An Edge in Small-Business Lending? Tiny Bank Thinks It Has Answer

Lead Bank, a tiny Missouri institution, believes it has developed a winning formula to compete for small-business loans.

Executives at the $100 million-asset bank in Garden City are hopeful that offering small businesses more high-touch services, such as consulting, will provide an advantage in an area that has become fiercely competitive.

"Being a small bank goes hand in hand with the entrepreneurial spirit of being a small-business owner," says Joshua Rowland, Lead Bank's vice chairman. "Bigger or international banks aren't really attuned to the concerns … of the small businesses we serve."

In 2005, Rowland's family bought a controlling stake in what was then called Garden City Bank, located about an hour southeast of Kansas City. At that time, the bank was heavily involved in commercial real estate. That concentration presented big challenges leading up to the financial crisis, including a cease-and-desist order from the Federal Deposit Insurance Corp.

The bank also had to address issues with the liabilities on its balance sheet, which was weighed down by five- and seven-year CDs with interest rates exceeding 5%, Rowland says.

Kansas City "historically has been good for builder and land-development loans, especially for small banks," says Bob Wray, president and chief executive of Capital Corp. and a former Lead Bank director. "That's where most banks, including Lead Bank, focused much of their efforts until the recession hit. That business has slowly come back, but banks are still looking for other ways to branch out."

Rather than becoming discouraged, the Rowlands were determined to ensure the bank's survival. They took the opportunity to "think about the mission of a community bank and how we could return to a position of health and serve the next generation of customers," Rowland says.

There was a management shakeup and the bank began tackling its bad loans. The Rowland family recapitalized the bank in 2010, rebranding it as Lead Bank. That year, management also decided to focus more on small-business lending, including owners and their families, Rowland says.

Still, it "seems like almost every bank is chasing" small businesses, Wray says. The Kansas City area has become competitive for small-business lending with big and regional banks competing heavily on price, he adds.

So smaller banks must ways to stand out, industry experts say. The Rowlands formed Lead Capital to provide guidance to small-business owners, Rowland says. Lead Capital was later renamed Lead Business Advisors.

Many small business owners lack the technical skills needed to run a company. Lead Bank hopes that providing consulting services ranging from bookkeeping and accounting to strategic planning and forecasting financial performance will help clients fill in some expertise gaps, Rowland says.

Lead Bank, a unit of Lead Financial Group, also expects to open its third branch this year. This location will have more space for collaborative work between the bank and clients. It will deemphasize completing transactions by using more self-service technology, Rowland says.

"The space we're creating is designed around achieving the greatest level of collaboration rather than simply saying you can deposit a paycheck here," Rowland says. "No one needs that anymore. The branch should be a place for consultative work of thinking through a business relationship."

Added touches like these can help a small bank succeed over bigger competitors, says Lynn David, president of Community Bank Consulting Services. Serving as an advisor to a business owner can foster loyalty and improve retention, he says. Other banks are trying similar things, he adds.

For instance, the $3.1 billion-asset Enterprise Financial Services (EFSC) in Clayton, Mo., offers Enterprise University, which provides free classes to small businesses on topics such as marketing strategies and social media. The $1.7 billion-asset Seacoast Banking Corp. of Florida (SBCF) has opened offices that focus on bankers working with commercial clients rather than completing transactions.

"So many banks want to be small-business lenders right now [so] you can't just hang out a shingle and expect to get business," David says. "It is through these enhancements that banks can get new business."

Lead Bank still has more work to do. It lost about $138,000 through the first nine months of last year, compared to a nearly $2 million loss a year earlier, according to FDIC filings. Its cease-and-desist order was lifted in 2012.

The bank is expanding by providing small-market M&A advisory services. It is also working with a local microlender to introduce other options to businesses that may not qualify for traditional bank financing, Rowland says.

"This year looks significantly better and we are on track to profitability," Rowland says. "It's been a long and hard road, but we're confident about what we are doing and optimistic about the near future."