Indiana’s Puzzling Economic Position

Sometimes I just get puzzled. Recently the NorthWestern Financial Review issued its August 2014 edition. I always enjoy reading this magazine, which focuses on what is happening in the banking region of which Indiana is the easternmost state. My good friend Tom Bengtson has published this magazine for nearly 30 years. In the August issue, as he frequently does, Tom published a statistical snapshot of the states within the focus region; the statistics compare assets, loans outstanding, deposits, loan to deposit ratio, net income, return on assets and return on equity. What puzzles me is that, by most measurements, Indiana has been doing well economically. However, looking at the numbers in the statistical snapshot, Indiana does not fare very well in the banking industry.

Of the 15 states in the comparison, Indiana ranked 14th among banks of less than $100 million in assets on both return on equity (ROE) of 2.61 percent and return on assets (ROA) of 0.35 percent. The national average for ROE is 6.94 percent, and for ROA is 0.82 percent. While there are 2,005 banks remaining in the 15-state region, and only 27 are in Indiana that are under $100 million in assets, I suspect most in other states are located in more rural areas than Indiana offers. Agriculture lending has been a huge boon for many of these banks. Also, Indiana has not adopted the change from C Corporation to Sub S Corporation at nearly the same pace as has occurred nationally. Consequently, I can understand why Indiana small banks are lagging in these important measurements.

What I am having difficulty deciphering is the outlook of all banks headquartered in Indiana vs. the other 14 states, plus vs. the United States as a whole. Indiana has 129 banks – according to the March 31, 2014, data from the Federal Deposit Insurance Corp. – and these banks collectively rank 13th for both ROE at 7.90 percent and for ROA at 0.86 percent! Perhaps the agricultural lending and Sub S adoptions in Indiana explain some of our industry lag, but there must be other reasons. Even looking at all of the 6,730 banks in the United States, Indiana is trailing. The national figures for all banks are ROE of 8.99 percent and ROA of 1.01 percent. I thought that I knew the answer: It must be that Indiana has a much lower loan to deposit ratio. However, Indiana ranked third among the 15 states for the small bank group, and fourth for all banks in the group. Nationally, Indiana at 78.7 percent was well ahead of the average of 70.0 percent.

As I rack my brain trying to determine why this might be, I remain puzzled. Perhaps our state tax rate is higher. If that is the case, then the General Assembly may have helped our problem with passage of tax decreases in each of the past two legislative sessions that, over time, will lower the Financial Institutions Tax from 8.5 percent to 4.9 percent. Perhaps it is due to our historically inordinate reliance on manufacturing for high-paying jobs and continued expansion of facilities, increasing those jobs that have made Indiana the most manufacturing-intense state in the country. Manufacturing has not come back to the level it was in the late 1990s. Perhaps the fact that Indiana significantly lags the U.S. economy in average wages and family average wages causes us to fall behind. Perhaps it is because our average real estate values are lower than throughout the country. Perhaps it is all of the above.

I am interested in hearing from others as to why this conundrum exists. Until then, I remain puzzled.

-S. Joe DeHaven

One Response to Indiana’s Puzzling Economic Position

  1. Joe Morgan says:

    Joe,

    I have noticed this in the past. No Indiana banks rank highly on ROA or ROE according to banks in other states. My former boss, John Bowen, has said for a long time that he believes it is the regulatory environment in Indiana being the cause. Indiana banks are more highly regulated than other states, which holds back performance.

    I have a tendency to believe that this is the case. Additional regulation is expensive, and I can come up with no other explanation.

    Joe Morgan

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