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Banking players on rise: Despite flood of mergers, area competition heats up

January 16, 2006

Big-ticket bank mergers grabbed plenty of headlines in the past two years. Just don't let the splashy news stories fool you.

The number of players in the Indianapolis banking market is expanding, even amid consolidation in the industry nationwide.

Over the past 10 years, the number of banks taking deposits in the metropolitan area has grown from 41 to 56, according to annual data from the Federal Deposit Insurance Corp.

Analysts attribute much of the growth to smaller banks and startups that are trying to pick off customers amid the wave of big-bank mergers over the past decade.

"When mergers occur, there's a thought that the small niche banks might be able to gain market share from the fallout," said Dennis Bassett, CEO of J.P. Morgan Chase & Co.'s Indiana operations.

The new entrants might be taking a bite out of the giants, such as New York-based Chase, which entered the market by buying Bank One in 2004.

Although it's still the largest bank in town, Chase's share of local deposits dropped from 24.9 percent in 2004 to 23 percent in 2005, according to the federal data.

The aggregate market share of the five largest banks in 2005 also declined. From a high of 72.2 percent in 2000, it dropped to 67.8 percent in 2005, as smaller institutions grabbed slivers of the deposit business.

Bankers say that while the market share data provides an intriguing glimpse into the competitive dynamics of the Indianapolis banking market, it's also an imperfect source.

Banks self-report the data, and not all count deposits the same way. And over time, individual banks restructure operations, affecting the accuracy of comparisons from one year to the next.

In addition, the deposit figures don't reflect customer money that flows into investment products. And banks like Chase are convincing more customers to put excess cash in a mutual fund, not a savings account.

Bassett said Chase's internal data, for instance, conflicts with the federal government's.

"We're growing," he said. "We're pleased with our market share."

All banking is local

The Chase merger wasn't the only notable deal to pass before regulators in the past two years.

In early 2004, Birmingham-based Regions Financial Corp. scooped up Memphis-based Union Planters Corp. and Plainfield-based Lincoln Bancorp snagged Greenwood-based First Shares Bancorp Inc. The deals created the sixth- and 10thlargest banks in the market, respectively.

But most of the smaller banks aren't relying on mergers to boost market share. Instead, they're using their local headquarters and personal service as their calling cards.

"All of those new banks are [based elsewhere]," said Steve Tolen, president of Indianapolis-based Symphony Bank. "We felt we could fulfill a niche here in the Indianapolis area by offering small-town, community-bank customer service with top-ofthe-line technology."

The bank's sole location opened Dec. 14 on the north side. Tolen projects it will have $100 million in assets within three years.

Tolen isn't the only banking executive extolling the power of a local brand.

Since opening its doors in 1993, the National Bank of Indianapolis' market share has grown steadily and now is 3.3 percent-seventh-highest in town.

The bank's formula isn't a secret, President and CEO Morris Maurer said. Being local means decisions are made faster, he said, and customers get to shake hands with the person taking care of their money.

The bank has nine branches and three additional ATM locations. Michael S. "Mickey" Maurer, a shareholder in IBJ Corp., is chairman and co-founder of the bank.

Making progress

The biggest Indiana-based bank remains Union Federal Bank, with the third-biggest share of deposits. Its share, nearly 10 percent, is down more than a percentage point over the past year. But it's made huge inroads since 1994, when its share was 5.7 percent.

Executive Vice President Mike Newbold attributed the gains to aggressive marketing, new ATMs, a redesigned Web site and an enhanced telephone banking system. The bank also has 44 branches, seven more than in 2003.

The bank's future is uncertain, however. IBJ reported Jan. 9 that a deal may be near to sell Union Federal and its Fort Waynebased parent, Waterfield Mortgage Co. Officials won't discuss the sale talk.

Cleveland-based KeyBank made inroads as well. In 2004, it reorganized its business model to prioritize local service. Previously, each line of business, such as commercial banking, reported to a national head. Now all of the bank's divisions report to a local boss.

Partially as a result, the bank's deposits grew 37 percent in the past year. Its market share grew more than a percentage point, to 3.1 percent.

"We have every reason to believe we'll have a repeat in performance in [2006]," said Scott Brown, president of KeyBank's Central Indiana District.

The bank has opened three branches in the past 18 months and plans to open another three in the next 18 months. It has 34 retail locations in central Indiana.

Cincinnati-based Fifth Third attributes its gains to a similar strategy. Now the fourthlargest bank in the Indianapolis area, its market share since 1994 has grown more than any other bank that's been around that long, swelling from 1.81 percent then to 8.16 percent in 2005. Fifth Third operates in nine states and has divided its footprint into 19 territories, each with its own CEO and marketing group.

"We know the community and we've been more aggressive and communityfriendly than other banks," said Bob Amer, vice president and director of marketing for Fifth Third in central Indiana.

Cleveland-based National City Bank endured a 4-percentage-point drop in its market share from 2001 to 2004, shrinking its share of the deposit pie from 24.5 percent to 20.6 percent. In 2005, however, it rebounded and now holds 21.1percent of deposits.

Steve Stitle, CEO of National City Bank of Indiana, said the bank's 14-year commitment to Indiana helped lure back depositors. The company entered the market by agreeing to buy Merchants National Corp. in 1991.

"We're looked at as sort of a hometown bank," Stitle said. In addition, National City built five branches in the market in the past year and now has 73.

Evansville-based Old National Bank is using aesthetics to help give it an edge. The bank's Indianapolis branches are more coffee shop than bank lobby and feature flatscreen televisions and cyber cafes.

"Everybody's got the same products," said Dan Doan, Old National's region president. "Pricing can differ from time to time, but what can set you apart is how you deliver those services."

Old National entered the Indianapolis market in 2000 and has since grown its market share to 1.6 percent, making it the 11th-largest bank in Indianapolis.

Old National has eight branches in Indianapolis and will open one in Geist later this year. It plans to open two or three new branches in each of the next few years, Doan said.

"Our intention is to increase our market share," Doan said. "We'd love to see it in the double digits."

End of a trend?

While bank offices have been popping up here faster than hotels in a game of Monopoly, don't expect the pattern to continue. Small banks may start gobbling up smaller banks as the market reaches saturation.

Compared with some metro areas, Indianapolis may already be overbanked. Like Indianapolis, the Norfolk, Va., metro area has a population of 1.6 million. But it has just 13 banks, less than one-quarter the 56 competing here. Another similarly sized metro area, Sacramento, Calif., has 43.

"There's going to be consolidation for a lot of reasons," said John Reed, president of David A. Noyes & Co.'s Financial Institutions Group. "One of them is economy of scale. Small banks can't compete on cost. They can't compete on large sophisticated products such as trust operations."
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