Banks and Recession and Banking & Finance and First Merchants

Many banks cutting dividends to merely a penny

March 13, 2010

Banks used to take pride in having long records of increasing dividends. Now, about all most can say is they still pay one.

In recent months, financial institutions headquartered in the state have slashed their quarterly dividends—some to a mere penny a share.

And because they’re still battling their biggest woes in decades, they’re unlikely to up their payouts anytime soon.

“Banks used to think of their stocks as reliable, income-producing investments,” said Michael Renninger, principal of Renninger & Associates, a Carmel consulting firm. “All of that stability and conservatism and predictability have been totally thrown out the window.”

Five Hoosier banks with a substantial central Indiana presence—Muncie-based First Merchants Corp., New Castle-based Ameriana Bancorp, Greensburg-based MainSource Financial Group, Columbus-based Indiana Community Bancorp and Bloomington-based Monroe Bancorp—all have endured the humbling experience of rolling out 1-cent-a-share dividends.

The comeuppance was especially jarring for First Merchants. Until its full-year dividend leveled off at 92 cents in 2004, the bank had recorded 22 straight years of annual increases.

First Merchants cut back its quarterly dividend from 23 cents to 8 cents in May 2009. It held its dividend at that level for two more quarters before announcing in January that the dividend for the March payout would be just a penny.

The final cut will save $6 million this year, CEO Michael Rechin told shareholders in February.

“The corporation’s management and board of directors believe that retaining capital to protect and strengthen the corporation is one of its highest priorities,” Rechin said in explaining the move.

Any other philosophy in this environment might be reckless. The collapse of the housing market began dragging down banks two years ago. While the worst of those problems appear to have passed, commercial real estate woes continue to ravage banks’ balance sheets.

First Merchants executives still have their hands full. In the fourth quarter, the bank reported an $11.7 million loss, compared with a $220,000 profit in the same period a year earlier.

First Merchants, like other banks that cut their dividends, says it still has a strong capital base.

Rechin said protecting that by limiting dividends is prudent “until the operating environment and our earnings improve.”

But it is not entirely up to bank managers and their boards. U.S. regulators have told banks not to increase dividends or buy back shares until the outlook for the industry improves.

They’re trying to halt a rash of bank failures. Regulators have seized nearly 200 banks since January 2008, including 26 this year.

Regulators also want to get banks ready for stiffer capital requirements and higher assessments for deposit insurance coming down the pike.

“Banks are trying to be proactive and prepare for that,” said Renninger, the consultant.

Ice competitors frozen out

Cincinnati-based Home City Ice, the dominant distributor of packaged ice in central Indiana, was hit with a $9 million fine this month after admitting to engaging in a price-fixing scheme in Michigan.

That criminal case does not allege price fixing in Indiana. But a civil class action complaint in Detroit that Home City agreed to settle late last year for $13.5 million does.

The civil suit charged Home City conspired with the other two major packaged-ice manufacturers to carve up the nation into three territories, avoiding competition and pushing up prices.

Indiana retailers ultimately will end up with some of the $13.5 million. But a judge has not yet ruled on how the money will be divided.

Scott Beil, owner of the fledgling Penguin Ice in Indianapolis, doesn’t have firsthand knowledge of Home City’s colluding with other big ice companies. But he does know the opening of his company four years ago has changed dynamics here.

Beil was a big fish himself until 2000, when Home City acquired his former company, locally based Polar Ice. He jumped back in when his non-compete expired.

The new firm has 12 employees and sells about a million seven-pound bags of ice annually. That’s down from the 15 million Polar sold before the Home City acquisition. But Beil said the Cincinnati company has taken notice of its upstart rival.

“There have been a lot of price reductions in this market,” said Beil, 44.

Beil doubts he would have been successful gaining a new foothold if he hadn’t already known the market.

It’s a tough business, he said, with high upfront expenses. Ice suppliers shoulder the cost of customers’ iceboxes, for example, and those run more than $2,000 apiece.•

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