Analyst Jeffrey Davis anticipates a second wave of consolidations as out-of-state and large Hoosier banks look to 'fill in' markets

Analyst Jeffrey L. Davis predicts Indiana will experience a second wave of bank consolidation even though the number of institutions has been nearly cut in half in recent years.

The Hoosier State has just 239 banks, down from 412 in 1985. Mr. Davis, a securities analyst at Raffensperger. Hughes & Co., Indianapolis, said much of the consolidation will result as out-of-state and larger instate institutions push to build market share. Mr: Davis uses the term "fill-ins" for these acquisitions, in which banks enter areas where they don't already have a presence.

Mr: Davis, 43, previously worked at Indiana National Bank and then Merchants National Corp., Indianapolis, until Merchants was acquired in 1992 by National City Corp. He discussed his views with American Banker.

Q.: Explain why the number of banks in Indiana has drastically diminished in recent years.

DAVIS: In 1985, the Indiana legislature changed the laws regarding bank branching. Prior to that, any bank headquartered in Indiana could branch only within the home county. In '85, it was changed to contiguous counties, and after that, [the state] developed an interstate reciprocity law.

Between '85 and 1990, there was a lot of consolidation. There were the big three, Indiana National, Merchants National Corp., and American Fletcher National headquartered in Indianapolis. They went out after the 1985 legislation change and started acquiring banks in Indiana.

Then when reciprocity came into effect, then we saw Banc One come in and acquire American Fletcher. Subsequently, NBD acquired INB and the third of the large banks to fall was Merchants National, which was acquired by NCC.

Q.: So you expect consolidation to continue?

DAVIS: It's probably taken until now with the NBD and NCC acquisitions for them to do some operational digesting and look at systems conversions and systems efficiencies. So, those two banks in particular -- as well as Banc One -- are now expected to develop ... fill-in strategy.

Within the last couple of weeks, NCC [National City Corp.] has announced its acquisition of Central Indiana Bancorp In Kokomo, which is a thrift. You'll also see, as is the case with Indiana Federal in Valparaiso, they've gone out now in the last year and a half or so and acquired a couple of smaller institutions. Shareholders were getting a bit anxious for return. Either they wanted Indiana Federal to develop an acquisition strategy and be a valid survivor, or put themselves up for sale and get their return that way.

The other thing is, you have Old National in Evansville and CNB in Evansville, they're continuing what INB and Merchants did some time ago, acquiring the community banks. They're quickly going from sub-$1 billion institutions to the $2 [billion] to $5 billion range. That makes them appealing as acquisitions. They're priced at a P/E [price-to-earnings-ratio] of generally $16 to $17. That whole corridor from Evansville to Terre Haute is pretty much that way. You get up to Terre Haute, and First Financial is probably around 19 times P/E.

Q.: What's the time frame on consolidation?

DAVIS: Consolidation is going to pick up in the next year to two years. If this interstate banking/branching legislation is passed, then I think there's going to be a new wave.

Q.: What are the prime acquisition targets in Indiana?

DAVIS: I think the targets would be such names as Fort Wayne National Corp. in Fort Wayne. We've heard since the days when Merchants and INB were taken over that it's been a target.

I think Old Kent in Michigan has its eye on Fort Wayne and northern Indiana in general. If you want to look at who's available for fill-in, I think First Merchants Corp. in Muncie, as well as ANB Corp, again in Muncie offer precisely the fill-in approach. There's no regional in Muncie.

In Marion, there's Marion Capital Holdings, which for the last couple of years has been rumored to be an acquisition target. Again that would fit into the fill-in approach.

At Indiana Federal in Valparaiso, -- given that Kokomo just fell and they're both thrifts -- I think that shareholders are kind of anxious. It could be appealing for a Michigan institution.

I think if you look at most savings and loans throughout the state, their price-to-book is somewhere around ... 105% versus the banks at about 175% So you figure, you can get a savings and loan that's got a branch network and it's got mortgage business, which is appealing to more and more institutions now.

Not only do you have the S&Ls, but you have Irwin Financial in Columbus. It's got a mortgage servicing portfolio somewhere around $8.3 billion. [However] there's some family ownership and some youth in management. It's probably a legitimate deterrent.

The largest remaining Indianapolis-headquartered institution is First Indiana. Again, there's some family ownership there, but it's large. That's a thrift. Obviously it's in the mortgage business and it's been expanding into the auto-lending business.

There's a number of institutions that are about to be there as far as succession questions. Questions of that nature might cause them to open up and say maybe we should look more closely at being acquired.

Q.: How does Indiana's merger activity compare to other states'?

DAVIS: Indiana is ... going to be a fill-in state. Everybody that wants to be here is pretty much here already. Kentucky might be the same scenario.

What you'll see in Michigan and Ohio is the regionals will be looked at by the superregionals, say NationsBank. We've seen Continental Bank in Illinois is going to be acquired by BankAmerica. It's another level up. Hoosier Targets Jeffrey L. Davis' takeover picks BANKS HEADQUARTERS ASSETSFort Wayne National Corp. Fort Wayne $2.1 billionFirst Indiana Corp. Indianapolis $1.3 billionIrwin Financial Corp. Columbus $753 millionFirst Merchants Corp. Muncie $644 millionIndiana Federal Corp. Valparaiso $602 millionANB Corp. Muncie $422 millionMarion Capital Holdings Marion $171 million

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