BALTIMORE - Are community banks making a mistake by expanding into brokerage, insurance, and other nonbanking lines of business?

Though banks of all sizes have lobbied hard in recent years for the right to sell new products, there is scant evidence that smaller banks are making money in these businesses. So at a super community banking conference here last week, an analyst asked a group of chief executives if banks were "diluting their business model" by emphasizing fee-based products and services over traditional lending.

The bankers' response: Shrinking margins and increased competition for loans have left community banks with little choice but to diversify.

"What we're seeing in traditional banking is a commoditization of product," said Faye E. Cannon, president and chief executive officer at F&M Bancorp, a $1.8 billion-asset company in Frederick, Md.

Still, bankers insist they are not acting purely defensively.

Hunter R. Hollar, president and CEO at $1.7 billion-asset Sandy Spring Bancorp in Olney, Md., said community banks are in position to parlay their relationships with customers into new business opportunities.

As an example, he said he recently received a phone call from a high-net-worth depositor who had inquired about moving all his accounts from various financial services firms to Sandy Spring.

"I think what we do best is interact with customers," said Mr. Hollar. "We have to leverage that level of trust and rapport into selling new products."

The Mid-Atlantic Super Community Banking conference was hosted by the Cleveland-based investor relations firm Margolin & Associates and featured six banking companies from Maryland and Pennsylvania. Joining F&M and Sandy Spring were $765 million-asset Columbia Bancorp of Columbia, Md.; $2.1 billion-asset BT Financial Corp. in Johnstown, Pa.; $4.8 billion-asset Susquehanna Bancshares Inc. of Lititz, Pa.; and $6 billion-asset Provident Bankshares in Baltimore.

The banks sent representatives to raise their profiles with analysts and investors and, in turn, boost their generally lackluster stock prices.

"This is a tier of banks that is underfollowed, undervalued, and underexposed," said Linda Margolin, president of the investor relations firm.

To get analysts "excited" about their stocks, bankers said they must make an effort to turn unprofitable customers into profitable ones.

John H. Anderson, chairman and CEO at BT Financial, said it uses profitability software to better understand which products and which customers make money. BT Financial hired Tucker Anthony Capital Markets, a consulting arm of the investment bank Tucker Anthony Cleary Gull, to analyze the data and produce quarter-by-quarter profitability reports.

Banks "know so much about their customers, but we've all done so little with [that knowledge] in terms of being opportunistic," said Mr. Anderson.

Mr. Anderson also urged that banks be less understanding with customers who bounce checks. "We waive fees for insufficient funds without any analysis of that relationship," he said. "Sometimes it's just a matter of stopping the stupidity."

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