Merchants Bank of Indiana is top home-grown bank

May 18, 2009

These days, many of the nation's biggest banks need bailouts to avoid bankruptcy. But plenty of institutions far from the limelight of New York and other banking centers continue to make money and manage their affairs well.

Which Indiana-based bank does it best?

Merchants Bank of Indiana, whose main office is in Carmel, books better numbers than any other Hoosier bank. Profits soar, waste is negligible and loans rarely sour.

"I don't know if we do anything better than anyone else," said Chairman and CEO Mike Petrie. "We just do business with good people.

"We perform and they perform. There's no magic other than that."

To determine which of Indiana's 144 banks is best, IBJ asked Chicago-based investment firm David A. Noyes & Co. to compile statistics on each of them in six key categories.

IBJ then analyzed the data to make its selection. The top median performance over the last five years produced each category's winner.

There were many strong banks. But the conclusion was clear: Merchants' results are at or just shy of the top in five of the six classifications. (See chart.)

It has the highest return on average assets, the lowest operating expense, and zero non-performing assets. Merchants also has the second-best return on average equity and the seventh-best ratio of equity capital to total assets.

Merchants placed toward the bottom in a sixth category, net interest margin.

Only one other bank, Kentland Bank northwest of Lafayette, appeared as frequently in the top 10, and it placed lower than Merchants in every category. If Merchants' story doesn't sound familiar, there are reasons. For starters, its name was newly minted April 3. It also has been called P/R Mortgage and Investment Corp. and Greensfork Township State Bank. And until recently, Merchants concentrated on a pair of lending niches that don't require broad branding: apartment construction and agribusiness.

Merchants doesn't advertise, preferring to rely on referrals and relationships developed over three decades.

"We don't seek out any publicity, because we don't need it," Petrie explained.

That philosophy will soon be put to the test. Last year, Merchants spent $3.9 million to acquire Symphony Bank, the troubled Carmel startup that never made a profit, largely because its sole branch was so lavishly expensive.

Merchants, which now has 49 employees, plans to leverage its new headquarters and the reputations of its founders and principals to provide jumbo home mortgages to the affluent on Indianapolis' north side. Merchants also will sell small-business loans to promising professional businesses, such as physicians' practices, law offices and accounting firms.

Best for everyone?

Merchants' statistical performance impresses some local experts. Barnes & Thornburg LLP partner Claudia Swhier, co-chairwoman of the law firm's Financial Institutions Practice Group, was particularly impressed with the lack of loan losses.

"In these economic times, which are very difficult with the recession we're in, it's highly unusual for a bank to have a loan portfolio with no problems," Swhier said.

Krieg DeVault LLP partner John Tanselle said Merchants' performance isn't based on its structure, but on its bankers' devotion to their chosen niches.

"It doesn't surprise me that [Petrie's] got those kinds of numbers, because they do stay with the business model that they know," said Tanselle, whose law practice focuses on financial institutions.

But not everyone agrees it's possible to name a best bank.

Judith Ripley, executive director of the Indiana Department of Financial Institutions, said shareholders, depositors, borrowers, regulators and charities all might favor different banks depending on their interests.

John Reed, executive vice president of David A. Noyes and Co., has the same concern. Even so, Reed considered the "best" ranking exercise worthwhile, as long as it focused on core nuts-and-bolts bank measures.

Reed pointed out that Merchants doesn't attempt to provide all the services available at other banks, such as convenient branches and ATMs.

"Their business model has evidently done extremely well. But pre-Symphony, they're not a mainstream bank," he said. "If every bank in the state replicated that model, nobody would be there to provide traditional banking services."

Reed also noted that the results of IBJ's best-bank search could easily change dramatically in a few months. Today's economy is far different from yesterday's. And as the recession drags on, volatility in even stable areas like apartment mortgages could rise.

Veteran banker Steve Beck, now Indiana managing director of Chicago-based Geneva Capital Group, is impressed with Merchants' performance as a niche leader to apartment developers and farmers. But he's not ready to call it Indiana's best bank.

"What they do, they do a very good job," Beck said. "But ... they're just getting into banking as compared to mortgage brokerage. Two years from now, if they can continue to perform the way they have, I'll be really impressed."

Apartments and farms

Petrie's roots are in another Merchants bank—Merchants National Bank, one of three Indianapolis titans swept up in a string of mergers in the '80s and early '90s.

Petrie made Indiana's first apartment mortgage loan backed by Freddie Mac, and over the next 10 years rose to become executive vice president.

"I have mortgages that have fully amortized," he joked.

In 1990, just as Cleveland-based National City Corp. was preparing to gobble up Merchants National, Petrie and another Merchants executive vice president, Randy Rogers, formed their own company, P/R Mortgage and Investment Corp.

Now a subsidiary of Merchants Bank of Indiana, P/R Mortgage to this day continues to focus only on apartment loans affiliated with major government agencies, such as Housing and Urban Development, Fannie Mae and Freddie Mac. With offices downtown and in Carmel, P/R Mortgage has originated $2.25 billion of apartment loans across the Midwest.

Bruce Cordingley, CEO of Carmel-based apartment builder Pedcor Investments, has worked with Petrie since before P/R Mortgage's inception, and said Petrie is a leader in financing multi-family development.

Cordingley was particularly impressed with Petrie's 2005 stint as chairman of the Washington, D.C.-based Mortgage Bankers Association, a one-year position usually filled by a banker who leads a much larger organization. Merchants has just $215 million in assets.

But those assets grew a median 12.42 percent the last five years, including outstanding years in 2005 and 2007, when growth topped 30 percent.

Petrie noted that Merchants' performance is possible largely because it doesn't face quarterly pressure from shareholders, who expect regular dividends and steady stock price growth.

The bank is still owned entirely by Petrie and vice-chairman Rogers, who are willing to wait patiently for growth to mature. In nearly two decades, Petrie said, he's seen only one apartment loan sour.

"Slower growth reduces risk," he said. "And we're not in a race with anybody we know of."

Strict lending standards are another key to Merchants' success. P/R Mortgage performs rigorous due diligence starting with examining each borrower's books for the last three years. Next comes half a dozen formal appraisals and physical inspections, then direct verification apartments are occupied by tenants listed on the rolls.

The disciplined checking and rechecking weeds out many potential deals. But it also prevents bad loans.

"We follow it every time," Petrie said. "We don't take shortcuts."

Petrie's downtown office floor is littered with preliminary loan applications, many of which will never be approved. P/R Mortgage charges no loan processing fees because they "nickel and dime" clients, and create pressure to focus on application volume, not loan fundamentals.

Fees also undermine Merchants' core philosophy of building business relationships that, over time, become friendships in which borrower and lender grow together.

"I can't make a bad loan for somebody just so I can make a fee," Petrie said. "That kills our whole business."

Eight years ago, P/R Mortgage embarked on its first acquisition. It bought Lynn-based Greensfork Township State Bank, a tiny institution that's served farmers near the Ohio border since 1923, in order to secure a stable base of deposits to back P/R Mortgage's growing book of apartment loans.

Greensfork wasn't making money. But Petrie built an agribusiness team around the same relationship-based lending philosophy and turned the bank into another cash cow.

The Symphony acquisition and corresponding name change to Merchants put the bank on a new path.

The consolidation won't be complete until July 25, so it remains to be seen whether Petrie can quickly turn the Carmel bank with the heated parking spaces into another profit center.

Leading the division will be Bill Olds and Richard Belser, veteran bankers who also trace to Merchants National.

Given the risks taken by big banks elsewhere, sticking to the basics wasn't easy for Petrie. He admits feeling tempted to stray into high-risk, high-return subprime lending areas during the housing boom.

But it went against the grain of his three decades of experience.

"It's very difficult when everyone else is doing it not to follow the herd off the cliff," Petrie said. "You may have to be wrong in the short term to be right in the long term."

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