterling recently opened the departments third office, in Portland, says Sid Bennett, a senior vice president and correspondent banking director at the bank. The departments other offices are here and in Seattle.


While Sterling had been performing some correspondent banking functions earlier, it launched the department just a year ago, and now has a staff of five, Bennett says.


Sterlings emphasis on correspondent banking unquestionably, absolutely is a sign of its maturity, says Jim Bradshaw, a Lake Oswego, Ore.-based senior vice president for research with D.A. Davidson & Co., the Great Falls, Mont., brokerage.


I cant think of a bank under $5 billion in assets that has any sizable correspondent banking division, Bradshaw says. Sterling Financial Corp., Sterlings parent, had $7.5 billion in assets as of Dec. 31.


In addition to making loans to other banks, Sterlings correspondent banking offices provide such services as check clearing, cash management, cash delivery, international banking, private banking for officers and directors of other banks, and bank-stock financing, which involves making loans to other banks that back the loans with their stock.


Its a good business to be in, Bennett says. People think of banks as places where money is held, but they need many of the services other corporations do.


Sterling will participate in a loan set up by another bank when that bank is unable or unwilling to provide all of the funds needed by a borrower, Bennett says.


Sterling tells other banks it can help them pursue larger credit opportunities with a partnership that reduces your exposure to risk and diversifies your product offering.


Regulators limit the amount that a bank can lend to any single borrower to 15 percent of the institutions risk-based capital for unsecured loans and 25 percent for secured loans, Bradshaw says.


Those levels are referred to as the institutions legal lending limit, but banks also set their own house limit, which generally is far lower than the legal limit, Bradshaw says.


At large institutions, lending limits rarely come into play, but they can become real barriers at small community banks, Bradshaw says.


Meanwhile, a federal regulation prohibits banks from lending money to their officers and directors at terms more favorable than those given to other customers, Bradshaw says. To avoid the appearance that the regulation isnt being met, bank officers and directors often seek loans from institutions other than the ones they serve. In its marketing materials, Sterling says it offers private banking service that provides direct and confidential loans and banking services to other banks directors and officers.


In bank-stock financings, correspondent banks lend money to other institutions so they can grow their loan portfolios, take advantage of acquisition and expansion opportunities, finance stock repurchases, increase their capital, or meet other institutional needs, Sterling says.


We deal a lot with community banks, Bennett says. Because of our size, we can take bigger parts of loans. Well lend directly to banks, to their principals.


Loans between banks usually are low risk, he says. Yet, while the loans also usually are low margin, Sterling CFO and Executive Vice President Dan Byrne says the potential profits from correspondent banking can be sizable. He says that when he checked on how well correspondent banking added to other banks profits, he heard some strong comments.


Key Bank, a couple of years ago when I asked the question, indicated to me that it was their most profitable department, and not by a small margin, he says. Whether it will contribute to Sterlings bottom line as much remains to be seen, but Sterling expects it will be a good contributor, Byrne says.


Usually, a correspondent banking department will do well if it makes good loans and does a considerable amount of cash management business, he says.


Bennett came to Sterling last summer from a Wells Fargo Corp. correspondent banking center in Minneapolis. He reports to Nancy McDaniel, Sterlings portfolio manager and an executive vice president with the bank, who says Bennett handles loan requests from other banks more quickly than big banks do.


Sid can get back to them in a week, McDaniel asserts.


Both she and Bennett say banks that use Sterlings electronic check-clearing technology avoid having to transport paper checks from bank branches to a clearinghouse. Instead, Sterlings customer banks transmit images of checks theyve cashed to Sterlings check-clearing operation.


Check-clearing technology is much too costly for small banks to buy, McDaniel says.


It took us until we were about $3 billion in size before we were willing to invest in the technology, says McDaniel. She adds that when Sterling developed its check-processing facility on the West Plains here, We built up a lot of capacity there with the knowledge that we could provide those services to other banks.


Sterlings correspondent banking department also buys loans that other banks have made, including portfolios of auto financings, mortgage loans, or commercial loans, Bennett says. Often, the other bank will continue to handle loan processing.


Because foreign business involves using instruments such as import or export letters of credit and performing tasks such as making international remittances and dealing with foreign currency exchanges, Sterlings international department reports to Bennett, McDaniel says.


Also, Bennett refers to Sterlings investment department requests from banks to buy fixed-income investments, such as bonds or mortgage-backed securities, to add to reserves or to create income.


In addition, Sterling offers a service through which its correspondent banking customers can borrow money on an overnight basis for liquidity purposes or to meet Federal Reserve requirements for reserves.


Each afternoon, banks look at their balances to determine whether they need to take out such loans, then borrow money if necessary, Bennett says.


We have an online product where they can do that without even talking with a person, Bennett says.


While Sterlings correspondent banking services are varied and complex, the Spokane bank, which was a startup as recently as the early 80s, tells customers it was once in their position. It says, Sterling understands the unique needs of community bankers because we have already confronted many of the issues that your bank may now face.


Contact Richard Ripley at (509) 344-1261 or via e-mail at [email protected].