Some of the most telling signs that banks finally may be recovering from the economic downturn are their decisions to begin increasing dividends.
In recent months, several financial institutions headquartered in Indiana began raising shareholder payouts after slashing dividends to as little as a mere penny a share.
The moves suggest they’re feeling more confident about improving earnings, said Michael Renninger, principal of Renninger & Associates, a Carmel consulting firm.
“No bank wants to reduce their quarterly dividend if they don’t have to,” Renninger said. “That sends shock waves through the investor base when they do that.”
Many, however, took the drastic measure two years ago in a desperate attempt to retain cash to weather the collapse of the housing market and commercial real estate woes that ravaged their balance sheets.
Three Hoosier banks with a substantial central Indiana presence—Muncie-based First Merchants Corp., New Castle-based Ameriana Bancorp and Greensburg-based MainSource Financial Group—endured the humbling experience of rolling out 1-cent-a-share dividends. Others that since have been swallowed by competitors did so, as well.
First Merchants is the only one of the three to raise its dividend. But some banks that cut theirs—albeit not to as low as a penny—have increased their dividends, too. They include Michigan City-based Horizon Bancorp, Warsaw-based Lakeland Financial Corp. and Evansville-based Old National Bank.
First Merchants reduced its dividend from 23 cents to 8 cents in 2009, before lowering it to 1 cent in 2010. The decision in April this year to raise it to 3 cents suggests that the bank’s outlook is getting better, said President Mike Rechin.
In the first quarter this year, for instance, the bank’s provision for loan losses totaled $4.9 million, down from $5.6 million in the same period last year.
“We’re pleased with the beginnings of commercial loan growth,” Rechin said. “We need [companies] to feel confident to take on that next project. I think that’s still at a low level, but it’s better than it was last year, for sure.”
First Merchants earned 46 cents per share in the first quarter, including 21 cents per share attributable to its asset purchase of SCB Bank in Shelbyville. Based on the higher earnings, directors of First Merchants chose to raise the dividend to 3 cents, said Rechin, and could increase it again within six months.
Old National cut its dividend from 23 cents to 7 cents in 2010 before raising it to 9 cents earlier this year. In the meantime, Old National acquired Columbus-based Indiana Community Bancorp. and Bloomington-based Monroe Bancorp, two institutions that also reduced dividends to a penny.
“We realize the importance of the dividend,” CEO Bob Jones said, “but we also realize the importance of being prudent.”
Most Old National shareholders are seeking long-term value rather than a short-term gain, Jones said. To be sure, banks historically have been viewed as reliable, income-producing investments. But much of that stability and predictability has been lost during the economic downturn.
Old National’s decision to raise its dividend reflects confidence that earnings are improving, Jones said. The bank posted first-quarter profit of $21.7 million, up 32 percent from a year earlier.
In July, Horizon in Michigan City completed its purchase of Heartland Bancshares Inc. in Franklin and opened its first downtown Indianapolis office.
CEO Craig Dwight said the bank raised its dividend from 11 cents to 13 cents this year, on confidence that future earnings will increase. Horizon has reported 12 consecutive years of record earnings and is on pace for another record this year.
MainSource in Greensburg, however, is among the banks choosing to hold its dividend at a penny. It’s been at that level since the bank paid stockholders 14 cents per share in 2009.
Hanging over MainSource’s decision to up the amount is the $36 million it still owes in Troubled Asset Relief Program, or TARP, funds, down from $57 million in 2009.
The bank hopes to repay the debt or repurchase the remaining $36 million in bank shares by 2014, MainSource CEO Archie Brown said.
MainSource earned $6 million in the first quarter compared with $4.5 million in the year-ago period, primarily due to a decrease in its loan-loss provision expense.
“What we’ve said publicly, from the time we took the dividend down, is that we need to get TARP repaid,” Brown said. “At that point, we would certainly look at taking the dividend back up.”
Like Horizon, MainSource also sees the value of a downtown Indianapolis presence. It announced last month that it snagged a prime location by signing a lease to take 9,500 square feet in the former downtown home of Borders at the southeast corner of Meridian and Washington streets. The branch is slated to open in October.•