A decade ago, banks began entering the insurance distributionbusiness with high hopes for cross-sales. Terms like “one-stopshopping” and “financial services supermarket” were often used bybanks as the rationale for buying agencies.

The fully integrated model (banking-investments-insurance) wasprojected to generate cross-sales that would, at least, make agencyacquisitions highly accretive for banks and, at best, transform thefinancial services industries.

But these high hopes have not been fully realized. Banks thathave achieved cross-selling success have found it to be meaningful,but not transformational. Cross-sales have provided supplementalagency growth and have helped to secure targeted commercial lendingrelationships. Both are worthy contributions, but neither is asufficient reason to acquire agencies.

Before we address the impact of this realization, however,consider that for most banks that sell insurance today, the primarymotivation is not cross-selling–it is growth of fee income.

The 2006 American Bankers Insurance Association's “Study OfLeading Banks In Insurance” surveyed over 500 banks. Of thoseselling insurance, only one-third indicated “cross-sales” as theirmain objective. By comparison, more than half cited “growth of feeincome” as the goal.

As banks continue to try to diversify their revenues, insurancecommissions are especially attractive because of their renewingnature.

These findings suggest two conclusions:

o First, if fee income contribution is the measure of success inbank-insurance, community banks may ultimately be the mostsuccessful.

o Second, expect the composition of the bank-insurance industryto shift over the next few years as some large banks exit whilesmaller banks enter.

Consider the following.

o Some Large Banks Will Divest Agencies:

To date, large banks have captured most of the bank-insuranceheadlines. Primarily through acquisition, many large banks havedeveloped significant agencies. This includes 13 banks that eachown an insurance agency among the 50 largest in the United States.Median assets for these 13 banks are more than $40 billion.

Bank of America is one of these 13 banks. But earlier this year,BOA announced it was exploring a possible divestiture of itsinsurance agency. Although the agency generates tens-of-millions ofdollars in annual fee income and is among the 30 largest U.S.insurance agencies, BOA considers it expendable.

Why? Because in 2006, BOA produced tens-of-BILLIONS of dollarsin fee income, of which its insurance agency contributed less than1 percent.

Granted, as one of the largest banks in the country, BOA is anextreme example. But the point holds true for other large regionaland money-center banks.

Income from insurance sales may never be a material contributorto fee income for these big banks. As other banks reach thisconclusion, expect additional high-profile divestitures tofollow.

o More Community Banks And Small Regionals Will AcquireAgencies:

While large banks have acquired agencies, small banks havelagged behind. The ABIA study found that 65 percent of surveyedbanks larger than $10 billion in assets currently sell commercialproperty-casualty insurance–with most of them having entered thebusiness through an agency acquisition.

However, this rate drops to only 43 percent of banks in the$1-to-$10 billion asset category, and to less than 21 percent inthe $0.5-to-$1 billion asset category.

But the study also found indications this gap may be closing.For example, more than 11 percent of the surveyed banks in the$1-to-$10 billion asset category plan to enter the commercialproperty-casualty business–the highest rate found in all the assetcategories. The second highest rate–nearly 6 percent–was found inthe $0.5-to-$1 billion asset category.

So, why are smaller banks entering the business as some largerbanks exit? Because for community and small regional banks, thefee-income contribution from an agency acquisition can be much moremeaningful.

For example, assume a community bank with $1 billion in assetsgenerates $10 million in annual fee income. Further assume thisbank acquires an agency with $5 million in revenues. The bank wouldimmediately increase its fee income by 50 percent, with the agencycontributing one-third. This example is reality for dozens ofcommunity banks that earn between 30 percent and 70 percent oftheir fee income through insurance sales–and this list isgrowing.

Does this suggest smooth sailing ahead for community banks ininsurance? Not necessarily. Several challenges will need to beovercome.

o First, community banks should be prepared to invest enoughcapital.

Buying too small will not only reduce the fee-incomecontribution but will also put the bank at risk of failure to meetthe constantly increasing premium expectations of the carriers.

Most banks should target to reach a minimum of $3 million inannual commission income within the next five years. Depending ontheir level of organic growth, this might require $5 million ormore in invested capital.

o Second, some community banks will not find a high-caliberagency to acquire within their geographic footprint.

A common mistake for community banks has been to buy a smalllocal agency that lacks the leadership, markets and productioncapability to be an effective platform. Rule of thumb: If theagency doesn't have the horsepower to lead you to your $3million-within-five-years target, keep looking.

Many community banks that intend to enter the insurance businesswill be thrown off course by either the capital requirement or by alack of quality acquisition candidates, so don't expect communitybanks to reach the 65 percent participation level any time soon–norshould they.

The insurance distribution business is not for every bank. Butfor those community banks committed to insurance as a key componentof their fee-income strategy, the impact can be significant. In theend, these community banks may be the winners inbank-insurance.