The nightmare of many community bankers may soon come true.
State Farm Mutual Automobile Insurance Co. is on the verge of opening a federal savings bank that will operate coast to coast. State Farm Financial Services FSB will court customers through the company's 16,300 offices-a national network dwarfing the combined branch operations of the nation's 10 largest banks.
By the end of April, State Farm expects to get a green light from government regulators to begin competing directly with banks.
"State Farm poses a great threat," said Michael L. Cox, president of First Merchants Corp., a $704 million-asset banking company in Muncie, Ind.
"It has a tremendous franchise name in America and there's no question they would have an advantage because of the agent infrastructure."
According to its thrift charter application, State Farm plans to offer mortgage and home equity loans, automobile loans, and credit cards. The conglomerate will also offer certificates of deposit, savings and checking accounts, and money market accounts.
The insurer is betting that it can raise funds cheaper than small-bank competitors and keep operational costs down by forgoing the traditional bank branch. With that one-two combination, State Farm officials plan to undercut small banks on loan charges, while luring deposits with more attractive rates.
State Farm isn't alone.
Twelve insurers are seeking federal thrift charters in order to offer banking services nationwide. Others with applications pending are Transamerica Corp., SunAmerica Inc., and Hartford Financial Services Group. The Office of Thrift Supervision has already granted charters to ReliaStar Financial Corp., Travelers Group, and Principal Mutual Insurance Co.
Many of the companies are recruiting bankers to lead their thrifts.
State Farm has hired Stan Ommen, former regional president of First of America Bank-Illinois. Mr. Ommen, a 30-year banking industry veteran, would not comment until the OTS acts on State Farm's application.
Insurers are getting into banking because financial firms are shifting their focus from simply selling a particular type of product to controlling as large a portion of their customers' assets as possible, said Michelle Giordano, a financial services analyst with J.P. Morgan Securities.
"Insurance companies are tired of watching while beneficiaries of life insurance policies or annuity contracts put their money into banks," she said. "Owning a thrift gives insurance companies flexibility to provide deposit services and keep these customers."
A staggering amount of money is at stake.
For instance, ReliaStar officials said they want their thrift to retain at least 40% of the $2 billion in annual insurance and annuity payments the company makes each year-that's $800 million annually.
The entire banking industry should be gearing up for the new competitors, said John Timmer, senior vice president at First Chicago NBD Corp. and chairman of the Illinois Bankers Association.
"We think it's a serious threat," he said. "For the first time, agents will be allowed to consult with customers about their entire financial plans."
With the thrift charter, the insurers' banking operations will also be exempt from most state consumer protection laws and branching rules, giving them a leg up on commercial banks, he said.
State Farm's huge agent network will allow the country's biggest property and casualty insurance company to combat the key weapon local banks use to fend off larger rivals: strong ties to local markets.
Most insurance representatives have worked in their towns for years and are just as likely to have grown up with or socialize with their customers.
"That's an advantage that community bankers fear," said Jim Maag, executive vice president at the Kansas Bankers Association.
Like most of the insurers getting into the banking business, State Farm officials said their thrift operation will expand slowly.
Lending will be offered only in Illinois and Missouri during the institution's first two years. In the third year, full banking services will be expanded to Arizona and then gradually nationwide, according to State Farm spokesman Steve Witmer.
State Farm will take deposits nationwide more quickly, though no timetable has been set.
But bankers should not be fooled by the slow rollout. State Farm and many other insurers are determined to offer nationwide thrift services.
"The initial business plans may look skimpy, but these companies want to prove themselves and then expand," said Venable, Baetjer, Howard, & Civiletti attorney Ronald R. Glancz. "They will move into new areas in organized ways that makes business sense."
Bracing for a State Farm onslaught is C. William Landefeld, president and chief executive officer of Citizens Savings Bank. Citizens is based in Normal, Ill., right next to State Farm's headquarters in Bloomington.
The insurer's banking pilot program will be conducted in Bloomington- Normal where State Farm employs 12,000 of the market's 100,000 residents. Nearly one of every three Citizens' loan applicants is employed by State Farm, according to Mr. Landefeld.
"Obviously I'm not thrilled," he said. "State Farm casts a big shadow in my backyard.
"I don't want to lose that customer base."
Mr. Landefeld's predicament is ironic. In 1997, as chairman of America's Community Bankers he lobbied Congress to preserve the unitary thrift charter, which allows nonbanks like State Farm to own a single savings association.
Though he hasn't reversed his position, Mr. Landefeld said he is frustrated by State Farm's plans. "Bankers here are wondering why," he said. "I can't think of any banking product that isn't already available in this community."
But despite State Farm's advantages, bankers said the insurer won't find it easy to steal their customers. After all, banks have deepened their portfolio of financial planning products in the past decade.
"Many banks now sell mutual funds and insurance and are in a good position to compete," said John K. Sorenson, president of the Iowa Bankers Association.
Furthermore, small banks already face a plethora of big competitors with distinct advantages. Interstate branching allowed multistate behemoths such as NationsBank Corp. and Norwest Corp. to invade many markets in the past four years, while nonbank competitors such as Edward Jones Co. have been fighting for savings dollars for years in many small towns. Community banks also must compete with the low-cost lending offers by the government- sponsored Farm Credit System.
"Community bankers shouldn't be afraid of State Farm," Mr. Sorenson said. "Most of us have been fighting in a tough environment for years."
The insurer may also discover that agents will not be eager to deal with the regulatory paperwork that comes with mortgage and home equity lending, Mr. Landefeld added.
"The first time an agent has to fill out the documents for a mortgage loan application, it might be the last one he ever does," he said. "In the amount of time it takes to fill out the paperwork, he could have sold a couple of life and auto policies."
