Who says small banks can't run with the big boys?

A group of 23 community banks, led by MidFirst Bank, a $9.6 billion-asset unit of MidLand Financial in Oklahoma City, provided $150 million in corporate debt to U-Haul. The banks benefited from the moving giant's desire to borrow from local lenders. And U-Haul's executives wanted to take advantage of the smaller banks' knowledge of local communities.

"U-Haul operates in virtually every city in the U.S. and we like to participate with people in the areas where we do business," says Gary Horton, treasurer at AMERCO, the Reno, Nev., parent company of U-Haul. "We haven't really done much with local banks in many areas, but this made sense."

Other large corporations have inquired about financing from smaller banks, says David Hill, chief executive of BancAssets in Austin, Texas, which arranged the U-Haul loan. Small banks will increasingly target non-traditional clients, like U-Haul, as they look for new ways to add higher-yielding assets.

"These community institutions need to find new sources of credit and they're up against a hard task within their footprint," Hill says.

Community bankers have often wondered why they are unable to bid on lending opportunities that typically go to JPMorgan Chase (JPM) or Bank of America (BAC), says Don Shafer, chairman of BancVue. He co-founded BancAssets to match community banks with Fortune 1000 borrowers.

The idea came about after Shafer asked Hill what would happen if Coca-Cola needed a $1 billion loan. Hill responded that the large borrower would call Goldman Sachs (GS), which would then round up B of A, Citigroup (NYSE: C) and Wells Fargo (WFC). That discussion led the men to find a way to get community banks "a seat at that table," Shafer says.

U-Haul will use proceeds from its participation loan to pay off loans tied to its moving centers and refinance other debt, Horton says. It was more difficult to close the BancAssets loan because almost two-dozen banks were involved. But now that U-Haul has completed its first transaction through BancAssets, the next one will be easier, Horton says.

"You're always looking for the next source" of funding, Horton adds.

The $8.9 billion-asset Western Alliance Bancorp. (WAL) jumped at a chance to join in the loan, even though it has already conducted business with U-Haul, says Robert Gramhill, the Phoenix company's senior vice president.

"We had been doing a lot of direct financing … on their truck fleet, but we were never given the opportunity to participate in their corporate facilities," Gramhill says. "Regional banks like ours and smaller community banks weren't given those opportunities in the past."

It's a natural fit for a company like U-Haul to borrow from community banks, Shafer says.

"If an American company is selling products and services all over the country, they should invite community bankers to the table," Shafer says. Smaller banks "should sit here with Credit Suisse and Bank of America and the first company that totally agreed was U-Haul."

Hill admits that he has launched a new business venture in a very crowded arena. Promontory Interfinancial Network and the Ohio Bankers League are among the industry players that have seen an opening to act as matchmakers for lending.

"Anyone who's out there working to help community banks get stronger, more power to them," Hill says.

Participation loans also remain under close regulatory scrutiny. A report issued in October by federal bank regulators noted that weaker underwriting on loans to highly leveraged corporate borrowers has contributed to a nationwide deterioration in credit quality.

BancAssets believes it has an edge because of connections to corporate borrowers, Hill says. It also helps that community banks are eager to diversify their loan portfolios, he says.

"The growth of online banking, and megabanks reaching into secondary and tertiary, small-town marketplaces are creating alternatives that didn't exist," he says.

Smaller banks, which are under pressure due to more aggressive lending by big banks, have "to get creative and look outside their local markets," Hill says.

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.