Some of the megabanks spending billions of dollars to get into the leasing business might look to Midwest community banks as models.

Thousands of small agricultural banks in the Midwest rushed into equipment leasing in the late 1980s as a way to reduce their reliance on farm production lending. Though many have since left the business, hundreds still make leasing a major part of their bottom line - and have learned some tough lessons along the way.

"Some of those big banks might do well to stick to consumer lending," said Larry Nelson, president of Burt County State Bank in Tekamah, Neb., which has 34% of its portfolio in leases.

"Sure, you underwrite a lease the same as a loan. But this perception that it's easy money is erroneous."

Almost every bank with a major reliance on leasing is a small bank. Of the 300 or so that have more than 10% of their portfolios in lease financing, more than 285 are independently owned banks with less than $100 million of assets. Most are in the Midwest.

Of the 30 banks with more than 30% of their loans in lease financing, all but one are community banks, and almost all are in the upper Midwest.

As a group, the 10,200 banks with less than $3 billion of assets rely less on leasing than bigger ones do. But they have been also been increasing their leasing portfolios faster.

But with the likes of Mellon Bank Corp., NationsBank Corp., First Union Corp., and BankAmerica Corp. spending big to buy nonbank leasing affiliates, large-bank leasing growth appears likely to eclipse growth at community banks.

The leasing leaders among small banks, however, didn't spend a ton of money buying free-standing operations. Instead, every small bank contacted about its large leasing portfolio reported having hired a key man back in the 1980s who built up the operation in-house.

Such was the case of First National Bank and Trust in St. John, Kan. In 1986, staring at an 80% portfolio concentration in lackluster farm production loans, First National president Don Hildebrand hired Steve Bonner to start a leasing business. Mr. Bonner had 13 years' experience at the time with a local leasing company.

"I don't think we could have done it without an expert," Mr. Hildebrand said. "There's not much about equipment leasing in Kansas he doesn't know."

Since 1987, Mr. Bonner has built up a $9 million portfolio of lease financing receivables, or about 32% of the bank's loans - the fifth- greatest percentage of any bank in the country. The leases are in all manner of equipment: medical, farm, construction, office.

"The thing with leasing is, you've got to have bodies," said Mr. Bonner, a vice president who doubles as a loan officer and the bank's insurance agent. "You've either got to hire a lot of people or keep it one-man and hire brokers."

The problem with brokers, Mr. Bonner said, is that you can't control them. A few years back, he said, some banks in Kansas got into trouble involving brokers who were selling one piece of leasing paper to several banks.

Most competition in equipment leasing comes from nonbanks, such as equipment makers and specialty finance companies. Executives at small banks said they don't usually run up against big banks - not yet, anyway.

Mr. Nelson, the Nebraska banker whose lease portfolio doubled in three years, said the large banks may not find leasing is the Holy Grail of higher margins.

"They're going to find a lot of competition," he said. "There's a heck of a lot of competition for equipment leasing, and it's not just from small banks."

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