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You can take it to the bank: Financial experts say state's economy is rising, merger mania isn't over and regulatory laws could take a toll

March 13, 2006

On Feb. 24, IBJ Publisher Chris Katterjohn, Managing Editor Greg Andrews and banking reporter Matt Kish sat down with four leaders from Indianapolis' banking and finance sector: Judith Ripley, director of the Indiana Department of Financial Institutions; Kit Stolen, CEO of Union Federal Bank of Indianapolis; Steve Beck, president and CEO of the Indiana Venture Center; and Keith Slifer, senior vice president of LaSalle Bank. Among the topics of conversation: How's the state's economy doing? Are more bank mergers on the horizon? And what's going to happen if Wal-Mart gets into the banking business? Following is an edited transcript of the discussion.

IBJ: How will the sale of Union Federal [to Bowling Green, Ohio-based Sky Financial Group Inc.] benefit Hoosiers?

STOLEN: There are several ways Hoosiers will benefit, mostly in central Indiana. Start with our customers, who will have an expanded set of products. There will be significant benefit to our commercial customers in the form of added borrowing capacity.

The customer base will also have access to the branch distribution that Sky Bank has by adding their 290 branches to our 44 branches. They will also provide us with, instead of privately held currency that we had in the past for acquisition potential, we will now have a publicly traded currency by which to consider other expansion potentially throughout the market or throughout the state. And then lastly, there is going to be a pretty significant infusion of liquidity into the Indiana marketplace when the transaction is closed, both in the form of cash and very valuable Sky Bank stock.

IBJ: What is your sense of Indiana's economy? How is the state doing?

BECK: The state's on the uptick. Do we have total recovery from where we have been? No. But there are an awful lot of positives. The types of jobs in businesses that are being started are very knowledge-based and growth-oriented where they don't impact the economy heavily today, but the potential for tomorrow is very significant.

SLIFER: I don't know if it is growing by leaps and bounds, but it's pretty stable. One measure that we use is line usage, where people have open lines of credit, and while there was lot of capacity out there after 9/11, people who could have borrowed didn't. Line utilization was probably less than 50 percent. Now it is in the 60s, which is a good sign.

IBJ: Does that mean people are expanding their businesses and buying equipment?

SLIFER: You are seeing more dollars go out now because the economy is good and they have gotten through the last two or three years.

BECK: Use the health analogy where if you get yourself trimmed up, you are in better fighting stance. Companies have done the same thing. They have improved their position. They have cut their debt. They have prepared for the future. They have done an awful lot of transition from old types of manufacturing, for example, to a much more modern [economy]. All of those things really prepare the market for some significant growth.

RIPLEY: Our examiners take a good look at the economy when they are look ing at banks, and our banks are in pretty good shape.

IBJ: What about the difference between Indianapolis and the rest of the state?

BECK: I spend around 50 percent of my time outside of Indianapolis. And while Indianapolis' economy is much more robust, you can see around the state, even in small communities, there seems to be more optimism in places like Logansport and Kokomo and Marion. They have decided that nobody can bail them out. They have got to do it on their own. And they are taking steps to do that. So while they are not moving at the same pace, it is positive. Job growth is up. Most communities are doing something to create new businesses in their communities and those things in my mind all bode well.

STOLEN: The Indianapolis economy has the benefit of diversity that the other communities throughout the state do not enjoy. If you take the state as a whole, I would feel fairly confident that we are still swimming a little bit upstream against the migration out of manufacturing into other forms of employment. And we may have been a little late to lunch.

IBJ: Are you seeing fallout from the auto industry's troubles?

SLIFER: Probably more than 50 percent of our business is outside of Indianapolis and there are a lot of very strong, stable companies around. But there are also a lot of suppliers to the automotive industries-besides the large companies-that are feeling that pain.

BECK: While they are feeling the pain, if you take a look at the statistics across the Midwest, Indiana's auto manufacturers were some of the first in the Midwest to start diversifying. If you take a look at the percentage of revenue in Indiana and its automotive revenue four years ago, it is down, which basically says the manufacturers have started to diversify and say to themselves, "We can't be as dependent upon the auto business. We have an awful lot of high-quality computer-oriented manufacturing that can, and is, moving away from auto business."

Life science is a good example. A lot of those companies are now doing device manufacturing in life sciences that five years ago they didn't do. Are we far enough along? No. But you can see the shift starting to move.

IBJ: At our 2004 roundtable, Barbara Branic from Regions Bank said there was weak demand for commercial loans in Indianapolis. How do you think that's changed?

SLIFER: The demand for commercial loans is relatively stable. There is more competition and the banks as a whole are much more aggressive. So there are more people chasing the same amount of deals.

IBJ: Is that similar to what you are seeing on Union Federal's commercial side?

STOLEN: I think so. There is no question that it is a very competitive environment. The market is stable, but not robust. It is a good time to be a business looking to obtain financing.

IBJ: What are the most attractive investments for local venture capitalists? Who's getting funded?

BECK: There are four real key segments. One, life sciences. If you talk to the venture community, about 25 percent of what they are seeing is in the life science orientation. Second, as you would expect, is information technology. Third is transportation technology, which lends itself very well to where Indiana is located. And then there is a smattering of other stuff.

IBJ: How burdensome is the state and federal regulatory environment? What effect are Sarbanes-Oxley and the Bank Secrecy Act having?

RIPLEY: There is no doubt they are having an effect on banks, and especially the smaller banks. We are very sensitive to this. As far as the BSA, the Bank Secrecy Act, is concerned, none of the banks that we work with have any violations right now. And anytime there has been maybe a little bit of a wobble, they have cleaned it up in about 90 days. That being said, yes, it is more burdensome than it has been in the past. Sarbanes-Oxley has created some financial burden for some of the smaller institutions and [as a result] you may see some of them look at going private. That could happen in the next year.

STOLEN: [Union Federal] is a fairly modest-sized thrift, but a large privately held thrift, and there is a rapid migration toward privately held S-corporation financial institutions. There are over 2,200 of them at this point in time. One of the issues with Sarbanes-Oxley is that a lot of small, publicly traded companies are banks. It is very easy to establish a publicly traded financial institution. And because of that, if you look at the pub licly traded companies in the state of Indiana, look at how many of them are banks. And so Sarbanes-Oxley compliance is a fixed cost that's more difficult for a smaller institution to accommodate.

IBJ: Is it a reasonable expense?

STOLEN: Those are judgment decisions made by our legislators. We have to rely on [their] making good judgments.

BECK: As a non-banker, I think it's overkill. They are killing a fly with a cannon. If you look at the number of instances where they have had a problem, they are relatively small.

SLIFER: Being as large as LaSalle, we have the people to handle that. We also deal with a lot of small public companies, and the same as the small banks, if you have small public companies that are, or would, consider, going private or delisting, then the cost compared to the benefit is not worth it.

BECK: Yesterday, I was in Chicago at a venture capital group that has VCs throughout the country. They see this as a significant market for venture capital in the next 24 months-the number of companies that are going to go private to get out from underneath [regulatory burdens].

IBJ: Is there going to be a place for little state banks or are they all going to disappear?

RIPLEY: It is a problem, but the dual banking system has been incredibly strong. Banks are innovative. They have found ways to do things in the past. Now, we do see some mergers, but I don't know what will happen. There are a lot of community banks that do very well because they are community banks.

BECK: If you go back to 1984-1985 when the bank expansion legislation was being passed in Indiana, the reason everybody complained that we shouldn't do it was because all the banks were going to disappear. The last numbers I saw, today there are as many, if not more, banks in Indiana than there were in '84 and '85. And in the last couple of years, more new banks have been chartered in the United States than in the last 20 some years.

SLIFER: There will always be a place for small community banks. It is an investment strategy and it's a business. And as technology gets better, they can also buy those services that the big banks have for a very competitive price.

Before I saw the community banks sprout up in Indianapolis, I saw them sprout up in Chicago. And I've seen a couple of those that started 15, 20 years ago now being sold. Those investors made a very nice return.

BECK: From a technology standpoint, if you take a look just here in Indiana, First Internet Bank of Indiana is probably the fastest-growing Internet bank in the country.

STOLEN: The overall trend is in a reduction in the number of banks. Twenty-eight years ago, when I started in the industry, there were over 15,000. Today, there are 7,500. It's a slow migration because there are startups happening every day, but there is also consolidation taking place every day. The long-term trend is going to continue toward a reduction in the number of financial institutions because there are synergies and economies of scale available to the larger institutions. That gives them a strategic competitive advantage.

IBJ: Keith, you said smaller banks could always buy services from bigger banks. Explain that.

SLIFER: Sure. You start a bank, you might use LaSalle for your international, you might use an M&I bank to process your checks. BECK: Indiana Business Bank does most of its back-office [work] by shopping it off to somebody else.

IBJ: Like transaction processing? BECK: Sure. The Internet banking, all that is through somebody else because you can't afford to start that from scratch.

IBJ: What effect are rising interest rates having on the state economy and local banks? What effect do you think they'll have in the next couple of years?

SLIFER: To me, that is a sign the economy is strong. Our net spread for loans over the last two years has declined. So even though interest rates have gone up, our net spread is low. So to me interest rates are just a sign that the economy is doing well. Probably at some point there is an inverse relationship, kind of like gas prices, in terms of how much the guy who owns the gas station takes home.

BECK: From a business owner's perspective, it depends on how astute the business is, because if they are a sharp company, they will take into account the cost of money and factor that into their price. Depending upon how much elasticity they have, raising the price typically won't affect them. If they don't take that into effect in their pricing model, it can be fatal. But I agree with Keith, I think it is a sign that the economy is really robust. And historically interest rates are still relatively low.

STOLEN: Most financial institutions will generally have a slightly longer duration in their assets than they will have in their deposits and so the flattening of the yield curve has really narrowed the margins in general for most financial institu tions. That, coupled with a lot of aggressiveness towards deposit pricing on the part of virtually all financial institutions, has created a good environment for consumers and put a squeeze on the margins at financial institutions.

The rising rates scenario is a two-edged sword. One side is good for consumers as they are able to invest their funds at higher returns. The other side is for borrowers. They will get squeezed by higher rates. Those that are thinly capitalized will be challenged by an ever-increasing shortterm borrowing rate.

IBJ: Why are we seeing more banks start up and more institutions like Sky come to Indianapolis? Do we have too many banks?

SLIFER: Competition is good. Just like any other business, the competition makes you stronger. The Midwest [has] good, stable companies that long-term you want to have a relationship with, as opposed to some newer places like Colorado or California where it may be heavily oildependent or technology-dependent and you have 10 years of boom and then bust. This is a stable economy.

STOLEN: You really have two questions. First was what makes this an attractive market, and [Keith's] comments were most appropriate. It is a very stable, viable major metropolitan market that has done a wonderful job with its business district and created a very vital economy overall and has some rapidly growing counties.

The other question was what makes it attractive from a banking standpoint. There are 56 banks operating in the market today. Go back six years and there were 52. What has changed is there are an awful lot of branches and there are nearly 100 more branches today than there were five or six years ago.

IBJ: Why is there an emphasis on building new branches?

STOLEN: Because the core of our business is the consumer and small to midsize businesses. They make a lot of their buying decisions on location.

BECK: Also, the consumer is the provider of a big supply of the raw material-cash-the bank uses. The more convenient you are, the higher probability you are going to get their money so you can take that cash and turn it around on the other side of the equation and lend it out and generate revenue.

IBJ: Those numbers-56 and 52-surprise me.

BECK: [Banks are] just changing nameplates.

IBJ: Are other markets in the country this active?

BECK: They are all this active.

SLIFER: In growing markets like Phoenix, it's even worse.

IBJ: What effect would car-title-lending legislation have if passed?

RIPLEY: It hasn't passed so far. This is the second year that [proponents] have come to the Legislature and asked for it. We look at the bill as a predatory lending bill. There is no borrower qualification. It is a bill where we feel there would be more unsophisticated borrowers perhaps giving away a car title and paying 22-percent-a-month interest, which is quite a bit more than our usury rate. In fact, it is quite a bit more than the criminal usury rate in Indiana.

The Legislature has passed and we regulate payday loans. Payday lenders are allowed to charge a very high interest rate on loans. It's fairly new. We are still looking at it. We recently put in a database to keep track of how many payday lenders there are. We know there are over 50 of them in Indiana. We also know there are over 550 locations for payday lenders in Indiana. That is a significant number. It shows there is a segment of the community that is utilizing this service and the vehicle title lenders will most probably locate in the same places. The Center for Responsible Lending has written some information on these vehicle title lenders, pointing out the problems that can occur when they come into the community. That having been said, they're very, very interested in coming to Indiana. They feel there is a market here for the type of loan they offer.

IBJ: How are banks going to continue to grow despite the slowdown in the mortgage market?

STOLEN: Banks aren't huge players in the mortgage market. Most publicly traded banks, if they have mortgage operations, will not want those mortgage operations to become too big a part of their overall revenue base. And so I don't know that the slowdown is going to be particularly detrimental to banks.

SLIFER: If a bank, in terms of its retail and commercial lending, commercial real estate lending and mortgage lending, is balanced, those two can actually complement each other in terms of the bank's performance.

IBJ: How do we get more early-stage money into the hand of entrepreneurs?

BECK: It's not an accident that Indiana ranks among the top 10 states in the country in early-stage business failures. Money, or lack thereof, is one of the key ingredients. We have taken the initiative in two or three areas. We have started a very robust angel market across the state, not only here in Indianapolis, but in Marion, in Kokomo, Anderson, Fort Wayne, South Bend, Hammond, Evansville, Columbus, Bloomington.

From a banking perspective, local banks have not done a good job of learning how to lend to early-stage companies through using risk-mitigation methods. That is stymieing growth somewhat. But as they grow, if you look at the overall marketplace, the banking community does a tremendous job in the bigger companies, middle-market. But in both the early-stage and second-stage companies, there is a huge need and demand.

If we are going to grow tomorrow's Fortune 1,000 companies, they all start small. They grow. And we just haven't done a good job in the state to capitalize those companies.

IBJ: Are banks in any state handing out early-stage loans?

BECK: If you take a look across the country, the answer is yes and no. Those communities that have seen robust growth dramatically ahead of the marketplace have seen it because they have grown startups. And those startups have gotten bigger and created spin-offs. And in all those marketplaces, there is robust lending. One of the things that those communities, in one way or another, have figured out is how to mitigate their risk by participating greatly, by using governmental programs, whatever it took to get there. [Local] banks are becoming much more interested, but it needs to really ramp up.

IBJ: Are banks missing opportunities?

BECK: The bank should not, and will never be, an investor in early-stage companies. But there are various tools that, as a company starts to grow, you can utilize to mitigate the risk. Ultimately, when a company gets big enough, it has to have bank financing in order to really meet its goals and objectives.

IBJ: What's an example of a program they might be able to utilize?

BECK: [The U.S. Small Business Administration] is an example. You can't abuse the SBA, but in some markets banks have figured out how you can leverage SBA programs to improve their chances. Some states have implemented programs to help reduce the bank's risk.

IBJ: How do the bankers in the room react?

SLIFER: He is right. It is a risk. There is a price where banks can't price that risk high enough for one loss. For one loss, a bank has to make a lot of loans with little spreads to make back the principal of the one loss. If there are programs like SBA that support them, banks can get more aggressive.

Again, we have shareholders that we have to report to, and the comptroller of the currency, and others, so we have to make prudent loans. It is not that there isn't a market. It's how we underwrite that, and what are the underwriting guidelines?

IBJ: As bankers, are you trying to expand those opportunities?

SLIFER: Here in Indiana, we don't provide that service. We are only a middlemarket and commercial lender. In the states where we have branch locations, Illinois and Michigan, we do provide those services.

BECK: Last week, there was new technology that came out of Purdue. It was sold and moved out of state. One of the reasons was they couldn't get the appropriate funding. And it isn't just banks; it is at every step in the continuum the companies go through. We are starting to fill those holes.

SLIFER: There is a point where you have to look at whether you are taking an equity risk or a bank risk. It's in that inbetween part that Steve's talking about that it is very difficult. The owners don't want to give up too much so they want to turn to a bank, but the banks can't lend that way. They have to lend at an interest rate. So there is a point where it's very gray.

IBJ: How willing are customers to change banks?

SLIFER: It's painful to move banks. That's one of the reasons why, most times, the current financial institution will always get the last look at something. You don't want to change your checking accounts. You don't want to deal with signature cards. You don't want to go on a new platform for the Web-based systems you use.

And two, it is a lot cheaper to retain a customer. In our business, it might take five or 10 years of calling on someone to get a piece of business.

STOLEN: In the consumer segment, over the last 20 some years, it has changed a lot. The consumer used to be relatively consistent with their banking, but they are much more likely to switch institutions today. That's a function of more availability, more branches and more convenience. They also see larger differences in the value equations between financial institutions today.

Keith's points in the commercial segment are right on. It is a fairly significant undertaking to switch one's relationship and all of us, as financial institutions, consider retention of our clients as probably the key to long-term success.

IBJ: How important is new technology for banks? What's the future for online banking?

SLIFER: The bigger base across which you can spread the investment you have to make in your technology, the easier it is to deliver to your customers. In that sense, technology is very important and will continue to be important. You can get notifications of things on your BlackBerry today when a deposit comes in.

BECK: For smaller companies, it has only been in the last four or five years they have really embraced [technology] because of Internet access. Before, you had to have dedicated lines or ways to get in.

SLIFER: You actually had to load software of the bank. It wasn't Web-based, so every application you had to have someone go and install software.

BECK: With the advent of so many home-based smaller companies that are dependent upon electronics, the consumption of technology-based banking is going to accelerate at a very rapid rate. Four or five years from now, there are going to be things going on we don't even think about today.

SLIFER: Remote deposit is technology where a customer has a scanner and every deposit that comes in gets scanned ... and the physical check is never deposited into a bank. You don't even need a branch to do it.

BECK: More and more companies aren't even issuing checks. They just send the money electronically. How many companies today issue their paychecks on direct deposit?

STOLEN: Technology is synonymous in our industry with product innovation. Virtually all of our product innovation is technology-based.

IBJ: How much acceptance have you seen of products like check scanning technology?

SLIFER: Check scanning is new. I don't know whether it's widely accepted yet. The first scanners just came out last year, so that's something that's too early to tell whether it's going to be successful or not.

BECK: Historically, it has been bigger companies that embraced it because if you are a great big company with thousands of checks coming in, it makes it easy. But the acceleration of the acceptance of technology from big to small is really being compressed.

STOLEN: We began offering a product that we call You Deposit last year. We have a few clients utilizing the service at this point in time. It is going to become more popular, but it has not been a groundswell of activity initially.

SLIFER: As the price comes down and the technology is easier, then that's when you'll see scanners and more businesses in the next five years.

BECK: I agree with that. More and more companies are going to move to electronic transfer of money and they are going to eliminate the check completely. It's easier. It makes sense.

IBJ: Where will new bank branches be built?

STOLEN: To say it's going to be concentrated in any one area would be diffi cult. There has been expansion consistent with the population expansion that has taken place in Hamilton County. Hendricks has also been robust in expansion. If and when I-69 takes place, population expansion usually takes place around transportation channels. You would anticipate the branch expansion to correlate to the population expansion.

BECK: Mostly it has to do with the bank's strategy. A lot of banks have strategies of whom they are going after. The population they are focusing on somewhat dictates where that branch is going to be located. If you are a bank that is going to be focused on upscale, more affluence, then it makes sense that your banks are going to be where they work or where they live. If you are predominantly a commercial bank vs. a retail bank, then your bank is going to be located somewhere closer to the commercial customer.

IBJ: How is the state doing in its efforts to switch from a manufacturing economy to a high-tech one? What can banks do to help speed up this evolution?

BECK: If you look at the last 10 years, we are seeing a shift, not a dramatic shift, but at least a positive trend. Unfortunately, most of that effort is focused in larger, more major metropolitan areas-Indianapolis, Evansville, Fort Wayne, South Bend. The more rural communities are still relatively dependent because they don't have the flexibility. From both a state and a banking perspective, the state is at least using its bully pulpit in a way to try to influence people to do some diversification. One of the first shifts is just dependency on the auto industry. Companies in manufacturing are becoming more flexible. From a banking perspective, it takes money to fund those new companies that will allow the state to diversify its base. It takes equity to do that. It takes investors to say we want to be involved in this process. It takes bankers to say we are willing to help finance this process.

We didn't get where we are at in five years, and we are not going to get out of it in five years. If you go back historically, Indiana has been one of the most robust entrepreneurial marketplaces in the world. In the early 1900s, Indiana was the equivalent of the Silicon Valley of manufacturing. Anything that was going on in the world of manufacturing was taking place in Indiana. We actually became too successful in that the successes that came from this technology created monster companies that then influenced people's willingness to take risks and go into business. We are starting to see the shift back for entrepreneurial activities. And in a 20-year life cycle, we will see the shift back, as long as we have the structure in place to enable that.

IBJ: Indiana sits near the bottom nationally in terms of foreclosures and personal bankruptcies. Why?

RIPLEY: According to the FDIC, we are number one in personal bankruptcy and second in mortgage foreclosures. That's not near the bottom. That is the bottom.

STOLEN: The question is the long-term trend there. We would also be relatively near the bottom in terms of property value increases. Those things tend to ebb and flow. Let's see when value increases start to slow in some of the hotter markets and let's see what happens to those personal bankruptcy and foreclosure issues then.

IBJ: Is it just a matter of time? Or is there something we can do at the state level to educate consumers?

BECK: Part of it is an educational issue. It also gets back to job growth. Wealth is created by a paycheck. That's the first step. If you have the paycheck and if the paycheck is big enough, you can save some.

The only way you can grow yourself out of this is by job [creation]. Where does it come from? People taking risks and having money that allows them to start a company, grow a company. That company over a period of time grows jobs, those people create wealth from that process, and the wealth keeps recreating itself, and ultimately gets bigger and bigger and bigger. So how do people not have foreclosures? They have a better paycheck that allows them to make their payments on time and to grow wealth. It's a pretty basic process.

RIPLEY: We have one of the highest home ownership rates in the country.

STOLEN: Exactly. Looking at the foreclosure statistics has to be taken in relevance to the home ownership statistics as well.

RIPLEY: We are in the process right now along with the Attorney General's Office of finalizing a settlement with Ameriquest [Mortgage Co.]. Ameriquest is going to return to Indiana borrowers well over $4 million for some loan practices that were a problem. That may be part of the problem, too. We have had some problems with mortgage lenders who have perhaps gone a little beyond where they should have been loaning to folks.

IBJ: What sort of programming does the state offer to help educate consumers?

RIPLEY: The Attorney General's Office has a fraud investigation unit that has recently been funded. They will be looking into mortgage practices. I don't know of very many schools, but if you are going to start with an education process, you have got to start with some high schools where you teach personal financial responsibility. And I don't know that there are very many schools at all that are doing that. It should be a basic course.

BECK: The education system does not do a good job of preparing kids coming out of grade school, high school or college to really understand how to utilize money. There was an interesting statistic I saw just a couple of weeks ago-how many college graduates today have no idea how to balance a checkbook. If you don't even know how to do that, then there is a high likelihood you are not paying any attention to your money. And if you are not paying attention to your money, you are going to start missing your bills.

RIPLEY: The DFI has in the past sponsored some education programs at the high school level and has gone out and done those through the department, but that's not something that's a regular education program.

IBJ: Wal-Mart wants to get into the banking business. What's going to happen if they're successful?

STOLEN: I am not particularly concerned that Wal-Mart being in the banking industry would be devastating for the banking industry. Wal-Mart's operating model has been to have a strategic competitive cost advantage from a purchasing standpoint over the competition, and they have been very effective at that. The big- ger they get and the more scale they get, the more that strategic competitive advantage plays to their favor.

In our industry, it is difficult to get a strategic competitive cost advantage because the primary cost that we have is what we have to pay our depositors for their funds. That's a relatively common market, and a very liquid market. And so I don't think they can get the same cost advantages in the banking industry that they have enjoyed in the merchandising industry. There is a lot of question as to whether they will in fact be granted the investor loan charter they are seeking. In fact, there will be hearings on the subject coming up in the not-too-distant future. But it will be very interesting to see how that evolves.

BECK: Other major retailers have tried it in the past. Sears is the prime example. One of the things they came up against was they were not used to the regulatory environment in which they had to play. Right now, Wal-Mart pretty much makes the rules. They are not going to have that luxury.

SLIFER: They could have an advantage because they have a built-in-they already have their branch network built, and they have a base of customers that could potentially get beside that. Like Steve said, there are a lot of people trying to get into the banking business and they are trying to do the residential lending and the consumer lending of other products. That tends to be a lot more difficult and there are a lot more regulations.

BECK: It could be a positive. Just by the demographics of Wal-Mart, there are an awful lot of customers who don't have bank relationships. And so a percentage of the American marketplace that does not embrace financial discipline might by utilizing that type of structure and it could be a positive. It could add liquidity to the marketplace. It could draw money that is sitting in tin cans and in drawers at home into the marketplace. It could have a positive effect across the market. It is not just a negative.

IBJ: In terms of banks, what do you see happening in Indiana in the next few years? Are more big-ticket mergers on the horizon?

BECK: Absolutely. The sign plates that you see around are going to change. There will be more consolidation. News at 11.

STOLEN: What changes are the shareholders. It is not a dramatic change in terms of the delivery of the products. They're relatively common products largely delivered by the same people. And so there will be continued changes of the signs over those financial institutions that are here in the community.

Over the long haul, there will probably be a national reduction in the number of financial institutions that exist. But that will get down to a point of equilibrium at which it will flatten out. And there will be a lot of competition and it will continue to be a very good market for consumers and businesses.

BECK: Banking is going to shake out to three levels. You are going to see the monster banks that are going to be all things to all people and there will be a limited number of those-10, maybe-that will be everywhere.

Then you are going to see some strong regional banks, and there will be a bigger number of those who will concentrate in a four- or five-state region and do a very good job.

And then you are always going to see those small niche-oriented community banks. I don't think we're ever going to be like Canada and have five banks.

SLIFER: I think the regional banks and the larger private ones are the next to consolidate. And then after that happens, you will see some of the community banks that were started years ago will be bought because there is nothing left to buy in the market for the banks that want to get in. And then you will see new community banks come in.

IBJ: Are there any trends you've been thinking about that we haven't discussed?

SLIFER: With acquisition financing, the debt levels that are getting done are very aggressive. To give you an example, total debt to EBDA or free cash, whatever you want to call it, is going beyond five times. Senior debt, which is what the banks do, senior final debt to cash flow is well over three.

Just five years, ago you probably wouldn't have seen a total debt of over 3-1/2 to four. That's because there is so much liquidity in the market, those types of transactions are getting done. And if anything happens to those transactions in terms of the company, those companies fall very quickly.

IBJ: So you see a trend toward too much leverage?

SLIFER: I see a trend toward too much leverage. With all the banks having a lot of liquidity, a lot of VCs having liquidity, the debt that is being put on these transactions are levels that I have never seen before in 20 years.

BECK: I think an issue is going to be banks' and regulators' ability to keep up with technology change. I mean, it is going to do nothing but accelerate and as the old adage goes, when you always do what you always did, you always get what you always got.

And the regulators, a lot of it is just constraints of manpower. Can they stay up? Can they envision more technologies take in the marketplace? Can they regulate the banks and have the flexibility that they really need to participate in tomorrow's economy?

STOLEN: Those are both good observations. I would offer what I characterize as unconventional mortgage products are going to create some interesting issues-products which are created for the purpose of making the payment as affordable as possible, and might even lead to little or no amortization of that mortgage loan over time.

The premise is largely based on perpetual appreciation of mortgage in home values, which over a long enough period of time is fairly reliable, but over shorter periods of time could create real payment problems. Banks don't do a lot of that, but a lot of it takes place in the mortgage market. I think it'll be an issue for government and regulatory bodies for years to come.
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