First National Bank and Trust Company of Beloit faced a formidable challenge when it decided to enter the brokerage business two years ago.
Customers of the $180 million-asset bank in rural Wisconsin were asking for alternatives to low-yielding deposits. The bank was eager to comply by adding mutual funds and other investments to its product menu.
But to do it right, First Nationalwas going to need considerable help.
The bank lacked the experience and manpower to sell investment products on its own, and felt uncomfortable with the marketing firms that were banging on its door, said Kevin K. Logterman, an assistant vice president who was recruited to launch the investment sales program.
Enter Milwaukee's Firstar Corp., a $13.8 billion-asset banking company that had recently begun offering brokerage services to its correspondent banks.
For years, First National had relied on Firstar for a battery of services such as check clearing, funds transfers, and lockbox. Once the Beloit bank had decided to jump into investment sales, it seemed only natural to turn to its correspondent bank to show the way.
"We were confident we could do the sales," said Albert J. Swanson, First National's vice president and cashier. "All we needed was someone to do the paperwork, the marketing, and above all the compliance."
So in October 1992, First National turned over a comer of its lobby to Firstar's brokerage subsidiary, Elan Investment Services. In exchange for a 30% share of gross sales commissions, Elan would handle. all investmere transactions, do the marketing, and oversee compliance.
The relationship certainly seems to have paid off for First National. In 1993, the bank sold more than $5 million in mutual funds and annuities through the brokerage, netting $200,000 in fee income, 9% of its total net income of $2.2 million.
And First National is not alone. Dozens of community banks around the country have struck similar arrangements with bigger banks.
Key players, in addition to Firstar, include Premier Bancorp of Baton Rouge, La., and First Colonial Baneshares, Rosemont, Ill.
While the vast majority of community banks that sell investments do so with the aid of a third-party marketing firm, these correspondent arrangements are emerging as an alternative.
Some bankers say they feel uncomfortable introducing their customers to a broker from an unaffiliated marketing firm, but like the idea of working with another bank.
First National chose Firstar because "they weren't about to come in and take this bank and its customers," Mr. Logterman said. Not that it was easy. Firstar's brokerage subsidiary initially approached First National about setting up a sales program in 1991:
"It took a long time for Elan to convince the people of First National to get into the business," said Mr. Logterman. "You can't push anything on these people."
But a year later, demand for mutual funds was so strong that the bank reconsidered. "We felt you either get involved in this, or you're out of the business," Mr. Swanson said.
A stubborn, conservative streak runs through most of Beloit's 35,000 residents, many of whom are still clutching passbooks or certificates of deposit, by far the bank's most popular product.
Most of First Nationa!'s customers are 60 or older, making selling investment products a particular challenge.
"If these people are sold on CDs, they're going to stay in CDs," Mr. Logterman said. Many of the bank's investment products customers are new to investing, and they are cautious about risk.
For instance, Mr. Logterman said, "they read in the paper that insurance companies are having trouble and they don't want to get into insurance products."
"These people depend on me to steer them right," he added.
To that end, Mr. Logterrnan depends a great deal on Firstar's Elan unit for support. The bigger bank gives Mr. Logterman access to research and product specialists as well as providing compliance check-ups that keep the brokerage from falling into any regulatory snares.
Elan's auditors drop in once a year, as do Firstar's. And after they're through, Mr. Logterman endures another compliance and suitability check from First National's own internal auditor.
While Mr. Logterman is trying harder to satisfy existing customers, he has had to redouble his efforts to get new ones.
After a banner first year, the brokerage was rocked by volatile markets and a sophomore slump.
"Last year, you didn't have to market; you just sat back and watched the people walk in," he said. "Now you have to try harder."
He's had some success, however. A bankwide effort to generate referrals and a direct-mail campaign have kept sales volume on par with last year's. By comparison, some bank brokerages across the country have seen up to a 50% drop in sales.
As if rocky market conditions weren't enough, the competition has set up shop around the corner.
Local brokerages companies like Edward D. Jones & Co., and Baird Inc. have opened offices on the same street as the bank.
Donald N. Theis, a Beloit resident and an investment representative with Jones & Co., said he sees plenty of business to go around. But he thinks he has the upper hand.
"I see the bank as a healthy competitor," said Mr. Theis. "But I'm not really sure that First National has the inventory of products that we do."
First National isn't taking the challenge lightly. The bank had signed a "noncompete" contract with the town's insurance agents, promising not to sell insurance. But that agreement expires in March 1995, and Mr. Logterman has big plans. "I'm hoping to sell life, disability, long-term-care insurance," he said. "This product mix will help us develop a younger clientele."
