Northeast Bancorp in Lewiston, Maine, has bought seven insurance agencies in the last 18 months, but its desire to increase fee income only half explains its motives.
Some of the agencies it bought have offices outside Northeast's traditional market area, and the $586 million-asset company intends to use those offices as springboards to establishing bank branches there.
"It's a reverse strategy to the norm that you would see in banking," said Jim Delamater, Northeast's president and chief executive officer. "Instead of trying to open a branch de novo and hoping that people show up, we feel it makes more sense to acquire an agency in a market we want to be in, with the goal of starting to cross-sell them banking products and services and eventually establishing a branch presence."
Mr. Delamater said new branches are hard to justify in an area with little population growth, so his company needs to think differently about how to expand.
"If our plan works, we will see much more steady growth as a result of delivering more products and services to every household," he said. "So we won't have to rely on market growth as much as we rely on getting a better share of the wallet."
Mr. Delamater joined Northeast as its president and CEO in 1981, when it had assets of $18 million, two branches, and nine employees. The former mutual thrift went public in 1987 and switched to a commercial bank in 2004.
Northeast bought its first small property and casualty insurance agency about five or six years ago and took time familiarizing itself with the business before buying more.
"We spent a few years embracing the product line," Mr. Delamater said. "Once we thought we understood how it worked, we grew quite aggressively."
Its insurance agency buying spree took off shortly after Northeast purposely started lowering its lending volume, he said. Heavy competition had squeezed pricing, and Northeast anticipated credit quality would get weaker, "so we made a decision to shrink our balance sheet, which is always painful in the banking business."
(Its net loans and leases at yearend were $403 million, down 9% from two years earlier, according to Federal Deposit Insurance Corp. data.)
The results are satisfying so far; in Northeast's fiscal third quarter, which ended March 31, the acquisitions helped fuel a 28% profit increase compared with the year-earlier quarter, to $672,000.
Though net interest income slipped 10%, Northeast's noninterest income jumped 52% from a year earlier, to $3.6 million. Noninterest income generated from insurance rose 166%, to $2 million.
Several observers said banking companies often struggle to make insurance worth the effort, partly because the margins are low.
Michael White, the president of the bank insurance consulting firm Michael White Associates LLC in Radnor, Pa., said a key to Northeast's success in insurance is a commitment that is rare among community banks.
"They've devoted management time and capital to it, and that's part of what it takes to succeed," he said.
Mr. Delamater said Northeast is aiming for noninterest income to equal 50% of its revenue, and it is up to 43% now. "So we're getting closer."
No analysts cover Northeast, but Gerard Cassidy of Royal Bank of Canada's RBC Capital Markets, who follows other banking companies in the area and knows of Northeast, said that is a "very commendable" level.
"A community bank generating over 40% of its revenue in noninterest income has to be patted on the back, because that's very difficult to do," Mr. Cassidy said.
Mr. Delamater said that in some markets where Northeast has both branches and insurance offices, it has started to move insurance operations into bank branches.
He said the typical Northeast branch is nontraditional. It scales down the space allotted for tellers and drive-up windows, to shift more attention to its insurance, investment, and wealth management services. "They're more financial centers," Mr. Delamater said. "Given the growth of online banking and mobile banking, we don't want to be investing too heavily in old-fashioned traditional branches."
Northeast has acquired agencies from central Maine to southern New Hampshire.
Mr. White said Northeast's plan to sell banking products through insurance offices is novel.
Kenneth Kehrer, the director of the Kehrer-Limra research and consulting firm in Princeton, N.J., agreed. He noted that insurance companies, such as State Farm, sell banking products through insurance outlets, but he said he did not know of any banking companies using that strategy.
Mr. White said Northeast's insurance income ranks among the largest compared to its peers. Of the 261 banking companies nationally with assets of $500 million to $1 billion that reported insurance brokerage income in the quarter ended Dec. 31, Northeast generated the ninth-highest amount, up from its No. 23 ranking a year earlier.
Mr. White said 38.5% of Northeast's noninterest income that quarter came from insurance; the mean for its peers was 6.7%.
Mr. Kehrer said the cyclicality of insurance revenue is one reason some banking companies dislike the business. He said insurance premiums can vary greatly from one year to the next, and this past year the market has been soft, meaning that premiums — and thus revenues — were down.
But Mr. Delamater said Northeast began its insurance push knowing it would be doing so in a soft market.
"We try to look further down the road than next quarter or next year," he said. "If you're looking at growing for the future, this is a wonderful opportunity. Plus we felt more agencies would be for sale at a better price in a soft market, which we think has been the case."
