First Commerce Bancshares recently entered territory where small banks rarely venture.

The Lincoln, Neb., holding company with assets just shy of $2 billion came to the debt market for the first time by issuing $10 million in commercial paper.

Earlier in the year, First Commerce had entered into a joint-venture credit card program with Cabella, a mail-order sporting goods company. Issuing debt was considered the best vehicle to fund it, said treasurer Donald D. Kinley.

"Our credit card receivables almost doubled in three months, so we needed another source of liquidity," Mr. Kinley said. "Commercial paper is a good short-term liquidity source."

Ten years ago, First Commerce's chances of a successful debt issue would have been close to nil. At the time, a bank's size was perceived by investors as going hand-in-hand with quality, making the capital markets the almost exclusive domain of superregionals and money-centers.

But as core deposits ebb and the pressure to compete with the "giants" intensifies, some small banks like First Commerce are taking bolder steps to sate their funding needs.

The number of small banks tapping the capital markets remains small, but James. E. Moss, vice president of Duff & Phelps Credit Rating Co. contends the loss of depositors to other investments has made some small banks bolder in funding strategies.

Since 1990, there has been a "dramatic" increase in small banks accessing the capital markets, he said.

Nearly one fifth of theholding companies with assets between $6 billion and $4 billion derived more than 5% of their total liabilities from bank-level debt as of Sept. 30, 1995. That marked a substantial increase since the end of 1990, when only one bank in this group had tapped the market - for a mere 2% of its liabilities.

In addition to eroding deposits, the perception that "bigger is better" also has begun to give way in the marketplace, said industry observers.

In spite of its size, First Commerce's issue received a D-2 rating - meaning high liquidity and low risk - from Duff & Phelps because of its "unique structure," said Thomas G. Stone, an analyst with the company. "They have a global fund which invests equity and fixed- income instruments, and they have foreign securities, which gives them significant liquidity at the holding level."

Richard M. Cloney, vice president and secretary of Susquehanna Bancshares, in Lititz, Pa., said detailed data about small companies over various electronic data sources has helped educate the market.

"There is much more known about smaller companies than was put out in the past. Size no longer defines quality," he said.

Susquehanna, which has $3 billion in assets, convinced investors and underwriters of that fact when it issued debt for the second time in late January.

The issue, rated investment grade by Standard & Poor's and Moody's, was needed to fund three acquisitions made in the last 18 months, said Mr. Cloney.

Underwritten by Oppenheimer & Co., Keefe, Bruyette & Woods, and Legg Mason, the Susquehanna issue sold out completely at closing.

Although the company could have tapped other resources for the venture, Mr. Cloney contended that publicly trading debt looked "more attractive" based on costs.

In spite of the trend, the number of small banks tapping the capital markets still remains small and the challenges high.

Fred Price, vice president at Sandler O'Neil & Partners LP, a company handling middle-market financial institutions, said small banks that access the capital markets are an "anomoly."

He argued that there are other ways for small banks to access the funding, including the Federal Home Loan Bank and the Reverse Repurchase Market.

Mr. Stone of Duff & Phelps, however, argued that traditional routes for accessing capital are not necessarily cheaper.

Mr. Stone did concede, however, that larger banks have an easier time tapping the capital markets. "Small banks tend to have smaller and illiquid issues and certain investors may shy away from something they cannot easily convert," he said. "Size does bring its limitations."

At JeffsBanks, in Philadelphia, chairman and chief executive Betsy Cohen, said it was the bank's size that compelled the company to come to market without a rating with its second issue.

The bank, with $926 million of assets, needed additional capital earlier this year for three acquisitions it had made.

Ms. Cohen said low interest rates and the flattening yield curve encouraged the move, but it was size that made her "feel that it was not worthwhile to get it rated.

"In our general experience, we believed that we were too small for anyone to pay attention to us."

Nevertheless, Jeffsbanks was able to issue $20 million of 10-year subordinated notes. The issue underwritten by Alex. Brown & Sons Inc., was priced as if it had a triple B rating, said Ms. Cohen. It sold out the first day it was issued.

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