South Financial Group's insurance business is growing, but not at the pace the Greenville, S.C., super community bank had set as its goal.
In June 2005, fresh off a big agency acquisition, executives at the $14 billion-asset South Financial spoke of increasing annual insurance revenue from $7.5 million to $20 million by the end of 2006.
"We'll probably be shy of that $20 million," Tom Ryan, its vice president of wealth management, said last week. "But we still view it as an integral component of our noninterest income."
South Financial had nearly $5.8 million of insurance brokerage fee income in the first half of the year, according to Michael White Associates, a research firm in Radnor, Pa.
Three factors have held revenue growth below the target. Hurricane Katrina played a minor role in trimming revenue, Mr. Ryan said. More important, a bankwide review of retail strategy put insurance buyouts on hold, and the market has not been favorable to buyers, he said.
"We've slowed on our acquisitions and have been completely reviewing our corporate strategy," he said.
Though South Financial is still interested in buying agencies, it is also planning for more organic growth.
The retail banking review was initiated by Christopher Holmes, who joined in late 2005 as director of retail banking. As South Financial reevaluated the best locations for branches, the insurance unit had to lay aside its checkbook.
"We wanted to not step into a market that was not interesting to the rest of the bank," Mr. Ryan said.
With the green light on once again, the insurance business is close to making an offer to buy an agency, he said. He would not say where that agency is based.
But there are not many of the right agencies to buy and prices are steep, Mr. Ryan said. A reasonable valuation for an agency is around six times earnings, but sellers have been conditioned to expect more, he said.
"In the past, banks possibly overpaid, so the multiples are high," he said.
Further inflating asking prices is the increased business brought by rapid population growth in South Financial's footprint - the Carolinas and Florida. As a result, the agencies are looking for multiples of seven or eight times earnings; South Financial wants to pay five and a half or six times earnings, Mr. Ryan said.
Another factor that has created a sellers' market is the paucity of shops with revenue of $1.5 million to $3 million, he said. "There are not as many of them available for sale at a realistic price point as would be anticipated."
As a result, the insurance unit is building plans for "aggressive organic growth" into its 2007 budget. He would not say how much of that money would go into beefing up staff.
The insurance unit also "got hit with the Katrina issue" because of its location and the commercial property/casualty claims, Mr. Ryan said.
As Michael A. White, the research firm's president, explained, insurance underwriters pay contingent commissions based on their distributors' sales volume as well as the profitability of their customers.
When a book of business becomes costly - through lots of expensive claims, for instance - carriers can hold back these bonuses. For agencies with revenue of $10 million or more, contingent commissions could add up to 10% of the total, Mr. White said.
He said South Financial's insurance brokerage fee income business is a strong earnings contributor - it accounts for about 10% of the bank's noninterest income, he said.
Its Florida subsidiary, Mercantile Bank, bought Bowditch Insurance Corp. of Jacksonville, Fla., in June 2005. That helped South Financial jump to 14th from 24th in ranking based on noninterest income from insurance brokerage, according to Mr. White.
