Banking on insurance & annuities: in the decade since the Supreme Court ruled in their favor, banks steadily have increased insurance sales.

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In its unanimous 1996 decision, Barnett Bank v. Nelson, the U.S. Supreme Court established bank-sold insurance as an activity that's here to stay. The high court ruling not only sustained the historical legal authority of national banks to sell insurance, but it also resulted in expanded bank insurance sales powers in dozens of states.

A decade after this major victory, the question can be asked: How well is the banking industry doing selling insurance products?

Bank holding companies earned $7.2 billion from insurance and annuities sales in the first six months of 2007, according to the Michael White-Symetra Bank Holding Company Fee Income Report published by Michael White Associates of Radnor, Pa., and sponsored by Symetra Financial Corp. of Bellevue, Wash.

The report's findings are derived directly from data fried by nearly 900 large top-tier bank holding companies with consolidated assets of more than $500 million, and nearly 100 smaller ones with assets between $300 million and $500 million.

Overall, the banking industry earned $6.26 billion in insurance brokerage fees in the first half of 2007, up 2% from $6.13 billion a year earlier. During 2007's first half, 621 bank holding companies--65.3% of those reporting--sold insurance products that generated commissions and fees.

The current 2% rate of growth falls far short of the 19.5% compound annual growth rate of insurance brokerage fee income that bank holding companies earned from 2001 to 2006. Excluding financial holding company MetLife, which did not engage in significant banking activities, insurance brokerage fee income actually declined 2.8% to $3.51 billion in the first half of 2007. That's somewhat less than the $3.62 billion reported a year earlier.

Several factors account for this slowdown. First, key conversions in charters to thrift holding companies such as People's Mutual Holdings of Bridgeport, Conn., and Countrywide Financial of Calabasas, Calif., removed insurance brokerage revenues from the count. Insurance brokerage is no longer reported when a bank or bank holding company converts to a thrift or thrift holding company charter, because a thrift entity is not required to report detailed, line-item, noninterest fee income such as insurance brokerage.

Second, certain large organizations, including Citizens Financial Group Inc. of Providence, R.I., BNCCORP Inc. of Bismarck, N.D., and Capital One of McLean, Va., sold large property/casualty insurance agencies. All three sold their operations to Hub International Ltd. Bank of America sold its New Jersey-based agency with $66 million in revenues in 2006 to Hilb Rogal & Hobbs Co. Those sales related specifically to each financial institution's particular circumstances, strategic aims and commitment to insurance.

A softening commercial property/ casualty market, sporadic decreases in contingent commissions and the complete removal of annuity commissions not earned via securities units from insurance brokerage fee income totals also slowed growth.

Program Productivity

Despite the observed slowdown in total revenue, the momentum of growth in insurance brokerage activities since 2001 has been strong. The report reflects this trend in a metric called Insurance Program Productivity per Employee.

For all bank holding companies with assets greater than $300 million, program productivity has grown steadily, from $1,437 in mean insurance brokerage income per employee in 2001 to $2,979 per employee by 2006. Annualized, first-half 2007 performance shows $3,120 in program productivity per employee.

For institutions with assets between $300 million and $1 billion average, program productivity also has more than doubled from $1,199 in 2001 to $2,438 in 2006. Annualized productivity for first half 2007 shows a slight increase, to $2,464, in insurance brokerage income per employee.

Income by Asset Class

Year-to-date national mean insurance brokerage fee income rose 2.5% from $9.8 million to $10.1 million. But national median insurance brokerage fee income fell 23% from $106,500 in 2006 to $82,000 in first half 2007.

Of bank holding companies with assets exceeding $10 billion, 92% offer insurance products. Sixty-nine of the 75 companies in this asset class earned $5.8 billion year-to-date in insurance brokerage income. That accounts for 92.8% of the industry's measurable total.

This group experienced 2.1% growth in insurance brokerage revenue in the first six months of 2007, compared to the $5.68 billion earned a year earlier. New York-based CitiGroup, California-based Wells Fargo and BB&T Corp. of Winston-Salem, N.C., led in insurance brokerage fee income as of June 30, 2007.

Bank holding companies with assets of $1 billion to $10 billion generated insurance brokerage fee income of $373.3 million in the first half of 2007, up 4.7% from $356.5 million in first half of 2006.

Leaders in this asset class were Great Bay Bancorp of California, which was acquired by Wells Fargo in October; Eastern Bank Corp., Boston; and Old National Bancorp, Evansville, Ind.

Bank holding companies with assets between $500 million and $1 billion earned $72.3 million in insurance brokerage fee income in first half 2007, down 10.6% from $80.9 million earned the year before. Leaders include Central Community Corp., Temple, Texas; Shore Bancshares Inc., Easton, Md., and MountainOne Financial Partners, North Adams, Mass.

Another metric in the report, Insurance Program Concentration, is the ratio of insurance brokerage fee income to noninterest income. Program concentration measures the contribution a particular fee income is making to the revenue of the bank's non-lending activities.

Even with a robust and profitable insurance program, the percentage of noninterest income from insurance might be lower than the averages if the institution enjoys a high level of earnings from other noninterest or non-credit sources.

At midyear:

* BancorpSouth Inc. of Tupelo, Miss., led all bank holding companies with more than $10 billion in assets. BancorpSouth's insurance brokerage income comprised 31.8% of its noninterest income. Next was R&G Financial Corporation of San Juan, Puerto Rico, with 31.3%.

* Greater Bay Bancorp of East Palo Alto, Calif., was the leader in program concentration among those with assets between $1 billion and $10 billion, with 74.9% of its noninterest income in insurance brokerage income. Leesport Financial Corp. of Wyomissing, Pa., was second with insurance brokerage constituting 57.1% of its noninterest income.

* Alliance Bankshares Corp., of Chantilly, Va., ranked First among those with assets between $500 million and $1 billion; its program concentration was 78.2%. Central Community Corp., Temple, Texas, was second with 66.8%.

* Delmar Bancorp of Delmar, Md., ranked first among those with assets between $300 million and $500 million with insurance brokerage income constituting 36.6% of noninterest income in first-half 2007. Goodenow Bancorporation of Okoboji, Iowa, placed second with 32.9%.

Annuity Commissions

The relative success of a bank annuity program may be measured by the amount of program revenue generated per $1 million of core or retail deposits. These deposits substitute as a measure of retail customers and the breadth of the customer relationship; the higher the ratio, the broader and deeper the bank-customer relationship.

On that basis, annualized program penetration was $572 per $1 million of retail deposits. This is the first year Michael White Associates could isolate bank holding company annuity income, so annuity sales performance is compared between first and second quarters.

Of the 951 large bank holding companies reporting line-item fee income, 383 bank holding companies, or 40.3%, reported year-to-date fees and commissions on annuity sales of $935.9 million. Second-quarter annuity income was $539.4 million, up from $396.5 million in the first quarter.

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Average year-to-date commissions were $2.4 million ($4.9 million annualized). Median year-to-date commissions were $111,000 in the first half of 2007, or $222,000 annualized.

Of 588 banks reporting retail investment program income, 383 sold annuities. Forty-eight of them sold only annuities and did not engage in securities brokerage.

This may be indicative of banks that have only platform annuity or licensed bank employee programs and not full-product investment programs.

* The Issue: Ten years after the historic Barnett Bank v. Nelson decision by the U.S. Supreme Court, bank sales of insurance products have expanded to all the states.

* The Situation: The banking sector's income from insurance brokerage fees continues to grow.

* The Outlook: Banks must improve their penetration rates with annuity programs to generate more robust income.

Contributor Michael D. White is president of Michael White Associates LLC, a consulting and research firm headquartered in Radnor, Pa. He may be reached at [e-mail].

BHC Insurance Brokerage Fee Income Participation
YTD First Half 2007, by Asset Size

              Reporting
              Brokerage                              % of
BHCS          Fee Income            Insurance      Total Ins.
By Asset                            Brokerage      Brokerage
Size          Number    Percent     Fee Income     Fee Income

Over $B         322       73.2     $6.18 Billion       98.7
Under$1B        299       58.5     $80.0 Million        1.3
Over $10B        69       92.0     $5.80 Billion       92.7
$1B-$10B        253       69.3    $373.3 Million        6.0
$500M-$1B       250       59.1     $72.3 Million        1.2
$300M-$500M      49       55.7      $7.7 Million        0.1
Total           621       65.3     $6.26 Billion      100.0

BHCS           Mean Ins.      Median Ins.
By Asset       Brokerage       Brokerage
Size          Fee Income      Fee Income

Over $B       $19,178,146       $262,000
Under$1B         $267,692        $36,000
Over $10B     $84,087,638     $6,704,000
$1B-$10B       $1,475,557       $116,000
$500M-$1B        $289,168        $35,000
$300M-$500M      $158,122        $43,000
Total         $10,073,113        $82,000

Source: Michael White-Symetra Bank Holding Company
Fee Income Report

BHC Annuity Commissions & Fees Participation
YTD First Half 2007, by Asset Size

              Reporting Annuity
              Commissions                           % of
BHCS          and Fees            Commissions      Total
By Asset                          and Fees From    Annuity
Size          Number   Percent    Annuity Sales    Income

Over $B         221       50.2    $922.8 Million     98.6
Under $1B       162       31.7     $13.1 Million      1.4
Over $10B        56       74.7    $864.9 Million     92.4
$1 B-$10B       165       45.2     $57.9 Million      6.2
$500M-$1B       141       33.3     $12.0 Million      1.3
$300M-$500M      21       23.9      $1.0 Million      0.1
Total           383       40.3    $935.9 Million    100.0

BHCS             Mean          Median
By Asset        Annuity       Annuity
Size          Fee Income    Fee Income

Over $B        $4,175,471     $284,000
Under $1B         $80,722      $53,500
Over $10B     $15,444,018   $4,361,000
$1 B-$10B        $350,994     $144,000
$500M-$1B         $85,404      $54,000
$300M-$500M       $49,286      $45,000
Total          $2,443,488     $111,000

Source: Michael White-Symetra Bank Holding Company
Fee Income Report

Bankers Buying Agencies

Many big banking companies
announced plans to acquire or
expand their insurance units in 2007.

Banking Company                    Headquarters

Alliance Bankshares Corp.          Chantilly, Va.
BancFirst Corp.                    Oklahoma City
BancorpSouth                       Tupelo, Miss.
BancWest Corporation               Honolulu, Hawaii
BB&T Corporation                   Winston-Salem, N.C.
First Defiance Financial Corp.     Defiance, Ohio
First Niagara Financial Group      Lockport, N.Y.
Harleysville National Corp.        Harleysville, Pa.
Huntington Bancshares Inc.         Columbus, Ohio
National City Corp.                Cleveland
Northeast Bancorp                  Auburn, Maine
Oak Hill Financial                 Jackson, Ohio
Shore Bancshares Inc.              Easton, Md.
Summit Financial Group             Moorefield, W.Va.
Wachovia Corporation               Charlotte, N.C.
Wells Fargo & Co.                  San Francisco

Source: Michael White Associates

Bank Holding Company
Insurance Brokerage Fee
Income 2001-2007

$ Billions

2001      $4.82
2002      $5.66
2003      $8.10
2004      $9.35
2005     $10.98
2006     $12.13
2007 *   $12.52

Note: Table made from bar graph.

Insurance Brokerage
Income: Number of BHCs
Reporting & Fee Income

                             Insurance
            Number of BHCs   Brokerage
              Reporting      Fee Income

First
Half 2006        624         $6.13 Billion

First
Half 2007        621         $6.26 Billions

Note: Table made from bar graph.