Mutual of Omaha isn't the first or largest insurance company to venture into banking, but it could soon be the most visible.

While competitors like Nationwide and State Farm rely heavily on the Internet and their own agents to generate deposits and loans, Mutual of Omaha Bank is building its customer base in a more traditional way: through acquisitions and de novo branching.

Just three years old, the bank already has $4.1 billion of assets and nearly 40 branches in six states, and it isn't done yet. Jeffrey Schmid, the bank's chief executive, says his goal is to create a brick-and-mortar franchise stretching from Washington State to the Carolinas, and with the backing of a deep-pocketed parent, he has the resources to do it.

"We're in a position now where we can look at every deal that becomes available," Schmid says.
Still, building a nationwide banking franchise one deal at a time is one thing, managing it profitably is another. Mutual of Omaha Bank's strategy is less about establishing critical mass in a handful of states than it is having small branch networks in multiple states. That's not always the most efficient way to run things, as several banking companies have painfully discovered.

And the bank's long-term plans to cross-sell banking products to insurance customers, and vice versa, is alsoeasier said than done, observers say.

Yet perhaps more than most acquisition-minded companies, Mutual of Omaha can afford to be patient; as a mutual owned by its policy holders, it's under less pressure than publicly traded firms to generate profits quickly.

With strong name recognition—particularly in the Midwest—it is also positioned well to take advantage of growing customer dissatisfaction with big banks. Mutual of Omaha is an iconic brand, untainted by a financial crisis that has sullied the reputations of so many financial firms.

"The thing that gives us a huge amount of momentum is the brand," Schmid says. "We don't have to spend a lot of time telling people that they should trust us."

Mutual of Omaha Bank is the brainchild of Schmid's boss, Daniel Neary, the chairman and CEO of Mutual of Omaha Insurance Co.

Neary, a lifelong insurance industry executive, had studied banking up close as a director at Commercial Federal Bank in Omaha and was struck by the similarities with the insurance business. Both pay interest on money taken in from customers, collect interest on money loaned to others, and try to profit on the margin. Neary also saw that banks were becoming a key channel for selling insurance, while insurers were starting to offer bank products, such as certificates of deposit, loans and credit cards, to their policyholders.

Neary's opportunity to merge his interests in insurance and banking came when he moved into his current job at Mutual of Omaha in 2005.

At the time, the insurer was sitting on excess cash after shedding some business lines. Neary was also looking for ways to diversify and capitalize on a brand that was as recognized as any in financial services—particularly among baby boomers who fondly remember the TV show Mutual of Omaha's Wild Kingdom. (By that time, too, Commercial Federal had been sold, freeing Neary from any conflicts in pursuing a banking charter.)

Neary brought in Schmid, a longtime Omaha-area banker, to help develop and execute a banking strategy.

From the outset, Schmid laid out a business plan unlike that of other insurer-owned banks or thrifts, which typically have an office or two near the parents' headquarters while counting primarily on the Internet to bring in deposits. Mutual of Omaha instead would target small businesses; grow by acquiring banks or opening branches in markets that it perceived as fast-growing or that had concentrations of loyal Mutual of Omaha insurance customers; and hiring bankers from those areas to tend to its far-flung operations.

Mutual of Omaha Bank started small at first, buying three community banks in Nebraska and Colorado in late 2007 that had combined assets of less than $600 million.

The pace of growth accelerated unexpectedly in July 2008, when the government took bids on the branches and deposits of failed banks in Nevada with affiliates in Arizona and California. Suddenly, the bank that Schmid had initially hoped could accumulate $2 billion of assets within five years had grown to $4 billion of assets in less than one.

Since then, the bank has opened branches in Texas and Florida and, in February, beefed up its Florida franchise with the purchase of a failed bank in Marco Island. Beyond its six-state branch footprint, the bank also has loan production offices in Iowa, Kansas and California.

Schmid, 51, has visions of doubling the bank's assets within the next few years by making strategic acquisitions and sticking primarily to small-business lending in select markets.

"This is about traditional community banking," he says. "The footings of this thing are finding a great market and finding great, local banking talent."

Once in the markets, Mutual of Omaha Bank's strategy is to reach all qualified customers—small businesses with annual sales of up to $2 million—within a mile-or-two radius, says Allen Chaffee, who manages the bank's five retail locations in the Omaha area.

About two-thirds of deposits would also come from those businesses and their employees, with the rest from local consumers. The Nebraska branches have a typical loan mix of about 85 percent commercial and 15 percent consumer, Chaffee says.

This approach to banking is similar to the one Schmid took in his years running American National Bank in Omaha before he was recruited away by Neary. In his 13 years as president, its assets more than tripled to $1.5 billion, and for a 10-year stretch, the bank enjoyed an average return on equity of 20 percent. Even today, American National is far more profitable than the average bank.

Small-business banking wasn't necessarily what Neary had in mind when he decided to start the bank. But Schmid convinced him that, with this strategy, Mutual of Omaha could reap at least three times the profits it had earned from traditional insurance, and Neary was willing to give it a shot.

"Clearly, Jeff has had some significant influence on shaping that strategy," Neary says.

Still, there appears to be some friendly tension between Schmid and Neary over the direction of the bank. Schmid plays down the potential of cross-selling insurance customers, while Neary suggests that more mixing of banking and insurance will help drive profits in the long term.

"Jeff and I have spent many hours on discussing the intermediate and long-term approach to banking," Neary says. "Clearly, in the longterm, we'll have an interest in the more traditional insurance-company banking, the Internet type of banking that will get products out to more of our insurance customers."

Andrew Edelsberg, an analyst at A.M. Best, an insurance-rating agency, says other insurers with banking arms have yet to prove that they can consistently sell banking products to their insurance customers. Indeed, he says most have a tough enough time selling life insurance to property-and-casualty customers.

Also, small-business lending can be hard to manage across a far-flung network, says Stephen Skaggs, president of the Bank Advisory Group in Austin, Tex. A distant parent might want local subsidiaries to operate with local authority, "but all it takes is one big, bad loan to a Houston developer, and the home company decides it wants to institute more controls," Skaggs says. "It becomes very easy to bureaucratize the process. The execution gets muddled."

Skaggs also believes the bank could operate more efficiently if its branch network was more compact and not spread so thinly across so many states.

"I'm not saying it can't work, but it becomes hard to make it work," he says.

One bank that employed a similar strategy has been retrenching. Capitol Bancorp of Lansing, Mich., for years operated independent banks across a number of states. Now, it's pulling back, and consolidating or selling many of its operations.

Schmid says a key difference is that Mutual of Omaha Bank operates with a single thrift charter that allows it to branch across state lines, while Capitol owns dozens of independent banks, each with its own name and charter. That has made for more administrative expense, not the least of which is separate boards for each charter, he says. Mutual of Omaha Bank has just one board of directors.

Mutual of Omaha Bank had an unimpressive 90% efficiency ratio in 2009, but much of that reflected start-up costs, such as establishing a single computer system across its new branches, Schmid says. The bank also had to absorb $3 billion in deposits when it took over the failed First National Bank of Nevada and its affiliated branches in California and Arizona in 2008, and it took time to get the deposits into earning assets.

Schmid says the bank's efficiency ratio is somewhere in the 70s now, and the target is in the mid-60s.
Yet even if the bank is never quite a model of efficiency, it would more than justify its parent company's investment if it achieves the profits that Schmid is projecting.

Schmid says that while he would "love to make a 20% return on what's invested," a return of 10 percent to12 percent would be a significant improvement over the parent company's historical returns. And the goal is to achieve returns in the mid-teens.

It will get there, he says, by giving local lenders the resources—such as larger lending limits—to compete aggressively for small-business loans in their markets. Each region will have a fair amount of autonomy, with decisions on only the largest credits being made by a central committee at the state level, rather than at the Omaha headquarters. Bonuses will be paid based on local performance. "We'll be giving leaders at the state level a real sense of ownership," Schmid says.

Having a large insurance company behind it brings other benefits to Mutual of Omaha Bank. In taking over the failed First National, for example, the bank was able to take all deposits, including the uninsured deposits. Executives decided to take on the uninsured deposits after seeing clips of panicked customers lined up outside branches of IndyMac, which had failed a few weeks earlier.

Perhaps Schmid's biggest challenge is finding quality loans to make. The bank did turn a $5.3 million profit last year, but it was helped by the investment department at the insurance parent, which found safe securities in which to park deposits. From the failed First National, Mutual of Omaha Bank also inherited a business line serving homeowners' associations—including roughly $1 billion of deposits-that's turned out to be a profitable niche.

The economy is largely to blame for the dearth of lending opportunities. But Schmid is also critical of examiners, who he says are out of touch with the federal government's stated desire to get banks to make more loans. Real estate loans are community banks' bread-and-butter and Schmid says examiners aren't distinguishing enough between the development loans that got banks into trouble and other types of real estate assets.

"There can be diversification, even within a real-estate portfolio," he says.

Still, Schmid is so confident that lending will pick up once the economy recovers he has suggested that Mutual of Omaha Bank could eventually rival its $22 billion-asset parent in size.

That appears to amuse Neary, who says Mutual of Omaha will always remain primarily an insurance company, despite Schmid's aspirations.

One thing both Neary and Schmid agree on, though, is that Mutual of Omaha Bank has a way to go before tapping the brakes on growth. For now, it's a buyer in a buyer's market, backed by patient capital and the resources of an insurance giant. "I just might," Schmid says, "have the best job in banking right now."

This story has been reprinted with permission from US Banker.

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