HONOLULU - The fear of disintermediation is alive and well among community banks, judging from the concerns raised by bankers at a conference here last week.

Executives attending the Independent Bankers Association of America's national convention last week made it plain that they see a serious threat from mutual fund companies.

Robert N. Lowery, president and chief executive of Kings River State Bank, Reedley, Calif., said he was afraid he would be "handing over" his customers to fund companies if he started selling funds through his $46 million-asset bank.

James C. Holly, president of $257 million-asset Bank of the Sierra, Porterville, Calif., nodded in agreement, saying, "It's a risky business."

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It seems that Mr. Lowery and Mr. Porter weren't alone in their sentiments. Conference organizers put on three mutual fund workshops during the conference, but each was sparsely attended.

Lisa Jones, a vice president at Massachusetts Financial Services, who oversees a mutual fund program for IBAA members blamed the lush surroundings for the poor workshop turnout. Said Ms. Jones: "Who can compete with this beautiful weather?"

However, there were some lively moments at the sessions. During one workshop, two unidentified bankers cornered IBAA Financial Services president William W. Reid Jr. and asked him about the costs involved in getting into investment sales.

"Bottom-line it for us. How much is it going to cost us?" the bankers demanded.

Mr. Reid's response was quick. "You have to figure out how prominent you want to make mutual funds in your product line before you can determine costs," he said.

"What I tell people who are hesitating is, 'If your customers want it, then your competition will offer it,'" Mr. Reid said.

James R. Lauffer, a past president of the IBAA and now head of First National Bank of Herminie, Irwin, Pa., agreed. He said cutthroat competition from regional brokerage firms helped him decide to get into investment sales.

"The A.G. Edwardses are all around the small towns, siphoning off deposits,' Mr. Lauffer said. "You may feel comfortable staying out of the business now, but the problem isn't going to go away."

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Kenneth Guenther, executive vice president for the IBAA, said he thinks more community banks will start selling investment products this year than last, despite the low interest in the topic at the conference.

"In a way, it's a good time for banks to get into this market now," Mr. Guenther said. "The froth is off the market, and people know there are risks now and will be more cautious investors."

He added that bankers are "underestimating their customer base if they think that they don't need to offer investment products. Demand will drive them into this market."

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But profit is a bigger motivator, according to Ormel Prust, president of McHenry State Bank, McHenry, Ill.

The $435 million-asset bank has sold individual stocks and bonds through its discount brokerage for more than 15 years and made what he described as a tidy profit from the operation, though he declined to say how much.

Mr. Prust is now considering selling mutual funds. While he says he is "not in any hurry," he is considering turning to the IBAA for help.

"We know them, and they're a good organization," he said. "We've been with them for 25 years."

Reid Pollard, president of Randolph Bank and Trust Co., echoed the sentiments. Mr. Pollard said his Asheboro, N.C.-based bank started selling mutual funds three years ago, believing there was money to be made.

Mr. Pollard hasn't been disappointed. And, as an extra benefit, he said the bank hasn't dropped deposits. "The outflow of deposits has been well offset by the inflows of new money our customers brought in from other institutions or investments," Mr. Pollard said.

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