A lot of small-town banks have big-city ideas. That, at least, appears to be the biggest reason that scores of country and community banks-many headquartered in backwater hamlets with such homely names as Gilmer, Cornelia or Cold Spring, and most with assets of under $500 million-have joined Chase, Citigroup, Bank of America and other city-slicker powerhouses in opting for the new financial holding company structure.The designation, created by the passage last fall of the Gramm-Leach-Bliley Act, eases the way for bankers to transform their financial institutions into money emporiums. Banks that rearrange themselves under the umbrella of a financial holding company can more conveniently offer both individual and business customers mutual funds, retail brokerage services and insurance policies of all kinds.Once they have adopted the new structure, banks also can enter several lines of business that previously were off limits. They can operate travel agencies and sell real estate, as well as engage in more sophisticated activities, such as underwriting municipal bonds or doing merchant banking, which historically have been the jealously guarded preserve of Wall Street firms.But while most community bankers are biding their time, a tiny coterie of entrepreneurial bankers are moving rapidly and aggressively to diversify their operations and avail themselves of the new structure. It is these bankers-who are hatching plans as innovative as any of the schemes concocted in banking centers of New York, Charlotte and Chicago, albeit on a smaller scale-who are likely to serve as lead steers in the industry.In many quarters, the excitement is palpable. "We're going to keep growing our bank but we're going to grow horizontally too," says a buoyant Ray Davis, president of South Umpqua Bank, a Roseburg, OR-based financial institution with 14 offices ranged across the western part of the state and $380 million in assets. Among the most enterprising entrants into the new markets, Davis's bank recently purchased a Portland, OR, brokerage firm with $1 billion in assets under management. Says he: "We are redefining what a community-focused financial services company can be."But, of course, lead steers may be first to the slaughterhouse. Skeptics remind bankers that success in the new endeavors is not necessarily their manifest destiny. "In one form or another, community banks have been trying to expand for years, and the upshot is that most banks should just do what they do now-only they should be doing a better job of it," asserts Kevin Tynan, a Chicago-based consultant to community banks. "Nine out of ten new businesses fail," he adds, "and I wouldn't be surprised if the great majority of these banks discover that new activities are costly and a drag on earnings. New horizons always look more profitable and exciting than current opportunities, but many are just a mirage." And while more than 160 banks have already opted for the new structure by mid-April, most are fairly cautious. So far, few community banks-if any-appear even to have considered the new merchant banking option. And it is still way too soon to discern more than the faintest lineaments of the changing financial services landscape in the wake of Gramm-Leach-Bliley. "I would say at this point that such permissible activities as merchant banking are still being explored, and I don't know anyone who has leapt into them since January," says Pat Satterfield, executive director of the Virginia Association of Community Bankers. "We're only talking one quarter."At this stage, even the experts seem uncertain. "Merchant banking could mean a lot to community banks," says John Knight, an attorney at Boardman Suhr Curry and Fields, a Madison, WI, law firm that is counsel to the Wisconsin Bankers Association. "But one of the persistent questions is whether you can invest in a borrower or a business in the community who is a bank customer. The Fed has come with a couple of rules that don't make it all that easy, so that is one area that we are watching with great interest."As interviews with more than a dozen top officers at independent banks disclose, plenty of bankers are simply opting for the FHC designation because, as mountain climbers are wont to say, it is there. "Why not? It's easy to do," says Marvin Melson, president of NBC Bancshares, the San Antonio-based financial holding company that includes NBC Banks, which at $550 million in assets represents the largest banking organization interviewed for this story. Melson could be speaking for the universe of community bankers who applied for the financial holding company structure when he says: "The requirements were fairly simple."If a bank is well capitalized and has a good rating under the Community Reinvestment Act, the new structure is there for the asking. All it takes is the willingness to complete a one-page application. "We went ahead in case we get an insurance company later on," says another Texas banker, Joe Jones, executive vice president at First National Bank of Gilmer, a $150 million-asset bank in the piney woods section of the Lone Star State. "But we don't have any plans to do anything different now," he adds. "In the first go-around we figured there was less paperwork."Contrast that stance, however, with the heady enthusiasm with which Central Progressive Bancshares, a Hammond, LA-based banking company has switched to become a financial holding company. The FHC now is the aegis for not just 11-branch Central Progressive Bank, with $200 million in assets, but also Central Progressive Insurance and Central Progressive Mortgage Co. "We're excited about the new structure," says Richard Blossman, chairman and CEO of both the bank and the holding company. "It gives us the chance to enter new lines of business, cross-sell new products and establish relationships with new customers." A good example of how the new structure is already paying dividends, he says, can be seen in a $3 million commercial loan for the construction of a new truck stop on Interstate Highway 10, outside Lafayette. There, in addition to financing the project itself, CPB was able to bundle into the deal a passel of insurance policies. These include a performance bond, a "key man" life insurance policy, a "builder's risk" property and casualty policy, and even flood insurance should one of the bayous overflow its banks.One-stop shopping, Blossman asserts, serves as a boon not only to the financial services firm but to the grateful customer, who reaps rewards in the form of cheaper products and services. "Having all the information to analyze and underwrite the loan makes it easier to underwrite the insurance," he says. "There's no duplication and, since we're not paying commissions on each policy, we're able to discount our rates. Everybody wins."The ability to package insurance seamlessly along with a loan and other financial services is one big reason why Nebraska banker Hod Kosman opted for the new structure. Kosman is president of the newly formed Platte Valley Financial Service Companies, based in Scottsbluff, and already had been running something of a conglomerate. His Platte Valley bank holding company, he says, comprised a mortgage bank, a consumer finance company, an agricultural credit company and a trust company. Now, the financial holding company allows him to bring the insurance business into the fold. Because it matches up with almost every other financial service that the bank and its affiliated lending organizations offer, insurance of all kinds has emerged as ideal product to cross-sell out on the western Nebraska prairie. It's "a big piece of the financial services pie," Kosman says.Crop insurance, for example, fits snugly with the agricultural credit business. Property and casualty insurance complement the full range of the bank's commercial borrowers, including those businesses needing the services of the mortgage banking company, which underwrites both commercial and residential mortgages. The health and life insurance policies are a natural fit for the universe of retail customers, he says, including managers of businesses who would purchase group policies for employees. And for retired and older customers there is long-term care insurance.Now travel northwest to South Umpqua Bank, located in the old timber town of Roseburg, OR, population 22,000, where bank president Davis unselfconsciously invokes Citigroup in describing the kind of diversified financial services conglomerate he envisions for the institution.From the southwestern corner of the Beaver State, Davis has re-registered Umpqua Holdings Co., the bank's parent, as a financial holding company. (The institution takes its unusual nomenclature, a Native American word, from the nearby Umpqua River.) In addition to the bank, the operation now includes the Portland-based brokerage-Strand, Atkinson, Williams and York-for which the bank did not disclose the price, saying only that it paid 10 times earnings. The acquisition was announced Dec. 1. "Our strategy is not unique except for the size of our bank," Davis says. "But there is no reason why we can't create the same kind of parallel organization to Citigroup, which also has Travelers Insurance and Salomon Smith Barney, but on a lower scale."The brokerage deal makes Umpqua Holdings the smallest bank holding company ever to have acquired a brokerage and win authorization from the Federal Reserve Board. Prior to that deal, Davis says, the smallest bank to own a brokerage was one with $14 billion in assets. The deal was hailed by Melba Bartels, a bank analyst at Seattle-based securities firm Ragen MacKenzie, who likes the fact that the bank has become a one-stop shopping center for financial services. "Umpqua Holdings has the financial capital and the sophisticated management it takes to make an acquisition like this fly," she adds.Strand, Atkinson brings more than $1 billion in client assets and about 5,000 customers to the financial-services party. Davis, who already boasts of South Umpqua's adroitness at cross-selling-the bank claims that customers acquired over the last three years purchase 2.6 financial services products on average, compared with an industry average of 1.3 products-says: "The bank has 75,000 customers and the brokerage 5,000. I would love to see 20 percent of all the customers using the other's services."One key feature of the new financial holding company structure is that it allows non-banking divisions to grow to more than 25% of the firm's total revenues-a prohibition that remains intact for financial institutions choosing to continue as bank holding companies. It seems as if that would leave plenty of room for the brokerage to expand: Despite its size, Strand, Atkinson will contribute just 15% of Umpqua Holdings' overall revenues. But that could change in the years ahead. The financial holding company structure "gives us additional flexibility," Davis says. "I think we'll see the financial services industry blurring together, and there's a good chance that banks won't be the big players."In the beet and barley farming town of Powell, WY, meantime, another ambitious banker is looking to the future. Dick Nelson, president of First National Bank and Trust, which has three branches and $180 million in assets, already offers mutual funds and brokerage services to its customers. Although the Wyoming banker was among the first to adopt the financial holding company structure (and a new name, First Co.), he has not chosen to place several non-banking businesses he operates or invests in-including an insurance company-within its shield.Instead, he is thinking about using the FHC to expand into underwriting bonds for public works projects in the region. "There isn't anybody doing municipal underwriting in this neck of the woods," he says. "To float a bond for a sewage treatment plant, now you have to go to Denver."One big reason why he likes this area of business, Nelson says, is that his 28-year-old son has been working in the investment banking arena in New York and Chicago, and understands that business. Nelson is also a driving force in bringing industry to Powell. To that end, the bank hired an economic development manager for the town and keeps him on its payroll. The Wyoming banker also uses his own funds to keep business in the region. Last June, he joined with two investors to purchase Fitch Investors' back-office operation for $1.2 million. The New York-based bond-rating firm had planned to close the office last year.Nelson worries about young people leaving their hometowns, as so often happens in rural communities. He believes that the new banking powers will be beneficial to both his bank and-through its new investment and financial services-its region. As a result, he hopes, when both his sons are ready, they will succeed him at the bank and take over a going concern in a prosperous town. "A lot of young people who have left would love to come back here," Nelson says. "The quality of life is unreal."

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