More community banks are buying insurance agencies as a way to diversify their product lines and boost fee income.

Though figures are not available on how many small banks own insurance companies, industry experts said they the number has grown considerably in the past year.

Indeed, more than a third of community banks offer insurance products, and 74% plan to do so within five years, according to a survey released last month by Grant Thornton LLP.

"There's hardly any bank that isn't thinking about getting into insurance right now," said Andrew Stapp, executive vice president of Garland McPherson & Associates Inc., a Baltimore-based firm.

Most community banks are opting to buy agencies in their towns rather than enter a joint venture or create an agency from scratch.

"Buying an agency is a quick and easy way for banks to get involved in insurance," said Val Jordan, president of Jordan & Jordan Associates, a Belchertown, Mass.-based consulting firm. Start-ups can be very expensive and slow to produce profits, she said, and agencies come with an established customer base.

Community bankers that have bought agencies say they want to sell more kinds of products at their banks. Some also say they are looking to catch up to larger competitors that already sell insurance.

F&M Bancorp in Frederick, Md., for example, wants to stay competitive with companies that offer complete financial planning.

"We realize that the financial services industry is becoming more diversified," said Faye E. Cannon, president and chief executive officer of $1.1 billion-asset F&M. "Insurance and banking have a lot in common."

F&M recently agreed to buy Hagerstown, Md.-based Keller-Stonebraker Insurance Inc. Ms. Cannon would not say how much fee income F&M expects to garner from the agency, but she said it will "very clearly" add to earnings.

James P. Ghiglieri Jr., chief financial officer of Alpha Financial Group in Toluca, Ill., said the four insurance agencies owned by his $120 million-asset bank holding company provide a steady stream of fee income. Though the profit is now being offset by depreciating the cost of the acquisition, Mr. Ghiglieri said, the agencies are a solid long-term investment.

"This has been very positive," he said, noting that insurance agents' commissions have grown by 25 to 30% each year since the bank began acquiring agencies in 1992.

Paul Buse, vice president of Risk Management Services, a division of Washington-based Aon Services Group, said banks that purchase agencies can expect returns averaging 27% a year over 10 years.

"This can be a good strategic decision for the bank, but banks should know that revenue builds slowly," he said.

Mr. Buse also said buying an agency is not the answer for every bank. For those that do not want to make a long-term commitment to insurance, Mr. Buse recommends entering into a joint venture with an agency.

For Allegiant Bancorp in St. Louis, a joint venture was a logical choice. After searching 18 months for an agency to buy, $617 million-asset Allegiant said Friday that it would form a venture with Lockton Group, a leading St. Louis insurance firm.

Shaun Hayes, Allegiant's president and chief executive officer, said Allegiant elected to form a joint venture because it could ally with a bigger firm than it could afford to buy. He added that the bank holding company was also leery of the risk involved with buying an agency.

Mr. Buse said joint ventures with insurance agencies earn higher returns than acquisitions - on average, 66% a year over 10 years.

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