With bank consolidation in full swing, community bankers are starting to worry that their friendly correspondent banker is becoming their tough local competitor.

Community banks often rely on out-of-state banks for such services as check-clearing and loan participations. But as those correspondents march into new territories, they could end up competing with their bank customers for the loyalties of local consumers and businesses.

In particular, small banks fear a regional bank could use information gleaned from its correspondent role as a potent competitive weapon.

"There's always that concern that someone who starts out as your provider eventually acquires one of your competitors and finds himself in a position to use the information," said Michael A. Bauer, president and chief executive of Quad City Bank and Trust, Bettendorf, Iowa.

Perhaps the concerns are summed up best by Gayle Earls, president of Texas Independent Bank, a bankers' bank: "Are they here to help you or are they here to eat you?"

The fears are most evident in parts of the Midwest, where correspondent banking is strongest and the landscape is ripe for acquisitions because the strict state branching laws were relaxed in recent years.

Community bankers in Iowa, for example, are asking themselves whether they should keep their relationships with Firstier Financial Inc., Omaha, or Mercantile Bancorp, St. Louis.

Although the two correspondent regionals don't now have much of a branch presence in the state, Firstier is being bought by First Bank System Inc., Minneapolis, which has a significant thrift franchise in Iowa. And Mercantile is trying to acquire Hawkeye Bancorp, Des Moines, the state's largest in-state bank.

That will suddenly give both correspondent players a major branch presence in the state, making a lot of community bankers more than a little wary.

"If they don't own a bank in your town, I don't think they really compete with you," said Charlie E. Walsh, president of Farmers and Merchants Bank and Trust in Burlington, Iowa. "But if they had one in the same town where you had a branch, then, yeah, I wouldn't want to be doing business with them."

"The Iowa bankers know that things are changing," said Helge S. Christensen, president and chief executive of the Bankers Bank, Madison, Wis., which serves banks in Iowa. "They're seeing some things they don't like. They have some suspicions of motives and competitive situations."

Some correspondent banks, however, have recognized the concern among their customers and have responded to it with firm policies to prevent infringement.

Milwaukee's Firstar Corp., for example, bars its direct-lending personnel from even calling on a company when Firstar is sharing the loan with the company's community bank.

"It is a concern, but while there's a little shock factor involved when an out-of-state bank comes in, they've been facing up to that competition for years anyway," said Mark A. Hoppe, executive vice president of LaSalle National Bank in Chicago. "Once the shock factor wears off, it becomes kind of a nonissue anyway."

But Mercantile spokesman Patrick Strickler said community banks have in fact welcomed the bank into their market because the company operates its subsidiaries locally.

"We have seen many cases where it has strengthened the local banking situation and it has not adversely affected our correspondent banking relationships," he said. "Our correspondent banking relationships are individually maintained and are inviolable. We don't share that information. I can understand a bank having that paranoia, but it doesn't apply here."

But the distrust of large regionals left room for Wisconsin's Bankers Bank to jump into the fray. The bank, which has only been offering its correspondent services in Iowa for about a year, already has 70 relationships.

In fact, such fears of the large banks drove the creation and growth of the nation's 16 bankers' banks, Mr. Christensen said.

In many states like Iowa, the suspicion of out-of-state regional banks has even allowed other community banks, both large and small, to get into the correspondent business themselves.

When Quad City opened its doors in January 1994, other bankers in the region who knew Mr. Bauer had directed correspondent banking for a predecessor bank and urged him to get back into correspondent services.

"A lot of them felt that 'I don't have a partner and a relationship anymore and I've got a competitor that I'm doing business with,'" said Kathy M. Framcque, correspondent banking officer for the $85 million-asset bank. The bank started offering the services less than a year ago, but already has 15 customers in Iowa and nearby Illinois, with officials hoping for 30 by the end of June.

"Just as we think there's room for community banking, we also think there's a place for community correspondent banking," Ms. Framcque said.

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