Nearly a third of all community banks may be hawking mutual funds by yearend as mounting competition forces them to expand their offerings, a survey has concluded.

The survey by Grant Thornton, a Chicago-based accounting firm, found that one in five community banks now sells mutual funds, and that an additional 12% may launch sales program this year.

Grant Thornton based its findings on a poll of 1,155 executives of independently owned and operated banks with assets of $1 billion or less. Most of the responses came from banks with assets of less than $500 million.

Community banks are eyeing mutual funds sales as a way to build fee income and compete with nonbanks and out-of-state financial institutions, according to Scott Reed, the partner in charge of the study.

'A Defensive Move'

"For many community banks, the decision to offer mutual funds is strictly a defensive move," Mr. Reed said.

Community banks in suburban markets and those with more than $100 million in assets are likeliest to launch mutual fund programs this year, the survey found.

Some fund industry executives see strong evidence that community banks are eager to jump into mutual fund sales.

"I think that is where a lot of the growth will come from," said Ann Marie Klingenhagen, vice president and bank marketing manager at Van Kampen Merritt, a Chicago-based mutual fund company.

But other observers expressed doubts.

"I'm surprised at the magnitude," said Thomas Mongan, executive vice president at Victoria (Tex.) Bank and Trust, which holds $ 1.7 billion in assets.

Now that the stock market has headed south, mutual funds have clearly lost some of their appeal among bank customers, and sales are slowing down, said Eli Neusner, a consultant at Cerulli & Associates, Boston.

"It would be very hard for community banks to peddle funds in this type of environment," Mr. Neusner said.

Even so, many small banks are taking a careful look at mutual fund sales.

Reaching for Yield

For the most part, community bankers are responding to demand for mutual funds from clients who want an alternative to low-yielding deposits, said Diane Casey, executive vice president of the Independent Bankers Association of America.

Last year, the association formed a program to help small banks offer mutual funds because "bankers were saying that they did not want to lose their customers," Ms. Casey said.

Portage (Pa.) National Bank, with $100 million in assets, already offers investment services to high-net-worth and trust clients. Now it is thinking of marketing mutual funds to retail customers.

Like many other community banks, Portage's aim is to avoid "being left at the starting gate," said James H. Campbell Jr., vice president and trust department manager.

"We are concerned about keeping our relationships," Mr. Campbell said.

At Busey Bank in Urbana, Ill., mutual funds are part of a product mix that also includes individual stocks and bonds.

"If we don't offer customers what they want, they will take their business somewhere else," said Curt A. Anderson, president of the $700 million-asset bank's First Busey Securities subsidiary. Mutual funds account for about 40% of the unit's sales.

Of the survey's findings, he said: "For a lot of community banks, this is a wake-up call."

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