Newman Grove, Neb., many farmers and business owners turn to the Gerhart family for both their banking and their insurance needs.

The family has owned First National Bank of Newman Grove since 1897. In the 1960s, the family bought a stand-alone insurance agency.

The combination of businesses deepened relationships with customers, says Jeffrey L. Gerhart, president and grandson of the bank's founder.

The $34 million-asset institution is like many other Midwestern banks whose owners have long offered insurance to their business customers through separate insurance agencies. These banks remain committed to the practice even as the overwhelming majority of community banks shuns insurance for small business customers.

"Banks have a tremendous relationship with small business and so to capture their insurance business is, on the surface, a good idea," says Kenneth Kehrer, a consultant based in Princeton, N.J. "But the problem is one of scale."

He says that if a $1 billion bank company had several hundred business customers and achieved a 20% penetration rate with insurance, that would be just 40 customers.

That is the sort of analysis that led First American Bank, a $1.3 billion institution in Elk Grove, Ill., to scrap the idea of introducing insurance. It did not make sense to post agents in the bank, says John Ward, president. "Can we make an agent enough money in our branches?" asks Mr. Ward. "The answer is no."

So Mr. Ward came up with simpler alternative. He chose to give bank customer names to a local insurance agency in return for referrals to the bank from the agency.

The deal has borne fruit. In the past year, referrals from the agency have resulted in 20 new business banking customers.

Mr. Ward says every community bank should look at its own market before deciding whether to tap into insurance sales. Some, he says, will find the competition too hot to handle.

Other banks believe they have found a way to make insurance work for them.

Thomas H. Olson, president of Linsco State Bank, a $13 million-asset institution in tiny Linsco, Neb., owns an agency stationed in the bank that generates $300,000 in premiums per year. He advises banks to consider offering both commercial and retail insurance.

About one-quarter of his business is offering insurance to local businesses, he says. The agency has one agent plus a bank officer who has a license to sell insurance, Mr. Olson says.

While Mr. Olson owns the only insurance agency in town, the Gerharts in Newman Grove have long faced competition. With long-standing accounts, the business is profitable, Mr. Gerhart says.

"We've always had a good book of business and that keeps overhead down," he says. Last year, Gerhart Insurance accounted for $500,000 in premiums.

The agency, run by Mr. Gerhart's father with help from four loan officers who are also licensed to sell insurance, is similar to Mr. Olson's agency in that it sells lots of agricultural insurance to serve its many farm customers.

One big seller is hail insurance, Mr. Gerhart says. Each year farmers across the Plains lose crops of corn and beans to hail, he says. With insurance that offers deductibles between 5% to 20% of the value of the crop, Gerhart Insurance gives its customers and the bank's loan officers peace of mind.

In addition to such specialized insurance offerings, the bank also sells general property and casualty insurance on farm operations and a variety of businesses including a grocery store, a gas station, a used-car dealership, and a nursing home.

Most of the business have fewer than 10 employees, Mr. Gerhart says.

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