Community banks in isolated or rural areas have always been successful small-business lenders, but four Midwestern banks are showing that you don't need elbow room to make money in that niche.
The four banks are in competition-crowded suburbs of Chicago and Minneapolis, but they posted a three-year return on assets greater than 1.5% with more than 90% of their loans made to small businesses. That puts them among the best-performing small-business banks in the country, according to research by the American Banker.
These banks, two of which have less than $100 million of assets, go against a trend in small-business lending. According to Federal Deposit Insurance Corp. figures, the country's smallest banks have seen a slight decline in their market share of small-business loans in recent years.
At the same time, larger banks have focused attention on small-business lending and adopted new techniques, such as credit scoring, to churn out small-business loans.
But executives from the four banks say they compete by maintaining consistent customer relationships in an age when many of their large competitors have gone through mergers.
"We can spend more time and do a better job on a smaller deal," said G.M. Robertson, president of State Bank of Rogers, a $38 million-asset Minnesota bank.
Its neighbor in the Twin Cities suburbs, $72 million-asset First Minnetonka City Bank, has competition from 13 other banks in its town of 48,000, including Norwest, First Bank System and several credit unions.
The $114 million-asset Elgin (Ill.) State Bancorp has competition from 16 other banks-including Banc One Corp. and First Chicago NBD-in its suburban Chicago city of 77,000, as well as credit unions.
State Bank, along with the fourth top-performing bank-Bronson-Gore Bank, a $75 million-asset subsidiary of $237 million-asset Gore-Bronson Bancorp in Prospect Heights, Ill.-posted strong returns but have somewhat less competition in their immediate suburban areas.
Delbert Smith, First Minnetonka executive vice president, said his bank benefits from a seasoned staff of lenders, all of whom have been with the bank for more than a decade. "Customers deal with the same banker year after year, rather than having to train someone new," Mr. Smith said. "Our customers know who we are."
Mr. Smith said veterans in the marketplace tend to be more familiar with their customers' needs and can structure appropriate loan packages.
"They are able to react real well to our customers' needs and wants," said Mr. Smith, whose customers include a diverse mix of high-tech businesses and retailers.
Mr. Robertson said State Bank of Rogers' market had been largely rural, but in the last two decades Minneapolis began spreading westward, bringing in some light industry. State Bank of Rogers, which competes with Minneapolis-based Norwest Corp. and First Bank System Inc., gets most of its business from referrals from existing customers, Mr. Robertson said.
Mr. Robertson said that though his bank can't compete with larger banks on prices for loans to machine shops or plastic molding companies in its market, it can offer better service to smaller customers. "A $250,000 commercial real estate loan is right up our alley," he said. "The bigger guys don't even want to look at that, at least that's the impression I get."
