Lender finds a winning strategy

Fidelity Bank doesn't make loans to consumers. Its office is tucked away in a nondescript Edina office park, and its only other branch, in Eden Prairie, is actually a night deposit drop box.

Yet the bank has made a name for itself in Twin Cities commercial lending circles, where it's a shining example of a lender that has thrived through the financial crisis and recession.

The bank, with about $350 million in assets, has actually seen some of its best performance in the last two to three years, said Fidelity's president and CEO, Chuck Mueller.

"It's a long and steady tortoise approach to building a bank," Mueller said in an interview in the bank's Edina headquarters.

Fidelity's winning formula has been a laser focus over the years on two lending specialties that have been gaining popularity: short-term, asset-based loans to small companies for working capital, and mortgage warehouse lending to mortgage companies.

That business, which Fidelity stuck with through the housing debacle and has been expanding, involves short-term loans to mortgage originators that use the money to make loans that they typically turn and sell to investors.

Fidelity largely steered clear of subprime mortgages and the speculative commercial real estate loans that turned toxic for banks when values plummeted.

The bank's parent, Minnetonka-based Fidelity Holding Co., is owned by a number of trusts controlled by the family of Opus founder Gerald Rauenhorst, which bought it in late 2005.

It's Rauenhorst's first and only bank, said Mueller, and the family has been very hands-off. It hasn't poured capital into the bank and "made no huge changes."

Fidelity's bread-and-butter commercial loans are short-term loans and lines of credit to companies needing working capital. The loans are secured by such assets as a borrower's inventory, machinery or, most often, accounts receivable.

Its total book of commercial loans, which includes some commercial real estate loans for owner-occupied buildings, hit $144.49 million in the first quarter, up 3.6 percent from the fourth quarter and 14 percent from a year ago.

It's a niche the megabanks play in, but Fidelity's target market is privately held companies with sales up to $50 million, below the bigger banks' focus, Mueller said.

TCF Financial Corp., for instance, in March launched a new asset-based lending division that the Wayzata-based lender said will focus on smaller companies.

"They're not going to be stuck in that loan for 30 years. So as interest rates go up in a recovering economy, they're able to reprice," said David Koch, a bank consultant at Fair & Associates in Madison, Wis. "They'll have more cash flow to turn over into the new higher rate."

New competition

More community banks are eyeing Fidelity's other longtime moneymaker: warehouse mortgage lending. Many banks ditched that business after the housing collapse, but it's gaining popularity as ultra-low interest rates and government programs encourage a wave of mortgage refinancing.

"We were there when there were just a handful of warehouse lenders left in the U.S.," Mueller said. "We were well positioned with a good, clean portfolio and a good capital base."

Robert Carter, CEO of Plymouth-based Summit Mortgage, said Fidelity was critical to his company's survival. "They're really active in their partnerships with their customers," Carter said.

Competition among banks for warehouse lending is heating up again. Although the business dipped in Fidelity's first quarter from the fourth quarter of 2011, it picked up four new clients and business "is still very robust," Mueller said.

"We think it will be very strong this quarter, maybe uptick a little bit due to some programs the federal government has to stimulate refinance activity with borrowers who are underwater," he said.

Mueller cautioned that it's not a business for every community bank.

"Warehouse lending has a lot of curveballs and you'd better know what you're doing," he said. "Independent mortgage bankers don't have the capital to hold these notes on their books. If the transaction falls through, you'd better know what to do with those loans, and quickly."