WASHINGTON — When the Gramm-Leach-Bliley Act became law last November, many observers were quick to write the obituary for community banks, predicting that the new law would help financial services conglomerates bleed customers from their smaller brethren by offering broader services at less cost.

High on the list of community bankers’ worries was that large banks would acquire insurance underwriting affiliates and sell bank products to their large policyholder bases. Before the law’s enactment, banking companies could not underwrite insurance and could only operate insurance agencies in towns with populations of 5,000 or less. The new law provides for a financial holding company structure with much wider powers.

But nearly a year later, the only instance of banks’ taking advantage of the new law to underwrite insurance — not counting Citibank, which had merged with the big insurer Travelers Group to form Citigroup before Gramm-Leach-Bliley passed — involved a coalition of Midwest community banks. Meanwhile, other small institutions are finding innovative ways to add insurance sales to the services they offer customers.

“Community banks are beginning to regard moving into the insurance area as a new frontier,” said Kenneth A. Guenther, executive vice president of the Independent Community Bankers of America. “If you look at the financial holding company filings at the Federal Reserve Board, most have been done by community banks, and most have been done to facilitate insurance sales,” he said.

According to Fed officials, as of mid-September, 80% of the applications for financial holding company status had come from banks with $1 billion of assets or less.

This month Eaton National Bank and Trust, a $139 million-asset institution in Eaton, Ohio, brought together three other Ohio institutions and an Indiana bank to buy 50% of property and casualty insurer Century Surety Group.

“We looked at going out and acquiring an agency, but one of the things that we decided early on was that we needed to get involved in the manufacturing as well as the distribution of the product,” said Jeffrey A. Maffett, president and chief executive officer of Eaton National. “We thought that if we could also have the input on the design of the products there would be some advantages.”

Robert R. Davis, managing director of government relations for America’s Community Bankers, said that savings banks organized under unitary thrift holding companies have a long and successful record of operating insurance underwriters — often in coalitions similar to that formed by Eaton. That small banks should move into this market after Gramm-Leach-Bliley enactment, therefore, is no surprise.

For some smaller banks, insurance underwriting has been too drastic a step, but finding ways to more effectively sell insurance has been a crucial means of supplementing fee income.

Last month, the Virginia Bankers Insurance Coalition, made up of 67 community banks, announced that its members had jointly bought an insurance agency and would convert its offices into a network focused on selling insurance to community bank customers. Though bank insurance sales were legal before Gramm-Leach-Bliley, it had been harder for small banks to meet the town-of-5,000 and other restrictions.

A. Pierce Stone, the chairman, chief executive officer, and president of Virginia Community Bank, a coalition member and six-branch bank based in Louisa, Va., called insurance sales “a natural extension” of his business.

“We are handling folks’ financial needs, and one-stop shopping makes sense,” he said. “If they can trust us with their money, they might trust us to write their insurance for them.”

However, he said, it may also be a smart move for small banks facing increased pressure on profit margins. “Our main interest is going to continue to be community banking, but our net interest margins are being squeezed, and we have to go out and find some new fee income,” he said. “We’re continually looking for ways to pick up a buck here and a buck there.” From Our Archive:

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