BNCCorp Inc. was so successful selling insurance that the Bismarck, N.D., banking company had to make a choice.
"It got to the point where we really had to make a decision [whether] we wanted to be in the insurance business or the bank business," president and chief executive officer Gregory K. Cleveland said.
The decision: Sell the unit, BNC Insurance Services Inc.
Though it was hugely profitable, accounting for the unit's trail of acquisitions took a toll on the $624 million-asset BNCCorp's capital base, hampering BNC National Bank's growth, Mr. Cleveland said.
Hub International Ltd. in Chicago bought the insurance unit in June for $37.25 million in cash.
BNCCorp used some of the proceeds to absorb short-term losses from a restructuring and plans to use most of the balance to build branches and/or buy banks, Mr. Cleveland said. The rest would be used to expand the bank's wealth management division by hiring portfolio managers.
Most of the 1,000 or so banking companies in the country that have insurance brokerage units stick with the business line for the fee income it generates, which is particularly important in an era of shrinking margins and, lately, deteriorating credit quality, said John M. Wepler, the president of Marsh, Berry & Co., an insurance consulting firm in Concord, Ohio.
Banking companies that get out of the business usually do so because they did not buy or build quality agencies, he said, or because they inherited an agency when they bought another bank but selling insurance did not jibe with their business model.
Few, if any, banking companies sell their insurance units when they are making so much money, but BNCCorp may not have had a choice, Mr. Wepler said.
"Insurance was such a disproportionate part of their earnings stream, it was no longer a complementary part of their core business," he said. "If BNCCorp were a $20 billion-asset company, they could continue to feed that tiger so that it wouldn't affect their operations," but the much smaller company "could only hold that tiger by the tail."
When BNCCorp got into the insurance business in 1997 by buying a small North Dakota agency, it had about $370 million of assets and 12 branches. The company has acquired several more - and larger - agencies since then, including Milne Scali & Co. in Phoenix, which was generating $10 million in annual commissions when BNCCorp bought it in 2002.
In 2005, BNC Insurance Services generated $19 million in commissions, and its $1.9 million in net income accounted for about 47% of BNCCorp's profit that year. Only one other bank's insurance unit contributed a bigger percentage of its parent's profits in 2005, according to the Bank Insurance and Securities Association's "Who's Who in Bank Insurance."
However, Mr. Cleveland said intangible assets generated by the insurance subsidiary's acquisitions had cut into the company's capital base, slowing the bank's plans for branch expansion. (It has added seven branches in the last decade.)
BNCCorp entered the insurance business to cross-sell insurance products to its bank customers. But the bank's customer base is relatively small, Mr. Cleveland said, so most of the insurance unit's growth was organic.
After selling BNC Insurance Services, the company used part of its $6 million pretax gain to immediately improve its balance sheet, something that it could not do previously because its capital was tied up. It sold low-yielding securities (at a pretax $2 million loss), paid off Federal Home Loan Bank advances (incurring a $1.54 million prepayment penalty), and increased its total of loans and leases held for investment by 27% (taking $700,000 in loan-loss provisions to cover the increase).
The restructuring let BNCCorp improve its net interest margin to 3.66% in the second quarter, from 3.13% the year earlier.
After closing several transactions during the second quarter that substantially reconfigured the company for growth in its banking and wealth management businesses, net losses from continuing operations were nearly $2 million, compared with net income from continuing operations of $645,000 the year earlier.
Including the results of discontinued operations, net income was $1.8 million in the second quarter, compared to $1.1 million the year earlier.
Perhaps most importantly, BNC National's capital ratios improved. The core capital ratio was 15.29%, well above its peers' nationwide. In the previous quarter, its core capital ratio was 7.64%, well below the average for banks nationwide with assets of $500 million to $1 billion, according to the Federal Deposit Insurance Corp.
BNCCorp plans to use the excess capital generated from the insurance unit sale to build branches or buy community banks mainly in Arizona or other parts of the Southwest, Mr. Cleveland said. (The bank unit moved its headquarters to Arizona in 2002 after its parent bought the Milne Scali agency and merged three separately chartered banks it owned in North Dakota, Minnesota, and Arizona.)
BNC National still has 11 branches in North Dakota and four in Minnesota, where its wealth management division is based, but Mr. Cleveland said the best growth opportunities are in Arizona.
"Arizona has been one of the fastest-growing markets in the country," he said, "and now we have roots here, with a decent foundation to grow."
The state is projected to have the second-highest population growth rate (16.1%) from 2006 to 2011, behind Nevada, according to data from SNL Financial LC. Arizona also is projected to have the second-highest average household income growth rate (21.3%) during the period. Unemployment there has held steady at 4% for the last year and a half as the national rate rose to 4.5% by the end of May.
Robert S. Patten, an analyst at Regions Financial Corp.'s Morgan Keegan & Co. Inc., pointed out that other midwestern banking companies, like the $4.2 billion-asset Johnson Financial Group in Racine, Wis., and the $15 billion-asset TCF Financial Corp. in Wayzata, Minn., have been bulking up in Arizona to take advantage of its growth, particularly in the state's two largest urban markets, Phoenix and Tucson.
Large banking companies like JPMorgan Chase & Co., Bank of America Corp., and Wells Fargo & Co. command the lion's share of deposits in Phoenix (63.6% as of June 2006) but have been steadily giving up share to community banks. This gives banks like BNC National room to grow, Mr. Patten said.
"The big banks are still giving up little bits of share, but those little bits are big gains to the little banks," he said. "But it's still all about execution and pricing their products correctly - it isn't a slam dunk by any means because Arizona is still an extremely competitive market."
