News Column

To merge or not to merge: For community banks, that is the question

July 6, 2014

By Joseph S. Pete, The Times, Munster, Ind.

July 06--Remember Hoosier State Bank of Hammond, Gary Federal Savings and Loan Association, or Industrial National Bank of East Chicago?

What about Portage National Bank or Steel City Federal Savings and Loan Association?

Bygone community banks in Northwest Indiana now far outnumber the remaining ones -- by a rate of more than six to one.

Longstanding local financial institutions like Mercantile National Bank of Hammond, which boasted in ads of being Hammond's oldest bank and once seemed as solid as the brick and concrete facade of its downtown headquarters, have disappeared from the landscape over the last few decades. BMO Harris bought out Mercantile eight years ago, and the Hohman Avenue office building it occupied for three-quarters of a century is now a small business incubator.

Big local banks like Gary-based Gainer, which amassed $1.5 billion in assets, and small ones like Griffith Savings, which peaked out at $742,000, alike have closed or been folded into bigger institutions.

Northwest Indiana is not unique. The total number of banking and thrift charters nationally has plunged from about 20,000 in 1980 to 6,812 at the end of last year, according to the Federal Deposit Insurance Corp. The number of community banks in the United States has shrunk by 29 percent over the last decade alone.

At one time, Lake, Porter and LaPorte counties were home to 51 independent community banks.

Today, just eight remain: Centier Bank in Merrillville, Muster-based Peoples Bank, Lake Federal Bank of Hammond, Munster-based American Savings, Liberty Savings Bank in Whiting, First State Bank of Porter, Michigan City-based Horizon Bank and The LaPorte Savings Bank.

Historically, community bank mergers have been the result of poor quality loans that got banks into financial trouble, or the lack of succession plans when senior managers were about to retire, said Dave Rose, executive vice president and senior retail bank officer for Horizon Bank. But other forces have been at play in recent years, when interest rates have hovered around historic lows and federal regulations have multiplied exponentially.

"The recent consolidations are primarily being caused by the additional regulatory burden," he said. "Smaller banks don't have the manpower to comply, and it's expensive. The other thing is that earnings are being compressed. Margins are shrinking in the industry because of the extremely low interest rates. Loan yields have been declining, creating some additional pressures."

Last year, Northwest Indiana has 10 community banks. But Muncie-based First Merchants bought out Munster-based Citizens Financial Bank in a deal valued at $114.7 million. A group of 13 Hammond businessmen had founded the bank in 1934 with $6,140, and it grew over the years into the fourth biggest bank in Lake County history.

Munster-based Peoples Bank acquired Hammond'sFirst Federal Savings and Loan Association, which was one-twentieth of its size and was looking for a buyer as long-time president and CEO John Freyek neared retirement.

Another Northwest Indiana bank has been on a buying spree. Over the past year, Horizon Bank has expanded into new markets by buying East Lansing, Mich.-based Summit Community Bank for $18.4 million and Indianapolis-based 1st Mortgage of Indiana for an undisclosed sum. Horizon just bought Franklin-based Heartland Community Bank for $19.7 million in 2012.

"There's been a lot of consolidation going on in the industry," said David Bochnowski, president and CEO of Peoples Bank. "There is a certain amount of capital resources it takes to run a modern day bank. The technology investment is very high. Customers don't just want brick-and-mortar branches. They want to be able to access their accounts by computer, telephone and mobile device."

Increased federal regulations, particularly in the area of risk management, also have driven consolidation in the industry, Bochnowski said. Smaller banks lack the staff to keep up with all the regulatory filings that are now required, and sometimes cannot shoulder the cost of outsourcing it to a third party.

Peoples Bank has stayed in business for 104 years over several generations and through many changes in the industry and consumer tastes because it has always met the needs of its customers, Bochnowski said.

Though fewer in number, community banks remain vital because they are plugged into the communities they serve, he said.

"A good part of the customer base really wants to deal one-on-one at a local level with decision-makers," he said. "They want to talk to a decision-maker who really knows the customer and knows the their business, and not just from afar and what's on paper."

Northwest Indiana community banks often boast of their hometown roots. American Saving's slogan is "Bank better, not bigger," while Liberty Savings brags of being "The little bank with the big heart." Centier, which has been family-owned since 1895, touts its "Not For Sale" promise, even splashing it across billboards whenever other Northwest Indiana banks get bought out.

"Throughout all the merger activity, (Centier president) Mike Schrage made that commitment to remaining independent, which I think has drawn a lot of clients and led to really good growth," Centier senior partner Carol Highsmith said. "We've stood the test of time because we know the community really well in Northwest Indiana. The decisions aren't being made from another state. We can react very quickly and in the best interests of our customers."

Community bankers tend to be deeply involved in the communities where they live, said Joe DeHaven, president and CEO of the Indiana Bankers Association. Bank presidents often lead local economic development and United Way campaigns.

But the consolidation trend seems to have traction, he said.

At one time Indiana had 600 banks and thrifts. The number shrunk to about 300 by 1993 and to 160 by 2003.

Today, a little more than 120 independent community banks are left in the state.

"We're certainly not done yet," DeHaven said. "In this low-interest rate environment, it's hard to find loans, to find places to put the deposits to earn money."

Large national or regional banks have economies of scale and a much easier time of generating revenue, such as through fees, insurance, investments, international transactions and credit card loans, he said. They can get business that community banks cannot, such as packaging and servicing loans for hundreds of other banks.

The environment is so tough for smaller community banks that virtually no new ones have formed in the United States over the last few years, DeHaven said.

"I think we're going to continue to see consolidation for several more years," he said. "My crystal ball isn't clear enough to see where this floor is. Local banks are able to move the community forward, but each bank has to decide what's best for shareholders."

To survive, community banks need to be well capitalized with good quality loans on the books, said Gerald Skrabala, president and CEO of Hammond-based Lake Federal Bank.

Many banks have suffered because they made bad loans and ended up owning real estate that does not generate any earnings, Skrabala said. But community banks still serve an important role, he said.

"People have feelings for small community banks, and there's a niche for it," he said. "Bigger isn't necessarily better. Our decisions are made right here in Hammond."


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