Banking plus: with competition and deregulation, banks in Indiana are offering more non-traditional financial products.

• Author: Beck, Bill

It used to be axiomatic that customers went to the local bank for loans and deposits. The local savings-and-loan institution made its business on home mortgages, and folks who belonged to a credit union could get a car loan. Insurance agents sold insurance and stock brokers brokered stock.

It's not that simple anymore. Today, banks in Indiana are increasingly full-service financial institutions, offering a wide variety of products including variable-rate annuities, mutual funds, equities and financial-planning services.

"The distinctions are blurring," says Tom Williams, director of government relations for the Indiana Bankers Association. As they blur, he says, banks are left at a competitive disadvantage compared with other types of financial-services organizations. Banks often can't diversify to the extent that they'd like because of federal and state government regulations, he says, but securities brokerage houses nationwide are buying banks and offering bank services.

"Merrill Lynch can do its traditional securities business," he says, "but it also owns a bank. So, you can draw checks on your brokerage account, and that's a service very similar to what bankers offer."

While much of the move to competition in financial services was spurred by deregulation, an equal contributor in the 1990s has been the precipitous drop in interest rates. When rates dropped through the floor in the late 1980s, investors fled CDs and money markets en masse, in search of higher-yielding investments. Estimates are that local CD deposits under $100,000 in Indianapolis alone dropped 8 percent between 1992 and 1993, and some $44 billion was pulled out of CDs nationwide in 1992. With CD interest rates hovering below 3 percent in 1993 and through the first quarter of 1994, that trend is expected to continue both here and across the country.

"The traditional bank income just doesn't cut it anymore," says John Reed, a banking industry analyst with David A. Noyes Capital Markets in Indianapolis. "The margins are thin and we've had a protracted sluggish economy which has held loan demand way down."

Reed explains that the alternative to loan income is fee income, and says Indiana banks have begun getting into non-traditional bank products. For now, that means offering primarily mutual funds and fixed-rate and variable annuities, but Reed expects to see the super-regional banks get into a wider range of financial products.

"The big money-center banks are now...