Banks no longer in critical condition, but full recovery still distant

The banking sector is on the mend after being tattered by the financial crisis, but it still has a long way to go before
making a full recovery.

That’s the consensus, judging from recent stock performances of the largest publicly traded banks
with a presence in Indianapolis.

Since hitting 52-week lows early this year amid the tumult of the financial collapse, stock prices are
beginning to show signs of a rebound.

Shares of all eight publicly traded banks that are among the city’s 10-largest financial institutions
(National Bank of Indianapolis and First Internet Bank of Indiana are not public) have risen lately.
And half of those stocks have enjoyed eye-popping triple-digit jumps.

However, despite the improvement, the stocks are still far below levels of two years ago, long before the turmoil
struck and the Troubled Asset Relief Program, or TARP, entered the national vernacular.

“Nobody thinks that we’re totally out of the woods yet,” said Mike Renninger, principal
of Carmel-based bank consultancy Renninger & Associates LLC. “But we hope we’re past
the crisis.”

Recent “stress tests” by federal regulators show that many of the nation’s largest
banks are stronger than thought, and able to raise capital.

Until the sector fully recovers, though, the economy will face a long slog back, experts warn. Banks too cautious
to increase lending and end the credit crunch remain part of the problem.

With the exception of the former National City Bank—sold to Pittsburgh-based PNC Financial Services
Group Inc. late last year—banks doing business in Indianapolis avoided dabbling heavily in the
subprime mortgage market. National City, for instance, was among the 10 largest subprime lenders nationally.

 “We kind of missed that,” said Mike Rechin, CEO of First Merchants Corp. in Muncie.
“And thank God, I’m happy about that.”

In the ‘doldrums’

Growing First Merchants finalized its purchase of Plainfield-based Lincoln Bancorp on Dec. 31 and expanded to 80 branches,
20 of which are in the Indianapolis area. The acquisition catapulted First Merchants to the ninth-largest local bank based
on its $601 million in deposits as of June 30, 2008, the most recent statistics available from the Federal Deposit Insurance
Corp.

Its stock closed at a 52-week low of $7.57 in March and then climbed above $12 the
following month before settling in the $8 range in mid-July. Shares have increased
a modest 9 percent since bottoming earlier this year but still are down 66 percent from their price of
$24.03 at the beginning of July 2007.

“Our stock has been pretty badly damaged,” Rechin said. “This
year has been difficult.”

Others have suffered much worse. Parents of Cincinnati-based Fifth Third Bank; Columbus,
Ohio-based Huntington National Bank; Cleveland-based KeyBank; Milwaukee-based M&I Bank and Birmingham,
Ala.-based Regions Bank all have watched their stock prices plummet at least 80 percent in the past two
years.

Regions and M&I registered the steepest declines—87 percent and 86 percent, respectively. KeyBank
trails slightly at 85 percent, followed by Huntington and Fifth Third, at 82 percent and 81 percent,
respectively.

By comparison, the Dow Jones industrial average is down 39 percent from two years ago.

Much of the trouble in the banking industry can be traced to questionable lending. In Fifth Third’s
case, non-performing loans rose from 0.4 percent in 2005 to 3.8 percent at the end of March of this year.

“Bank stocks are very much in the doldrums,” said John Reed, executive vice president of
David A. Noyes & Co. “Banks are what led us into the current malaise with their subprime mortgages
and various other instruments.”

JPMorgan Chase & Co., the New York parent of Chase bank, and PNC are struggling as well, but not nearly as badly. Their
stock prices have dropped 25 percent and 46 percent, respectively, from two years ago.

Regions and Fifth Third, as well as PNC and KeyCorp, need to raise a total of $6 billion in capital based
on results of government “stress tests” released in May.

Mounting a comeback?

Even so, the banking industry is beginning to show a pulse.

After sinking to $1.03 in February, Fifth Third was trading at $7.37 as of July 16, a whopping 616-percent
increase—the largest of the eight largest publicly traded banks in the city.

Huntington has jumped from $1.02 to $4.12, a 304-percent increase. Other banks that have risen at a triple-digit
percentage clip are JP Morgan, 127 percent, and PNC, 109 percent.

Morris Maurer, president of National Bank of Indianapolis, said there is indeed reason for optimism.
Some banks have repaid bailout money, and stress tests show the problems are manageable, he said.

Conversely, banks are expected to lose hundreds of billions more before the carnage is over.

“You can take the optimistic view that the worst is behind,” Maurer said, “or you can
take the other side and say, ‘My gosh, there’s another $700 billion in losses yet to come.”

Maurer’s bank, co-founded with cousin Michael Maurer, co-owner of IBJ Media, doesn’t have
to answer to public shareholders. Yet, its private investors know that their ownership shares could fetch
$39 each if they were to sell, Maurer said. The share price is calculated by an outside appraisal firm
to gauge the bank’s performance.

No stock in National Bank of Indianapolis is currently for sale, Maurer said, which tells him shareholders
are relatively pleased with its performance. The bank’s value is down modestly from a high of $52
a share a couple of years ago.

The bank has capitalized on performance concerns of its larger competitors, Maurer said, by adding new
accounts and remaining profitable.

“We’re doing pretty well, all things considered,” he said. “It’s hard not
to be affected by what’s going on.”

Banks are still failing. In neighboring Illinois, six—all owned by the same family—closed
July 3.

So when will the economy begin to thaw enough so banks feel comfortable lending again? That’s hard
to predict, industry experts said. What is certain is that any turnaround hinges on a recovery of the residential mortgage
and commercial real estate markets.

A receding unemployment rate would help.

Said Rechin at First Merchants: “If people don’t have jobs, banks that lend money are going
to be in trouble.”•