Most community banks stayed out of insurance distribution this year, despite their larger competitors' massive participation.

Nearly nine out of 10 banks with more than $10 billion of assets are distributing general lines of insurance products, but the ratio drops to about four of 10 banks with less than $1 billion of assets, according to a study released by the Association of Banks-In-Insurance in Washington. Moreover, community banks have made little progress toward increasing their participation in the market since 1999.

"This is the third year we've looked at this," said Ken Reynolds, executive director of the ABI, which defines any bank with less than $1 billion of assets a community bank. Two years ago, he said, more than 30% of community banks were involved in insurance. Last year, participation rose to the mid-to-high-30% range, he added, "and now it's around 40%."

But Jerry Sage, executive director of the Missouri Independent Bankers Association in North Kansas City, Mo., said community banks in his state are jumping into insurance distribution.

"We've seen a lot more interest in insurance in the last six months than ever before," said Mr. Sage, whose organization's 200 community banks average about $50 million of assets. "It's physically tough for a small bank used to making agriculture loans and small loans to one day decide to sell insurance. It's a slower transition. It takes time and costs money. But now that big guys are doing it, community banks are realizing they have to do it as well."

Leton Harding, executive vice president of $330 million-asset First Bank and Trust of Abingdon, Va., said one reason community banks are lagging larger banks is methodology, both in charging fees and in marketing.

"Most community banks have simplified fee structures" and have attracted customers with some no-fee services, Mr. Harding said. "An example would be banks of our size offering free checking to individuals and businesses."

At larger banks, the fee structure remains in place, and that is an advantage when marketing expanded product offerings, he said.

"You have a mindset of referrals and cross-selling at larger institutions," Mr. Harding said. "So when you're used to cross-selling, it's easier to plug in a system where you add products."

Gary Teagno, president of the Independent Community Bankers Association's Community Banking Network in Washington, which offers turnkey mortgage, credit card, securities, and other financial services to small banks, said insurance companies' need for bulk leaves community bankers at a disadvantage.

"Insurance companies love volume. They love tonnage," he said. "They want large markets where they can use direct mail and telemarketing techniques. They're more focused on accumulating business."

Though a large bank might feel cold-calling its customers is acceptable, Mr. Teagno said, a community bank might be less apt to do so.

"A smaller bank could be more concerned with the customers' privacy," he said. "So it might not give the insurance company the potential to embrace the small bank."

Community banks can overcome this obstacle, he said, by buying independent agencies. Buying an agency gives the community bank a culture that is difficult to build from within, Mr. Teagno said.

"You buy insurance expertise, and you buy a book of business," he said. "There are agencies in small towns that face the same struggles as the community banks, so the opportunity to buy is there."

But the Missouri banking group's Mr. Sage said some community banks rule out buying an agency as too expensive.

"Sometimes it's better to develop a concept of selling insurance and then start your own agency," Mr. Sage said. "The problem, however, is that a lot of insurance companies won't give you products to sell unless you have a book of business. But some smaller insurance companies are working with banks to get around that."

Community banks also can pool their resources to buy insurance agencies. For instance, First Bank and Trust is part of the Virginia Bankers Insurance Center, a 67-member consortium of community banks that has thus far bought three insurance agencies.

And in October, four Ohio community banks and another in Indiana joined forces to buy half of Century Surety Co., a Columbus, Ohio, insurer, for $28 million.

For what it's worth, larger banks figure community banks will become aggressive in entering insurance.

"There's a small number of key managers who wear many hats" in a community bank, said David Holton, president of Wachovia Insurance Services in Winston-Salem, N.C., "and it's much easier to have someone dedicated only to insurance. But many smaller banks are trying to either make a small acquisition or a strategic alliance. It's a challenge, but they're getting involved."

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