Saint Cloud, Minn.-based Stearns Bank NA expects to see its recent investment in financial technology translate into higher loan volumes and higher non-interest income from net interchange fees and other services.
On June 10, Stearns Bank announced that it has acquired Encino, Calif.-based South End Capital Corp. and its digital lending platform. Just a month ago, it entered a strategic partnership with Productfy Inc., a technology developer helping other fintech companies to launch banking products.
South End Capital was founded in 2009 as a nationwide, non-conforming lender and intermediary. It now becomes a specialized division of the bank led by Noah Grayson, South End's founder and president.
South End brings to Stearns Bank thousands of referral sources as well as direct borrower contacts, which will enhance production at Stearns, said Heather Plumski, chief financial and strategy officer of the bank.
South End has been focused on commercial real estate and Small Business Administration loans, and it operates a loan marketplace. Prior to joining Stearns, South End generated revenues from fees earned by getting loans funded either with other lenders or through its direct relationships, Grayson said. As technology helped ramp up its deal flow, South End was seeking strategic partners to monetize the leads, and the search led to deal talks with Stearns Bank, he added.
While Stearns Bank plans to hold loans generated from South End's platform, it will continue to send referrals and will not cut out other lenders, Plumski said. South End can also leverage Stearns' outlets in other niche lending areas, such as equipment finance and loans administrated by the U.S. Department of Agriculture, to develop and market additional programs for its contacts, she said.
The acquisition comes as Stearns Bank highlighted M&A in its growth strategy for 2021. It is interested in acquiring banks with as much as $1.5 billion in assets, a fintech or payment company, performing or non-performing loan portfolios or a new niche lending business. CEO Kelly Skalicky said in a March interview that it wants to use M&A to accelerate growth and boost non-interest income.
Going forward, Stearns Bank has the dry powder to pursue further M&A and it is looking at independent companies to extend its concentration on niche lending, Plumski said in the interview. Potential targets can specialize in different areas of equipment finance or asset-based lending, she said. With respect to non-performing loan portfolios, the bank can work through those and help them get to performing status with the bank's strength in SBA loans and USDA loans, she added.
Among other growth drivers, Stearns Bank has seen promising results from its partnership with Productfy, a banking-as-a-service provider founded in 2018. Productfy develops the technology platform and engages with fintech companies on the front end, whereas Stearns Bank adds bank-level compliance and processing capabilities, including payment processing using the Automated Clearing House rail, and debit and secured card issuing.
Over one month into the partnership, Stearns Bank has had an increase in volume from ACH payment processing, which increases its interchange income, said Josh Hofer, the bank's chief risk and information security officer. As Productfy continues to add fintech customers, Stearns expects to see a higher number of card swipes and higher non-interest income from other services, Hofer said.
The technology infrastructure embedded within compliance components enables Productfy's customers to roll out products much faster, Hofer said. According to Productfy's website, it can help launch fintech applications in as little as three weeks.
"We're in a heavily regulated industry, so nothing we do is possible without a partnership," said Duy Vo, CEO and founder of Productfy. Besides Stearns Bank, Productfy's other partners include card issuing technology provider Marqeta Inc., Envestnet Inc.'s Yodlee, a financial data aggregation platform, and Equifax Inc.
Stearns Bank, a subsidiary of Stearns Financial Services Inc., has $2.2 billion in assets. As of December 31, 2020, Stearns Financial Services generated$37.3 million in net income, and non-interest income accounted for 16% of its total income, according to its annual report.