Financial experts urged community banks to challenge bigger rivals by offering creative business loan products and using innovative funding options.

"Rather than be in a defensive posture against big banks, be an aggressive competitor," said Neill LeCorgne, director of business development at the Federal Home Loan Bank of Atlanta.

Speaking at the American Bankers Association's annual convention here, Mr. LeCorgne said big banks seek high-volume lending, which gives them economies of scale. As a result, they offer only a few standard corporate loan products.

Community banks, he said, will never make enough loans to compete on volume, so they should tailor their products to individual customer needs. They should offer business customers a variety of fixed- and variable-rate loans, he said, and let the business choose which works best.

"You have some tremendous advantages, but you need to know how to play the game," he said. "It is all about innovation. It is all about doing something different for your customer."

The same strategy should permit community banks to compete in the mortgage market, which has been dominated by just a few firms, he said. Instead of making meager profits on prime mortgages, community banks should vie for nonconforming loans that the major mortgage companies ignore, he said.

Mr. LeCorgne also urged banks to tap the wholesale market for funds. "You don't want to be driven just by the deposits you can raise," he said. "You want as many funding sources as you can get."

Big banks have a 91.3% average loan-to-deposit ratio, compared with a 73.7% average for community banks, he said. As a result, large banks enjoy a 15.4% average return on equity, compared with 12.8% for community banks. Funding options include the Home Loan banks, Wall Street, correspondent banks, and asset securitizations, he said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.