When the nation's largest property and casualty insurer opens State Farm Bank next spring, about 300 insurance agencies will be transformed into de facto bank branches.

Agents of State Farm Mutual Automobile Insurance Co. will offer consumers everything from car loans to home mortgages to savings accounts.

State Farm is not the first insurer to charter a thrift, but it is the first one to focus on retail banking. And with 16,000 offices nationwide, it is the competitor bankers fear most.

"If State Farm is only successful in selling one banking product a month from each office, that's 16,000 new accounts per month," said John B. McCoy, president and chief executive officer of Bank One Corp., at last week's Retail Delivery '98 conference. "The barriers to enter the banking business are coming down."

Edward D. Horowitz, corporate executive vice president at Citibank, said the thrift charter will let State Farm do more than commercial banks. "If we let these companies take over our businesses, then we're dead," he said at the conference.

Under federal law, nonbanking companies like State Farm may own one thrift. After mulling State Farm's request for nearly 14 months, the Office of Thrift Supervision gave the mutually held insurer the green light on Nov. 12.

State Farm, which is capitalizing the thrift with $104 million, won the government's guarantee from the Federal Deposit Insurance Corp. on Nov. 17.

State Farm plans to start small -in St. Louis and its headquarters town of Bloomington, Ill. After two years the insurer plans to be operating statewide in Illinois and Missouri and to expand into Arizona.

Once the bank is fully operating in the first three states, 2,200 agents will be selling banking products to more than six million policyholders and other prospective customers. If things go well, State Farm Bank would be operating nationwide by 2002.

The five-page approval by the Office of Thrift Supervision is short on details. "The savings bank must operate within the parameters of its business plan," the order says. The agency has refused to release the business plan, saying it is confidential.

In a series of interviews, Stanley R. Ommen, president and chief executive officer of State Farm Bank, refused to provide many details about the banking operation. Even State Farm agents have not been clued in yet.

"We're in one of the initial sites, and I as an agent really don't know how we fit," said Thomas Brokaw, a State Farm insurance agent in Bloomington. "I know we're very excited about it. Whatever way they present it to the agents, it's going to be presented in a way that we're going to want to participate."

State Farm plans to offer an array of consumer financial products, including car loans and leases, home mortgages and equity loans, credit cards, certificates of deposit and savings, and checking and money market accounts.

Products will be advertised through newspapers, radio, and a direct-mail campaign, according to papers filed with the OTS by State Farm attorney A. Patrick Doyle. The papers stated that State Farm will also market directly to real estate and mortgage brokers in the Bloomington area.

Technically the insurance offices will not be bank branches, because they will not take deposits or underwrite loans.

Customers will fill out initial paperwork for services at the agents' offices. The agents will have pre-addressed envelopes on hand, but it will be up to the customers to mail everything from loan applications to certificates of deposit to the bank's headquarters in Bloomington for processing.

Further contact between bank employees and customers will occur by phone or mail, Mr. Ommen said.

Agents will be paid a flat fee for each banking product they sell, but the amounts have not been finalized, he said. Agents will have to comply with banking industry regulations. For example, they will be required to disclose whether services are federally insured.

And in a rare move, the OTS required State Farm Bank to hire a full-time compliance officer.

At first, checking accounts will be available only to State Farm employees. Mr. Ommen said the company is not sure whether customers will be comfortable having their checking accounts processed from a remote location with no real branches nearby.

State Farm will also offer an ATM card that will work on most networks and function as a point of sale card, Mr. Ommen said. The company does not plan to install its own machines.

In the spring of 2000, State Farm plans to roll out its credit card. Mr. Ommen said some type of rewards program, such as cash back to frequent users, will probably be offered with the credit card. State Farm customers might be able to automatically apply their bonuses to their insurance premiums.

About that time the bank plans to ramp up its Internet and on-line banking services, which would let customers pay bills, transfer money, and balance their checkbooks from home.

Within three years, Mr. Ommen said, State Farm Bank should be a nearly $900 million-asset institution. State Farm will not look a lot different once it becomes the parent company of an active bank. The bank will employ only 12 people. State Farm Bank plans to hire outside companies to keep track of deposits and provide loan underwriting.

Existing departments of the bank's parent company, such as accounting, telemarketing, human resources, and other administrative functions, will be contracted as if they were outside firms, Mr. Ommen said. "We're leveraging off our existing operations," he said.

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