Indiana community bankers are steamed over legislation that would allow out-of-state banks to accept municipal deposits at their local branches.

"Why should the tax dollars collected from Indiana residents be put in a bank whose primary office is outside Indiana?" asked S. Joe DeHaven, executive director of the Community Bankers Association of Indiana. "We don't think our tax dollars should be going to another state."

The Indiana Bankers Association, however, takes the opposite view. The trade group argues that the branches in question are in-state banks that would be converted under the interstate branching law. The state is considering legislation to "opt-in" early under the federal interstate branching law.

The banks should not be penalized if their parent company converts them into branches, the trade group contends.

The bill, recommended by a state commission that studied public funds, is expected to be introduced in January's legislative session. Components of the bill previously have been introduced individually but not in one bill, Mr. DeHaven said.

Community bankers also oppose provisions that would let public funds be deposited directly into a money market mutual fund and would authorize local government investment pools, where multiple government entities could combine their funds for a better return.

An early opt-in would allow the many out-of-state institutions that have entered Indiana - and that have been required in the past to maintain an Indiana charter - to consolidate their Indiana locations into branches.

Such offices now hold 55% of the state's public deposit base, said Indiana Bankers president William H. King.

"Our findings indicate that a number of communities - 75 or more - would have no local institution" to accept deposits if the offices became branches and could not do so, he said.

In addition, he said, Indiana is the only state with a public deposit insurance fund funded by the banks. Branches exempted from accepting deposits also would be exempted from paying assessments for this fund, he said, eliminating some of the fund's sources of money.

Also, if an out-of-state bank without an Indiana charter is considering buying an in-state bank, the value is likely to drop if the out-of-state company can't keep the municipal business.

Jerry Ault, president and chief executive of $115 million-asset Frances Slocum Bank and Trust, Wabash, Ind., was one of two bankers on the Public Funds Study Commission.

He said he voted against the proposal at the commission's meeting and unsuccessfully tried to present a motion to eliminate parts of it, including the mutual funds and investment pools.

"I don't have a large dependence on public funds to run my bank," said Mr. Ault, who is on the Indiana Bankers' board and supports the organization despite differing personal opinions. But, "it does no good for money to be shipped out of any particular area."

Similarly, the community bankers oppose public funds' going into mutual funds because such funds would be lost to community banks and the communities and would have more risk to the principal, Mr. DeHaven said.

"I hate using that Main Street-Wall Street thing because it's so overused, but that truly is the situation here," he said.

The Indiana Bankers have not yet taken a position on the mutual funds issue, Mr. King said.

However, he said the organization is likely to oppose the forming of government investment pools because research has shown that in other states such pools have taken money out of communities.

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