Now that the Glass-Steagall Act has been repealed, community banks are asking themselves, "What are the best opportunities for us?"

There are as many opinions about entering investment banking as there are bankers. But insurance operations are more clear-cut.

Banks often recommend insurance agencies that they feel are reputable. By doing so they not only ensure that their borrowers are properly covered, but they undoubtedly get reciprocal recommendations and the agencies' deposits.

But the new financial reform law, by repealing various restrictions, makes selling insurance more attractive to community banks.

I talked about the changing nature of the bank/insurance agency relationship with Paul Goldman, an old college friend and now chief executive officer of Paul Arnold Associates Inc. of Livingston, N.J. - a regional property and casualty insurance agency.

Here's what he says about how financial reform might aid community banks: "By getting an insurance license, albeit a nuisance of paperwork, a bank can become a broker that represents its clients in finding an agency or company that can provide insurance," he said. "This is a more formal arrangement than we have seen in the past, and the bank as a broker can make money for being the middleman."

But, as Mr. Goldman points out, the real way to make money is for the bank to become an agency itself. That way, it can earn the full commission.

What does a bank need to become an agency, other than a license? Mr. Goldman mentions three things: experienced people, contractual relationships with acceptable underwriters, and a solid track record.

It would seem that the best approach would be to buy an established agency instead of trying to develop one. After all, the track record, the people, and the relationships with underwriters all come in one package.

But how do you know which agencies would be worth buying and on what terms?

Mr. Goldman's advice: Call around, find out how big insurance customers feel about the agency. Call major insurers that have contracts with the agency to see if they are happy.

Make sure that the agency can get employment contracts signed by major producers so that the income-generating talent doesn't erode as soon as the agency is bought.

The cost of buying an agency will depend on how the purchase is set up. If the bank pays cash, the price would be lowest. If it gets to retain the commissions on business brought over, the price is higher. This also makes retention of key personnel easier.

Pressuring a borrower to use your agency is unethical and probably illegal, but the opportunities for combining insurance premiums with loan fees are substantial So try to convince borrowers that there is value in having both operations come from the same company.

It also gives the community bank a better shot at protecting its borrowers from incursions by bigger banks that, up to now, have used their own insurance operations to steal lending business from their smaller rivals. Mr. Nadler, an American Banker contributing editor, is professor of finance at Rutgers University Graduate School of Management.

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