A $17 million-asset bank in the tiny town of Tabor, Iowa, recently took a step that could signal the future of correspondent banking.

First State Bank, founded in 1925, last month became the first Iowa bank to sign up with the Midwest Independent Bank, a bankers' bank in faraway Jefferson City, Mo. It rejected sales pitches from some more traditional service providers - Firstar Corp. of Milwaukee and the Federal Reserve Bank of Kansas City.

Midwest Independent had "a good support staff that came out here and trained us and had just what we needed," said Grant T. Schaaf, vice president of First State. "We're real happy with them. No complaints."

By picking Midwest Independent, First State joined a growing movement in the correspondent banking business: independent institutions that are taking their correspondent needs away from the larger regional banks and bringing them to the 16 fledgling bankers' banks that dot the country.

Bankers' banks serviced 3,918 small- and medium-sized institutions nationwide in 1994, a 34% jump from 1990. In all, about 40% of the banks that use correspondent services have become customers of bankers' banks.

These numbers likely will increase because industry consolidation is making traditional correspondent banking uncertain for customers, observers said. The business is not always profitable for large vendors, and many have downsized or phased out correspondent operations entirely, they said.

"The former correspondent banks are more interested in acquiring the small banks today than in servicing them," said Camden R. Fine, president and chief executive of Midwest Independent. He added that the number of correspondent banks in the St. Louis area has halved in the past 10 years.

The trend will be boosted in the coming months by the formation of two new bankers' banks, one in California and the other in Connecticut. Both intend to open late this summer with 25 to 30 customers.

"For independent banks to survive they have to be able to control their own destiny," said J.F. 'Chip' Morrow, founder of the Pacific Coast Bankers Bank in the Los Angeles area. "This will give them that option."

Bankers' banks appeal to independents for several reasons: they are highly specialized; their services are often cheaper; and perhaps most importantly, since they are for the most part owned by their customers, they cannot compete with them nor can they be acquired by an unwelcome third party.

"You could be warm and cozy with Mercantile (Bancorp.) today and then wake up tomorrow and read in the American Banker that they've been bought by Boatmen's (Bancshares)," said Missouri's Mr. Fine. "Then what do you do? That could not happen with us."

Consolidation, and fewer banks as a result, have prompted bankers' banks to go regional in a search for more customers.

This development is seen most clearly in the name changes of the institutions in recent years - the Colorado bankers' bank has become the Bankers Bank of the West; Pennsylvania's is now the Atlantic Central Bankers Bank; Minnesota's has become the United Bankers Bank.

Many of them have begun marketing in neighboring states. Atlanta's Bankers Bank, for example, which dropped "Georgia" from its name, opened offices in North Carolina and Alabama in the past year, pushing its number of customers to 424.

While many bankers say the number of large correspondent bankers have halved in the last decade, the majority of the large banks interviewed said they're still committed to the business and are still successful at what they do.

"The number of accounts may be down some," said Phillip Straight, executive vice president of $6.6 billion-asset UMB Bank of Kansas City, Mo. "But our total volume is up. We're very positive about the future of correspondent banking."

Other traditional correspondent banks are not as optimistic.

"It (correspondent banking) will whither," said Stephen A. Melcher, executive vice president of Kansas City's $2.7 billion-asset Commerce Bank, a longtime correspondent provider. "I don't know if it will die, but there will be a deemphasis on it here."

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