O.J. Tomson, chairman and president of First Citizens Financial Corp. in Iowa, had a problem: The customer base for its four small rural banks was shrinking.

To grow, he decided, First Citizens would have to become a bit more urban.

Late last year he merged the four individually chartered banks into $385 million-asset First Citizens National Bank and moved its headquarters to Mason City - population 30,000 - from nearby Charles City.

"The lack of opportunity for growth was evident," said Mr. Tomson. "We chose to try to get into a county where there was a higher density of population."

Mr. Tomson's dilemma reflects that of many rural bankers who watch younger residents leave the area for larger cities. As farm populations decline, community bankers operating in the country must reevaluate how and where to seek new business growth.

"One of the things that I have seen is, in order to generate business, (rural banks have) had to expand their market ... to pick up some of the larger cities," said Stephen J. Thompson, who runs a bank consulting firm in Alton, Ill., bearing his name. "I think it's probably going to be a bigger issue several years down the road."

Mason City has nearly twice the population of many of the nine counties where First Citizens has offices. And that population is younger, too; the other areas tend toward people 60 or older who are more inclined to save than borrow.

Commercial lending is the fastest-growing segment of the bank's loan portfolio, said executive vice president Marti Tomson Rodamaker, Mr. Tomson's daughter. The bank also has seen new business in automobile installment loans because of several large auto dealers in Mason City, she said.

And the move appears to be paying off. The bank is generating new consumer, residential mortgage, and commercial loans from Mason City, Mr. Tomson said.

In the first quarter alone, deposits were up 4% to $322 million from yearend, and loans jumped 5% to $171 million.

For the year, the bank projects $50 million in deposit growth and $33 million in loan growth, with most of it generated from Mason City. The bank also expects increased earnings in 1996.

The anticipated growth surge contrasts sharply with performance in 1994. A year ago, deposits grew about 1%, and while loans were up 19%, most of the growth was due to participations with banks outside the area.

To date, the bank's loan portfolio has been divided equally among agricultural, commercial, and consumer or mortgage loans. But that's not to say First Citizens is putting less emphasis on agricultural lending. That business has been stable because, although there are fewer farmers, they are using more credit.

Technology, Mr. Tomson said, has "made it possible for one or two individuals to do significantly more in terms of row crop farming or livestock."

The move to Mason City, where First Citizens bought a 40,000-square- foot insurance building, is expected to save nearly $250,000 by centralizing operations, he said. Operational efficiencies should be fully realized by 1996.

The reorganization has meant neither layoffs nor new jobs for the bank's equivalent of 125 full-time employees.

First Citizens, which is privately owned, declined to disclose first- quarter earnings. The company, however, said it expects a drain on earnings this year because of $1.2 million in unrealized losses taken to restructure its investment portfolio, Ms. Rodamaker said.

However, the restructuring has let First Citizens increase the average yield in the investment portfolio by 40 basis points, which will have a positive effect on the bank's net interest margin, she said.

Return on equity, which has been between 11% and 14% in recent years, will come in at about 9% or 10% this year, Mr. Tomson said.

At March 31, stockholders' equity was $27.9 million.

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