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A good year for Indiana financial institutions.

As banks, S&Ls and insurance companies nationwide struggled, Indiana's financial institutions were keeping shareholders happy.

What recession? That's the question that observers of Indiana's financial institutions probably are asking in the wake of impressive 1991 earnings that have carried over into the first quarter of 1992.

As banks, savings and loans and insurance companies nationwide struggle with declining real-estate values, bad loans and a sour economy, Indiana's financial institutions were generally keeping their shareholders happy with strong performances on the financial balance sheet.

"Despite the recession, Indiana's banks have continued to be very profitable," reports Victor L. Saulsbury, a financial analyst with the Federal Deposit Insurance Corp. In addition, "Indiana's S&Ls were again among the most profitable members of the S&L industry last year. S&Ls in only six other states had a higher average return on assets in 1991." And a healthy number of Indiana insurance companies reported record earnings last year as well as in the first quarter of this year.

Some of the good news is the result of factors that affect the nation as a whole, not just Indiana. "Interest rates have dropped significantly," says Rick Nisbeth, vice president and managing director for corporate finance at Raffensperger, Hughes & Co., an Indianapolis-based investment banking firm. Nisbeth, who follows the banking industry, explains that a bank's assets, or loans, are supported by its liabilities, or deposits. The difference between the interest paid on deposits and that charged on loans is called the spread.

"The spread has significantly increased across the board," Nisbeth points out.

Then, too, Indiana bankers are generally more conservative than their brethren in some other regions of the country, particularly when it comes to making bad real-estate loans, what Nisbeth delicately refers to as "asset quality problems. You certainly wouldn't compare Indiana banks with banks in places like Texas and Oklahoma," Nisbeth says.

John Reed, who follows banks in his job as president of the Capital Markets group of David A. Noyes & Co. in Indianapolis, notes that as far as the nationwide recession goes, "real estate is the softest part of the economy, particularly in regard to commercial banking." But he hastens to note that Indiana has done very well in the commercial real-estate market, and still enjoys fairly high commercial occupancy rates.

Perhaps the biggest outside influence on Indiana banks these days is the wave of mergers and acquisitions that is cresting with the purchase of some of the state's largest bank holding companies. "I don't know what you call an Indiana bank anymore," laughs Nisbeth.

Call it profitable. At least that's what James T. Massey of Merchants National Corp. calls his company's affiliation with National City Corp. of Cleveland. Massey, president of the Indianapolis bank holding company, thinks the merger with National City will bring major benefits to Merchants.

"We can continue to grow," he says, noting that Merchants itself acquired 21 banks since statewide banking legislation was passed in 1985. "Their strength is obviously size and capital base," he says, adding that lending limits for Merchants will go up as much as five-fold.

Merchants National's earnings certainly haven't been hurt since the announcement of the acquisition. For the first quarter ending March 31, the $5.4 billion-in-assets Merchants National reported net income of $13.1 million, or 87 cents per share, up 39 percent from the $9.4 million, or 64 cents per share, reported in the same period last year.

Nisbeth thinks that a number of Indiana's larger bank holding companies will continue to report strong earnings through the year. "The Evansville banks--Old National and Citizens--always do well," he says. "One of the widest spreads in Indiana is Bank One. Irwin Financial--they're very strong. The banks in Muncie--First Merchants Corp. and ANB Corp.--are very strong."

The positive reports come in from all over the state. For example, last year "was the most successful ever for Fort Wayne National Corp.," reports Jackson Lehman, chairman and CEO of the company. "Earnings exceeded $20 million for the first time in our history, and assets neared the $2 billion mark." The company attributes the performance to a number of factors, including the area's comparatively solid economy. "Northeastern Indiana continues to perform better than the rest of the state and nation. Our unemployment rate is lower than the state's rate, which in turn is lower than the nation's as a whole."

"Our local economy has proven to be remarkably resilient," concurs Ernestine Raclin, chairman of 1st Source Corp. in South Bend. That's one of the reasons the bank had a record $12.6 million in net income last year. Return on average total assets at 1st Source also set a company record.

Nisbeth, meanwhile, is high on NBD Corp. of Michigan, which is acquiring INB Financial Corp. of Indianapolis, Summcorp in Fort Wayne and Gainer Corp. in Northwest Indiana. "They will always do well," he says of NBD. "They will be selective in their product offerings."

Although Indiana has not been immune to the recession in commercial and residential real estate nationally, the state hasn't experienced the overbuilding and hyperinflation of values that have plagued the East and West coasts. With few exceptions, Indiana's savings and loans have avoided much of the trouble that has consumed the industry elsewhere.

One homegrown S&L that is enjoying a strong performance in earnings is Indiana Federal Corp. of Valparaiso. Earnings increased 30 percent in 1991 to a record $4.3 million, or $1.71 per share. Records were again broken in the first quarter of 1992 when net income zoomed to $1.72 million, or 70 cents per share.

"We have benefitted from a reduction in deposit and borrowing costs due to the lower interest rate environment," says Peter R. Candela, president and CEO of the Northwestern Indiana thrift. "Lower interest rates are also responsible for the tremendous volume of residential mortgage originations. In the first quarter, we closed $41 million in residential mortgages, compared to $15 million in the same period last year."

Candela says he and his board "are quite happy with the progress" of Indiana Federal, and that the S&L has benefitted from nice steady growth in its home base of Porter County. Still, he points out that Indiana Federal is increasingly a diversified lender and has recently made a decision to offer commercial services to a broad segment of the business community.

"We want to position ourselves as a community bank," Candela states.

Bank analyst Nisbeth attributes Indiana Federal's success to "sticking to their knitting. Generally, the S&Ls that got in trouble got in trouble on something they did out of their market."

Other Indiana thrifts that Nisbeth identifies as well capitalized and well managed include Ameriana in New Castle and First Indiana and Railroadmens, both in Indianapolis.

First Indiana Corp., reports chairman and CEO Robert McKinney, earned a record $8.8 million last year. "Our earnings are the highest in the corporation's history, a 75 percent increase over last year's earnings." Low interest rates were part of the story, according to McKinney, but so was First Indiana's effort to restructure its balance sheet with shorter-term, higher-yielding assets that are funded by low-cost funds. "The restructuring of our balance sheet has resulted in much higher yields than two years ago."

A major component of the Indiana financial market is the state's insurance industry. The Hoosier state is a mecca for the insurance business, and some of the nation's largest companies are headquartered in Fort Wayne and Indianapolis. According to the National Association of Professional Insurance Agents, there are 1,804 insurance companies doing business in Indiana, substantially above the national average of 1,327 companies per state. In 1990, the last year for which statistics were available, direct insurance premiums earned in Indiana totaled $3.83 billion. That was offset by $3.4 billion in reported losses, for a loss ratio of 84.4 percent.

"Overall, it's a good state to operate in," says Steve Duff of the Indiana Insurance Institute in Indianapolis. Duff notes that the overall insurance climate "is very favorable" and points out that the regulatory climate is "very good. There's not a lot of tort-expanding laws getting passed. The climate is very positive."

Ann Doran, who lobbies for the Association of Indiana Life Insurance Companies, agrees that Indiana is good to its insurance companies from a regulatory point of view. Some neighboring states, she says, have historically taken a much more adversarial regulatory stance, and consequently they aren't as well represented by insurance-company headquarters.

Although he hesitates to make a blanket statement about the state of Indiana's insurance companies, Duff does observe that "nobody's going out of business. There are no solvency problems." The Indianapolis-based Insurance Institute consists of 22 member groups that write property/casualty insurance, primarily on homes and automobiles.

One Indiana-based insurance company that continues to set records is Carmel-based Conseco. In the first quarter of 1992, the specialized financial-services holding company whose subsidiaries develop, market, issue and administer annuity and life insurance products, reported record first-quarter operating earnings of $29.8 million, or 90 cents per share, up from $13.9 million, or 50 cents per share, in the same quarter last year.

Spokesman James W. Rosensteele says the company "has been very successful in selling annuity products through financial institutions." Conseco has six wholly-owned insurance subsidiaries and is a 50 percent partner in Conseco Capital Partners, a limited partnership that has acquired three other insurance companies in the past two years. Conseco is currently forming a holding company for the partnership and intends to offer one-third of the stock to the public.

"We're backing our products with very conservative investments," Rosensteele says. "Our secret is to try and market products that people want to buy and to maintain a low-cost, efficient operation to back up those products."

Even in the property/casualty business, where insurers ride a continually changing business cycle that's currently in the down mode, there was good news in Indiana. Holding company Baldwin & Lyons Inc., for example, told its shareholders that 1991 was a good year for the company in spite of the soft market conditions. The company's net income was up about $4 million to $19.2 million.

Another Hoosier insurance company that reported record first-quarter earnings this year is Lincoln National Corp. of Fort Wayne, the state's largest insurance company. All five of the company's business segments--property/casualty, reinsurance, investments, individual life, and annuities and pensions-performed strongly during the quarter. Record first-quarter income from operations totaled $63.6 million, up sharply from the $34.6 million reported a year earlier.

"We had pretty explosive growth in annuities," says spokesman Bob Jones. "And we've had pretty consistent investment gains." He says the company attributes the convincing first-quarter results to the long-awaited turnaround in the national economy. "We think the economy is straightening out. It's a hopeful sign."
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Article Details
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Author:Beck, Bill
Publication:Indiana Business Magazine
Article Type:Industry Overview
Date:Jul 1, 1992
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