Cole Taylor Financial Group has added a facet to its identity: insurance agency.

In October, the suburban Chicago community bank started hawking life insurance products to its customers through three of its 10 branches, said Richard D. White, executive vice president of trust and investment services at the $1.8 billion-asset institution.

The decision didn't come easily, Mr. White said. But after two years of meetings and planning, the bank decided it needed to get into the game to retain customers and generate a new revenue stream.

"The bank is trying to position itself as a full-service financial provider," Mr. White said. "We're trying to solve as many needs as we can."

Cole Taylor is just one of a growing number of community banks that are turning to insurance sales as a means of holding their own in the ever- more-competitive financial services arena, industry officials and observers said.

"There is a lot of interest by community banks" that want to "avail themselves of insurance powers," said Michael D. White, an industry consultant and executive director of the Financial Institutions Insurance Association, a trade organization representing bank insurance operations.

The number of community banks that sell insurance is difficult to pin down, but most observers believe it is sizable. Kenneth Kehrer, a bank insurance consultant, estimated that 20% of all banks with less than $2 billion of assets are selling insurance.

The percentage is substantial because community banks in many parts of the country have a history of selling insurance. In the Upper Midwest, for example, state-chartered banks long have been allowed to sell certain types of insurance.

But more of the small banks now are eager to sell insurance for the same reasons as their big bank cousins, industry observers said. They want to grab a greater share of their customers' financial services spending and, in an age of narrowing interest spreads, increase their fee income.

Mr. Kehrer said community banks also have an edge over regional and superregional banks when it comes to selling insurance: a closer affinity to their customers.

But the smaller size of community banks confronts them with a different set of concerns.

One is the limits of a smaller market area. While a regional bank can market insurance products over a wide swath of territory, there's only so much volume small banks can generate.

Also, small banks are less willing to swallow large up-front losses to get into the business, so they are less likely to start their own agencies, observers said.

"Sometimes a major bank is willing to get into a product line even though it isn't profitable for a while," Mr. Kehrer said. "Community banks are more apt to take a dollar-and-cent approach to something like this. Community banks don't have as deep pockets as big banks to build a business."

James E. Caspary, chief executive of $22 million-asset First National Bank of Clifton (Ill.) backs up Mr. Kehrer's assessment. His bank bought an insurance agency 18 months ago. "If I were starting a new agency I would have concerns about getting customers," he said.

Anecdotal evidence suggests that First National's approach is the most popular among banks that want to take a crack at selling insurance. In a 1991 survey - the most recent available data - the Independent Bankers Association of America found that 23.4% of its members owned insurance agencies.

This tactic is a natural for community banks because they have an intimate knowledge of which businesses in a town are successful and which aren't, bankers and observers said.

First National used its market knowledge to break into insurance sales, Mr. Caspary said.

"We bought an existing agency from an individual we knew was considering retirement," he said. "Most of his clientele were also our clientele."

Mr. Caspary said the agency, which has about 600 customers, is surpassing financial projections and should turn a profit this year.

The Illinois banker decided to enter the insurance fray after seeing insurance companies and other nonbanks move onto his traditional turf, lending.

"We felt we needed to diversify into other areas that will help us when the banking industry isn't doing so great," Mr. Caspary said.

Other banks, like Cole Taylor, retain third-party vendors to sell insurance. The Wheeling, Ill., bank hired Financial Network Investment Corp., a financial planning company, for the job.

A big challenge is training bank employees to refer customers to insurance specialists, Mr. White said. "We are trying to educate our lenders and all our bankers about how to identify prospects for us," he said.

So far, Cole Taylor is selling only life insurance, but it may add to its lineup. "At this time we're not selling any property insurance," Mr. White said, "but it certainly is one of the things we're looking at."

More third-party insurance providers will eye small banks as a niche worth pursuing, Mr. Kehrer said. "There will probably be a proliferation of companies that will cater to those banks' needs," he said.

A large number of community banks concentrate on the small-business and agriculture niches, bankers said, and selling insurance complements these activities.

As Mr. Caspary sees it, selling insurance is the next logical evolutionary stage for community banks.

"You get to where you're comfortable with what you're doing," he said, "and you take that course and then society changes around you. Then you have to do something."

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