It's not good enough to be the market-share leader anymore.
Just ask Peter S. Damon, president and chief executive officer of Bank of Newport. Though it holds about 47% of the deposits in Newport County, the thrift's interest margins have dropped-to an estimated 4.48% this year, from 4.78% in 1995.
"We're about as powerful a deposit-gathering institution as there is down here," Mr. Damon said. "But we still have to finance our asset growth by Federal Home Loan bank borrowings. That's quite expensive."
Mr. Damon said a squeeze on interest rate margins propelled Bank of Newport, the nation's oldest mutual savings bank, to look beyond mortgages and savings accounts for growth and profits. In a quest for fee income, the once-conservative thrift has entered lines of business that are not typical for mutual savings banks.
In the past year, $475 million-asset Bank of Newport has bought an investment management business, started a trust division, and, most notably, agreed to acquire an insurance agency.
"Virtually everybody is thinking about how to generate more noninterest income," Mr. Damon said. "To me, the future lies in increasing our noninterest income."
Mr. Damon said the goal is to increase fee income-currently about $2.8 million a year-until it exceeds the thrift's noninterest expense of $14.2 million. He thinks that will be possible once the insurance agency deal closes in 1999.
At community banks with less than $3 billion of assets, the average net interest margin has dropped 12% during the past year. Mr. Damon said he looked at what other banks are doing to bring in noninterest income. He saw them buying brokerage firms and insurance companies and decided to follow.
He said the thrift's motive was simple: "We fully intend to be a survivor. Your success is going to be in acquiring new clients. You do that by providing new services."
Industry observers consider Bank of Newport among the more aggressive and visionary community banks.
"They are ahead of the curve in terms of really implementing alternative delivery channels their customers are beginning to demand," said Mary Anne Callahan, executive director of CIBC Oppenheimer Corp., a New York investment bank. "They've built a very nice company-with a very nice range of businesses."
She said Bank of Newport responded to the aging of its community; people who needed mortgages in the past two decades now need investment services.
The biggest growth on its home turf of Aquidneck Island, about 45 minutes from Providence, has been among people 45 to 65 years old.
By reducing reliance on residential mortgages and increasing high-margin commercial and industrial lending and fee-based services such as retirement planning, Bank of Newport is positioning itself to compete against larger banks and nonbank financial institutions, Ms. Callahan said.
Bank of Newport boasts return on average assets of 1.16%. But because it is a mutual thrift and can't deploy excess capital, its return on equity now hovers around 10%. Mr. Damon said creating subsidiaries will allow the thrift to use capital as it increases fee-based services.
The thrift also extended its reach beyond Newport County with a new branch in nearby Bristol County. Mr. Damon plans to fight Fleet Financial Group Inc. and Citizens Financial Group Inc. for customers there. He is betting that local people, who are very loyal to the area-some never leave it, he said-and would rather have the personal service of a local bank.
"The thing that's going to account for our survival is the ability to put the customer first," he said.
He said he looked for similar philosophies of customer service when searching for an investment adviser and insurance company to buy.
In September, Bank of Newport cemented a deal to buy Corrigan Financial, an eight-year-old company with $65 million of assets under management.
The investment advisory subsidiary offers financial planning, tax preparation, and investment management. It also refers clients to Bank of Newport's new trust officer for fiduciary services.
Mr. Damon said the company has wanted to offer trust services for five years, but it first needed assets under management.
Daniel G. Corrigan, the investment firm's founder and now primary consultant, didn't have the capital to grow so he decided to sell.
"I've been with the bank as a customer since college," Mr. Corrigan said. "I could never imagine doing this with another bank."
But the move that is getting the most attention is Bank of Newport's decision to buy two insurance agencies. Under a May agreement, two old-line Newport insurance companies, Packer Braman Agency and Gustave White Agency, merged and will be acquired in 1999. Bank of Newport is waiting two years to close the deal so it can evaluate the combined agency by its profits, Mr. Damon said.
The deal was spurred by last year's Supreme Court decision in a case involving Florida's Barnett Banks to let national banks market insurance from small towns.
"The floodgates opened," Mr. Damon said. "We began talking to an insurance agency."
Mr. Damon said he decided it "would be a folly" to start an insurance agency. "Our people are not qualified to sell insurance."
Nor does he think the relatively low-key bankers have the personalities for selling insurance.
On a visit to the offices of the combined insurance agency, he compared the ebullient manner of the insurance agents with the quieter, more reserved bankers at Bank of Newport.
"We absolutely do not talk the same language," he said. "They'll be a shot in the arm to our institution."
Mr. Damon said Bank of Newport decided to buy an insurance agency instead of forming a partnership with one because it didn't want to yield control.
Unlike many community banks, Bank of Newport doesn't have to fend off dissident shareholders. Established by a group of Rhode Island citizens in 1819, it still proudly touts its mutual status and has no plans to convert to a public company.
The temptation is there, however. Investment bankers come courting at least once a month. Some analysts say its market share alone would make it a prize.
"If we weren't a mutual, I don't think we'd last six months," said John H. Ellis, the thrift's chief operating officer, executive vice president, and corporate secretary. "We'd all be standing outside in the parking lot."