The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
NORTHERN EDITION
¡1SSN 0026-296X)
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
AUGUST, 1983
Problem-Loan Workouts
First Line of Defense
Is Well-Trained Officers
Early detection and prompt action
are the keys to controlling problem
loans and loan losses, says a bank
senior vice president.
These steps can be taken to deter
mine the severity of a problem credit:
• All loan and deposit relationships
must be fully determined.
• Study all loan and deposit docu
ments to determine if they have been
prepared properly, what rights the
bank has and what can be done to
improve the bank’s position. Be pre
pared to move promptly.
• Get a handle on the collateral —
where it is, what its real value is.
• Determine who the other credi
tors are, possibly by studying dis
bursements as shown on cancelled
checks in the account file. Where has
the money gone and where is it going?
• Review all legal aspects of the
case with the bank’s attorney. (See
page 18.)
{in a ici*
Some
safekeeping advice:
Go Mid-west,young man.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
T h a t a d v ice h old s for m a tu re
m e n . A n d lad ies of all a g e s. Y o u
se e , s o m e b a n k e rs th in k th e r e ’s o n ly
o n e city for S a fe k e e p in g . T h e y
n e e d good re a s o n s to c o n sid e r S a fe
k e e p in g w e s t of th e H u d s o n R iv e r.
A t C o n tin e n ta l B a n k , w e ’v e
g o t th e re a s o n s. G ood o n e s. A n d
lots of th e m . T a k e s o m e th in g th a t
c a n a ffe c t y o u r P & L . L ik e m a tu r
in g s e c u ritie s. O th e r b a n k s m a k e a
big h o o p -d e -la h a b o u t n e x td a y c a s h availability. W e sk ip th e
h o o p -d e -la h . A n d g iv e y o u im m e
d iately av ailab le f u n d s . . . 90% of th e
tim e . Y o u r fu n d s c a n be re in v e s te d
b efore m o s t b a n k s e v e n p a y o u t.
H o w a b o u t s u b -a c c o u n tin g ?
Y o u r b a n k offer th a t? W e do.
O u r c o rre s p o n d e n ts g e t o n e m a in
a c c o u n t. A n d 9 9 9 s u b -a c c o u n ts to
a ss ig n to c u s to m e rs o r o th e r b a n k
d e p a rtm e n ts . A n im p o rta n t e x tr a
th a t s a v e s tim e a n d h e a d a c h e s
c o m e a u d it tim e.
W a n t m o re good re a s o n s ?
H o w a b o u t q u ality tra n sa c tio n
s e rv ic e a t a p e n n y p ric e ? O r a n
im m e d ia te re s p o n se to in q u iries
th a t’s h a rd to find e ls e w h e re ?
----- ^
M a y b e it’s tim e to sta rt
th in k in g B i g O n io n . . . n o t B i g
A p p le. C all R o b e rt C . V a sk o
in C h ic a g o . A t (312) 8 2 8 -4 0 4 6 .
W e ’ll w o rk to g e t y o u r
S a fe k e e p in g b u sin e ss. A n d w e ’ll
w o rk to k e e p it.
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C ontinental Illinois National B a n k and Trust Com pany of
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Rock Valley, Iowa
712/476-5905
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Birmingham, Alabama
205/833-0920
Pleasant Hill, California
415/689-2000
Monett, Missouri
P.O. Box 607, 65708
417/235-6652
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4
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Federal Reserve Bank of St. Louis
MID-CONTINENT BANKER for August, 1 9 8 3
Convention Calendar
MID-CONTINENT RANKER
(Incorporating MID-WESTERN BANKER)
Aug. 28-31: Bank Administration Institute Microscape
Chicago, Hyatt Regency Chicago.
Sept. 7-9: Dealer Bank Association Government Secur
ities Traders Seminar, Philadelphia.
Sept. 11-14: ABA National Personnel Conference,
Phoenix, Hyatt Regency.
Sept. 11-13: Kentucky Bankers Association Annual
Convention, Louisville, Galt House.
Sept. 12-14: Independent Bankers Association of
America Commodity Marketing Seminar, Chicago.
Sept. 13-16: Bank Marketing Association Corporate
Marketing Conference, Vail, Colo., W estin Alpine
Resort.
Sept. 16-17: Equipm ent-Lease Seminar, Kansas City,
Westin Crown Center.
Sept. 18-21: Bank Administration Institute National
Convention, San Francisco, Fairmont Hotel.
Sept. 18-21: National Association of Bank Women
Annual Convention, Dallas, Hyatt Regency Dallas.
Sept. 18-23: Robert Morris Associates Loan Manage
ment Seminar, Columbus, O ., Ohio State Universi
tySept. 18-30: ABA National School of Retail Banking,
Norman, Okla., University of Oklahoma.
Sept. 20-23: ABA National Bank Card Convention, Los
Angeles, Bonaventure.
Sept. 25-29: Consumer Bankers Association Annual
Conference, Scottsdale, Ariz., Camelback Inn.
Sept. 28-30: Dealer Bank Association Senior FundsManagement Roundtable, Boston.
O ct. 2-8: ABA Management School for Corporate Bank
ers, Evanston, 111., Northwestern University.
Oct. 8-12: ABA Annual Convention, Honolulu, Hawaii.
O ct. 9-15: ABA National Graduate Compliance School,
Norman, Okla., University of Oklahoma.
Oct. 10-12: Independent Bankers Association of Amer
ica Advanced Commodity Marketing Seminar, Chi
cago.
Oct. 16-19: Bank Administration Institute Cash Man
agement Conference, Boston, Westin Hotel.
Oct. 19-21: Dealer Bank Association Operations Semi
nar, New York City, Vista International.
O ct. 2 1 -2 2 : E q u ip m en t-L ease Sem inar, Atlanta,
Peachtree Plaza.
O ct. 23-25: ABA International Banking Conference,
New York City, Grand Hyatt New York.
O ct. 23-26: Bank Marketing Association Annual Con
vention, Atlanta, Atlanta Hilton.
Oct. 23-28: ABA National Commercial Lending Gradu
ate School, Norman, Okla., University of Oklahoma.
O ct. 30-Nov. 2: Robert Morris Associates Annual Fall
Conference, San Francisco, Fairmont Hotel.
Oct. 31-Nov. 2: Conference of State Bank Supervisors,
Federal Legislative Conference, Washington, D .C .,
Mayflower Hotel.
Nov. 2-5: Independent Bankers Association of Amer
ica, Seminar/Workshop on One-Bank Holding Com
pany, Hilton Head Island, S. C ., Hilton Head Re
sort.
Nov. 6-18: ABA National Commercial Lending School,
Norman, Okla., University of Oklahoma.
Nov. 9-11: Association of Bank Holding Companies Fall
Meeting, Seattle, Westin Hotel.
Nov. 9-11: Dealer Bank Association Public Finance
Seminar, New Orleans.
Nov. 13-16: ABA National Agricultural Bankers Con
ference, Los Angeles, Bonaventure.
Nov. 13-16: Bank Administration Institute Money
Transfer Developments Conference, Boston, Westin
Hotel.
Nov. 13-16: Bank Marketing Association Corporate
Business Development Training Workshop, Orlan
do, Fla., Orlando Marriott Inn.
Nov. 13-17: Bank Marketing Association Trust Market
ing Conference, Dallas, Fairmont Hotel.
Nov. 27-D ec. 2: ABA National Commercial Lending
Graduate School, Norman, Okla., University of
Oklahoma.
D ec. 5-9: Bank Marketing Association Southeasten
Essentials of Bank Marketing School, Athens, Ga.,
University of Georgia.
D ec. 11-14: Bank Administration Institute ATM/6National Conference, Atlanta, Hilton Hotel.
Jan. 15-18: Bank Administration Institute PATH Con
ference on Productivity, New Orleans, Sheraton
Hotel.
Jan. 20-21: Equipm ent-Lease Seminar, New Orleans,
Marriott Hotel.
Volume 79, No. 8
IN THIS ISSUE
8 THE BANKING SCENE
‘O xym o ro n ’ banking regu lation s
11 FIVE 'P's OF ASSET-QUALITY REVIEW
A m an ag em en t-in fo rm atio n system
14 BENEFITS OF LOAN-REVIEW COMMITTEES
R ep orts by banks in M C B su rvey
18 ACTIONS TO TAKE W HEN A CREDIT IS WEAK
H ow to p erform satisfactory loan w orkouts
26 NEWS ABOUT BANKS A ND BANKERS
P ro m otio n s, re tire m e n ts , m a n ag em en t ch an ges
36 BANK IN TEXAS USES FINANCIAL FUTURES
To optim ize asset/liability m a n ag em en t
40 ASSET/LIABILITY-MANAGEMENT SYSTEMS
Available to financial institutions
46 BOARDS OF ABA, BMA AGREE TO MERGE
B M A m em b ersh ip to v ote in S e p te m b e r
48 BANKS ENJOY POSITION OF STRENGTH
A ccord in g to B A I-A n d erson study
52 SURVIVAL PLANNING:
A ‘m u st’ for banks
MID-CONTINENT BANKER for August, 1 9 8 3
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
August, 1983
EDITORS
Ralph B. Cox ........ Publisher
Rosemary McKelvey .. Editor
Lawrence W. Colbert
Assistant to the Publisher
Jim Fabian ___ Senior Editor
M ID -C O N T IN E N T BANKER E d ito rial/A d ve rtisin g O ffices
St. Louis, Mo., 408 Olive, 63102. Tel. 314/4215445; Ralph B. Cox, Publisher; Marge Bottiaux,
Advertising Production Mgr.
MID-CONTINENT BANKER is published monthly by
Commerce Publishing Co., 408 Olive St., St. Louis,
Mo. 63102.
Printed by The Ovid Bell Press, Inc., Fulton, Mo.
Controlled circulation postage paid at St. Louis,
Mo., and at additional mailing offices.
Subscription rates: Three years $27; two years
$20; one year $12. Single copies, $2.50 each.
Foreign subscriptions, 50% additional.
Commerce Publications: American Agent & Bro
ker, Club Management, Decor, Life Insurance
Selling, Mid-Continent Banker and The Bank
Board Letter.
Officers: Donald H. Clark, chairman emeritus,
Wesley H. Clark, president and chief executive
officer; James T. Poor, executive vice president
and secretary; Ralph B. Cox, first vice president
and treasurer; Bernard A. Beggan, David A. Baetz,
Lawrence W. Colbert and William M. Humberg,
vice presidents.
5
Intodayk
charging banking
environm ent
a regional bank
thaldoesrft
change probably
w xft be
1
around tom orrow
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
MID-CONTINENT BANKER for August, 1 9 8 3
Regional banks and thrift institutions are
realizing that survival under deregulation
requires change, and most often it’s through
either acquisition or merger.
Kidder, Peabody is uniquely positioned to
help financial institutions think through their
various alternatives. Our Bank and Financial
Services Group has the depth of investment
banking experience and resources to handle
the most demanding situation. Each invest
ment banker has personally had extensive
commercial banking experience. And they’re
supported by a Research Department that is
one of the best-thought-of in the industry,
plus a Trading Department that makes active
markets in over 100 regional bank stocks.
The Bank and Financial Services Group has
grown significantly in response to deregula
tion, adding numerous banking clients and
participating in over 15 recent transactions.
The record reflects a broad spectrum of skills,
from successful defenses to successful take
overs.
If your bank has assets of between $500 mil
lion and $5 billion, your greatest asset is an
investment banker that understands your par
ticular circumstances, markets and business.
When your bank is thinking of its future, think
of Kidder, Peabody.
To discuss confidentially our program in
more detail, call:The Bank and Financial
Services Group (212/747-5742).
R EC EN T TR A N SA C T IO N S INVOLVING BAN K & TH RIFT CLIENTS
Banking Company
Advisory Service(s)
Transaction's
Present Status
American Bancorp, Inc.
Central Penn National Corp.
Merger Advisory
Common Exchange
P e n d in g
Dauphin Deposit Corporation
Acquisition Advisory
Cash and Common
Exchange
P e n d in g
B a n c o r p o f P e n n s y lv a n ia
Equitable Bancorporation
Tender Defense
T en d er O ffe r
W ith d r a w n
L Z H A s s o c ia te s
FGB Holding Corporation
F in a n c i a l G e n e r a l B a n k s h a r e s , In c .
First Marine Banks, Inc.
B a r n e t t B a n k s o f F l o r id a , In c .
Acquisition Advisory
Tender Offer
C lo s e d
Merger Advisory
Tender Defense
C lo s e d
Florida Federal Savings and Loan Association
Stock Conversion
P e n d in g
Greater Jersey Bancorp.
Merger Advisory
Cash and Common
Exchange
P e n d in g
Acquisition Advisory
Tender Offer and
Common Exchange
C lo s e d
Merger Advisory
Multiple Securities
Exchange
C lo s e d
Merger Advisory
Common Exchange
C lo s e d
M i d l a n t i c B a n k s In c .
Huntington Bancshares Incorporated
U n io n C o m m e r c e C o r p .
Northern States Bancorporation, Inc.
F ir s t A m e r i c a n B a n k C o r p o r a t i o n
Ocean County National Bank
T h e S u m m it B a n c o r p o r a tio n
Old National Bancorporation
Stock Repurchase
C lo s e d
The National Bank of South Carolina
Tender Defense
T en d er O ffe r
Merger Advisory
Multiple Securities
Exchange
C lo s e d
W ith d r a w n
S o u t h e r n B a n c o r p o r a t i o n , In c .
The Oneida National Bank and Trust
Company of Central New York
N o r s t a r B a n c o r p In c .
Tender Defense
The Peoples National Bank of Central Jersey
O ffe r
W ith d r a w n
F ir s t J e r s e y N a t i o n a l C o r p o r a t i o n
The Union Savings & Trust Company
Merger Advisory
P e n d in g
Merger Advisory
Common Exchange
C lo s e d
B a n c O n e C o r p o r a tio n
York Bancorp
C o n t in e n t a l B a n c o r p , In c .
Kidder, Peabody's clients bold faced.
K id d e r , P e a b o d y
&
C O *
INCORPORATED
Founded 78 6 5
Members NewYork and American Stock Exchanges
10 Hanover Square, NewYork City, N.Y. 10005
MID-CONTINENT BANKER for August, 1 9 8 3
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
— O ver 60 additional offices worldwide —
7
THE BANKING SC E N E
By D r. LEWIS E. D A V ID S
Illinois Bankers Professor of Bank Management
Southern Illinois University, Carbondale
'Oxym oron' Banking Regulations
HE TERM “oxymoron” refers to a financial institutions. For example, the and renewal of shaky loans would re
figure of speech in which opposite Comptroller of the Currency raised
sult in banks exceeding their loan
or contradictory ideas are combined,the loan limit for national banks from limits. Thus, one quick and easy her
such as “thunderous silence” or “sweet approximately 10% of capital and sur oin-like fix to the problem was to per
sorrow.”
plus to 15%. Some bankers view this as mit these banks to have higher loan
Federal banking regulators have a positive sign that permits them to limits and thus be able to rollover non
latched on to this concept and given compete with state-chartered banks performing loans so they could be
fanciful titles to many new regulations which, in some states, can lend up to brought up to cu rren t paym ent.
that imply the opposite of what one 25% of capital and surplus.
Granted that the topic is complex, but
would think of when viewing the titles.
Each year the Fed conducts a study
as to whether the general public’s
"The C o m p tro lle r recently instructed national banks to
understanding of interest rates has im
value U. S. governm ent securities put up as c o lla te ra l fo r
proved because of truth-in-lending
(TIL). The typical conclusion is that
loans a t their m a rke t, ra th e r than their fa c e, value. But
more people understand interest rates
banks7 holdings o f governments in investment accounts
each year the regulation is in force.
a re carried a t cost, not m a rk e t."
However, a careful analysis of the data
raises serious questions as to the pub
lic s truthfulness when responding.
The more than a thousand interpretive
Is this the appropi xate time to make for well over 100 years the 10% nation
letters on TIL and the dozens of pages such a relaxation of lending standards? al bank loan limit was considered a
making up the revised regulation Typically, loan losses rise for a period fairly prudent guideline. Directors of
would indicate that not only does the even after a business cycle has reached national banks should ponder whether
borrower not fully understand TIL,
its bottom and started to move up they wish to increase loan limits to an
but the lender also has tremendous ward. The Comptroller states that, as individual borrower in light of the new
difficulties interpreting the sometimes of June, 1982, the average percentage regulation.
contradictory portions of the act.
of loans past due at all national banks
A second heroin-like fix injected
Compliance regulations requiring was 4.3%, up from 3.6% at year-end into the financial arteries of savings
that lenders not discriminate by re 1980. If the pattern holds true, non and loans is the use of Federal Home
ceipt of public assistance are another performing loans of national banks — Loan Bank paper capital.
example of regulators having lost sight as well as other banks — can be ex
The idea isn’t new and can be traced
of reality. Who but a legislator or reg pected to increase during the early back 1,000 years to China. It also can
ulator would construe a person receiv period of recovery.
be understood in terms of the World
ing public assistance as creditworthy?
There is a danger of thinking simply Bank and its companion institutions.
The Justice Department has forced in terms of averages. It must be re Gold originally was the basis of the
the American Institute of Real Estate
membered that, for almost all data expansion power of world organiza
Appraisers (AIREA) to delete signifi there is what is called a “normal tions, but as it became insufficient to
cant portions from its appraising curve. ” Thus, a good number of banks accomplish the ambitious goals of in
manual and substitute words and will have substantially higher losses ternational world organizations, spe
phrases that are presumed not to show than average. Several hundred banks cial drawing rights (SDRs) and similar
any type of discrimination on proper are classified as problem institutions creative paper devices were devel
ty. Some phrases are so well recog and the probability is that, as losses oped that substitute pieces of paper for
nized by everyone but the Justice D e in crease, the num ber of problem the gold base. SDRs have a relatively
partment that a serious question is banks also will increase.
short history and are dependent on
raised as to why the AIREA submitted
Some cynics believe the reason the each and every obligor country doing
to such blatant cen sorsh ip . The
Comptroller increased loan limits to its share to support SDRs.
answer: The cost to fight the issue
any one borrower is the recognition,
The ability of such nations as Mex
would have been prohibitive.
especially on the international level, ico, Brazil, Argentina and Chile to sup
Some new regulations are worded to that several hundred banks probably port their obligations should not be
imply that they improve the safety of had loaned their then-existing limits
(C ontinued on page 44)
T
8
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Federal Reserve Bank of St. Louis
MID-CONTINENT BANKER for August, 1 9 8 3
MORE BULDMG BLOCKS
FORYOURO B U r GROWTH
COMMERCIAL CREDIT’S ASSET-BASED LENDING
MAXIMIZES THEIR BORROWING POWER.
Term and
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Revolving
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Acquisition
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Short-term
Unsecured
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Factoring
MID-CONTINENT BANKER for August, 1 9 8 3
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Federal Reserve Bank of St. Louis
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9
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Appropriate quality information.
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MID-CONTINENT BANKER for August, 1 9 8 3
Five 'P's of Asset-Quality Review:
A Management-Information System
Unlike this example, most banks
By Harold A. Marcum
INCE the implementation in 1976
clearly recognize the IRB for what it is
Vice President
of new national bank examination
— a loan — but it is highly important
procedures by the Office of the Comp
And Senior Credit Officer
that the review program evaluate the
troller of the Currency (OCC), the
American National Bank
quality of these assets on a regular
subject of loan review has been cov
Chattanooga
basis. IRBs should not be overlooked
ered from all angles. Much of what has
because they are carried on the books
been written deals with the specifics
as investments.
necessary to insure that the loanAsset review is a means to an end —
review program will be successful.
analysis is an integral part of this sys
not an end in itself. Obviously, its
From experience we know that suc tem that produces a composite rating
primary objective is identification of
cess depends primarily upon:
for each bank analyzed.
potential problems in time to correct
• Unequivocal, vocal support from
Some banks have ignored the re
them. If this is all the review system is
top management.
view of letters of credit. Much time is
• Proper selection and training of spent analyzing and reviewing lines of being used for, however, numerous
opportunities are being missed. A
staff.
credit which, of course, is proper.
good review operation generates sub
• A clear-cut, written loan policy.
Keep in mind, though, that most lines
stantial amounts of data about the
• In d epen d en ce of loan review from
of cred it agreem en ts have “ ou t”
lending function of the bank. By creat
the lending function.
clauses linked to deteriorating finan
ing a management-information system
Many banks have taken the cue pro cial position, while letter-of-credit
to organize and analyze that data, a
vided by the OCC and have estab com m itm ents provide for no such
most effective tool for management of
lished effective loan-review opera escapes. If the beneficiary of the letter
the lending function results. Although
tions. This is well and good, but needs of credit meets its terms, the bank has
automation is not a requisite of creat
to be expanded.
to pay. For this reason, letters of credit
ing such a system, recent major ad
First, if the review system is to be should be considered as loans at their
effective, procedures must be de inception and throughout their exist vances in small-computer technology
have made this job easier than ever
veloped to evaluate assets of the bank ence. Quality review on an ongoing
before.
other than loans.
basis is a must.
Consider some major areas of man
Another asset of the bank that is not
Second, ask the question “Once a
agement interest that can be readily
good solid asset-review system is in always reviewed is the industrial rev
enhanced by analysis of loan-review
place, how can management best uti enue development bond (IRB). These
data:
lize it to the ultimate advantage of the securities are nothing more or less
• Loan officer p erfo rm a n ce.
than term loans and should be treated
organization?”
• Program m ing training activities.
W hat assets, oth er than loans, as such. One small bank in Tennessee,
• Pricing of loans.
should be reviewed and evaluated? recently failed and auctioned off by
• Adequacy of provision for loan
Until the Penn Square failure, no bank regulatory authorities, carried in its in
losses.
in modern history had ever lost money vestm en t portfolio an IR B of an
• Planning portfolio structure.
on a fed-funds transaction. The poten amount approximately equal to its
For reference purposes, let’s call
tial loss was there, but it was largely capital structure. Collectibility of this
these the five “P”s of asset-quality re
asset was solely dependent on the suc
ignored by most banks.
view.
The potential for loss is still there, cessful construction and leasing of an
Information produced by the loanand many otherw ise sophisticated office tower.
banks still have no review program to
cover fed-funds transactions.
M r. Marcum joined American N atio n a l, C h atta
American National, a medium-sized
nooga, in 1 96 5, where he developed and im
bank, has developed a rating system
plemented the bank's credit analysis and loanfor banks that is used to establish for
review functions and managed them for more
mal lines of credit for both upstream
and downstream fed-funds sales. Us
than 10 years. He also developed the bank's
ing a micro-computer and bank call
written loan policy and procedures manual. He
reports, a series of some 35 ratios is
is an associate member of Robert Morris Associ
computed in an effort to appraise li
ates and is a certified instructor for R M A -O m ega
quidity, quality of loan and investment
Commercial Loans to Business.
portfolio, capital strength and adequa
cy and quality of earnings. Trend
S
MID-CONTINENT BANKER for August, 1 9 8 3
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
review operation can and should be
used in an evaluation of the lender’s
performance. With minimal record
keeping, statistical data can be
accumulated and analyzed to set stan
dards of performance for each lending
officer, section and departm en t.
Though not an all-inclusive list, the
following items would be included in
such a system:
• Average loan grade weighed as to
dollar amount outstanding.
• Incidence of incomplete or miss
ing collateral and credit-support docu
ments.
• Percentage of documentation de
ficiencies corrected within appropriate
time-frames (such as 30, 60 and 90
days).
• Amount of charged-off loans.
• Amount of classified loans.
• Delinquency ratios.
Integrate into the above system in
formation about income earned for the
bank, establish a method of following
trends and you have a statistical system
for evaluation of loan-officer perform
ance. Obviously, the officer’s final rat
ing must be tempered by such consid
erations as economic conditions, size
of work load, etc. The final decision
will — as always — be a subjective
one, but it will be based on a good deal
of “hard” data.
American National has used such a
system on a department-level basis for
two years. The head of each lending
department sits down with his boss
once each year and, using historical
statistical data pertaining to the items
listed above, jointly develop a series of
performance standards. Using a small
computer, a report is generated each
month comparing actual performance
with the standard. When the depart
ment manager’s annual performance
review comes due, he already knows
exactly how he has performed. The
bank is planning to expand this system
to include performance review on an
officer-level basis.
Just as statistical data generated by
loan review can be used to measure
loan-officer performance, it can be
used to define credit-training needs.
The old saying that “those who ignore
history are doomed to repeat it” has a
stronger influence in lending than in
any other profession. Truly, if we do
not use our mistakes as a basis for selfimprovement, we are foolish.
There are any number of reasons
why young lenders make mistakes, in
cluding failure to clearly understand
bank lending policy, reliance on in
accurate or incomplete information
and failure to properly utilize available
data.
There are, of course, many more
12
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Federal Reserve Bank of St. Louis
Loan Chargeoffs Hit High
Loan chargeoffs hit a seven-year
high last year, according to Robert
Morris Associates.
Last year banks charged off $4.27
billion, or 0.56% of loans net of re
coveries. In 1981 they wrote off
$2.75 billion, or 0.36% of loans net of
recoveries.
The chargeoffs were attributed to
a lagging economy and lower oil
prices that affected energy-related
businesses.
The situation has not been as bad
since 1976 when banks charged off
0.84% of their loan portfolios. This
peak came at a time when banks
were embroiled in loan problems re
lated to real estate investm ent
trusts.
Analysts predict the worst is over
for most banks for the current busi
ness cycle. Although a high level of
chargeoffs and loan-loss provisions is
predicted, the rate of increase for
domestic chargeoffs should decline.
reasons. Every bank that has a loanreview program also should have a for
mal system for identification and re
porting of mistakes that either led to
problem credits and/or were made in
administering them. In this way a
credit-training program can be tai
lored to suit the needs of lending staffs.
Asset-review data can be an invalu
able aid, both to proper loan pricing
and to evaluation of loan-loss reserve
adequacy. While some banks use a
pass-fail system of review, with little
additional effort a numerical-rating
system can be developed. Grading
loans on a scale of one to six will pro
vide the basis for determining a risk
factor that can be built into the loan
pricing mechanism.
Again, with the proper record keep
ing, historical data on loan grades and
loan losses can be analyzed to deter
mine the average degree of risk for
each loan-grade category. A risk pa
rameter can be set for each grade cate
gory and can be integrated easily into a
pricing formula.
One obvious result of such a system
is more equitable treatment of custom-
ers. Just as important is the greater
likelihood that the bank will be proper
ly remunerated for the risk it takes.
The same “risk factor” data also can
be used to measure adequacy of loanloss reserve. American National is ex
perimenting with a computerized sys
tem of regression analysis that uses
loan grading data to predict annual
charge-offs. Using a six month moving
average of monthly balances of inter
nally classified loans, actual net
charge-offs could have been predicted
by this bank for each of the past four
years with no worse than 90% accura
cy. For the four-year period as a
w hole, the form ula produced an
accuracy rate of 97%. This method is
admittedly crude and needs refining,
but it shows some degree of promise
for determining loan-loss-reserve ade
quacy on a somewhat scientific basis.
Review data can be quite useful in
management planning of portfolio
structure. W eighted average loan
grades, on a moving average basis, can
be computed for all significant seg
ments of the loan portfolio. By tracking
trends of industry and industry-related
loan-grade averages, potential highrisk segments of the portfolio can be
spotted early enough to allow manage
ment to modify parameters for port
folio composition. In this manner, un
due concentrations of risk can be
avoided and a proper degree of diversi
fication maintained.
For banks serving highly industrial
ized areas, another method of evaluat
ing portfolio risk is the use of bankrupt
cy-prediction models, such as Alt
man’s Z-Score predictor, Gambler’s
Ruin model and others. These models
can be applied to individual firms for
purposes of evaluation but can also be
aggregated for industry groups. Here
again, by weighting as to dollar amount
of exposure and employing trend
analysis, deterioration of quality can
be detected soon enough to allow
effective management action.
In conclusion, though asset-quality
review is an important activity in itself,
if managed properly, potential man
agement-information benefits can be
tremendous. It can provide an effec
tive means of measuring lender per
formance and programming training
activities for lenders. It can be just as
valuable in providing information crit
ical to pricing and in evaluating ade
quacy of provision for losses.
Finally, data generated by the assetquality-review system can be quite
useful in management planning of
loan-portfolio structure. • •
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Federal Reserve Bank of St. Louis
13
Benefits of Loan-Review Committees
Reported by Banks in MCB Survey
OAN-REVIEW committees have
grown in importance at banks as
loan portfolios suffer losses — often
severe losses. Banks are “beefing up”
their loan-review com m ittees and
loan-review procedures.
M i d - C o n t i n e n t B a n k e r recently
surveyed a number of banks to learn
how their loan committees operate and
how effective they are. Conclusions
gained from the survey include the fol
lowing:
• Formal loan-review committees
are being established by many banks.
• It takes a period of time before
these committees show positive re
sults.
• Regulators report declines in
numbers of classified loans at banks
with loan-review committees.
loan-officer perform ance, insuring
board/executive committee awareness
and input, managing loss reserves,
monitoring non-performing loans and
attempting recoveries.
Mr. Weissert says the benefits or
successes of the loan-review commit
tee include an emphasis on adhering to
loan policy and pricing guidelines by
loan personnel, unification of adminis
tration of loan policy, a training and
learning process through joint discus
sions, fixed responsibilities in credits,
requiring loan personnel to make out
side calls on designated loan-customer
assignments, avoiding losses through
anticipation of credit problems and
strengthening documentation disci
pline.
“Some say a bank of our size can’t
"Some say a bank of our size can't a ffo rd a loan
a d m in is tra to r/ says an Indiana b an ker. 'I feel a bank
can't a ffo rd not to have o n e .'
*
*
*
A Missouri b an ker says the success of his bank's loanreview com m ittee is 'directly responsible fo r the decrease
in delinquency problem s and technical exceptions' his
bank has experienced.
• Loan-review committees serve as
excellent educational activities for loan
officers.
Following are summaries of survey
respondents’ remarks:
P eru (In d .) Trust C o . This $85million bank has had a formal loanreview com m ittee for three years,
according to John D. Weissert, presi
dent. In addition, a separate loan com
mittee reviews all loans coming due
weekly for rating, repayment, collater
al, etc. A loan administrator reviews all
new and renewal loans after the fact for
interest rate, terms, rating, collateral,
etc.
Functions of Peru T ru st’s loanreview committee involve monitoring
the loan portfolio, credit training for all
officers, internal communications con
cerning credit policies, anticipating
problem loans by industry or type,
monitoring suits, rewriting loans be
fore problems grow larger, evaluating
14
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
afford a loan administrator, ” Mr. W eis
sert says. “I feel a bank can’t afford not
to have one.” The loan administrator
should be the liaison with the presi
dent or whoever else is in authority.
“Success comes slowly,” he says,
“but over a period of years it starts to
work. It’s not an overnight improve
ment process. As a bank with a history
of slightly higher than average losses,
we are just now feeling the effects of
real improvement.”
Members of the loan-review com
mittee at Peru Trust include the chair
man, president, executive vice presi
dent, senior loan officer, loan adminis
trator and two outside directors. All
other loan officers are included, with
the loan administrator serving as chair
man. The committee meets twice a
month.
P atrons State, O lathe, K an. This
$94-million bank has a discount com
mittee that handles loan approval and
review, according to Sam G. Perkins,
president.
The com m ittee includes all loan
officers, the customer-service officer
and all outside directors and some re
tired directors. M eetings are held
weekly.
Committee policies include the fol
lowing:
• All new loans of $10,000 or more
and all extensions of credit to borrow
ers whose total lines exceed $10,000
are presented for approval prior to
commitment by the bank (except loans
on the bank’s CDs and government
securities).
• A list of all new and renewed loans
of $5,000 or more processed during the
prior week is circulated, discussed and
approved by recorded vote. The list
includes borrowers’ names, collateral,
interest rates and financial-statement
dates.
• An officer presenting a proposed
loan for approval must have all normal
information available at the meeting,
including financial-statement informa
tion as to net worth and total indebted
ness from a current statement. All
pertinent information is included in
the minutes of the meeting and is dis
tributed to all directors.
• Free and open communication
and criticism is encouraged at meet
ings. Votes often are not unanimous
and are recorded in the minutes.
• Minutes of the meetings are re
viewed in detail at the bank’s monthly
board meeting.
“No bank loan can exist without re
view by this committee, ” says Mr. Per
kins. “Attendance at the meetings is
almost perfect on the part of loan offic
ers.”
He says that it’s difficult to point to
“successes” that can be credited to
committee action, but the bank’s reg
ulator has noted that the ratio and dol
lar amount of classified loans has de
clined in each of the bank’s three most
recent examinations.
Bank o f G ainesville, Mo. This $41million bank established a loan-review
committee last year, according to John
L. Harlin, president. Membership in
cludes all loan officers, outside direc
tors and the auditor/compliance offi
cer.
Mr. Harlin says he feels the success
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Federal Reserve Bank of St. Louis
AUnion Planters
^ 1 1 ^ NATIONAL BANK OF MEMPHIS
15
of the committee is “directly responsi
ble for the decrease in delinquency
problems and technical exceptions”
the bank has experienced.
The committee meets weekly and
attempts to review from three to six
loans each session, concentrating on
those over $50,000. The committee
also reviews and approves new credit
applications that exceed an individual
loan officer’s lending authority.
In terF irst B an k N ed erla n d , Tex.
This $84-million institution installed a
separate credit department charged
with monitoring and evaluating pres
ent credits, new credits, consumercompliance laws, docum entations,
past-due loans, charged-off loans, ade
quacy of reserves and proper files,
according to R. E. Gray, chairman.
The department reports its findings
to the credit-quality committee each
month. This committee consists of the
chairman, president, senior officers
and three outside directors, along with
a representative from the holding com
pany that controls the bank. Senior
and junior officers also review past-due
and problem loans on a weekly basis.
“I can strongly recommend a sepa
rate departm ent to monitor credit
quality, compliance and documenta
tion,” Mr. Gray says. “There is abso
lutely no doubt in my mind that it will
pay big dividends to any financial in
stitution.”
S ecu rity N atio n a l, K an sas C ity,
K an. A loan-review committee was
started in 1979 by this $229-million
bank, according to R. J. Rreidenthal
Jr., president.
Membership of the committee is
similar to that of the bank’s discountloan committee, but an independent
loan-review officer reports directly to
the committee.
The committee reviews all loans
over $25,000 and rates them on a scale
of one to six, Mr. Breidenthal says.
Each week a review is made of old
loans after loan presentations are
made. Also, the committee reviews
new loans independently of the loan
officer making the loans.
N orth east N ational, F o rt W orth,
Tex. This $141-million bank has had a
loan-review program for the past 10
years, says Charles Brinkley, chair
man.
All senior officers participate as well
as outside directors. Loans are graded
in five categories: prime, desirable,
satisfactory, warning and probable
loss.
“I would suggest that everyone in
the lending business have an active
loan-review program,” Mr. Brinkley
says.
N ational B ank, L u b bock, Tex. This
16
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
$180-m illio n in stitu tio n recen tly
established a loan-review program that
is monitored by the credit depart
ment. Membership includes all senior
lending officers and meetings are held
weekly, says Tom Battin, president.
F irst con sid eration is given to
seriously past-due loans, rather than
loans classified by regulators, he says,
and then to all loans on an orderly
basis.
“W e feel this program will give
lending officers a better understanding
of the total loan portfolio and will im
prove the quality of loans, enable them
to anticipate problems that may be de
veloping and serve as an excellent edu
cational activity,” Mr. Battin says.
Security Bank, H arrison, A rk., has
had a loan-review committee for more
than five years. Membership consists
of two loan officers and three outside
directors.
A spokesman for the $80-million
bank says all lines in excess of $50,000
are reviewed semi-annually. Loan
officers typically pair off and check
documentation and performance of
each others’ loans. They then present
large lines to the loan committee for
review.
The process has improved docu
mentation and kept the bank’s direc
tors aware of the progress being made
by large borrowers. The spokesman
says there are fewer surprises when a
loan goes sour now, since management
usually can determine potential prob
lem loans in advance.
Loan officers perform better when
they know their performance is being
reviewed, the spokesman adds.
F a r m e r s Lr M erch a n ts, C en tr e ,
A la ., has had a directors’ loan commit
tee for a number of years, reports Mary
George Jordan Waite, chairman/president of the $45-million institution.
Three senior loan officers and three
directors serve on the committee (the
latter on a 90-day rotation basis).
The committee has put together a
loan-review policy and a new-loan
policy. It performs credit analysis, sets
lines of cred it and review s and
approves all applications above
$25,000. It meets weekly, sometimes
more often.
Mrs. Waite says the committee is
helping to control lending and mini
mize loan losses. She predicts there
will be some success stories to tell
within the next two years.
“Our directors . . . are trying to be
come more . . . familiar with loans in
our bank,” she says. • •
A number o f banks responded to this
survey too late to be included in this article.
Their responses will be reported in the next
issue o f M i d - C o n t i n e n t B a n k e r .
BRANDT
SALES OFFICES
ALABAMA, MONTGOMERY, 205-284-1382
LeFevre Money Processing Systems, Inc.
CALIFORNIA, IRVINE, 714-540-6575
Ernie C. Nietzke, Inc.
CALIFORNIA, SANTA CLARA, 408-727-2630
Robert E. Slavik, Inc.
COLORADO, DENVER, 303-429-5122
H illyer Money Processing Systems, Inc.
C O NN EC TIC UT, ROCKY HILL, 203-247-8369
T im othy C. Harris & Associates, Ltd.
FLORIDA, CORAL SPRINGS, 800-432-8180
M oney Handling Systems of Florida, Inc.
FLORIDA, TAMPA, 800-282-2936
Coin, Currency & Docum ent Systems of Florida, Inc.
GEORGIA, ATLANTA, 404-952-2227
CEL Money Systems, Inc.
HAWAII, AIEA, 808-487-1696
M oney Processing Systems of Hawaii, Inc.
ILLINOIS, DOWNERS GROVE, 312-953-1255
Dawayne A. M iller, Inc.
ILLINOIS, ALSIP, 312-597-9250
Neal W. Perry, Inc.
ILLINOIS, PEORIA, 309-674-4336
W elch Money Processing Systems, Inc.
INDIANA, INDIANAPOLIS, 317-257-6300
Kruger & Associates, Inc.
KANSAS, LEAWOOD, 913-648-5049
P. Zam bito Associates, Inc.
LOUISIANA, COVINGTON, 504-469-2313
Harry Nedoma Money Processing Systems, Inc.
MASSACHUSETTS, FRAM INGHAM , 617-875-0505
Warren Associates, Inc.
MARYLAND, COCKEYSVILLE, 301-667-6400
Roger A. W ittenbach, Inc.
M ICHIGAN, BERKLEY, 313-545-5558
The Michael Cornelius Company
M ICHIGAN, DOW AGIAC, 616-782-7015
K. Clark Service Co.
M INNESOTA, M INNETONKA, 612-546-7662
R. E. Doll Enterprises, Inc.
MISSOURI, CREVE COEUR, 314-434-1664
Burgess A. Brooks, Inc.
NEBRASKA, OMAHA, 402-571-5577
Money H andling M achines, Inc.
NEVADA, HENDERSON, 702-564-2353
Money Processing Systems, Inc.
NEW HAMPSHIRE, HUDSON, 603-889-8011
B. Forest Taylor, Inc.
NEW JERSEY, W OO DCLIFF LAKE, 201-573-0575
Frank Connell Associates, Inc.
NEW JERSEY, AU DUBO N, 800-322-8093
T. J. W elch & Associates, Inc.
NEW MEXICO, BOSQUE FARMS, 800-432-4900
Money Processing Systems
NEW YORK, FLORAL PARK, 212-343-4343
Slater Money Processing, Inc.
NEW YORK, COLO NIE, 800-342-9299
Daniel L. Birkhauser, Inc.
NORTH CAROLINA, CHARLOTTE, 800-432-0555
Carolina Money Processing Systems, Inc.
OHIO, W ORTHING TO N, 614-888-6473
Michael L. Moran & Associates, Inc.
OHIO, HUDSON, 216-656-2675
Reed L. Dallm ann & Associates, Inc.
OHIO, CIN C IN N A TI, 513-528-5220
W illiam H. Benagh, Inc.
OKLAHOMA, JENKS, 918-492-8163
JMF Processing Systems, Inc.
PENNSYLVANIA, BETHEL PARK, 412-831-7400
R. A. Simm ons Co., Inc.
PENNSYLVANIA, BRYN MAWR, 215-525-5250
T im othy B. Bard & Associates, Ltd.
SOUTH CAROLINA, 800-438-2466
Carolina Money Processing Systems, Inc.
TENNESSEE, MEMPHIS, 901-398-1864
W right Money Processing Systems, Inc.
TEXAS, DALLAS, 214-437-2233
C ollins Money Processing Systems, Inc.
TEXAS, FORT WORTH, 817-656-1449
Money Systems, Inc.
TEXAS, HOUSTON, 713-465-5760
Advanced Coin Equipm ent, Inc.
VIRGINIA, CHARLOTTESVILLE, 804-973-1848
Money H andling Systems, Inc.
W ASHINGTON, FEDERAL WAY, 206-838-6230
Northwest M oney Processing Systems, Inc.
W ASHINGTON, SPOKANE, 509-448-0515
CPF Money Processing Systems, Inc.
W ISCONSIN, BROOKFIELD, 414-782-4890
Peter L. Castner, Inc.
W ISCONSIN, M ADISON, 608-271-8616
Bruns, Inc.
For States not listed call: 414-261-1780
MID-CONTINENT BANKER for August, 1 9 8 3
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MID-CONTINENT BANKER for August, 1 9 8 3
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
17
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I
Actions to Be Taken
W hen a Credit Is W eak
By James L. Nicholson Jr., Senior V ice President,
Central C arolin a Bank, D u rh a m , N . C.
RO BLEM loans have been pla
Early detection and prompt action
guing bankers from Day One. The are the keys to controlling problem
reason they haven’t gone away is that
loans and loan losses. Hopefully, all
loan officers forget or neglect to prac bankers have developed some skills in
tice what they know about lending — d etectin g problem loans. C red itthe basics.
administration personnel ought to be
After a loan is made, three events adept at id entifyin g p oten tially
can occur:
troublesome credits at the time a loan
• Pay as agreed — repaid on sched is made and during systematic regular
ule.
review of the bank’s credits during the
• Pay as modified or renegotiated repayment period.
satisfactorily to the borrower and bank
— like a 90-day note on which you
agreed to a 30-day extension.
• Not handled as agreed or satisfac
torily renegotiated — a problem loan!
A problem loan is one in which the
borrower is unable to repay in satisfac
tory terms — or where there is real
potential for loss to the bank.
Here are the principal causes of
problem loans:
• “B ad Going In ,” caused by lack of
training, striving too hard to develop
business or being a “good guy. ” Lack of
training is evident when a loan officer
The loan officer is the first line of
is not prepared to underwrite loans,
he/she doesn’t possess seasoned and defense in problem-loan detection. He
sound judgment, or he/she doesn’t ask knows the borrower better than any
the right questions of the borrower. one else and normally is the first to
Competitive pressure can prompt an review financial data and other in
officer to try so hard to develop busi formation on the borrower. The re
ness that he/she overlooks the basics. sponsibility for reporting problem
The “good guys’’ get themselves into loans should be clearly established by
trouble because they don’t know how the bank’s loan policy and the loan
officer’s job description.
to say “no.”
Each loan officer should understand
• P o o r C r e d it A d m in is tr a tio n ,
which includes bad documentation, that a problem loan is not (in itself) a
lack of follow-up and failure to act until blight on the officer’s record. Lending
it s too late. Lending officers should money almost always entails some risk,
keep in touch with borrowers, be and loan problems will develop in most
sensitive to information (both good and normal loan portfolios. The cardinal
bad) about borrowers, police loan sin is having a problem loan and not
agreem ents and obtain and study recognizing and reporting it.
Loan department managers should
financial reports of borrowers. Failure
to act often results from fear of retribu create a positive atmosphere where
tion from management when a loan problems can be discussed openly and
goes bad, a sense of pride that can’t without fear. Account officers should
admit that something is wrong with a report unusual occurrences and signi
loan and wishful thinking that the ficant changes (both good and bad) in a
credit relationship. Each lending offic
problem will just “go away.”
• Unforeseen Events, such as man er needs a definite and well under
agement problems caused by death or stood reporting channel to assure clear
other changes, a poor economy and com m unications with fellow staff
problems in the industry of the bor members with whom he can freely
share concerns and observations,
rower.
P
18
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Federal Reserve Bank of St. Louis
which should be documented with
memos to the loan file.
Once a loan officer reports a prob
lem loan, the loan manager must
quickly assess the nature and extent of
the risk and look at some probable
means of resolution. Usually this takes
place through informal discussion,
along with a review of the credit file
and collateral evaluation.
The manager’s mission is to protect
the bank s assets and minimize any
possible loss. In order to accomplish
this goal, he must be sure the loan is
assigned to an individual who can work
it out successfully. This person may or
may not be the officer who made the
loan or who presently handles it.
In assigning the problem credit, be
sure the loan officer understands who
has the resp on sibility for accom
plishing workout objectives. Other
wise, loan officers may tend to avoid
problem credits and continue to “hope
for the best. ” Often, a second person is
designated on the credit for assistance,
counsel, or even for training purposes.
The manager himself is involved and
provides guidance — or at times may
assume responsibility for the problem
loan. Reporting should be on a regular
basis, follow ing a p redeterm in ed
timetable.
In determining the severity of a
problem credit, fact finding must be
gin immediately. Here are some of the
steps to take:
• All loan and deposit relationships
(including real estate, leasing, letters
of credit, open-end credit) must be ful
ly determined.
• Get the credit file and read it from
cover to cover with the hope of doing
something to improve your position.
• Study all loan and deposit docu
ments. Determine if they have been
properly prepared, what rights the
bank has and what can be done to im
prove the bank’s position. Think of
offset and be prepared to move
promptly.
• Get a handle on the collateral —
where it is, what its real value is.
• Determine who the other credi
tors are, possibly by studying dis
bursements as shown on cancelled
checks in the account file. Where has
the money gone and where is it going?
• Review all legal aspects of the case
with the bank’s attorney.
• Study financial rep orts and
trends.
After this review of the bank’s rec
ords, make routine checks with other
creditors. Update files by talking with
trade creditors, any other banks in
volved, other mortgage lenders, fac
tors and oth ers. C red it-rep o rtin g
bureaus and agencies also may have
MID-CONTINENT BANKER for August, 1 9 8 3
T h ere a re som e th in g s o u r
c re d it in su ra n ce p ro g ram s don’t cover.
We don’t insure castles in the
sky. But when your custom ers’
credit insurance needs are more
down to earth, whether for a home,
car, personal loan, or line-of-credit,
you can depend on the USLIFE
Credit Insurance Group to deliver.
Fact is, we have the most com
plete coverage you can find. Some
thing you would expect from one of
the largest credit insurance organ
izations in the business.
For example, we offer a special
policy that offers more flexibility
and much higher coverage. The
kind of coverage your custom ers
may want for large personal loans
or other large credit needs. And
when it comes to hard-to-find lineof-credit coverage, come to the
USLIFE Credit Insurance Group.
How are our three companies,
USLIFE Credit Life Insurance Com
pany, Sooner Life Insurance Com
pany, and Security of America Life
Insurance Company, able to offer
you the best in products and fast,
personalized service nationwide?
One major reason: credit insurance
is our only business. Which means
credit insurance isn’t gravy to our
staff of salaried representatives—
it’s their bread-and-butter.
So, if you want to expand your
b u s in e s s , ta lk to th e c r e d it
insurer that has the policies you
need to cover anything. Well, al
most anything. To see for yourself,
just call toll-free, 1-800-323-4747*
IH.IFE
CREDIT INSURANCE GROUP
USLIFE Credit Life Insurance Company • Sooner Life Insurance Company • Security of America Life Insurance Company
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
1-800-323-4747
‘ (within Illinois, call 312-490-6000)
useful information.
An early meeting with the customer
is vital in order to:
• Review with the customer the ex
act nature of the problem and possible
solutions as he sees it.
• Get up-to-date financial reports
and information.
• Explore the possibility of new in
vestment, guarantees, additional col
lateral, etc.
• Identify other repayment sources.
There are just four — sale of assets,
profit, another lender, more equity.
• During the plant visit, look at all
conditions, try to evaluate employee
morale, determine the status of inven
tory and receivables and get a “feel” for
what’s really going on.
A lot of this exhaustive fact finding
could be done as a joint effort with the
several people involved. Call in the
workout specialists or the recovery
group, whichever is needed. Begin
making a decision to work with or
against the credit.
Some of the tough questions might
be:
• What is the real prospect of the
company’s making it? What help must
the company have in order to survive?
• Does the honesty and integrity of
management allow us to sleep at night?
Do they show a “tell-it-all mentality,”
or are we not getting the full story?
• What is the long-term value of the
collateral, if any?
• How accurate and timely is the
financial information being supplied?
• How realistic is the borrower?
Does he realize how serious the situa
tion is or does he believe there is little
or no problem?
The officer of account ought to be
kept actively involved, for he knows
the details of the loan and he knows the
borrower. Remember, the bank and
the borrower should operate as team
mates in trying to solve their mutual
problem.
Keep these points in mind:
• Unless the borrower is completely
dishonest, don’t become adversaries.
• Fights rarely produce worthwhile
results, but often get the bank into
court. This wastes time and money and
Bank HC Powers Would Be Expanded
By Administration-Backed Proposal
HE REAGAN Administration has ious companies have sought to acquire
proposed to Congress that banks banks but skirt Fed supervision.
be allowed to engage in real-estate, Initial comment from the thrift in
insurance and some securities activi dustry was negative. S& L officials
ties. The proposal also moves the have stated that the plan would permit
banking and thrift industries closer their industry to be absorbed by large
together by subjecting S&L HCs to banks. The proposed controls on S&L
essentially the same controls that are HCs also are not expected to win
applied to bank HCs.
approval of the thrift industry, since
If approved, the plan would draw there currently are almost no restric
new boundaries within the financial- tions on who can own single S&Ls.
services industry. It would free banks
The Administration plan would pre
to compete head-on with other finan vent takeovers by nonbank financial
cial companies and it would permit firms such as Sears Roebuck and
mergers between banks and S&Ls. It National Steel, both of which currently
also would prevent nonfinancial firms own thrifts. A grandfather clause
from taking over banks or S&Ls.
would protect takeovers that have
The plan would permit bank HCs to already occurred.
engage, through subsidiaries, in realThe proposal also would prevent
estate investment, development and nonbank firms from acquiring banks.
brokerage and in insurance underwrit Some firms have tried to gain control of
ing and brokerage. It also would per banks through a loophole in the Bank
mit them to deal in and underwrite Holding Company Act that defines a
government bonds, except for indus bank as any institution that takes both
trial-developm ental bonds, and to demand deposits and makes commer
operate mutual funds. It would con cial loans. By dropping one or the
tinue to prohibit the underwriting of other of these criteria, nonbanks claim
corporate securities.
an acquired bank no longer is subject
Fed support for the plan is ex to the Fed’s jurisdiction.
pected, since the proposal permits the
The new proposal would close the
Fed to maintain substantial regulatory loophole by stating that the Bank
power over bank HCs. The proposal Holding Company Act applies to any
also would close a loophole in the Bank bank eligible for federal insurance. • •
Holding Company Act by which var
T
20
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Federal Reserve Bank of St. Louis
only the attorneys win.
After the loan officer detects the
problem loan, studies all the factors
and confronts the borrower, often the
borrower may not agree that a problem
exists. He chooses to ignore it. This is
because of pride and fear. If the bor
rower doesn’t cooperate, the bank
should immediately ask the loan to be
paid in full and the relationship ter
minated.
If this tactic is pursued, it must be
done rapidly and deliberately while
the borrow er still is attractive to
another lender.
The facts of each problem loan will
dictate ultimately the responsibility
and functions of the account manager,
how credit-administration personnel
may be involved, what kind of profes
sional support is to be marshaled and
whether a workout group or the recov
ery department should be called in.
It’s management’s responsibility to
establish who is in charge. • •
Plan to Cancel Mergers,
Including Bank-Brokerage,
Proposed by St Germain
A plan that would indefinitely ban
banks and thrifts from combining with
other kinds of businesses has been un
veiled by Fernand J. St Germain,
House banking committee chairman.
The plan carries a retroactive date of
January 1, 1983. Thus, it would wipe
out virtually all cross-industry acquisi
tions launched since that date.
The plan also calls for the nullifica
tion of any in terstate banking or
branching arran gem en ts w ithout
approval under the Bank Holding
Company Act. This proviso, if
enacted, would force a number of in
stitutions to undo any cross-industry
and interstate banking arrangements
that began this year, including the
BankA m erica-C harles Schwab ac
quisition recently approved by the
Fed.
Mr. St Germain’s plan would serve
three purposes, according to an aide to
the congressman:
• It would nullify any “new” bank
ing activities unless federal laws were
passed to permit them or, in the case of
state-chartered institutions, if state
laws authorize such activities.
• It would p reclu d e all cro ss
industry acquisitions launched after
January 1, 1983, except for supervisory
mergers facilitated by the Depository
Institutions Act of 1982.
• It would disallow all interstate ac
quisition and branching arrangements
after January 1, 1983, except for those
approved in supervisory actions by
regulators.
MID-CONTINENT BANKER for August, 1 9 8 3
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
VisirTravelers Cheques carry the most
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Credit Analysis— Manual Vs. M icro
By Thomas L. Christensen, Sales Representative, A urora Systems, M adison, W is.
OU ARE the only credit analyst climate as they were 50 years ago. It
for your bank’s commercial loan was not until recently, when the mi
cro-computer revolution arrived, that
department. One of the commercial
loan officers, Jack Smith, has just re productivity gains and improved effi
turned from a lu ncheon with a ciency could be realized in the creditprospective commercial customer he analysis area and scenarios similar to
has been soliciting for several weeks.
the above could be eliminated.
Jack is impressed with the owner and
Since the introduction of the micro
the company’s financial statements he
computer several years ago, its ap
has just received, but saw some ques plications have altered every area of
tionable trends within the data. The
the banking industry. Micros have encustomer is anxious to switch all his
banking relationships — corporate,
personal and trust — to your bank and
Jack sees this as a great opportunity,
not only for the commercial loan de
partment, but for himself as well.
Before the customer departs, you
overhear this question to Jack: “How
long do you think it will be before you
reach a decision?’’ Over-zealous Jack
replies, “I’ll have to take a look at the
numbers first, but you’ll have a deci
sion before I leave the office today!’’
You immediately eye the wall clock
and notice it’s 2:15 p.m. and the bank abled commercial-loan officers and
closes at 5 p.m. You pause, take a deep credit managers to build and create
breath, sigh and begin clearing your their own spreadsheet models, greatly
desk of the three-year SB A projections reducing repetitive manual tasks and
the time involved. However, because
you were preparing m an u ally.
Jack says goodbye to his customer of lack of programming background,
and proceeds directly to your desk bankers’ models frequently are sim
with the financial statements. Armed plistic and unsophisticated. These
with several pencils, an eraser, a calcu weaknesses are responsible for the
lator and several blank spreadsheets, variety of financial-statement spread
you wait for Jack to dump the material ing, analysis and forecasting programs
on your desk. On Jack’s arrival, he now available. With so many financialstates, “I want these financial state analysis software packages on the mar
ments completely spread and analyzed ket, what should a prospective banker
before 5 p.m. so I can make my deci look for?
F eatu res o f a G ood Credit-Analysis
sion. I took a quick peek at the data
over lunch and I noticed a few ques Softw are P ackage. When analyzing a
tionable areas.’’ As Jack continues to credit-analysis software package, keep
babble on, all you can think about is in mind a few key points before pur
how one credit analyst can review, chasing:
• How flex ib le is the software pro
spread and analyze five years of finan
cial data and complete the SB A projec gram?
• Does it have graphics abilities?
tions by 5 p.m. It’s now 2:30 and you
• How quickly can data be entered,
have 2Vfe hours left in the business day
calculated and printed?
to complete your work. Good Luck!
• What types of useful reports are
This dramatization occurs frequent
ly within credit departments and com generated?
• Will the program fo reca st?
mercial-loan departments in large and
Flexibility in a good credit-analysis
small banks all over the nation. As a
former credit analyst, I can attest to program is a must! Since no business or
the fact that manual spreading and industry is alike, it is important to be
analysis of financial statements, as well able to customize the spreadsheet to fit
as projections, are as cumbersome and the business. One way to do this is to
time-consuming in today’s economic modify the standard chart of accounts
Y
22
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
built into the package. In addition, the
ability to “cut and paste’’ various time
periods together in order to spread the
information for analysis and the capac
ity to update spreadsheets by deleting
columns of data and adding columns of
data is desirable. Using the previous
scenario as an example, Jack’s five
years of material can be entered into
the worksheet model, the chart of
accounts modified to fit the customer’s
business, the information saved to disk
and printed, all in a fraction o f the time
it would take with pencil and paper.
Since the data have been saved, at a
later time they can be retrieved and
another period of data deleted and
added with just a few keystrokes.
After examining how the informa
tion is entered when purchasing a
credit-analysis package, it is important
to see how the information is analyzed
and printed out on hard copy. With a
computerized credit-analysis package,
time is saved not only with input, but
validation of data, calculation of ratios,
percentages and cash-flow analysis and
the multiple printing of graphs and re
ports can be done in seconds. C om
p u terized validation should include
several balance computations, such as
assets-to-liabilities and net worth,
calculated income-to-income, calcu
lated retained earnings-to-earnings,
cash-flow-to-cash, to check-data entry.
Imbalances should be pointed out, so
the user quickly can correct entries
and revalidate without redoing the
whole worksheet.
Once data has been entered and bal
anced, the user should be able to print
in both detailed-report form and in
graph format. R eports for the commer
cial-loan officer and the various loan
committees should include:
• A detailed balance sheet, income
statement and retained-earnings rec
onciliation. This report could be used
by the loan officer for making the lend
ing decision and could be retained in
the credit file.
• A b alan ce-sh eet-an d -in co m estatement summary. This could be
used by the loan committees, which do
not need to be inundated by financial
data.
• A complete cash-flow analysis ex
h ib itin g the com pany’s funding
MID- CONTINENT BANKER for August, 1 9 8 3
Yield ahead.
Improving the yield on your investments
takes constant, careful review. Under today’s
rapidly changing market conditions, knowing what
to buy, when to buy it,
and when it m atures is
essential.
That’s why you
should call the
Commerce Bank Bond
Investment Group.
Our Bond Group
representatives are
trained professionals in
portfolio management. They will keep you up to
date and informed of rapidly changing market
conditions. And they will help you in making timely
decisions in order to improve your yield.
Call the Commerce Bank Bond Investment
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816/234-2462 • 10th & Walnut • Kansas City, MO 64141
MID-CONTINENT BANKER for August, 1 9 8 3
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
23
sources and uses for each given year.
• A complete ratio analysis with in
dustry comparison. A good software
program should enable the user to en
ter an industry’s RMA averages in
order to compare the customer’s data
with the pertinent industry standard.
• A common size balance sheet and
income statement with RMA averages
in percent form.
Returning to our scenario, viewing
the detailed reports in g rap h fo r m
would be a great time-saver. With a
global p ictu re, our cred it analyst
quickly could check the financial direc
tions depicted on the graph printouts,
and any questionable trends would be
come apparent without having to wade
through hundreds of numbers.
The availability of a fo rec a stin g
Analyze—don't agonize.
When performing a credit review, you probably spend more
time agonizing over your calculator than you do analyzing the
data. Why not let your microcomputer do the calculations for
you?
With the Credit Manager program, you can prepare a 5-period
analysis. Compute key ratios. Compare to industry averages.
Forecast future cash trends. Review output in both report and
graph form.
So start analyzing the alternatives to the agonizing manual
preparation of a credit review. Contact Aurora Systems today.
-------------------------------------------------------------------- •
aurora systems me.
2423 american lane, madison, wi. 53704
(608)249-5875
How a banker keeps
borrowers going
w hen he can’t say “yes!’
“ I suggest
BarclaysAmerican /
Business Credit.”
Your most solid source of loan
business is from a healthy, growing
customer. Yet there are times when
a turndown is necessary.
This is when Barclays American/
Business Credit can help, perhaps
as no one else can. By analyzing
your borrower’s accounts receivable,
machinery and equipment, and
inventory — we can often discover
asset values that may have been
overlooked.
When a customer requires fund
ing for expansion, turnaround,
acquisition or
refinancing, we
can lend a hand,
either solely or
Business Credit
in participation
with you.
m od u le to interface with a creditanalysis program is another feature to
look for. Once the past period informa
tion has b een en tered , analyzed,
printed and graphed, loan officers fre
quently want the “what i f ’ question
answered regarding financial projec
tions. A forecasting module should
allow the user to project out data for at
least three years, using the past two
years of historical data already entered
through the credit-analysis program as
a basis for the projections. From this
information, a balance sheet, income
statement, ratio and cash-flow analysis
also should be obtainable in both re
port and graph form. Using a compu
terized forecasting module, pieces of
data could easily be changed to
accommodate “what i f ’ scenarios, pro
ducing new reports and graphs within
seconds. (With a forecasting module
interfaced with a credit-analysis pro
gram, our harried analyst could even
finish his SB A projections by 5 p.m.)
The credit-analysis software pro
gram has become an essential com
mercial-lending tool designed to pro
vide more accurate and reliable finan
cial information to assist in lending de
cisions. This software greatly reduces
the repetitive manual work and time
necessary for the credit-analysis func
tion. For those lending areas without
the luxury of a credit department, its
simplistic format and ease of use allow
a loan secretary or clerk to perform the
input function, thereby freeing up the
loan officer to do the job he/she is
being paid to perform.
A forecasting module enhances the
credit-analysis program by projecting
different “what i f ’ scenarios based on
historical trends and assumptions.
Forecasting will assist in monitoring
problem loans more closely by adjust
ing the assumptions quickly to actual
occurrences, thus averting the poten
tial for loan losses. Aggressive lending
areas will utilize this program with the
help of compatible, compact micro
computers to perform on-sight cus
tomer calls, thereby increasing their
opportunity to develop new commer
cial customers along with satisfying
their existing customer base.
Chances are, if the credit analyst in
our scenario had a credit-analysis pro
gram with a forecasting module, the
statement spreading and analysis and
the SB A projections would have been
completed by the 5 p.m. deadline.
Only time would tell how long it would
have taken manually. • •
Call 1-800-BARCLAY
O ffices located nationw ide. Corporate H eadquarters: 111 F ou nders Plaza, E ast H artford, CT 061 0 8
24
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Federal Reserve Bank of St. Louis
MID-CONTINENT BANKER for August, 1 9 8 3
POSITION FOR THE FUTURE
As an aggressive, forward-thinking banker,
you know that nationwide electronic banking is
a force to contend with in the future. And to stay
competitive you must offer customers the
convenience of ATM banking wherever they
travel. Now, you can meet this challenge and
outpace the competition by joining the CIRRUS
Network today.
CIRRUS is the leading nationwide network
that links you and your customers with ATMs in
major markets throughout the U.S. Created by a
group of the country’s strongest and most
progressive banks, the CIRRUS Network will
include over 5,000 ATMs and over 20,000,000
cardholders when fully operational at the end of
1983. Right now you can find CIRRUS tellers
in major airports, shopping malls, resorts, hotels,
universities, recreational areas, amusement and
theme parks, restaurants, and thousands of
other locations. And, by 1986, we project over
8,500 CIRRUS ATMs will be in place.
Enhance your image as an innovator by becom
ing a part of a powerful, national network, while
offering your customers the widest scope of ATM
convenience. CIRRUS. It’s the future of banking,
within your reach today.
For further information call: Mr. Bruce A. Burchfield, President, CIRRUS System Inc.
at (312)-850-7080, or contact one of the following members:
Member
AmeriTrust
BayBanks
The Central Trust
First Chicago Corporation
First Interstate
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Headquarters
Member
Cleveland
Boston
Cincinnati
Chicago
Los Angeles
Headquarters
Member
Headquarters
Manufacturers Hanover
MercantileTexas
Merchants National
Bank and Trust
Mellon Bank
National Bank of Detroit
New York
Dallas
Indianapolis
Norwest Corporation
Service Card System
SUN BANKS, INC.
Trust Company of Georgia
United Virginia Bank
Wachovia
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About B anks & Bankers
ILLINOIS
EFI, Yes Card Networks
Sign Joint Agreement
General Bancshares, St. Louis, has
announced plans to acquire MidCentral Bancshares and Charleston
National. General Bancshares is the
only out-of-state HC eligible to ac
quire Illinois banks. M id-C entral
Bancshares also owns controlling in
terest in Ashmore State.
A joint network agreement has
been signed between Yes Card and
Electronic Funds Illinois that will
permit financial institutions who are
members of the latter network ac
cess terminals located in 181 Jewel
Food stores throughout the Chicago
area.
Electronic Funds Illinois (EFI),
which operates as the Statewide
Funds Transfer Corp., is comprised
of more than 600 financial institu
tions including banks, S&Ls and
credit unions, of which more than
150 have agreed to participate in the
statewide network, which has been
operating since April.
The E F I network serves indi
vidual financial institutions as well as
proprietary networks throughout
the state, reaching major communi
ties such as Belleville, Bloomington,
Champaign-Urbana, Decatur, DeKalb, Galesburg, Kankakee, Peoria,
Rock Island/Moline and Springfield,
as well as five university campuses.
First Galesburg National has named
Albert C. Dickson Jr ., senior vice
president/lending and R ob ert E .
Peterson vice president, human resources/planning.
Harland L. Edwards, chairman, First
National, Evanston, has retired. He
joined the bank in 1976 and became
chairman in 1980. Howard B. Silverman, president/CEO, succeeded Mr.
Edwards.
First National, Skokie, has promoted
James E. Malecha to vice president/
controller.
Raymond M. Michaelsen has been
elected commercial banking officer,
Harris Bank, Chicago. He joined the
bank’s college training program in
1979.
Continental Illinois National, Chica
go, has promoted the following: Doug
las E. Meneely to vice president and
Carl N. Thornrose to second vice pres
ident, operations/management; E d
win F. Skonicki to vice president and
Carolyn A. Hanes to second vice presi
dent, personal banking; Jan S. Hobson
to second vice president, corporate
affairs; Jennifer Olsztynski to second
vice president, corporate personnel;
Thomas F. McGrath and Susan M.
Spalding to vice presidents, trust/investment; Cheryl A. Feltgen, Ronald
R. Juskiewicz, Macey B. Smith and
Terrence A. Walsh to second vice
presidents, real estate; Thomas S. Bagley to vice president and Philip C.
Adams, W. Thomas Barnett and W il
liam P. Waschle to second vice presi
dents, banking; William E. Read to
vice president and Richard C. Allen,
Richard J. M eliska, C atherine A.
Schulze and Brenda C. Seliga to
second vice presidents, financial.
26
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Federal Reserve Bank of St. Louis
Elmhurst National has named Mary
Gail Bielawski operations officer, John
E. Pierce auditing officer and Jeffrey
C. Schemer trust officer.
Bernardine Barth, assistant cashier,
Devon Bank, Chicago, has retired af
ter more than 27 years of service.
Died. Hugo A. Anderson, 96, retired
executive vice president, First Nation
al, Chicago, and pioneer lender to the
nation’s petroleum industry, June 18
in Northbrook, 111. He joined the bank
at age 14 and retired in 1957.
tions, Citizens Bank, Jeffersonville,
sponsored “ Sunshine J o e ,’’ which
emphasized the need for positive atti
tudes, positive self images and concern
for other people through creative
embroidery. Children from the pro
gram made a special presentation of its
wall hanging to Citizens Bank’s man
agement and thanked the latter for its
support of the project.
Frederic G. Burke Jr. has been pro
moted to vice president, Lincoln
National, Fort Wayne. A member of
the U. S. District Court for the Dis
trict of Columbia Bar Association, he
joined the bank in 1981.
Lincoln National, Fort Wayne, will
offer about 400 loans next year to stu
dents and parents who meet certain
requirements established by the state
of Indiana under a new program called
PLUS. The bank has committed $1
million for PLUS loans that will be
made to parents of undergraduate stu
dents, to graduate and professional
students, and in some cases, to under
graduate students who are financially
independent of their parents. The
maximum loan amount per year is
$3,000, which is repaid in monthly pay
ments of $50.
Harrison Accepts State Post
Ruth D. Harrison, vice president/
director of marketing, Irwin Union,
Colum bus, has been appointed
director of the Indiana Department
of Financial Institutions.
INDIANA
Sponsoring Bank Is G iven
G roup's W a ll Hanging
The Jeffersonville, Ind., Fine Arts
Council was organized to help youths
develop character, scholarship, lead
ership and citizenship in Clark and
Floyd counties. It holds regular meet
ings at two Jeffersonville centers.
For one of the council s presenta
Mrs. Harrison is the new chief executive/administrative officer of the
department that supervises all statech artered banks and trust com
panies, building and loan associa
tions, consumer credit associations
and credit unions.
MID-CONTINENT BANKER for August, 1 9 8 3
TOU DONT HAVE TO BE
A GIANT TO O FFER
CREDIT CARD CONVENIENCE.
A sound credit card program
can round out your institution’s
product line to help you attract
new customers and retain your
present ones. And no matter
what size your institution,
Franklinton’s sponsored
member credit card program
lets you offer your customers
credit card convenience with a
minimal investment.
The sponsored member
program is a complete turnkey
operation that helps you
compete more effectively, while
maintaining your personal
identity. The program includes
everything to establish and
maintain a profitable card
program, including card design,
embossing and issuance of
plastics, credit review and
approval, cardholder statement
processing, fraud security,
cardholder/merchant authori
zation service, payment
processing, comprehensive
reporting... even delinquency
notification and collections.
Participation options
Banks, savings associations
and credit unions may own the
receivables and set their
own interest rates, or allow
Franklinton to handle the entire
package. Either way, the
credit card will be issued in your
institution’s name, and will
be completely your own in the
eyes of your customers.
Credit card experience
Franklinton’s system expertise
and flexible working arrange
ment help you get your program
rolling with a minimum of
expense and headaches.
Franklinton has over thirteen
years of credit card experience
with nnp of the industry’s
largest card issuing banks. We
now rank among the nation’s
top third-party processors, with
plenty of capacity for expansion.
Personal service
At the same time, our service
is individual. Each client is
assigned a personal represen
tative to work with them every
step of the way. We provide all
necessary training and technical
expertise to start your program,
and we coordinate periodic
calls to review your work flow
and provide training updates.
Whenever you need assistance,
your client representative is
just a phone call away.
Electronic banking, our
specialty
Credit card processing is not
just a sideline at Franklinton. It’s
our primary business. Our
facilities are totally dedicated
to electronic banking services.
Sponsored member card pro
grams are just one of many
MID-CONTINENT BANKER for August, 1 9 8 3
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Franklinton services that can
make your operations more
profitable and efficient,
including credit and debit
card processing, plastic prepara
tion, participation in the
AnytimeBank® regional and
PLUS SYSTEM® national shared
ATM networks and the Home
Banking Interchange!" Through
products like the sponsored
member program, we can help
provide the services you need
to keep you competitive in the
years to come. You don’t
have to be a giant. Just call
Del Tonguette at
614/863-8222.
FRANKLINTON
FINANCIAL SERVICES
a division of BancOhio National Bank
4661 East Main Street, Columbus, Ohio 43251
Your competitive edge
in the electronic age.
©Registered service mark
©Registered service mark of Plus System, Inc.
27
MICHIGAN
Bank To Build In Mall
the Commonwealth, owned by First
Arabian Corp. The move will result in
an institution with assets exceeding $8
billion. Comerica operates 17 banks,
11 bank-related subsidiaries and had
assets of $7.2 billion on March 31.
Bank of the Commonwealth operates
48 branches in the tri-county Detroit
metro area and has assets of $880 mil
lion.
Pacesetter Bank-Lansing has changed
its name to Old Kent Bank, Lansing.
The change reflects the bank’s recent
acquisition by Old Kent Financial
Corp., Grand Rapids. James C. Allan
has been named chairman/president.
People's State, St. Joseph, w ill build a $3.2
million, four-story main office, scheduled
for completion in October, 1984. The struc
ture w ill house bank operations on a par
tial basement level and on portions of the
first and second floors. Remaining space
w ill be sold as condominiums. The bank,
designed by HBE Bank Facilities, St. Louis,
is part of St. Joseph's new downtown mall
development.
Comerica Inc., Detroit, plans to ac
quire 77% interest in Détroits’ Bank of
28
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Federal Reserve Bank of St. Louis
Comerica Inc., Detroit, has promoted
John C. Krieman to assistant vice president/community banking, Comerica
Bank-Livonia; William G. Osbach to
assistant vice president/central loan
administration; and Shirley Larkins
and Deborah A. Wilson to accounting
officers/controllers.
Comerica Bank Detroit has promoted
Dennis M. Clancy to vice president/
personal banking, M ack-H illcrest
office; Terry B. Taylor to vice president/funds m anagem ent, Paul D.
Seventh Bank Joins CIRRUS
Michael F. Moore (I.), first vice president,
inform ation/operations service division,
National Bank of Detroit, shows James D.
Madigan, executive vice president, Mer
chants National, Indianapolis, how to use
CIRRUS system, a nationwide network of
ATMs. The Detroit bank provides the com
puterswitching system for the CIRRUS net
w ork th a t allow s customers to m ake
routine banking transactions at participat
ing institutions throughout the U. S. Mer
chants is the seventh bank to go on-line in
the system.
Tobias to vice president/metropolitan
corporate banking, David C. Wind to
vice president/personal trust, Mark J.
MID-CONTINENT BANKER for August, 1 9 8 3
Adams to assistant vice president/community banking, all at the WarrenGreenfield office; Jeffrey C. Angell to
assistant vice president/metropolitan
corporate banking and Evelyn J. Kel
ley to assistant vice president/personal
banking, Woodward-Hamilton office;
Nicholas E. Pittiglio to assistant vice
president/community banking, Ma
comb Mall office; Eugene J. Plaunt to
assistant vice president/community
banking, Grand R iver-M id d lebelt
office; John H. Robb to assistant vice
president/personal banking, MapleTelegraph office; and Larry R. Taber to
assistant vice president/corporate
financial services, main office.
Joan M. Hosey has been named president/CEO, F irst of America Bank
— Grand Ledge. One of two women
bank presidents in Michigan, she be
gan her career in 1959.
MINNESOTA
F& M M arq u ette N ational, M in
neapolis, has named James E. Senske
vice president, Marquette Lease Ser
vices, Inc., the equipment leasing/
financing subsidiary of Bank Share
Inc.; and Robert F. Bodeau as the
bank’s director of marketing.
N orw est Bank M inneapolis has
appointed Dennis A. Lind senior vice
president and head of the bank’s bond
department. He joined the bond trad
ing division in 1979.
The Minneapolis Fed has promoted
Charles L. Shromoff to general auditor
and Kathleen J. Balkman to assistant
vice president/secretary.
OHIO
Andrew B. Craig III has been elected
president, BancOhio National, Co
lumbus, and an executive vice presi
dent, BancOhio Corp. He was pre
viously president/C EO /director,
Manufacturers & Traders Trust, Buffa
lo, N.Y.
Huntington Bank of Northeast Ohio,
Cleveland, has promoted Donna L.
Celebucki to senior vice president/sec
retary; Kevin J. Rieke to finance divi
sion manager; and Sherman B. Kelly to
manager/energy division.
Norwest C o rp ., M inneapolis, has
promoted Lawrence V. Grant to vice
president/m anager, corporate research/information services, corporate
marketing group; and elected Darryl
D. Hansen vice president, commercial
m arketing, com m ercial banking
group.
Gary W. Queen has been promoted to
senior vice president and head of em
ployee benefits/regional trust division,
Ameritrust, Cleveland. He joined the
bank in 1975.
The Minneapolis Fed has approved
the applications of First Mabel BanCorp., Inc., to acquire First National,
Crosby; and Cherokee Bancshares,
Inc., St. Paul, to become a bank hold
ing company through acquisition of
Cherokee State, St. Paul.
Huntington National, Columbus, has
two new senior vice presidents, Danny
F . Longo and R ob ert W. Lucas.
Elected assistant vice presidents were
Amy K. Kuhn and Richard C. Rastetter Jr. Mr. Longo joined the bank in
1956; Mr. Lucas in 1971.
MID-CONTINENT BANKER for August, 1 9 8 3
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
C o n tin u ity o f people. Continuity of policy.
Continuity of commitment. That’s what corre
spondent banking means at Drovers. With some
banks, it’s a sideline. With others, only the large
metropolitan relationships are sought and
serviced. Not so at Drovers. We seek strong, long
term relationships with banks in towns like
Sandwich. Or Watseka. Or Varna. (You know who
we mean.) So call John Crotty. Or Kathy Hardy.
Or Max Roy. Or Andy Ruments. Or Frank Bauder.
Or Jim Carmody. Professionals sensitive to over
line situations. Professionals sensitive to the
agricultural sector. Professionals sensitive to you.
Toll-free 1-800-621-8991.
In Illinois, 1-800-527-2498.
ft* » / Drovers Bank
of Chicago.
4 7 th & A sh lan d A ve., C h icago, IL 6 0 6 0 9 • 1 -3 1 2 -9 2 7 -7 0 0 0 .
MEMBER FEDERAL RESERVE SYSTEM AND FDIC.
29
Deregulation, Unity, Nonbank Competition
Highlighted at Michigan Convention
ICHIGAN bankers basked in ers. But it’s not isolated. Others are
some of the b est w eath er getting into the banking business by
buying banks and thrifts.”
they’ve ever seen during their annual
The only workable response is for
convention at the Grand H otel at
Mackinac Island this year. But the Congress to authorize all financial in
good weather didn’t deter their in stitutions to offer all bank services, he
terest in attending the business ses said.
He said the way to go to get more
sions in gratifying numbers!
The first speaker they heard was the non-interest income is fees. Why? B e
ABA’s William H. Kennedy Jr., chair cause they are inexpensive from a
man, National Bank of Commerce, capital outlook; they diversify the bank
Pine Bluff, Ark. The ABA president earnings stream , they provide for
addressed the deregulation issue head cross-sell opportunities. But they must
on. “Either we compete with non be com p etitive. Banks are being
banks or we try to stop them from com pushed in the direction of more fees,
peting,” he said. “The latter would be Mr. Kennedy said.
like trying to keep the tide from com
The deregulation battle will take
ing in!”
years because Congress’ nature is to
Deregulation is the key to compet put off change. The opposition will
ing effectively, he added. Product re fight banks in every way it can to pre
striction is the most serious problem vent them from entering their balifacing banks. It prevents them from wicks.
Turning to present issues, he said
meeting the financial needs of their
customers. Nonbanks are offering ser media coverage of financial conditions
vices similar to bank services that en of banks is inaccurate. The media
able them to fill the gaps of product tends to predict failures in advance, he
said, because it’s irresponsible. Nega
offerings of banks.
He conducted Michigan bankers on tive articles tend to undermine the
a mythical tour of a Sears financial cen public’s confidence in the banking in
ter. “ O ne-stop shopping is what dustry.
they’re offering,” he said, as he ex
During a break between speakers,
plained that people can do their finan an oversized check for $169,867.46
cial shopping at the same place they’re was presented to the MBA by the
buying merchandise. He ticked off the Michigan Bankers Workman’s Com
financial services Sears offers, includ pensation Fund, of which Edward G.
ing financial instruments, real-estate Weiss, risk manager, First of America
loans, auto loans, etc. Sears is planning BankCorp., Detroit, is chairman. The
to offer new tax-exempt investment amount represents the initial payout of
trusts, home equity lines of credit and the fund that was started in July, 1981.
other new services. “Even if Sears was The amount will be distributed to the
an isolated situation,” he said, “it 51 banks that are charter members of
would be a serious problem for bank the program. At present, 163 banks are
M
N ew MBA officers
for 1983-'84 include
(from I.) Loren C.
A d g a te — pres.;
Robert W. Sherwood
— 1st v.p.; Daniel R.
Smith — 2nd v.p.;
and Donald B. Jef
fery — treas.
30
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
participating in the fund.
An award was presented to Old
State Bank, Fremont, by the MBA in
observance of that bank’s centennial.
Roger Wyngarden, president/cashier,
accepted the award.
Outgoing MBA President Leland B.
Helms, who is vice chairman, National
Bank W yandotte-Taylor, reviewed
three important government-relations
victories that took place during his
term of office.
“First, and probably most impor
tant, we convinced the Michigan
legislature that it should not override
the federal preemption of state usury
limits on mortgage loans. Override
was a key objective of the labor move
ment and some consumer groups, he
said.
“Second, the financial institutions of
Michigan were successful in opposing
Proposal C on the general-election bal
lot last fall. That proposal would have
prohibited the enforcement of due-onsale clauses in the state. “There’s no
doubt that such a law would have
seriously interfered with the flow of
mortgage funds to M ichigan,” Mr.
Helms said.
The last victory is the expected re
peal of federal withholding, which is
sure to take place soon, he said.
He said there still are two “major
hills to clim b” in the governmentrelations area — usury and the MBA’s
BankPac.
“Now that interest rates have fallen
from record high levels, it’s time to
eliminate controls on credit in Michi
gan,” Mr. Helms said. The governor
and banking commissioner are ex
pected to support banking’s efforts in
this area as part of a tradeoff for their
participation in the investm ent of
funds in strategic venture capital in
vestment corporations.
Mr. Helms reported the revitaliza
tion of the associations’ BankPac pro
gram, brought about by George S. Nu
gent, president, First of America Bank
— Central, Lansing. A record $68,884
was raised last year and $43,000 had
been raised this year up to convention
time.
Incoming MBA President Loren C.
Adgate, chairman, First Security,
Ionia, told his audience of the two
primary objectives for his term of
office: Knowing the needs of MBA
member banks and ensuring that the
MID-CONTINENT BANKER for August, 1 9 8 3
ident; Daniel R. Smith, second vice
president; and Donald B. Jeffery,
treasurer. Mr. Sherwood is chairman/
president, National Bank, Hastings;
Mr. Smith is president, First of Amer
ica Bank Corp., and chairman, First of
America Bank — Michigan, Kalama
zoo; and Mr. Jeffery is first vice presi
dent, National Bank of Detroit. — Jim
Fabian, Senior Editor.
Participants during first business session at
MBA convention w ere (from I.) Barry
Asmus, consultant (who delivered first
annual Robert M. Perry memorial address);
MBA Pres. Leland B. Helms, v.-ch./CEO,
Nat'l Bank Wyandotte-Taylor; and W illiam
H. Kennedy Jr., ABA pres, and ch., Nat'l
Bank of Commerce, Pine Bluff, Ark.
MBA is meeting them and seeing to it
that the banking industry in Michigan
faces the public and the government
with a more united and more powerful
and effective front.
He said he recognized that there are
deep divisions among the MBA mem
bership and said that he hoped “these
are more the rivalries within a family
than the roots of a feud betw een
clans.”
He pointed out that the MBA cannot
serve its members well if it must be
concerned about offending one seg
ment when it is trying to act in the best
interests of all banks.
Addressing the second goal, he re
m inded bankers that when they
achieve a united front they must act as
if that was the case! Bankers who
undercut a unified front can cause con
siderable damage in the state legisla
ture — damage that can result in banks
not obtaining the legislative relief they
must have to compete.
Retiring MBA President Helms was
elected to the ABA’s governing council
during the convention.
Installed with Mr. Adgate in the
1983- 84 MBA officer lineup were
Robert W. Sherwood, first vice pres-
Food-Collection Program
Sponsored by Bank
Approximately 7,200 pounds of food
were contributed to needy Detroitarea families by employees and cus
tomers of affiliates of Manufacturers
National Corp. recently.
The program was begun with a
$5,000 contribution by Manufacturers
Bank. The food, as well as monetary
contributions, has been donated to the
Greater Detroit Chamber Founda
tion, which coordinates food collec
tions by local businesses.
The Gleaners Community Food
Bank, a nonprofit organization, dis
tributed the food to more than 150 lo
cal service agencies, including soup
kitchens and emergency food centers.
In addition to the food program, the
bank’s offices distributed brochures
about health care for the unemployed,
ways to avoid utility shutoffs and
money management.
“Convenience centers” may be
established by state-chartered banks
at any location they con sid er
appropriate, according to a recent
ruling by State Banking Commis
sioner William P. Dixon.
C en ters are not con sid ered
branch offices, says Mr. Dixon, and
may be located near ATMs. Person
nel can demonstrate electronic funds
transfer terminals, distribute in
formation on bank services, give out
application forms for credit cards, in
stallments loans and depository
accounts.
The centers cannot be used for the
approval or disapproval of loans, dis
bursement of loan proceeds, accept
ance of deposit or loan payments and
receipt of valuables for safekeeping.
First National Corp., Appleton, and
its eight member banks have adopted
the new name, Firstar. Member banks
now are known as “Firstar Bank” plus
the name of the city in which each is
located.
Mary Ann Berger, loan officer, Peo
ples Marine Bank, Green Bay, has re
ceived the North Central Region Edu
cational Fou ndation Sch olarsh ip ,
awarded annually by the National
Association of Bank Women, Inc. The
award covers registration, travel, room
and board at any foundation seminar.
M arine C o rp ., M ilw aukee, has
announced that Cudahy Marine Bank,
Oak Creek Marine National and South
Milwaukee Marine Bank have been
consolidated into Marine Bank, with
combined assets of $1.2 billion.
Employees of Manufacturers Bank, Detroit,
volunteered their time to sort and pack
food collected during month-long drive.
W ISCONSIN
Marine Corp. and Roundy’s, Inc.
opened “The Express W ay,” a custom
er-convenience center, earlier this
summer in Milwaukee. Said to be the
first service of its kind in Wisconsin,
the center is located in a supermarket
and allows customers to shop and bank
24 hours a day.
The past president's citation is presented
by Loren C. Adgate (r.), incoming MBA
pres., to Leland B. Helms (I.), outgoing MBA
pres.
Convenience Centers OK'd
Citizen’s Bank, Sheboygan, has pur
chased property in Plymouth to con
struct a new auto bank that will include
four drive-through stations and an in
side walk-up area. The facility will
open this fall.
MID-CONTINENT BANKER for August, 1 9 8 3
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Marine Bank, Milwaukee, has elected
three senior vice presidents: Leila
Fraser, Ronald C. Baldwin and Ronald
C. Condroski. Dr. Fraser and Mr.
Baldwin joined the corporation in
1982; Mr. Condroski joined Cudahy
Marine Bank in 1964.
First Bank, Sparta,
Celebrates Anniversary
First Bank of Sparta marked its
125th year on July 26, recalling its ori
gins in a small building that also
housed the local post office and the
Sparta Herald.
A young New York attorney and
real-estate developer named Thomas
B. Tyler started the bank in 1858 that
became the oldest banking institution
in western Wisconsin.
Current president, William A. Bar
ney, is a great-great-grandson of the
founder.
31
Minnesota Bankers Hear About 'N ew Era'
From Governor at Annual Convention
INNESOTA is about to enter a
“We announced then — and I still
“new era” in banking, said the believe now — that these changes
state’s governor, Rudy Perpich,would
to
put us in the vanguard of states
bankers attending the 93rd annual seeking changes in banking laws,” he
convention of the Minnesota Bankers said. “I believe these changes can
Association recently in Minneapolis.
bring jobs, new businesses and a more
The new era involves authority for vigorous financial activity in Minneso
state-chartered banks that are non- ta.”
Fed members to get into the securHe added that it’s ironic that the
ities/insurance business, permission banking-service industry is growing,
for out-of-state bank HCs to operate in but that commercial banks are missing
Minnesota under a reciprocity system out as participants.
and the removal of interest-rate ceil
He said he was grateful for the sup
ings on most types of borrowing.
port the MBA gave his proposals. “I
Governor Perpich had hopes that
hope I can count on that support again
his new era in banking would take
as hearings reopen.”
place in 1983, but the state legislature
John Elkins of the Naisbitt Group
didn’t see things his way so the propos
and
Trend Report, Denver, addressed
als were shunted aside until the next
the restructuring of America. “The
session.
“I want state government to be a single greatest risk institutions can
catalyst in that effort (to enter a new take is to expect to conduct ‘business as
era in banking), ” he told the assembled usual, ” he told his banker audience.
bankers, “and I’m going to push hard He added that sound business plan
next year for the legislative changes ning requires serious examination of
necessary to bring the banking indus the shifts taking place and the ability to
understand how they will affect the
try into this new era.”
The changes were prompted by the banking business.
He then discussed the 10 “mega
potential impact they are expected to
have on two key themes of the gov trends,” whose aggregate impact will
ernor’s administration — jobs and the “determine the general characteristics
economy, he said. “The legislature of the ‘new economy’ we now are
must consider how our banking laws building.”
Among the “megatrends” were the
are affecting the economy, and also
must look at how the new accent on following: A move from an industrial to
services will be a primary force in driv an information society, a move from a
national to a global economy, a move
ing the national economy.”
The changes came from a commis from short- to long-term planning, a
sion on investment and banking the move from centralization to decentra
governor established earlier in his lization and a move from a representa
term.
tive to a participatory democracy.
M
Gerald Corrigan, president, Min
neapolis Fed, called for sweeping
federal action on bank regulation and
deregulation. He said this was long
overdue and is necessary, but that gov
ernment should take care as to how far
and how fast it proceeds.
The government is faced with the
need to alter the financial structure of
the U. S., he said, but the legislature
has to keep its eye on several factors
when doing it. Care should be taken to
preserve a healthy, competitive, vital
environment, and there must be assur
ance that banking services will be
readily available to all.
Mr. Corrigan called for three major
changes in federal banking laws: First,
define the term “bank”; second, clarify
bank powers and ow nership; and
third, make a distinction between
thrift and bank parity.
The first change is a “messy busi
ness,” he said. On the second change,
he said we need a handle to determine
what kinds of activities banks can en
gage in and who can own a bank. Re
garding the third change, the historical
distinction between thrift and bank
parity has lost relevance. “W e’ve got to
create a situation where S&Ls are sub
ject to the same rules as bank HCs —
but we don’t necessarily need parity all
the wav down.”
During the ABA elections, William
J. Addington, vice president, F&M
Marquette National, Minneapolis, and
John P. Ingebrand, outgoing MBA
president, and president, Kanabec
State, Mora, were elected to the ex
ecutive council for two-year terms.
Succeeding Mr. Ingebrand as MBA
president was Herbert A. Lund, presi
dent, Security State, Albert Lea, who
moved up from first vice president.
Succeeding Mr. Lund as first vice
president was Galen T. Pate, presi
dent, Signal Hills State, West St. Paul.
Succeeding Mr. Pate as second vice
president was Clinton D. Kurtz, presi
dent, Citizens State, Norwood. James
R. Jorstad, president, Citizens State,
Hayfield, was elected to a second term
as MBA treasurer. — Lawrence W.
Colbert.
New MBA officers: (from I.) Clinton Kurtz
— 2nd v.p.; Herbert Lund — pres.; Truman
Jeffers — e.v.p.; Galen Pate — 1st v.p.;
James Jorstad — treas.
32
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Federal Reserve Bank of St. Louis
MID-CONTINENT BANKER for August, 1 9 8 3
Mary Ellen Morrissey accepts the presidential gavel from Rowland J.
McClellan on behalf of her husband, W illiam , who was temporarily
hospitalized during the WBA convention. Mr. Morrissey's acceptance
speech was read by Bryan K. Koontz, WBA exec. dir.
M ary Ellen Morrissey Accepts Gavel
O n Behalf of Hospitalized Husband
HIS W R ITE R saw a “first last
month in his 36 years of covering
banking events: the wife of a newlyWisconsin's
elected state association president
Top Three
“accepting the gavel” while her hus
Officers
band was temporarily hospitalized.
Mrs. Mary Ellen Morrissey gra
ciously — and indeed with great poise
— accepted the presidential post on
behalf of her husband, William J. Mor
rissey, hospitalized at Elkhorn, where
MORRISSEY
he is president of Independence Bank.
President
He also is chairman/CEO of Independ
Two other bankers also took office at
ence Bank Group, In c., a $450-million
bank holding company made up of the convention: Vice President John
seven community banks and head Johnson, president, Bank of Spring
Green; and Treasurer Dean A. Trepquartered in Waukesha.
Mr. Morrissey (now back on the tow, president, Brown D eer Bank.
job) obviously had anticipated attend Four new members of the 1983- 84 ex
ing the convention because he had a ecutive council are pictured with this
typed acceptance speech, which was article.
Mr. Morrissey’s acceptance speech
read in its e n tire ty by Byran K.
Koontz, executive director of the Wis was, indeed, an excellent one and it
would have been a loss for Wisconsin
consin Bankers Association.
T
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Federal Reserve Bank of St. Louis
JOHNSON
Vice President
TREPTOW
Treasurer
bankers had it not been read. His mes
sage dealt, in part, with deregulation
and how bankers can cope with this
process.
“We all now realize,” he said (or
wrote), that the process of deregula
tion will take us much further than just
the phase-out of federal interest ceil
ings required by the 1980 banking act.
In fact, the forces driving the process
of deregulation simply cannot be
evaded or ignored.
“We must pay attention to the pros
pect of future deregulation,” he con-
New members of 1 9 8 3 -'8 4 WBA Exec.
Council: L. H. Bender, s.v.p., Security State,
Minocqua; Larry J. Carson, pres., Lancaster
State; Richard P. Klug, e.v.p., F&M Bank,
Menomonee Falls; and Thomas L. Schiefelbein, pres., Security N at'l, Durand.
tinued, “because most of the forces
causing the process to move forward
are forces that we as individual bank
ers cannot control directly.
“Those forces, ’’ he said, “include the
new technologies and the remarkable
speedy entry of nonbank organizations
into the business of banking. We as
individual bankers cannot control this
process of deregulation, but I want to
emphasize that if we join together —
both here in Wisconsin and nation
wide — we definitely will be in a posi
tion to influence substantially the pro
cess of deregulation. ’’
“How do we as bankers,” he asked,
“work to control the process of change
and manage it effectively for our in
stitutions and for the customers and
communities we serve?
“Like it or not, ” he stated, “we must
become actively and personally and in
tensively involved in the political and
legislative processes, both in Wiscon
sin and at the federal level. If we fail to
become involved,” he insisted, “we
will have left the key decisions to be
made by others — not only for our
institutions but also for our personal
careers.”
Presiding presid ent Rowland J.
McClellan also talked at length about
deregulation and the positive effects
that have occurred since the passage of
the Garn-St Germain Depository In
stitutions Act of 1982. In this broad
legislation, he reminded bankers, the
D ID C (Depository Institutions D e
regulation Committee) was required
by Congress to create an insured
account for the market rate of interest
to allow depository institutions to com
pete with money-market funds. They
came up, he said, with that moneymarket-deposit account.
“Money-market-deposit accounts,”
he said, “an account banks were only
authorized to begin offering in midDecember of 1982, have attracted over
344 billion dollars in deposits so far.
“And super NOW accounts, another
new account authorized to give reg
Wisconsin's Governor Anthony S. Earl (r.),
chats with WBA Pres. Rowland J. McClellan
before his convention talk.
ulated depository institutions a tool to
compete with those money-market
funds consumers like so much, have
attracted 30 billion dollars since Janu
ary 5.
“A look at the financial-services mar
ketplace prior to the introduction of
these new accounts at banks and other
regulated d epository in stitu tion s
shows why I have no difficulty singling
out Garn-St Germain as the most im
portant event for banking in the last
year.
“ Money-market mutual accounts
attracted over 230 billion dollars in
assets — assets that came out of towns
like Madison and Janesville and Mil
waukee because our banks and savings
and loans were prohibited by law from
competing — because the rate of in
terest we could pay was regulated
along with size and length of deposit —
regulated to shut us out of the market
because we couldn’t give our custom
ers what they wanted!”
Now, he asks what has happened
after the D ID C authorized bank
m on ey-m arket-d ep osit accou nts?
“Money-market funds did not con
tinue on the projected growth curve;
money-market deposits in banks and
other depository financial institutions
grew in a very short time to well over
$344 billion. We know all of that is not
new money, but a good bit of it is and
. . . that money now is available for
lending in our local communities!
“As for the future,” continued Mr.
McClellan, “how will bankers prepare
for banking in the future? The banking
industry has long been an advocate of
in-service and continued education for
banking professionals. Our AIB pro
grams have been models for other in
dustries.
“As regulations decrease and new
entries to our marketplace increase,
the only real difference between com
mercial banks and the competition will
be quality of management. Education
and training will keep bankers ahead of
the pack,” Mr. McClellan insisted.
Another convention speaker, Silas
Keehn, president, Federal Reserve
Bank of Chicago, urged banks, both
large and small, to take advantage of
their opportunities by becoming active
proponents of legislative change. “By
resisting change, those that are reg
ulated are playing right into the hands
of those that are not,” he observed.
Mr. Keehn told Wisconsin bankers
that “overly restricted regulations that
are inappropriate in a marketplace
context simply don’t work” and that
regulators have a responsibility to pro
vide an environment in which institu
tions can “grow and thrive on a com
petitive basis.” Otherwise, institutions
outside the structure will continue to
make inroads into activities that tradi
tionally have been the exclusive do
main of banks.” And once their posi
tions have been established,” Mr.
Keehn said, “it will be terribly difficult
to dislodge them .”
Yet the Reserve Bank president had
strong words of praise and encourage
ment for all banks, saying they have
responded “magnificently” to the chal
lenges posed by nonbank competi
tors by offering an array of new and
sophisticated services. He reminded
the audience of predictions that many
of the smaller institutions would not
survive, commenting that instead they
continue to do their business in an
absolutely marvelous way and, by and
large, achieve superb results.
Mr. Keehn also painted a bright pic
ture for the future of these smaller in
stitutions, citing several advantages,
(C ontinued on page 44)
New 50-year Club members: Seated: Cran
ston F. Heckmann, pres., Cleveland State;
and Norma T. Yuhas, teller-bookkeeper,
Security State, Port Wing. Standing: Day F.
Pauls, dir. emeritus/consultant, Citizens
Bancorp., Sheboygan; Joseph A. Lauber,
dir., Valley Bank, Brownsville; Orval V.
Malueg, ch., Dairyman's State, Clintonville; and Claude C. Rohleder, v.p., State
Bank, East Troy.
34
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Federal Reserve Bank of St. Louis
35
Bank in Texas Uses Financial Futures
To O ptim ize Asset/Liability Management
By Fred D . Price, Executive V ice President, Financial Trends M anagem ent, Bakersfield, C alif.
SSE T/ liability m anagers have age yield of 8.75%, the current income
l been faced with a classic dilem
improvement on a $10,000,000 port
ma since the latter half of 1982: opti
folio would be approximately $1,000
mum investment of short-term liquid per day. That same degree of improve
ity in a positive-yield-curve environ ment will be realized as long as the
ment.
yield curve holds the same degree of
When the yield curve is positive positive slope.
(short-term rates lower than long-term
The basics to a YCES are:
rates), there is a give-up in return to
• A positive-sloped yield curve;
keep the funds in liquid instruments.
• Availability of short-term liquidity
This yield sacrifice consistently has for investment purposes;
been greater than 200 basis points and
• Purchase of a long-term fixed-rate
has, at times, been greater than 350 asset such as U. S. government bonds
basis points. In many cases, investors or GNMA coupons and simultaneously
have accepted this opportunity cost hedge with the appropriate financial
because they don’t want to expose futures contract;
themselves to the principal risk associ
• W hen appropriate, a simulta
ated with owning longer-term assets. neous close out of both cash asset and
The desire to maintain liquidity over futures hedge position.
rides the desire for increased return.
Financial Trends Management has
Financial-futures markets enable an been recommending the YCES to its
asset/liability manager to maintain li clien t institutions for the last six
quidity and enjoy the returns associ months. One particular client has en
ated with longer-term instruments. gaged in the strategy since it was first
This is done through implementation recommended. The client is a com
of the yield-curve-extension strategy mercial bank in Texas. The banker
(YCES). Sole objective of the strategy wishes to remain anonymous as he
is to improve current income with re feels that his ability to utilize futures
duced principal risk.
will be a key competitive performance
It is not a capital-gains strategy. A advantage. I will not disclose the in
long-term cash asset is purchased and stitution’s name, but I want to docu
simultaneously hedged with futures, ment its results to date.
which means the “liquidation” value of
The chronological detail of the bank
the asset will “float” up or down with er’s strategy implementation is as fol
the movement in long-term rates and lows:
thus remain at approximately the same
• On December 15, 1982, the bank
parity-to-market value that existed at acquired $4,000,000 par of GNMA
the time the strategy was placed.
13.50% coupons that w ere simul
If rates rise, the cash asset will de taneously hedged at purchase with
preciate in value but the loss will be Sep tem ber and D ecem b er, 1983,
approximately offset by gains in the GNMA futures. The GNMAs were
futures hedge position. If rates de purchased to yield 13.28% versus the
cline, the cash asset will appreciate in alternative of fed-funds-sold at 8.75%,
value but the gain will be offset by giving a yield improvement of 453
losses in the futures hedge position.
basis points.
The net benefit of the strategy is the
On February 4, 1982, the bank ac
improvement in current earnings that quired $5,250,000 par U. S. Treasury
results from increased return on the bonds 14.00% coupon of 2011, which
asset purchased versus the alternative were simultaneously hedged at pur
short-term investm ent that would chase with September, 1983, U. S. Thave been maintained if futures mar bond futures. The bonds were pur
kets were not available.
chased to yield 11.45% versus the
The financial impact of this benefit altern ative of holding tax-exem pt
can be substantial. For example, if the bonds at 9.52% , giving a yield im
long-term asset was purchased to yield provement of 193 basis points. The tax12.00% and the alternative use of those exempt bonds were sold to generate
funds was in fed-funds-sold at an aver the funds as there was no taxable
A
36
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
advantage to holding them due to a
tax-loss carry forward.
• On April 20, 1982, the GNMA
13.50% coupons and the U. S. Treas
ury bonds, with their respective fu
tures positions, were closed out and
the proceeds w ere used to buy
$10,000,000 GNMA 11.50% coupons,
which were simultaneously hedged
with Septem ber, 1983, GNMA fu
tures. The new GNMAs were pur
chased to yield 11.88% versus the
alternative of fed funds sold at 8.70%,
giving a yield improvement of 318
basis points. The GNMA 13.50%
coupons and Treasury bonds were sold
in order to reinvest in current produc
tion GNMAs.
Income improvement on
G N M A 1 3 .5 0 %
Income improvement on U. S.
Treasury bonds
Income improvement as of
June 16, 1983,
on GNAAA 1 1 .5 0 %
$ 6 6 ,1 7 0
18,570
4 9 ,1 7 0
Total im pact 1983 to date: $ 1 3 3 ,9 1 0
N et yield improvement
to date:
Book gain on sale of
G N M A 1 3 .5 0 %
Future hedge loss
Basis impact:
Book gain on sale of
U. S. Treasury bonds
Futures hedge loss
Basis impact:
June 16, 1983
Unrealized loss
G N M A 1 1 .5 0 %
Unrealized futures hedge
gain
Basis impact:
Total basis impact:
3 .3 6 %
$ 5 8 ,7 5 0
(1 7 ,4 10 )
$ 4 1 ,3 4 0
$ 2 1 4 ,1 4 0
(21 8,44 0)
$
(4,30 0)
$ (25 ,0 00 )
14,970
$ (10 ,0 30 )
$ 2 7 ,0 1 0
The bank has been able to earn
$133,910 more in 1983 than it would
have by staying in fed-funds-sold and
existing tax-exempt bonds. The bank’s
president/CEO feels that the YCES
will be the key to the institution poten
tially earning a 2.00% return on assets
in 1983.
Several important issues have not
been addressed in this article due to
limitation of space. Each is key to a
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successful YCES.
• Board approval of policies and
procedures regarding hedging activi
ty;
• Documentation of hedge strategy
and expected results;
• Calculation of initial hedge ratio
(appropriate number of contracts to
offset cash-position risk);
• Ongoing management of the basis
relationship between the cash position
and futures hedge position, including
periodic contract adjustments;
• Margin-account management;
• Periodic hedge status reporting to
board and management.
Hedging with financial futures is a
most important tool in the asset/liability manager s portfolio. Few institu
tions have chosen to engage in this
activity given its newness, but with
results like these being publicized,
more and more managers will be moti
vated to develop this capability. • •
Business Optimism About U. S. Economy
Tempered by Concern Over Deficits
U SIN ESS executives clearly are market business executives, or 82%,
becoming more optimistic about believe business will improve over the
the course of the economy but in
next six months. When asked a similar
creasingly concerned with the federal question in the July, 1982, Centerre
deficit, government-imposed regula poll, three-fourths, or 75%, predicted
tions and the need to lower interest an upturn in business.
rates.
A majority of those surveyed, 66%,
These are among the findings of the forecast expansion within their busi
Centerre Middle Market Economic ness in the coming year and 58% pre
Poll, a survey of executives in com dict equipment modernization within
panies with $25 million to $300 million the same time frame. Slightly less than
in sales. The survey was conducted in one-half, 45%, believe their company
13 Mid-Continent states by Centerre will increase inventory and more than
Bancorp., based in St. Louis.
one-third, or 35%, believe money will
“C enterre regularly surveys the be borrowed for new investments.
middle-market business community
Last July, 70% of the respondents
because it is the backbone of American accurately predicted an improved
economic health,” said Clarence C.
stock market this year. When asked
Barksdale, chairman, Centerre Ban recently to project a year ahead, 52%
corp. “Their opinions have proved to predicted the stock market will con
be a valuable indicator of business tinue to improve; however, 24% said it
trends and conditions.”
will begin to drop and 18% predicted it
M ore than eight in 10 middle- will remain the same.
Seventy-two percent think private
business will be most responsible for
economic progress, while only one
fourth, 24%, believe continued eco
nomic recovery is in the hands of the
government.
As confidence in the economy con
tinues to rise, a number of business
executives are expressing concern in
HE D ID C (Depository Institutions Deregulation Committee) re
other areas. When asked to name the
moved rate ceilings and other restrictions on all deposit accounts
most pressing problem facing Amer
with maturities of 31 days or more at its June 30 meeting. The action
ican business today, those polled fre
becomes effective October 1.
quently cite the size of the federal def
The action leaves ceilings applying only to passbook and NOW
icit and government spending (15%);
accounts, which are 514% for commercial banks and 514% for thrifts.
government interference in business
The DIDC established a $2,500 minimum denomination on new
and excessive regulation (14%) and
time-deposit accounts of 31 days or less, also effective October 1,
high interest rates (14%). Business
bringing that maturity in line with the minimums on other maturities.
productivity and an unfavorable bal
The $2,500 minimum continues for money-market accounts and super
ance of trade resulting from a high
NOWs. The effect is to eliminate the ceiling on virtually all time
volume of imports were both men
deposits, as there currently are no ceilings on time deposits in the
tioned by one in 10 executives.
7-31-day range in excess of $2,500.
Today, only 6% of the middle mar
The committee also voted to retain a mandatory early withdrawal
ket business executives surveyed think
penalty of 31 days’ interest — earned or not — for time deposits with
eliminating inflation entirely is an
maturities of one year or less and a penalty of 90 days’ interest for time
appropriate goal. Seventy-six percent
deposits with maturities of more than one year.
believe inflation should be reduced to
The existing rule requiring invasion of principal to meet penalties was
4% or less and only 15% favor 5% or
retained. Banks are free to set higher penalties if they wish.
higher inflation.
The DIDC retained a requirement that loans secured by time de
Businessmen were asked if they
posits must bear interest at least 1% higher than the effective rate for the
supported a second term for Paul Volcdeposit. However, it did remove existing regulations governing com
ker, chairman of the Federal Reserve
pounding.
Board, prior to his recent reappoint
All changes affect deposit accounts opened after October 1.
ment. Seventy-nine percent were in
Action to create interest-bearing corporate checking accounts was
favor of his reappointment, while only
deferred. The D ID C ’s members prefer to have Congress review and act
14% were not.
on the issue, since there are doubts that regulators have the authority to
When asked to predict the prime
address this issue.
rate one year from now, 62% said it will
be in the range of 10.0% to 10.9% or
lower while 33% believe it will rise to
the 11% level and higher. • •
B
Rate Ceilings Removed by DIDC
On Accounts in Excess of 31 Days
T
38
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Federal Reserve Bank of St. Louis
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Asset/Liability-Management Systems
Available to Financial Institutions
SSET/LIA BILITY-m anagem ent
i tech n iq u es are discussed in
several articles in this issue of M
C o n t i n e n t B a n k e r ; this article pre
sents a potpourri of asset/liabilitymanagement aids available to financial
institutions.
Due to space limitations, descrip
tions of services must be brief. Beaders
desiring additional information on any
service reviewed in this article can
contact the firms providing the ser
vices (see accom panying box for
addresses).
• Thunderbird Automation Group
has developed a series of m icrocomputer-based products, including
fin an cial-m an agem ent (including
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According to Bruce Skaistis, presi
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a stand-alone basis or it can be linked
directly to a mainframe-type compu
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from a bank’s loan and CD systems.”
• Control Data Corp. has a new ser
vice to assist bank executives in asset/
liability -m an ag em en t called the
EXAM system. It consists of three ma
jo r components: portfolio manage
ment, balance-sheet management and
analysis and presentation.
The portfolio-management system
is used to examine current interestsensitive portfolios and to explore the
impact of reinvestment/refunding de
cisions under various rate assump
tions.
The balance-sheet management sys
tem uses simulation or optimization
techniques to explore various port
folio-management decisions within the
framework of full financial statements.
The analysis and presentation sys
tem can draw on multiple application
programs and economic or industry
data bases to augment the decision
making process and to present the re
sults of analysis graphically.
• Integrated Management Services
offers a commercial-credit analysis sys
tem for all sizes of banks. Bankers re
port that this system allows commer
cial-credit officers to use their time
A
40
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Federal Reserve Bank of St. Louis
more effectively, relieving them of
“number crunching” and freeing them
i d to
- make more prospect calls and attend
to the business of selling products and
penetrating the market.
The system also enables a business
client to understand where his firm
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his decisions may take the firm by per
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Another banker reports that the sys
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narios.
• Apache Electronic Systems marFor more information on any of
the systems described in this article,
write to the addresses listed below.
Thunderbird Automation Group,
Inc., 4301 E. 31st St., Tulsa, OK
74135. Phone: 918/744-8009.
Control Data Corp., Public Rela
tions Dept., P. O. Box 1700, Green
wich, CT 06836. Phone: 203/6222455.
Integrated Management Services,
500 S. Main St., Suite 1009, Orange,
CA 92668. Phone: 714/558-7128.
Apache Electronic Systems, Inc.,
900 Jorie Blvd., Suite 124, Oakbrook, IL 60521. Phone: 312/7893330.
National Bank of Commerce, c/o
Doug Ingram, 1878 E. Brooks Rd.,
Memphis, TN 38116. Phone: 901/
523-3330, or Eddie Sligh, Systematics, Inc., 4001 Rodney Parham Rd.,
Little Rock, AR 72212. Phone 501/
225-5100.
Vining-Sparks A sset/Liability
Consultants, 889 Ridge Lake Blvd.,
Memphis, TN 38119.
Darling & Associates, Inc., North
Andover Office Park, 451 Andover
St., Suite 209, North Andover, MA
01845. Phone 617/794-0212.
Computer Based Solutions, Inc.,
3390 Peachtree Rd., N. E ., Suite
1148, Atlanta, GA 30326. Phone 404/
261-0501.
Norwest Bank Minneapolis, 8th
St. and Marquette Ave., Minneapo
lis, MN 55479. Phone 612/372-8123.
Sendero Corp., 1118 E. Missouri,
Phoenix, AZ 85014. Phone 602/2775486.
Chase Econometrics/Interactive
Data Corp., 22 Cortlandt St., New
York, NY 10007. Phone: 212/2854242.
kets an asset/liability-management
system that provides banks with a daily
analysis of status reports and forecast
ing data covering possible economic
changes.
The system, named MiniMax, is
said to provide banks with information
to maximize earnings while keeping
risks within reason. It provides in
formation required by the FD IC re
port of condition (Schedule J) in addi
tion to answering the operations side of
asset/liability, says Lester H. Keepper
Jr., Apache’s president.
The system generates a daily bal
ance sheet that highlights a bank’s
rate-sensitive assets/liabilities and
gives the current weighted average in
terest rate of all categories, including
both rate-sen sitiv e and non-ratesensitive assets/liabilities, which en
ables a bank to identify its interest
margin on a daily basis and to gauge its
profitability over any set period de
sired.
• National Bank of Com m erce,
Memphis, has developed a new asset/
liability management system called
ALMS, which is described as a com
prehensive micro-computer software
package for monthly, quarterly and
long-range planning. Recent enhance
ments have expanded the capabilities
of ALMS while making it available on
the IBM personal computer, says Tom
Charlton of the bank’s staff.
Various features of the system en
able banks to determine the highest
income-producing mix of fund sources
and uses, establish monthly balance
sheet and income budget adjusted for
seasonal and trend factors, measure
the gap between rate-sensitive assets
and rate-sensitive liabilities and deter
mine financial exposure to interestrate changes, examine bond-swapping
strategies to increase bond yields and
interest income and reduce rate sensi
tivity, determine an effective hedge to
reduce income exposure and rate sen
sitivity and produce daily, monthly,
quarterly and yearly financial state
ments to report balance sheet and in
come position and determ ine the
variance between actual and budgeted
balances.
• Vining-Sparks A sset/Liability
Consultants market an A/L manage
m ent system that has b een im-
MID CONTINENT BANKER for August, 1 9 8 3
NEED DIRECTION IN
ASSET/LIABILITY MANAGEMENT?
FOLLOW SENDEROS PATH...MICRO-FRS"
Theres no shortage of choice
when it comes to asset/liability
software.
The best path? Your
microcomputer teamed with
Sendero's M icro-FRS
(Financial Results Simulator)
software.
Sendero designed M icro-FRS
to be simple enough that you
can use it productively from
day one—even if you've never
used a microcomputer before.
As the system guides you,
your ability to analyze, plan
and report quickly expands.
Easy to follow, plain English
"menus" take you directly to
the task you want to perform.
In minutes, you can examine
your "what ifs" in rate
scenarios and balance sheet
strategies, with analysis of
results that management can
use and understand.
To handle all this capability,
Sendero's banking profession
als and software experts have
designed Micro-FRS to fully
exploit the capabilities of desk
top microcomputers, rivaling
the performance of similar
mainframe systems. In fact,
Micro-FRS evolved from a
mainframe software package
originally designed in 1977 by
people now at Sendero.
Sendero offers straight-for
ward documentation you can
read and understand; an effec
tive customer support group;
a system that's kept current to
reflect your changing needs;
consulting services; and a
National User's Conference.
For direction in asset/liabil
ity management, follow the
Sendero Path.
C O RPO FIATION
4815 N. 14th Place • Phoenix, AZ • 85014 • Phone (602) 279-0401
See us at Microscape Booths #607-609
MID-CONTINENT BANKER for August, 1 9 8 3
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
The Path To Success
41
plemented in more than 250 banks in
the past two years.
After the system is purchased, a
CPA takes the model to the purchasing
bank and gathers data, trains person
nel and helps interpret results and
make decisions.
The system has enabled banks to in
crease profits by matching assets and
liabilities, reducing current taxes, re
covering past taxes and developing
strategies for future growth, according
to C. J. Pickering, senior vice presi
dent at Vining.
• Darling & Associates markets a
balance-sheet information system and
a loan-safeguard system.
The first system is an asset/liabilitym anagem ent product designed to
assist managers in financial planning
and the optimization of interest mar
gins.
Key features include flexible user
options that allow banks to define bal
ance-sheet items, tax structures, rate
indices, interest calculations and li
quidity parameters; 12-month running
and fiscal forecasts for balance sheet,
rates/yields, in te re s t, income/expense, profit/loss, gap analysis and key
ratios; unlimited modeling of “what-if”
questions over monthly, quarterly or
annual tim efram es; asset/liability
matching that permits banks to allo
cate sources of funds to uses of funds
based on the characteristics of each
Now, more than ever, Christmas Clubs
become an integral piece of your
marketing strategy for the '80’s. Restore
the nobility of savings. Christmas Clubs
are a viable source of low cost core
deposits. In addition, Christmas Club
savers are loyal customers and frequent
users of multiple retail services. We
know, we’ve been marketing Christmas
Club programs to discriminating bankers
for over 72 years. Talk to us today.
c te R is rro a s
C lC lb a corporation
Helping America Save Since 1910
P.O. Box 20 • Easton, PA 18042
Call Collect— (215) 258-6101
42
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
asset and liability and to analyze the
effect of interest-rate changes and
funding shifts on each match so that
A/L strategies can be formulated for
pricing, lengthening or shortening
positions or hedging.
The loan-safeguard system enables
loan officers to better understand the
risk complexion of existing and pro
posed commercial loans.
Its features include storing and re
trieving corporate financial state
ments; analyzing and evaluating the
degree of risk of new loan requests
based on the client’s previous and cur
rent financial statements, quality of
collateral, peer-group comparisons
and bank standards and policies; moni
toring changes in the risk levels of indi
vidual commercial loans in the port
folio as updated financial statements
are received; calculating a “Z” score of
bankruptcy potential; plus other ser
vices.
• Computer Based Solutions offers
a software package that provides loan
officers with a structured mechanism
for handling the processing of loan ap
plications.
Among the functions performed are
the following: It poses questions about
the qualifications of the applicant; it
specifies in detail the reason for the
loan; serves as a checklist to assure
100% adherence to the data-collection
process required by each bank; assigns
bank-specified numeric values to each
answer or date elem ent; computes
scores based on the values assigned;
evaluates the scores based on the
acceptable range specified by the
bank; and produces a standard set of
documentation for the loan commit
tee.
System benefits include: guarantees
100% compliance with bank policy on
data required for the decision-making
process; provides quantitative analysis
describing the merit of the application;
standardizes the loan-review process;
produces a report for easy look-up of
key data, ratios and financial-state
ment analysis; and provides flexibility
for changing values and questions
about the application.
• Norwest Bank Minneapolis offers
an asset/liability management consult
ing service to guide other banks in
m anagem ent of th e ir resou rces
through its correspondent-banking de
partment.
“Objective of the new service is to
provide a framework for banks to plan,
organize and control their resources to
achieve their goals and objectives,”
says Donald G. Pederson, senior vice
president/corresponding banking
head.
The service provides development
of management resources, a strategic
financial plan, a policy manual and a
decision-support system. The process
covers a time period of about 10 weeks.
During the process, specific objectives
are set to help the bank manage the
allocation, mix, maturities and pricing
of A/L resources, placing particular
emphasis on managing net-interest
margin.
• Sendero Corp. is marketing a
micro-computer-based A/L software
package named Micro-FRS (Financial
Results Simulator). A representative of
Sendero says the package is capable of
handling complex A/L management
functions and is written in the PLAN80
language from Business Planning Sys
tems. It features extensive use of plain
English menus that take users directly
to financial-modeling worksheets. The
results are preformatted reports.
A banker reports that the system
allows for the evaluation of alternative
new volume maturity strategies as well
as desired balance-sheet structure.
Capabilities include input modeling
for variable target balances, key rates
and base information that feed detail
loan, investment, borrowing and de
posit models. Reports include income
statements, balance sheets, call re
ports (Schedule J), performance ratios
and gap analysis that can be generated
by each what-if or change in assump
tions.
Sendero also provides consulting
services and custom programming for
special adaptations of Micro-FRS and
supports customers with “hot-line”
phone service.
• Chase Econometrics/Interactive
D ata C orp. offers a bank riskmanagement system (BRMS) built for
financial executives who manage A/L
portfolios. The system helps these ex
ecutives see the results of different
portfolio management strategies be
fore any one strategy is acted on.
BRMS is customizable by the client,
supports a variety of management
styles, has a broad range of capabilities
and is applicable to a wide market, says
Judith B. Hopkins, manager, market
ing services.
BRMS simulates a financial institu
tion’s earnings over a maximum of 24
months in the future by processing bal
ances, forecast rates, maturities, newvolume allocation and strategies in
conjunction with each other. In addi
tion, the system can be used to com
pare the net interest income results of
any number of simulations at one time;
generate composite balances, rates
and interest amounts when given allo
cated forecasts of new business volume
and rates; indicate new business (or
reduction of existing volume) required
MID-CONTINENT BANKER for August, 1 9 8 3
Sallie Mae and the Community Lender
"How can you increase your full-service
capabilities? Try Sallie Mae's
Community Lender Sale Program.
It works for us."
Robert B. Pieters
President, Freedom Savings G Loan Association
Menomonee Falls, Wisconsin
W e've all heard a lot of talk
about the concept of "onestop" or "supermarket" bank
ing. Community lenders like
Bob Pieters are becoming form i
dable competitors in this "new
banking environment," thanks
in part to their relationships
w ith Sallie Mae.
The way Bob Pieters sees it, there's no
better reason for making more stu
dent loans than the cross-selling oppor
tunities they present. Start from
scratch with student loan customers,
sell them additional products, and
you're well on your way to becoming
a true full-service institution.
"We used to make student loans
just to accommodate existing cus
tomers and to enhance our
image in the community."
"Sallie Mae has enabled us to
expand our market penetration
beyond our immediate area—
and to offer products other than
student loans to new customers.
And student loans help us lock in
existing customers with one more
essential serviced
Sallie Mae's Community Lender
Sale Program can increase your
full-service capabilities, too.
"We define ourselves as a 'fullservice retail financial center.'
Student lending has played an
important role by enhancing our
mortgage business and bringing
us many new N. O. W. accounts.
It's been so important, that even
though we're the 46th largest
savings and loan in Wisconsin,
we were the state's third largest
originator o f student loans in
1981-82
Pieters talks about the evolution of fullservice banking...
Community lenders may take an un
derstandably limited view of student
loans as community service. They'd
welcome the chance to gain new cus
tomers by promoting loans to "out
siders," but prohibitive collection costs
put them off. The solution? Bob Pieters
has discovered that a sale to Sallie Mae
can broaden one's view considerably:
their portfolios before repayment,
eliminating the need for staff increases
and servicing. Many bankers use the
liquidity gained to reinvest in student
loans—increasing their commitment
to their communities as they build new
profit centers.
We're just a phone call away, and
we're very sensitive to the special
needs of community lenders.
Call us today at (202) 965-7700, or
mail the coupon below. Our cordial
and experienced staff is waiting to
help you start a student loan profit
center now.
Well, maybe there is another good
reason besides cross-selling for making
student loans. Bob?
I
"Sallie Mae has made student
lending a very desirable business
to be in. Over a period o f four
years, they have helped us build a
student loan profit center that
generates significant income"
I
The Community Lender Sale Program
makes it easy for Bob Pieters and other
community lenders to sell all or part of
Sallie Mae Marketing Dept.
Direct Marketing Division
1050 Thomas Jefferson St., N.W.
Washington, D.C. 20007
YES, TELL ME MORE ABOUT YOUR
COMMUNITY LENDER SALE
PROGRAM.
□ Please send me your Community
Lender Guide.
□ Please have a Sallie Mae repre
sentative call me.
Nam e
(p le a se p rin t)
T itle .... ____
I n s t it u tio n
SallieMae
Over $8 billion in student loan financing
to over 1,500 institutions.
MID-CONTINENT BANKER for August, 1 9 8 3
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
A d d re s s
C itv
S ta te
Phone(
)
B e st t im e t o ca ll
ZiD
AM
PM
□
□
M C 8003C2
43
to achieve target balances; calculate in
terest rates based on balance and income/expense data; calculate interest
income/expense based on balance and
rate data; analyze the portfolio by its
maturity structure; and inquire against
any aspect of the portfolio, strategy
statements, interest-rate forecasts or
results of completed simulations. • •
Banking Scene
(C ontinued fr o m page 8)
viewed too optimistically.
The F ed e ra l Hom e Loan Bank
Board (F H L B B ) has been issuing
pieces of paper capital to S&Ls in cases
where capital has deteriorated below
2%. Only a decade ago the agency
viewed 6% as the magic number for
capital.
These pieces of paper are supposed
to bolster the balance sheets of trou
bled S&Ls and permit the institutions
to compete with other financial inter
mediaries. The fact is that the more
desperate the plight of weak S&Ls the
more desperately they reach out to ac
quire or keep deposits. In the early
1930s, when the Reconstruction F i
nance Corp. (RFC ) issued similar
pieces of paper to commercial banks,
they were called preferred stock.
K now ledgeable b u sin essm en and
bankers viewed the appearance of
RFC obligations on a bank’s balance
sheet as red flags.
In one sense, the situation is worse
now for S&Ls than it was in the ’30s.
This is because, from the ’60s to the
mid ’70s, S&Ls were writing mort
gages with interest rates as low as
6Vz%. Many of those loans are worth
only 700 or so on the dollar and are still
on the books but they are carried by
virtue of regulatory accounting princi
ples at their original face value. Thus, a
thrift with a stated capital of 2% or less
and supported by pieces of paper from
the F H L B B probably has a negative
net worth of several percentage points.
Such institutions can remain afloat
only if they generate positive cash
flows.
Fortunately, many thrifts have been
able to generate such flows, but for
literally hundreds there is a question
whether they can continue operating
that way.
The C om p troller recen tly in
structed national banks to value U. S.
government securities put up as col
lateral for loans at their market, rather
than their face, value. But banks’ hold
ing of governments in investm ent
accounts are carried at cost, not mar
ket.
A logical question could be asked as
44
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
to rediscount advances made by the
Fed for banks putting up U. S. govern
ment securities for those advances.
Should they similarly be valued at
market?
Legitimate voices have been raised
against disclosure by banks of obliga
tions of foreign countries. Similar
sentiments have been expressed about
banks reporting 60-day past-due loans
in the future.
With the exception of a relatively
few periodicals, the typical financial
writer is lacking in sufficient back
ground to discuss such topics as pastdue loans intelligently. Nonetheless,
bankers would be Pollyannish to think
this topic can be brushed under the
rug. The regulation will pressure all
bankers to ride closer herd on their
loans and, long before they are 60 days
past due, to take stern steps to restruc
ture them.
It would behoove most banks to
have their boards designate one indi
vidual in the bank — probably the
C EO — to be the official spokesman to
discuss this extremely sensitive topic
with the media.
Several thoughts in this area come to
mind. One is that the track record of
banks, even at their worst, is substan
tially better than that of government
financing agencies, such as Federal
Farm Loan programs or SBA loans. In
comparison with those programs, los
ses of most banks look miniscule.
Another positive step: Now that the
secu rities m arket appears to be
buoyant, it may be an opportune time
for banks to seriously consider the de
sirability of infusion of additional capi
tal.
Third, those loans that have been
criticized by examiners provide a help
ful psychological approach for com
mercial bankers. By pointing out that
classified loans have been identified
and are expected to be corrected, the
onus to a considerable degree is re
moved from the bank and the commer
cial banker and placed on bank ex
aminers.
If your bank doesn’t have a loanreview committee, now would be an
opportune time to establish one and
put it to work on the 10 worst loans in
its portfolio. As the worst problems are
worked out, other problem loans can
be scrutinized.
One study shows that approximately
half the loans classified by examiners
actually are paid off in full, although it
may take considerable time. The bank
that takes steps to preserve its position
is in a good “oxymoron” position. That
is, it can improve its traditional posi
tion although circumstances may be
deteriorating. • •
Wisconsin Convention
(C ontinued fr o m page 34)
including their excellent profit rec
ords, strong capital positions, relative
freedom from anti-trust restraints and,
most significantly, knowledge of their
markets and customers. “I simply
don’t believe that major institutions
managed and headquartered at great
distances can make significant inroads
on these important market regulationships so long as the local institution
offers services at competitive prices,”
he said.
Concluding, Mr. Keehn warned
against gaining a false sense of security
from restrictions and moratoriums.
“The risk is that if we use the morato
riums as a crutch, we will continue to
provide opportunities for those that
are not impeded by regulations.”
Iowa banker C. Robert Brenton also
commented on deregulation, arguing
that bankers should lobby for further
deregulation so they can engage in in
surance, real estate and other busi
nesses of their non-bank competitors.
Mr. Brenton, ABA president-elect
and president, Brenton Banks, Inc.,
Des Moines, pointed out that “Every
body is getting into our business and
we can’t get into theirs. It’s just about
tim e,” he said, “to quit being Mr. Nice
Guy. This is getting serious.”
Mr. Brenton referred bankers to the
ABA-sponsored study completed by
Arthur Young & Co. This study shows,
he advised his listeners, the types of
businesses that banks can readily adapt
to present operations without the addi
tion of large amounts of capital or with
out the need of intensive training pro
grams. He urged bankers to obtain a
copy of the study from the ABA if they
haven’t already done so.
Keynote speaker of this year’s con
vention was W isconsin’s Governor
Anthony S. Earl, who had some good
news and bad news for his listeners.
The good news: the state will balance
its budget. The bad news: “all of us will
face higher taxes for the next two years
so Wisconsin (can be) stable and sol
vent! — Ralph B. Cox, publisher.
• J. Robert Brubaker, senior vice
president, Equibank, Pittsburgh, has
b een elected p resid en t, National
Automated Clearing House Associa
tion (NACHA). He succeeds James F.
Lordan, senior vice president, State
Street Bank, Boston. Merrill T. Miller
Jr., senior vice president, California
First Bank, San Diego, was elected
NACHA vice president, and Garry L.
Singer, NACHA’s staff director, was
elected secretary/treasurer.
MID-CONTINENT BANKER for August, 1 9 8 3
The Smart Money
is Heading to Atlanta
68th Annual Convention of the Bank Marketing Association
The good news is, deregulation is going to make
marketing people the heroes of the
banking industry.
The bad news is, heroes aren’t allowed to fail.
Which means that marketing will
not only be expected to make a
greater contribution to bank
profitability, it will also be held
more accountable.
That’s why the smart money is
heading to Atlanta in October. To
get a crash course on what
marketing people can do to insure
their own success and the success
of their banks.
It’s the 68th Annual Convention of
the BMA, and the cynics among us
are already calling it a survival
course.
Here are some of the highlights:
■ Presentations from non-banking
executives who haye fought the
battle of deregulation. And won.
Which gives us a chance to learn
from them, instead of reinventing
the wheel.
FOR FULL DETA ILS
CALL S H IR L E Y A N TE N U C C I
AT (3 1 2 ) 7 8 2 -1 4 4 2 .
■ A fascinating analysis of the
trends that are shaping our lives
and our futures by John Naisbitt,
author of the current best-seller
MegaTrends.
■ For perhaps the first time in
history, the presidents of three
Federal Reserve Banks on the same
podium, discussing the future of
our industry from their unique
perspective.
■ Workshop sessions developed
along five different tracks. You can
follow one track all the way
through, or you can mix ’n match.
■ ‘‘How T o ” sessions, which you’d
expect, and ‘‘W'hy T o ” sessions,
which you might not expect. So,
you can not only learn the nuts and
bolts, you can also explain the
concept to top management. And
t
o
BANK MARKETING
ASSOCIATION
that might be the most important
thing you’ll ever learn.
■ W e’ve left room for a red-hottopic session. Nobody knows what
it’ll be about, but you can bet that
by convention time the rumor mill
or DIDC will have given us all
something to talk about.
■ And, apropos to our Georgia
convention site, w e’ve put together
a peach of a program on the social
side. For you and your spouse.
So, before you do anything else
today, send in the attached
response form for further
information and a convention
registration form.
And join the smart
money in Atlanta.
Name
Title
Institution
to
BANK MARKETING ASSOCIATION
309 W. Washington St.
Chicago, IL 60606
Address
State
City
Phone (
MID-CONTINENT BANKER for August, 1 9 8 3
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Zip
)
45
Boards of ABA, BM A Agree to M erge;
BM A M em bership to V ote in Sept.
IRECTORS of the Rank Market
ing Association (BMA) have
unanimously agreed to recommend to
the BMA membership that it approve
an offer to affiliate with the American
Bankers Association (ABA). Officers ol
both organizations have been meeting
and working out details for the pro
posed m erger. ABA d irecto rs
approved the merger concept at their
June meeting.
A special m eeting of the m em
bership will be held at BMA Head
q u arters, 309 W est W ashington membership base than has been possi would assume the presidency of BMA
in alternate years, beginning with
Street, Chicago, to vote on the propos ble in the past. We are both pleased
al. A two-thirds vote of members pres and excited about future prospects,” BMA F irst Vice P resid en t Barry
ent and voting, including proxies, is Mr. Kennedy said. Mr. Kennedy is Deutsch, senior vice president, Mel
required for approval. The date for the also chairman of National Bank of lon Bank, Pittsburgh, who would suc
ceed Mr. Rosenberg as president at
meeting, which is tentatively sched Commerce, Pine Bluff, Ark.
BMA President Richard M. Rosen the BMA’s annual convention in Atlan
uled for September, has not yet been
ta in October.
berg, vice chairman, W ells Fargo
set.
BMA presidents in succeeding years
Under the terms of the proposed Bank, San Francisco, urged BMA
affiliation, the BMA would be merged members to approve the affiliation, for would be as follows: 1985, Robert A.
Krane, vice chairman, Norwest Cor
into a new Delaware corporation to be it assures continued funding of the
formed by the ABA before November association’s activities while relieving poration, Minneapolis, who currently
30, which is the last day of the BMA’s individual banks that also are ABA is vice chairman, ABA marketing di
fiscal year. Thereafter, all ABA mem members of the financial burden of vision; 1986, Smith W. Brookhart III,
president/CEO, Centerre Bank, Bran
ber banks would automatically be paying additional dues to the BMA.
eligible to participate in BMA func
“Holding operational costs down to son, M o., who currently is BMA
tions without paying corporate dues to their lowest level is essential for prof second vice president; 1987, John A.
the BMA. Individual members and itability in a deregulated environ Russell, vice president/director of
banks that are not ABA members, as m ent,” Mr. Rosenberg declared, “yet m arketing, Banc O ne C orp ., Co
well as service firms and international the need to enhance our marketing lumbus, O., who is a member of the
banks, would continue as BMA mem effectiveness has become ever more ABA marketing division’s executive
bers and would continue to pay dues.
important. We feel this affiliation is the committee; and 1988, Michael P. Sul
To assure that the current level and best possible way to extend the BMA’s livan, vice president/corporate com
quality of BMA activities will con marketing services to the entire finan munications, First Union National,
tinue, the ABA has agreed to under cial industry without requiring banks Charlotte, N. C ., who is BMA second
vice president-elect.
write the BMA for a five-year period to pay dues to additional associations.
In succeeding years, the BMA presi
for the amount of the corporate dues Furthermore, this affiliation absolute
relinquished — estimated at $1.7 mil ly preserves the organization, gov dent and board would be nominated
lion annually. There is no present plan erning structure and integrity of the under the present BMA nominating
to move the BMA offices, which will BMA. That concept was key to our committee procedure and their names
remain in Chicago and will continue to agreement and is assured to us by the submitted to the ABA president for
approval under the norm al ABA
be headed by BMA Executive Vice ABA.”
President Raymond M. Cheseldine.
The proposal endorsed by the BMA appointment process.
The BMA was founded in 1915 as
The proposed affiliation was hailed board provides for combining the ABA
by ABA President William H. Ken marketing division executive commit the Financial Advertisers Association,
nedy Jr., as an idea whose time had tee into the board and councils of the which later became the Financial Pub
come.
BMA. It also calls for blending the lic Relations Association, the Bank
“The synergy accomplished by the leadership of the two organizations in Public Relations and Marketing Asso
joining of forces of these two strong such a way that current BMA officers ciatio n , and, in 1970, the Bank
banking organizations is symbolic of and ABA marketing division leaders Marketing Association. • •
what is happening in today’s financialservices industry. We believe that
U nder the terms of the proposed a ffilia tio n , the BMA
such an affiliation will enhance the
would be m erged into a new D e la w a re corp o ratio n to be
financial community while strengthen
form ed by the A B A b e fo re N o vem b er 3 0 , which is the last
ing the BMA’s ability to continue to
deliver its professional m arketing
d a y of the BMA's fiscal y e a r.
programs and services to a far wider
D
46
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Federal Reserve Bank of St. Louis
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Personnel Consulting Agency
47
Banks Enjoy Position of Strength
According to BAl-Andersen Study
E SP ITE increased competition, Andersen & Co. The study presents
banks will continue to enjoy consensus opinions of hundreds of
banking and financial-services execu
competitive advantages over thrifts
and nonbank money-market funds in tives who were polled twice during the
attracting retail deposits and are ex year-long project.
The study, N ew D im en sio n s in
pected to maintain their historic mar
Banking: Managing the Strategic Posi
ket share of total outstanding credit.
These predictions are revealed in a tion, indicates that throughout the
study of the banking industry spon 1980s consumers will perceive banks
sored jointly by the Bank Administra as offering greater service availability
tion In stitu te (BA I) and A rthur and as having a better image than
D
48
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
thrifts. In addition, banks will retain a
competitive advantage over nonbank
money-market funds because of con
venient location.
“Taken together, these advantages
suggest that banks are well positioned
to attract deposits, despite a perceived
rate advantage held by thrifts and
money funds,” said Joel P. Friedman,
a partner in the San Francisco office of
Arthur Andersen’s Management In
formation Consulting Practice and co
manager of the study.
Between 1980 and 1990, study par
ticipants believe banks’ percentage of
deposits will decline only slightly,
from 60% to 57%. During the same
period, however, thrifts’ share of de
posits is expected to decrease sharply,
from 36% to 28%. The anticipated
combined 11% drop will be absorbed
by securities firms, retailers and other
new entrants.
“A wide choice of products will be
come even more important to custom
ers in deciding where to deposit their
funds,” said Richard J. Wurzburg, BAI
executive vice president/planning and
development, and the study’s other
co-m anager.
“ C o n seq u en tly , a
strategy of specializing by offering a
limited product line may inhibit de
posit growth.”
In terms of total outstanding credit,
the study predicts that banks and
thrifts will hold their historic shares of
41% and 23%. Finance companies’
share, however, is expected to decline
significantly to about 20%, with insur
ance companies, retailers and secur
ities firms achieving gains.
Participants expect thrifts will re
main the dominant home-mortgage
lender for 1990, despite a substantial
drop in market share from 40% to 33%.
Banks and government agencies at the
federal and state levels are expected to
maintain stable market shares while
mortgage pools and pension funds will
show gains, according to the survey.
Taking part in the survey were
panels of CEOs from banks of all sizes;
bank chief operations officers; invest
ment bankers and financial analysts;
regulators and legislators; and CEOs of
nonbank financial institutions.
Participants forecast the strategies
most likely to achieve success in the
banking environment of the 1980s.
Their consensus responses provide
MID-CONTINENT BANKER for August, 1 9 8 3
financial executives and planners with
information regarding changes and
trends in regulation, industry struc
ture, technology, bank financial per
formance, bank sources and uses of
funds, market outlooks and competi
tive strategies.
“The rep ort also high ligh ts 13
strategic success factors — key indica
tors of internal and external bank per
formance — that survey co-sponsors
believe will improve a bank’s ability to
assume a strong, differentiated market
position and operate profitably in the
1980s,” said Mr. Friedman, who spe
cializes in banking and strategic plan
ning. “These factors focus on those few
areas that are most critical to an orga
nization’s future profitability.”
Although nonbank acquisition of
banks is expected to be minimal,
panelists expect the number of banks
in the U. S. to continue to decline
from approximately 15,000 in 1980 to
about 9,600 in 1990 (See Chart 1).
Attrition is expected to be greatest
among small banks (under $100 mil
lion).
or acquisition targets,” said Mr. Wurz
burg. “Nonbank acquisitions of banks
are expected to be minimal.”
As a result of this industry consolida
tion, bank assets are expected to be
more concentrated in large banks (over
$1 billion), which are predicted to
account for nearly two-thirds of all in
dustry assets by 1990 (See Chart 2).
In terms of market strategies, most
banks plan to serve a balanced mix of
retail and commercial customers and
maintain a posture as full-service in
stitutions. Banks expect to price more
explicitly, unbundling product offer
ings.
Large and medium-sized banks are
likely to compete for the so-called
“middle market” commercial custom
ers — offering a full range of highquality, highly automated services.
Small banks are expected to differ sig
nificantly from their larger counter
parts, serving fewer industries, focus
ing on small businesses, offering a nar
rower range of services and serving
local markets.
“This major industry consolidation
will occur gradually and is expected to
involve more than half of all banks in
merger activities, either as acquirers
New Dimensions in Banking is
available at $40 p e r copy fro m
Arthur Andersen 6- C o., P. O. Box
1022, Tinley Park, IL 60477.
Large banks appear more commit
ted to the retail-market segment than
many competitors perceive. But these
same large banks, which view them
selves as the only likely full-service re
tail providers, may find stiff competi
tion for “high-net-worth” customers.
Concerning the regulatory environ
ment, panelists believe the Fed should
pay interest on reserves. Bankers be
lieve the Fed should continue super
vising and regulating banks and pro
viding basic check-clearing services.
Large banks, regulators and legislators
voice strong opposition, however, to
the F e d ’s position as a paymentsystems competitor.
In other findings, the survey sug
gests that institutions expecting to
achieve major gains through entry into
new business areas would be wise to
temper their optimism. Moderate suc
cess, at best, is forecast for such ven
tures, with entry into brokerage ser
vices likely to prove most successful.
Despite the widespread interest in
home banking, panelists foresee mar
ginal profitability for such operations
because of high start-up costs and lim
ited market potential. Forecasts indi
cate home banking will be used by only
about 10% of the nation’s households
in 1990, but up to half of all banks are
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MID-CONTINENT BANKER for August, 1 9 8 3
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Federal Reserve Bank of St. Louis
49
expected to offer such services defen
sively to prevent competitors from
gaining a market advantage.
C om petition, not consum er de
mand or the prospect of consumer
acceptance, is driving innovations in
home banking, ATMs and other hightechnology services, panelists say.
Thus technology is expected to have an
evolutionary, rather than revolution
ary, impact on the banking industry.
Pioneers in technology are expected to
gain only short-term market advan
tages because new systems will be rel
atively easy to replicate.
Survey participants expect bank
earnings to decline as a result of higher
deposit costs, new-product expenses
and increased competition. Return on
assets is expected to drop for all sizes of
banks.
Although small banks are expected
to experience the greatest earnings
erosion, they will retain the highest
ROA by bank size. Specifically, esti
mates indicate that by 1990, bank ROA
is expected to drop from 1.13% to
under 1.0% for small banks, from
0.92% to 0.86% for medium-sized
banks and from 0.82% to 0.76% for
large banks. • •
Northwest Ohio Banks Launch
Bankruptcy-Awareness Program
IX BANKS in northwest Ohio have
joined with other financial institu
tions and the Credit Bureau of Toledo
to conduct a program aimed at making
consumers more aware of alternatives
to bankruptcy as a way to deal with
financial problems.
The lenders have begun a publiceducation campaign that includes
broadcast announcements and print
advertisements, lobby displays and
distribution of literature. In addition,
representatives of the participating in
stitutions are being scheduled to talk
before com m unity groups and on
media interview programs.
Theme of the campaign underscores
the point that “bankruptcy may be a
problem, not a solution.”
Participating banks include First
National, Huntington National, Mid
American National and Ohio Citizens
Bank, all in Toledo. Four thrifts also
participate.
“The number of personal bankrupt
cies in the Toledo area has steadily
increased in the last five years, a situa
tion that mirrors national trends, ” said
John White Jr., senior vice president/
retail lending, Ohio Citizens Bank,
and chairman of the bankruptcy task
force formed to structure the program.
“This has had a profound effect on
lenders in terms of increased losses on
consumer loans.”
The need to impact the growing
number of bankruptcies by making
consumers aware of the consequences
and alternatives prompted the Toledoarea financial institutions to meet for
the first time late last year. The group
agreed to assess themselves a one-time
fee, prorated into shares based roughly
on each institution s assets, to fund a
public-education program. A steering
committee was formed to oversee de
S
50
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
O h io M a y Be G iving Banks
$ 1 0 0 -M illio n Tax Refund
The state of Ohio may have to refund
$100 million in property taxes to banks
in the state as a result of a recent U. S.
Supreme Court ruling.
The high court ruled that states that
impose property taxes on banks may
not include the value of federal secur
ities owned by the institutions when
figuring the tax. Federal securities in
clude T-bills, T-notes and U. S. sav
ings bonds.
Although Ohio has not had this per
sonal property tax since 1981, prior
imposition of the tax still would be
affected by the ruling, say officials of
the Ohio Department of Taxation.
Ohio banks already have applied for
more than $47 million in refunds re
sulting from a prior federal court ruling
in 1978. It’s estimated that the recent
ruling would add another $53 million
to the amount refundable.
The d eterm in ation of how the
money would be refunded is up to the
Ohio legislature. The majority of prop
erty-tax revenues went to local govern
ments and these jurisdictions could be
forced to share in the repayment.
According to Supreme Court Justice
Harry A. Blackmun, a 1959 federal law
“prohibits any form of tax (on banks)
that would require consideration of
federal obligations in computing the
tax.”
Bank-Tax Study Authorized
John W hite Jr. (standing), bankruptcy
task-force ch., and W illia m D. Travis
(seated), take part in press conference
an n ou n cing
s ta rt of b a n k ru p tc y awareness program for Toledo, O., area.
Mr. White is s.v.p., Ohio Citizens Bank; Mr.
Travis is v.p., First Nat'l, both in Toledo.
velopment of specific program ele
ments.
The program was announced in May
and has received support from the lo
cal news media and the community at
large.
“The single purpose of the program
is to educate consumers about what
bankruptcy might mean to their finan
cial future and make them aware of
options that exist within the commu
nity to help them deal with their debts
as they become overextended,” said
William D. Travis, vice president/
director of marketing, First National,
Toledo.
Interest in the program is being
monitored by recording the number of
requests for information by the public.
The Ohio legislature has autho
rized a two-year study on the ques
tion of what banks ought to be taxed
and how.
In the interim, the legislature de
cided on a net-worth tax for banks
and S&Ls that amounts to a basic
15-mill tax, or $15 on each $1,000 of
net worth. An additional 1.54 mills
will be charged on banks and 6.47
mills on S&Ls. The new tax will cost
banks about $90 million this fiscal
year.
Because of the generally lower net
worth of thrifts in relation to banks,
both categories of institution will be
paying about the same under the for
mula, according to Ralph Bolen, ex
ecutive vice president, Ohio Bank
ers Association.
The action represents a victory of
sorts for financial institutions, since
Ohio Governor Richard Celeste had
wanted to return to a full tax on de
posits of banks and S&Ls. This tax
had been phased out about two years
ago in favor of a corporate franchise
tax that is levied on all business firms
in the state.
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Survival Planning:
A 'M ust' for Banks
Excerpts from remarks by James E . Brown,
president, Mercantile Bancorporation, Inc., St.
Louis, at Mercantile’s 28th Annual Correspon
dent Banking Conference, June 1, 1983.
W ILL discuss in brief fashion the
conclusions of basic strategies
adopted by Mercantile Bancorporation’s 30-plus “community” banks in a
deregu lated environment.
To go back a little, the first year our
banks attem pted form alized longrange “strategic” planning, we became
bogged down in form and detail. In
several cases, we were trying to climb
to the “mountain top” when we were
up to our “kiesters” in mud (loan prob
lems in several of our banks). In short,
we needed to address the basic prob
lems and deal with those fu n dam en tals
that will ensure our viability, in fact,
our survival. I don’t believe we are
exaggerating the case for survival —
just read the press!
For the most part, my comments
reflect my own observations and the
basic fundamental goals of our affiliate
banks, not those of Mercantile Trust,
our lead bank or the parent holding
company.
P eer com p arison . Compare all of
your meaningful statistics with peers of
similar size. If you haven’t done so
already, join a noncompeting peer
group. You will learn more than you
can at broadly based conferences, if
only you “lie honestly” to one another.
I consider this one of the most valuable
exercises I have ever participated in.
Identify w eakn esses. If management
can’t find any weaknesses, that’s its
weakness! Frequently this weakness
relates to the overwhelming demand
we make on our computer capacity and
program enhancem ents. Also fre-
By James E. Brown
President
Mercantile Bancorp.
St. Louis
I
James E. Brown (I.) chats w ith Dr. Lewis E.
Davids, Illinois bankers professor of bank
management at Southern Illinois Universi
ty, Carbondale, during Mercantile Trust's
recent correspondent banking conference.
Dr. Davids is author of "The Banking Scene"
in / A i d - C o n t i n e n t B a n k e r .
quently it is careless loan administra
tion — the w orst of all weaknesses, by
far.
I d e n t ify s tr e n g th s . E n u m erate
them and appreciate what you need to
hang on to.
id en tify op p ortu n ities. When we
think of opportunities, we are inclined
to put “blue sky” in our plans. Stick
with the b a sic s. This planning step in
volves defining those relatively few
things that really matter and that really
influence the bottom line.
Set an action p la n . (1) W ho will carry
it out? (2) When — exact month? (3)
How? (4) What will it cost?
Each of these steps must be carried
James E. Brown first joined M ercantile Trust, St. Louis, in 1945,
follow ing discharge from the U. S. Arm y. He served in Korea as a
member of the Arm y reserve and rejoined the bank in 1954 as a
member o f the correspondent banking departm ent, where he held
various management positions before being named departm ent
head in 1962. In 1966 he was elected senior vice president and
soon thereafter was named a director of the bank and a member
52
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
out. Otherwise it’s only a plan and nev
er will be carried out — profitably.
And on schedule! Determine what you
are going to do, and then form an ac
tion plan and focus your attention on
the items that truly affect net income
and devote all your energies to see that
w hat needs to be done is, in fa c t, done.
O therwise you will get caught in a pile
o f plans and dream s, and you will find
yourself in meetings and in planning
during 90% of your workday.
In fact, sit back now and ask your
self, “What is better in my bank today
because I actually planned it that
way?” Can you name one result of pure
longer-range planning? Try to name
three things that are better today in
your bank because they were a direct
product of your planning. In addition
to who will be accountable, who will
replace you if you don’t get it done?
Minimize plans. As you might ex
pect, most of our conclusions and plan
ning were centered on the guts of
banking — the le n d in g function!
Achieving greater loan volume can in
vite problems, but, in our view, it is
absolutely essential. Survivability in a
deregulated deposit rate environm ent
is c r u c ia lly d e p e n d e n t on stro n g
volu m e. Without it, we simply cannot
continue to be competitive in rates we
pay our depositors. In recent years,
almost all of banking’s marketing
efforts have been related to attracting
deposits. The time has come to feature
loans in our advertising and marketing
efforts.
D ocum entation. In short, we should
plan to have no losses as a result of poor
documentation.
C ash flow o f b o rro w er. This often is
overlooked by smaller banks. Focus-
of its executive committee. In 1970 he was elected executive vice
president/director of M ercantile Bancorp, and in 1972 he was
elected HC president. He is one o f the founders and the first
president o f C redit Systems, Inc., and a director of Interbank
Card Association. He was a charter member o f the ABA's corre
spondent bank committee and chaired the government legislative
arm of that committee. He is active in numerous other groups.
MID-CONTINENT BANKER for August, 1 9 8 3
ing all attention on collateral or net
worth alone is not sufficient. So ob
vious, but neglected so frequently.
C ollection e ffo r t s . Require a formal
review of efforts by the audit commit
tee and board. Get proof of effective
follow-up on charge-offs and nonper
forming loans.
W atch list. In your watch list classi
fications, do a better job than examin
ers do. Recognize credit weaknesses
early and list poor credits before ex
aminers do.
C a p a b ilitie s . Structure your loan
departm ents on a s o lid b a sis with
effective d isciplin es in p la ce before
you d are to enlarge your loan volume
or approach new markets for loan
volume. As you move ahead to in
crease the volume of outstandings,
avoid the tendency to get “sloppy.”
That is the surest way to failure in the
face of th in n er m argins when at
tempting to increase loans. Continue
to emphasize strongly a borrower’s ca
pacity to repay.
E lim in a te . Banks have so many
products today. How much can be
saved in costs by cutting out a few?
Perhaps the m arginally profitable
ones? Cost accounting takes on a great
er emphasis today.
Training. Give your people a test
and, indeed, actually shop your newaccounts people to see if they really are
professional. The re a l d ifferen c e in
ban ks — with rates being almost equal
— will b e the d ifferen ce in your em
p lo y ees’ skills an d ability to han dle
custom ers and their problems. Train
ing and successor management should
be treated together. All smaller banks
have a real chance here to “outper
form” the “biggies.”
M ediocrity. Early retirement often
is recommended for truly mediocre
employees. Early severance is easier,
better and less costly. Mediocrity is a
luxury banks can no longer qndure.
Quality. We continue to believe we
can charge more for quality, and cus
tomers will pay for it — i f it’s real
quality!
Productivity. Remember that these
are plans, goals and accomplishments
of Mercantile Bancorporation’s affili
ate banks. They are not theory. These
banks realistically are trying to recog
nize each weakness and opportunity.
And, a key part of such planning is the
recognition of the growing costs of run
ning a bank. The added cost burden of
full-tim e employees today — with hos
pital insurance and other fringe ben
efits — is going out of sight! McKinsey
& Co. said a current 14.5% increase in
non-interest expense is a killer of fu
ture profit growth. Automated teller
machines can allow shorter hours and
reduce staff expense. We believe in
them! Also, we recommend increased
use of part-time employees.
In creased f e e s . We can expect some
loss of num bers of accounts, but lower
data processing and other costs associ
ated with these low-balance accounts
makes the exercise worthwhile.
F loat. We still find that some of our
most unprofitable accounts are those
we thought for a long time were among
our best. Analyze intently f o r uncol
lected fu n d s . In the face of the new
Fed pricing policy, account analysis
takes on an even greater importance.
E xpan ded trust serv ices. There are a
lot of rich farmers still living as if they
MID-CONTINENT BANKER for August, 1 9 8 3
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
were poor. And some poor farmers
acting as if they are still rich! We be
lieve that our trust marketing in this
area will prove that professional trust
services for farmers are worth pur
suing.
C ross-sell m atu rities. Who knows
for a fact where rates are going? We
need to market long an d short deposit
instruments.
A c q u is it io n s . W hen planning a
merger or acquisition, you are buying
— or selling — future earnings. In that
context, we are discounting to some
extent the recent history of high re
turns on assets. In the future, also, our
aim for merger candidates will be on
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m anagem ent talent — m ore than ever!
A sset/liability. This deserves con
tinued intensified efforts. Make great
er use of the micro-computer.
L oan pricing. Relationship pricing
seems to many smart bankers to be the
better way to price. I ’m impressed
with this quote from Dr. Bruce Adam
son, CEO, First Community Bancorporation, Joplin, Missouri, and chair
man of the ABA commercial lending
division, in a speech he made before
Robert Morris Associates May 19:
“Our efforts are driven by the simple
concept that if a bank somehow can
manage to maintain some semblance of
its net-interest margin, it really makes
no sense at all to give hard-earned
profits away through massive increases
in provision for loan losses!”
In summary, no bank can survive on
deposit growth alone, without sub
stantial loan volume or if it doesn’t
offer competitive rates. As we increase
our loan volume, we will fa c e an in
creasing challenge in preserving the
quality o f ou r loan portfolios. It is in
this area that we will win or lose the
battle to survive!
What all this adds up to is that we
intend to step on the credit accelerator
and develop a better steering and con
trol system at the same time. In my
view, there is very little choice! • •
Harold E. Ball • Carl W. Buttenschon
John E. King • M ilton G. Scarbrough
1- 800- 527-5511
MANAGER O F LEN D IN G in growing East
Texas bank. Must have commercial lending ex
perience and knowledge of regulatory com
pliance. Send resume to First National Bank of
Jefferson, D raw er K, Jefferson, TX 75657.
®
INDUSTRIAL
LIFE INSURANCE COMPANY
P.O. Box 220998, Dallas, Texas 75222
INVENTIONS W ANTED
Inventions, ideas, new products wanted for
presentation to industry and exhibition at
national technology exposition. Call toll free
1-800-528-6050. Arizona, call 1-800-352-0458,
extension 831 or write: IM I-M CB, 701 Smithfield, Pittsburgh, PA 15222.
AG BANKING PERSONNEL
E m ploye rs pay us to hire
the best.
O ur tw o ag banking p e rso n
nel s p e cia lists d e vo te full
e ffo rt to s e rv e b a n k s in
n e e d of e x p e rie n c e d ag
lending personnel.
You pay us only when we
produce.
C onfidential.
Guaranteed service, since
1968. Call without obliga
tion today.
Jeannie
515/263-9598
Masseria, IA 50853
54
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
a n n C 4 REERS, INC.
_J
THE ORIGINAL AGRICULTURAL RECRUITER
Linda
515/394-5827
New Hampton, IA 50659
BankAm erica/Seafirst M erge
To Form Largest Bank H C
The largest interstate banking ac
quisition in the nation’s history was
completed last month when BankAmerica Corp., San Francisco, took
over Seafirst Corp., Seattle.
About 80% of Seafirst’s shareholders
supported the acquisition, which in
volved $250 million in cash and a pre
ferred-stock offer from BankAmerica,
which also agreed to inject $150 mil
lion in new capital into the HC’s ailing
bank, Seattle First-National, which
has suffered severe loan losses in con
nection with its dealings with failed
Penn Square Bank, Oklahoma City.
The combination of $119.7-billion
BankAmerica with $9.6-billion Seafirst
resulted in the nation’s largest bank
HC, with total assets of more than $129
billion.
Seafirst and its bank continue to
operate under their original names.
In d ex to A dvertisers
•
Advanced Planning Systems, Inc.......................... 10
Agricareers, Inc....................................................... 54
Arrow Business S ervices.......................................
4
Aurora Systems, Inc............................................... 24
Bancvest Brokerage S ervice................................. 35
Bank Board Letter ....................................... S/4, S/5
Bank Marketing Association................................. 45
Barclays American/Buslness Credit ................... 24
Boatmen’s National Bank, St. Louis ................. 56
Brandt, Inc........................................................ 16-17
Brenner Steed Partner Plan ................................. 15
Bunce Corp.............................................................. 53
Centerre Bank, St. Louis ..................................... 25
Christmas Club a Corp........................................... 42
Cirrus Systems, Inc................................................ 25
Cole-Taylor Financial G roup........................... 28-29
Commerce Bank, Kansas City ............................. 23
Commercial Credit Business Loans, Inc..............
9
Commercial National Bank, Kansas City, Kan.
S/3
Computer Communications of America .............. 37
Continental Bank, Chicago...................................
2
Cummins-Alllson Corp............................................ 49
Dlebold, Inc............................................................. 55
Federal Land Bank, St. Louis ......................... S/17
First Alabama Bank, Montgomery ................... S/12
First Lease & Equipment Consulting Corp........... 39
First National Bank, Kansas City ....................... 27
First National Bank of Commerce, New Orleans 29
First Oklahoma Bancorp....................................... S /l
Fourth National Bank & Trust Co., Wichita . . . S / l5
Frankllnton Financial Services ........................... 27
Hagan & Associates, Tom ................................... 54
Henry & Associates, Inc., Jack ...........................
3
Hutchinson National Bank & Trust Co.,
Hutchinson, Kan............................................. S/21
Industrial Life Insurance Co.................................. 54
J.B.A........................................................................ 13
Kansas State Bank & Trust Co., Wichita ........ S/20
Kldder-Peabody & Co., Inc................................... 6-7
Liberty National Bank & Trust Co., Oklahoma City
2
Mercantile Bancorporatlon, St. Louis ............... 31
Midland Bank & Trust Co., Memphis ................ S/7
St. Johns Bank & Trust Co., St. Johns, Mo. .. S/24
Sallie M a e .............................................................. 43
Security National Bank, Kansas City .............. S/22
Security Schools, Inc............................................. 51
Sendero Corp........................................................... 41
South Side National Bank, St. Louis .............. S/23
Stifel, Nicolaus & Co., Inc................................. S/19
Third National Bank, Nashville ......................... S/9
Union National Bank, Little R o c k ....................... 47
United Missouri Bank, Kansas City ............... S /l 1
USLIFE Corp........................................................... 19
Visa U.S.A............................................................... 21
Whitney National Bank, New O rleans.............. S/13
Zahner & Co......................................................... S/18
MID-CONTINENT BANKER for August, 1 9 8 3
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Federal Reserve Bank of St. Louis
-1
Correspondent Banking Division
T H E BO A TM EN 'S
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314- 425-3600
Member FDIC
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