Teaming up with a third-party provider may be a viable way for community banks to enter the fast growing trust business.

Community banks are finding themselves impaled on the horns of two dilemmas nowadays--heightened demand for investment products including trust, and competition from superregional banks that are invading their turf. Virtually al of their bigger competitors offer some form of trust capability, which forces the community bank into a very difficult decision: Should they do likewise--and if so, how?

"This is a very new trend," says Amy Errett, president of San Francisco-based Spectrem Group, which has helped many community banks through this process. "It has only been in the last 18 months that people have developed a consciousness that this is important to do."

"If they don't have this service, they stand to lose," agrees Merlin Gackle, president of Invest Financial Corp. With a branch office of that big superregional now located across the street, "they don't want to say they don't offer it."

The decision whether a community bank starts its own operation, or searches out a third-party entity in some kind of partnering arrangement, needs to be addressed carefully.

The profitability dynamics are such that any community bank thinking of getting into the trust arena should consider whether a proprietary operation makes sense. "You'll find most (trust departments) are not real profit centers," says Gackle. "They just feel compelled to offer the service."

To go the proprietary route, a bank must hire a fund manager, a trust officer and a team of marketers. It also must establish the trust funds themselves, which will have to be seeded with the bank's own funds. And a third-party processor will have to be retained to handle all the record-keeping chores, since the trust business has a very heavy back office component.

High Threshold

Gackle estimates that a community bank should have between $50 million and $100 million under management before establishing a proprietary unit. For her part, Errett figures it can take two to three years for a new trust operation to become profitable, assuming there is a natural customer base to build around. Trust products have become commodities--they can be purchased from a wide variety of financial services providers. Any community bank trying to crash the party faces some pretty stiff competition, particularly when it targets customers who don't already have a relationship with it. Says Errett, "You really have to evaluate your existing client base."

There are a couple of different ways that a trust program can be set up through a third-party provider. Gackle suggests a "strategic alliance" where the community bank links up with an experienced asset manager as well as another institution to handle the required back office chores. Invest, which currently offers mutual funds and annuities through its Correspondent Bank Program, hopes to begin marketing a trust program in the first quarter of next year.

Errett also suggests that community banks may want to consider teaming up with another institution in what she calls a wholesale arrangement, where an entire trust program is provided to it on a private-label basis. The advantage of this approach is that the service is marketed to the community bank's customers as i it were its own proprietary program--and the third-party provider is essentiall invisible.

Clearly, there is a big scramble afoot to offer trust services in some type of partnering arrangement. In the last year, R.H. "Ren" Alderman, president of Darien, CT-based Investors Trust Co., has been working to convert his firm to a trust company specifically for the purpose of providing a complete turnkey trus program to community banks.

The way Alderman sees it, a "new paradigm" has emerged in this new era of nationwide banking--where highly centralized institutions and their "1-800-BANKER" approach present community banks with a wonderful marketing opportunity. By offering warmer, more personal service--including a trust program, where a hands-on approach is vital--they have a chance to succeed. Say Alderman, "The smaller bank really has a chance to be a winner."

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