Full text of Mid-Continent Banker : The Financial Magazine of the Mississippi Valley and Southwest : August 1984 : Northern Edition, Volume 80, No. 8

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(ISSN 0026 -2 9 6 X )

NORTHERN EDITION

AUGUST, 1984

ASSET/LIABILITY M A N A G E M E N T /

COMMERCIAL LOAN ISSUE

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Asset/Liability Management:
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Asset/LiabiIity-Management Software:
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CONVENTION
CALENDAR

MID-CONTINENT BANKER
(Incorporating MID-WESTERN BANKER)

Aug. 19-22: Independent Bankers
Association of America Seminar/
Workshop on the One-Bank HC,
Colorado Springs, C olo., the
Broadmoor.
Aug. 19-24: Independent Bankers
Association of America Senior
Bank Officer Seminar, Boston,
Babson College.
Sept. 1-4 : Assem blies for Bank
Directors Assembly 58, Colorado
Springs, Colo., the Broadmoor.
Sept. 9-11: Kentucky Bankers Asso
ciation Annual C onvention,
Louisville, Galt House.
Sept. 9-12: ABA National Bank
Card Conference, Washington,
13. C., Washington Hilton.
Sept. 10-12: Independent Bankers
Association of Am erica Basic
Commodity Marketing Seminar,
Chicago, Westin Hotel.
Sept. 12-13: Banking/Insurance
Forum: 1984, Boston, Colonnade
Hotel. (Sponsored by Risk Plan
ning Group, Inc., 203/655-9791.)
Sept. 12-15: Bank Administration
Institute National Convention,
Denver, Fairmont Hotel.
Sept. 16-18: Independent Bankers
Association of America Commer
cial Loan W orkshop, Kansas
C ity, Radisson M u ehlebach
Hotel.
Sept. 16-19: ABA Human R e
sources C o n feren ce,
New
Orleans, Fairmont Hotel.
Sept. 16-19: Bank Marketing Asso
ciation Annual Convention, New
Orleans, Marriott.
Sept. 20-22: ABA International
Banking Conference, Washing
ton, D. C., Mayflower Hotel.
Sept. 23-28: Robert Morris Associ
ates Loan Management Seminar,
Columbus, O.
Sept. 23-29: ABA National Con
sumer Credit School, Norman,
Okla., University of Oklahoma.
Sept. 24-26: ABA Chief Financial
O fficers Sem inar, New York
City, Waldorf-Astoria Hotel.
Sept. 25: Bank Marketing Associa
tion’s C ross-Selling, Chicago,
BMA Office.
Sept. 27: Bank Marketing Associa
tion’s Cross Selling, Chicago,
BMA Office.
Sept. 30-Oct. 3: Bank Administra
tion Institute Cash Management
Conference, Philadelphia, Belle
vue Stratford Hotel.
4

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Federal Reserve Bank of St. Louis

IN THIS ISSUE
Volume 80, No. 8

August, 1984

6 THE BANKING SCENE
Learning to pose the tough questions

8 BANK-LENDING PROBLEM S
Can they be solved?

14 RESTATING BANKING LENDING PRINCIPLES
They haven’t chan ged through the years

21 FD IC GIVES VIEW S ON LENDING PROBLEM S
B ro a d er pow ers could help banks diversify risks

27 WHAT IS MY BANK WORTH?
An investment b an k er s view

30 A/L MANAGEMENT ASSISTANCE
W here ban kers can get it

37 PROBLEM S OF DURATION; OTHER VIEW S
On AIL-rnanagem ent softw are

40 U SEFU L TOOL IN PLANNING CAPITAL ADEQUACY
F o r community banks

43 NEWS ABOUT BANKS/BANKERS
Prom otion, restructuring, meeting news
Mid-Continent Banker Staff
Ralph B. Cox
Publisher
Lawrence W. Colbert
Vice President, Advertising
Rosemary McKelvey
Editor
Jim Fabian
Senior Editor
John L. Cleveland
Assistant to the Publisher
Marge Bottiaux
Advertising Production Manager
Nancy Gilbreath
Staff Assistant
Shelia Humphrey
Subscriptions

Editorial/Advertising Offices
408 Olive St., St. Louis, Mo. 63102. Tel. 314/
421-5445.
MID-CONTINENT BANKER is published monthly
by Commerce Publishing Co., 408 Olive St., St.
Louis, Mo. 63102.

POSTMASTER: Send address changes to MID
CONTINENT BANKER at 408 Olive St., St.
Louis, MO 63102.
Printed by The Ovid Bell Press, Inc., Fulton,
Mo. Second-class postage paid at St. Louis,
Mo,, and at additional mailing offices.
Subscription rates: Three years $27; two years
$2 0 ; one year $12. Single copies, $ 2 .5 0
each. Foreign subscriptions, 50% additional.
Commerce Publications: American Agent &
Broker, Club Management, Decor, Life Insur
ance 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 W illiam M.
Humberg, vice presidents.

MID-CONTINENT BANKER for August, 1 9 8 4

Before your
problems get the best of you
get the best of them.
First National Correspondent Consulting Services offers educational and
training opportunities that deal with vital issues and problems facing bankers today.
Each of these “ hands-on” courses
features experienced instructors
from First National Bank of Louis
ville—the region's largest and
strongest bank. You'll gain valu
able information and skills that
can help you make your bank
stronger and more profitable.
Credit Analysis School and Work
shop. Gives you the skills and
expertise to analyze, structure,
document, review and adminis
ter commercial credits. September
24-25, November 20-21.
Loan Review School and Work
shop. A must for those whose
responsibilities require adminis
tering and monitoring individual
credits, industry segments or your
entire loan portfolio. September
4-5, November 12-13.

Professional Sales School. A
required course for our own
officers. A must for professional
ism in selling products, cross
selling services and developing
customer contacts. October 2224, December 10-12.

Officer Call Program. A completely
organized program that can be
easily implemented, monitored
regularly and enhanced as needed.
Addresses the issues of training,
motivation, documentation and
individual call-management. Fea
tures individual goal-setting by
each officer, use of a customized
manual, implementation of cus
tomized forms for advance prepa
ration and the reporting of call
results. Includes training sessions
and a quarterly officer meeting
conducted by First National Bank.
This program has been imple
mented in banks ranging in size
from $70,000,000 to $270,000,000.
Call for a presentation.

Personnel Administration Seminar.
Addresses such issues as salary
administration, regulatory require
ments, policy manuals and affirm
ative action plans. Dates To Be
Announced.
Agricultural Lending School and
Workshop. Focuses on the credit
analysis, cash flow and loan review
procedures required for agri-busi
ness and farm production loans.
October 25.
Problem Loan Seminar and Work
shop. A systematic approach to
identifying and evaluating poten
tial problem loans prior to the
loss stage. October 2.

MID-CONTINENT BANKER for August, 1 9 8 4

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ANK
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In neighboring states-(800)
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M EM BER F.D .I.C .

THE BANKING SCENE

By Dr. LEW IS E. D A V ID S
Professor of Finance
Southern Illinois University, Carbondale

Learning to Pose Tough Questions
IKE most academics, I have found
in and replace the lost board member
that one of the most difficult ques on short notice? Are you prepared to
tions a student can pose is one startinghandle the related estate changes and
with “what if?”
potential shift in stockholder control?
Television reporters love to pose
These are important questions if you
that question, especially when inter suddenly find yourself in that situa
viewing political figures. It’s a great tion. Posing the question before such
way to catch a politician off guard and
get him to say som ething he/she
perhaps did not intend to say. Politi
cians are becom ing more adept at
fending off such ploys, however. The
Good bankers learn to pose
public generally is less enlightened by
a noncommittal response, but for the the tough 'what-if questions.
politician, it is probably wiser to wait They know that while the future
until all ramifications of a “what-if”
scenario have been considered. Many is a mystery, even catastrophic
a political ship has been torpedoed by events can be planned for.
an ill-considered response to a “whatif” question.
Bank management can hardly afford
to wait to pose serious “what-if” ques
tions today. Recent events in the bank
ing industry have stirred clouds of an event actually occurs may not spare
doubt about the safety of the banking you all the pain if your speculations
system. No banker can claim to be run become reality, but it can make the
ning a safe institution unless most of transition period smoother.
Let’s say you came in the bank one
what conceivably could go wrong has
been postulated and contingency plans day and discovered that all of your loan
officers had been pirated by an aggres
have been developed.
No banker can foretell the future sive S&L now intent on grabbing a
with any degree of accuracy, of course, slice of your commercial-lending pie.
and no one expects a banker to act as Are you prepared to live with the loss
though his/her institution constantly of your personnel? What percentage of
operates at the edge of an abyss. Such a your customer base might follow your
banker soon would fall prey to paranoia lending officers over to the S&L, and
and create more doubts about the could you sustain such a loss safely?
soundness of the banking system than
Many banks are confronted with the
the most reckless of his/her peers.
problem of having about 20% of their
But good bankers learn to pose the customers account for 80% of their
tough “what-if” questions. They know loan portfolios. What if one day finan
that while the future is a mystery, even cial calamity struck a number of your
catastrophic events can be planned for. best customers and the bank regulator
What if a major shareholder current ended up classifying a significant seg
ly serving on your board suddenly ment of your portfolio?
Lately, there have been some dis
died? Banks typically replace at least
one board member per year due to quieting rumors about daylight over
retirement provisions in the bylaws. drafts. On an average day, more than
But the unexpected loss of a key board $500 billion is cleared through the two
member due to illness or fatality can be major international wire-transfer ser
traumatic for an institution. Can you vices, the Fed Wire and the New York
locate another director who could step Clearinghouse Interbank Payment

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Federal Reserve Bank of St. Louis

System.
Banks routinely run large overdrafts
during the day as this money moves
across the wires, and the concern has
been that a weak institution with sig
nificant overdrafts suddenly could find
itself unable to make settlement at the
end of the day. A domino effect could
pass destructively through the banking
system. You could be on the short end
of such a development. Are you pre
pared to handle it?
Some time ago, a major midwestern
bank suffered what normally would
have been a catastrophic fire, but for
tunately, it had recently revised its
contingency plans and was able to con
tinue operations with minimal inter
ruptions in service. Would your in
stitution be able to survive such an
emergency?
When a hurricane damaged an ex
tensive section of the Gulf Coast, some
banks were fortunate in that they’d
planned ahead and put their computer
operations in secured areas. Other
banks had kept computer operations in
highly exposed areas where broken
glass and torrential rains did consider
able damage.
Which class would your bank be in if
a hurricane or tornado struck? If this
happened, could you somehow man
age to reproduce your data base if the
damage was so severe that there was
no other choice?
Acts of nature can be destructive
enough, but sometimes the acts of men
can be even more so. Most bank merg
ers or consolidations are rather gen
tlemanly affairs during which manage
ment has ample time to plan for possi
ble consequences.
What if your institution suddenly
should become the target of an un
friendly takeover attempt? There’s a
lot of talk in the press these days about
“greenmail, ” a legalized form of black
mail wherein a raider besieges a com
pany with no other aim than to force
management to buy out his stock. The
(C ontinued on page 46)

MID-CONTINENT BANKER for August, 1 9 8 4

WHEN YOU WANT TO
GET IT DOME,
CALL A CORRESPONDENT
WHO HAS
BEEN THERE.
There are only a handful
of correspondents who can
say they’ve learned the
needs of community banks
firsthand.

And his knowledge is now
channeled into providing
services like fast, efficient
transit operations, bond
and investment services
and bank stock loans. The
same responsiveness he
provided to his bank cus
tomers is now offered
to you.

Ernie Yake is one of them.
He successfully man
aged Commerce Bank of
Moberly. And before
that, he headed a subur
ban Kansas City bank
on the Kansas side.

So give Ernie a call at
234-2483. He knows how
to get it done for you,
because he’s already done
it himself.

Today, Ernie runs the
Correspondent Depart
ment at Commerce Bank
of Kansas City. Ernie
knows what bankers need.

€'Commerce Bank
£*

'W T

N/\

of Kansas City

BANKER for August, 1 9 8 4
DigitizedMID-CONTINENT
for FRASER
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Federal Reserve Bank of St. Louis

MEMBER FDIC

GETTING IT DONE
7

Bank-Lending Problems:
Can They Be Solved?
What Are the Answers?
HAT has happened to bank
lending policies? How did so
many banks become saddled with
performing loans? Did the so-called
“troubled” banks get that way only be
cause they made loans they should not
have made? Or are they victims of the
economic downturn of a few years ago?
How can these banks, short of being
closed or sold, climb out of their pre
dicam ent? And how can “ nontroubled” banks keep from landing in
the same situation?
M id -C ontinent B anker editors
contacted bank regulators for answers
to these questions and for advice in the
bank-lending area.
One regu lator — E u g en e W.
Kuthy, com m issioner, M ichigan
Financial Institutions Bureau — says
that, from his experience, commercial
lending problems usually create a
number of other problems for a bank.
He lists — in order of their seriousness

— major problems his office finds
banks have encountered as a result of
maintaining a high volume of nonper
non
forming loans. Mr. Kuthy points out
that any one of the items by itself could
have a more serious impact than others
on a particular bank.
1. Loss of earnings as a result of addi
tional provisions to allowance for possi
ble loan losses and added expense of
increased collection efforts.
2. Declining capital because of loss
of earnings.
3. Elimination of cash dividends.
4. Management changes that cause a
disruption to a bank’s operation.
5. Management/board efforts to
solve lending problems cause neglect
in other areas, such as asset/liability
management, planning, marketing,
etc.
6. Pressure from shareholders for
change as a result of poor performance
and lack of return on investment.

What can banks do to avoid or alleviate lending prob
lems? Suggestions made by various bank regulators (see
accompanying article) include the following:
1. Implementing and following an adequate lending
policy.
2. Involving bank directors in the lending process.
3. Requesting management to update present loan
policies to more adequately address specific types of
loans, collateral requirements, financial information,
etc., and monitoring strict adherence to such policies.
4. Requiring that loans be extended mainly in a bank's
trade area and limiting types of loans to those within
management's expertise.
5. Constantly updating financial information on bor
rowers, as well as operating information on businesses
and cash-flow statements on farmers.
6. Retaining qualified senior lending officers and sup
port personnel.
8

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Federal Reserve Bank of St. Louis

Mr. Kuthy suggests some sound
lending practices, which he lists in
order of their seriousness:
1. Implementing and following an
adequate lending policy.
2. Properly structuring a loan to con
sider repayment capacity, cash-flow
projections and collateral value.
3. Adequate collection procedures
and obtaining adequate outside coun
sel to assist on workout loans.
4. Diversification within a particular
industry, e.g., farming, oil drilling,
automotive.
5. Monitoring financial progress of a
credit during its term.
6. Maintaining current adequate
financial information.
7. Involving bank directors in the
lending process.
8. Adopting an adequate internal
loan-review system.
9. Proper reliance on the primary
lending officer.
10. Strict loan-extension policies.
11. Proper reliance on collateral/
character.
“C orrective action could take a
number of different forms depending
on the severity of the problem, Mr.
Kuthy continues. “Generally, when a
lending problem is discovered, the ex
aminer reports the extent of the prob
lem to the board, along with some
basic recom m endations. Usually,
these recommendations involve re
view and strengthening of the loan
policy as well as a review of the ade
quacy of lending personnel. If the
problems persist or the recommenda
tions are not followed, we usually will
enter into a memorandum of under
standing with the board. This memo
randum, signed by all board members,
sets forth certain items to be achieved
and a timetable for accomplishing the
objectives. If the memorandum of
understanding does not achieve the
desired changes, our actions become
progressively more severe. Options, at
this stage, include issuance of a ceaseand-desist order or officer and/or
director removal. ”

MID-CONTINENT BANKER for August, 1 9 8 4

The response of Kenneth W. Little
field, Missouri banking commissioner,
is influenced by the fact, as he puts it,
that a majority of state-chartered banks
in his state are small, rural ones. He
lists four major problems he believes
banks have created and are encounter
ing in connection with nonperforming
loans:
1. Bankers have been collateral
lenders rather than cash-flow lenders
during the past (inflationary) decade.
This has resulted in a number of non
perform ing loans w here collateral
values have decreased (farm real estate
and machinery/equipment) as much as
25% to 30%, and banks now are faced
with under-collateralized loans that
also are cash deficient.
2. Banks often find their documenta
tion inadequate or too deficient to pro
tect their collateral interest or to moni
tor adequately the borrower’s chang
ing financial condition. This often
leads to unnecessary losses when liq
uidating a line of credit or prevents a
bank from taking a more timely action
to shore up weak credit.
3. Another problem is failure to de
velop a well-thought-out, workable
lending policy, which could be valu
able in preventing nonperform ing
loans and could provide guidelines for
dealing with nonperform ing loans
once they occur.

4.
Still another problem is failure to 8. Insider transactions.
9. Relaxation of bankruptcy laws and
deal with nonperforming credits at an
early date so as to prevent collateral
changing attitudes of borrowers.
di ssipation, financial deterioration
10. The large volume of credits ex
and, importantly, bankruptcy. A num tended to developing nations.
ber of banks don’t have adequate inter
In terms of corrective actions, Ms.
nal loan-review/rating systems, which
Page says the following are some of the
steps her department has taken to im
would enable them to identify prob
prove loan administration:
lem credits early enough to renegoti
1. Requesting management to up
ate, restructure or liquidate problem
loans without loss.
date present loan policies to more ade
quately address specific types of loans,
Ohio’s superintendent of banks,
Linda K. Page, lists 10 major causes of collateral requirements, terms, finan
cial information, etc., and monitoring
nonperforming loans in order of their
strict adherence to such policies.
seriousness:
2. Requiring that loans be extended
1. Loans have been extended based
mainly in a bank’s trade area and limit
on collateral values with little regard to
ing types of loans to those within man
purpose or repayment ability.
agement’s expertise.
2. Depressed industries, such as
3. Monitoring, on a periodic basis,
agriculture.
all large and problem loans in those
3. All classes of borrowers have had
banks where asset quality is deemed a
economic problems brought about by
concern.
recession, inflation, etc.
4. At problem banks, recommend
4. Concentrations of credit to indus
tries — such as agriculture, oil and gas
ing— and sometimes requiring — that
— have exposed some banks.
a board examine management strength
5. Many banks have inadequate
and capabilities in loan departments.
credit information and loan review by
5. Constantly updating financial in
management.
formation on borrowers, as well as
6. Lending without realistic repay operating information on businesses
ment terms based on the loan’s pur and cash-flow statements on farmers.
pose has created numerous workout
loans.
7. Out-of-area lending has caused
(Continued on page 10)
servicing/collection difficulties.

Loan Problems From Federal Regulators' Viewpoint
HE VAST majority of bank failures
credit review/loan-approval processes
in the past few years, says Comp and profitability measurement. These,
troller of the Currency C. T. Conover,Mr. Conover points out, are things
were caused not by problem foreign
well-managed banks will continue to
loans, which have attracted the most
do well.
media attention, but by domestic-loan
The F e d s O pinion. It’s clear from
losses.
events that have transpired in the last
The fundamental, recurring reasons
few years that some banks have gotten
for these loans, he believes, can be
into difficulty with loans in such areas
read straight out of the C om ptroller s as real-estate trusts, oil-drilling proj
H an dbook f o r N ational B ank Exam in ects and in making loans to foreign bor
ers. They include:
rowers. So says Frank O’Brien Jr.,
• Excessive concern about provid deputy assistant to the Board of Gov
ing income.
ernors, F ed eral R eserve System ,
• Compromise of credit principles.
Washington, D. C. There’s nothing
• Complacency about supervising wrong, per se, with lending in any of
loan performance or obtaining credit
these areas, Mr. O’Brien continues,
information.
and, indeed, in each case at the outset
• Poor selection of credit risks.
of the growth of lending in them, they
• Self dealing.
were profitable lending areas. Difficul
• Over-lending.
ties arose from extension of large-scale
There’s no substitute for the basic
lending in such areas after surrounding
principles and processes of commer economic circumstances changed and
cial lending, Mr. Conover continues.
made them less profitable or unprofit
They include: weighing risk against re able. Mr. O ’Brien adds that other
ward, diversification, ensuring ade problems have been created by viola
quate collateral, maintaining internal
tions of insider-lending rules and of
controls, asset/liability management,
other safe-banking practices.

MID-CONTINENT
BANKER for August, 1 9 8 4

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Federal Reserve Bank of St. Louis

He emphasizes that the great major
ity of banks in the U. S. — big and
small — have conducted themselves
prudently and responsibly and have
served the public well.
Mr. O’Brien points to corrective ac
tions such as enactment by Congress
— with concurrence of the regulators
— of the International Lending Super
vision Act of 1983. The Fed, Comp
troller and FD IC have taken the fol
lowing steps to implement the act with
the objective of strengthening the sys
tem of supervision of international
lending by U. S. banking institutions:
• Began a strengthened system of
country-risk evaluation by the agen
cies.
• Instituted prudential measures,
including maintenance by banking in
stitutions of adequate minimum capi
tal levels and establishment of special
reserves against international assets in
countries experiencing severe and
protracted debt-service problems.
• Require more frequent reporting
to the banking agencies on country ex(C ontinued on page 39)
9

With All Eyes on Foreign Countries,
Who Is Watching Domestic Lending?

Bank-Lending Problems

HAT does one financial observer think about present banking
problems? Here’s what was written by Herbert S. Gruber, presi
dent, Heller Mortgage Corp., Miami, a real-estate-lending unit of
Walter E. Heller & Co., Chicago. Mr. Gruber writes a weekly syndi
cated column (for the general press), called “On Balance,’’ and here’s
what his readers saw recently in more than 40 metropolitan newspapers.
D ollars and S en se. With all eyes on Mexico, Brazil and Poland, who is
watching domestic lending? Our banking system can get by with its
international loans because those countries somehow always will be
there and probably will find a way to roll over, reschedule or repay their
obligations with help from the World Bank, International Monetary
Fund or Bank for International Settlements. But when domestic com
panies can’t pay their bills anymore, Chapter 11, Chapter 7 or just
straight liquidation close the books for the banks and write-offs take
place. In 1975, as we came out of the latest recession, banks took their
lumps writing off real estate investment trusts, the Penn Centrals and
their real estate loans. They will find the same things facing them this
time, except that some of the new fatalities will be our large smokestack
industries along with oil- and energy-related companies.

“Diving for garbage.’ This is an
Arkansas colloquial expression, which,
according to M arlin D. Jackson,
Arkansas banking commissioner, de
scribes activities of banks that, to sup
port the ever-increasing cost of their
liabilities, either purchase loans out
side of their areas, purchase participa
tions out of their areas or make direct
extensions of credit to borrowers out
side of their trade territories.
In the oldest writings of the Bible,
Mr. Jackson points out, accounts are
given whereby warriors fighting in a
foreign land were paid “extra measures
of grain” because of the increased risk
incurred when one engages in combat
a great distance from home. The same
is true of banking, he continues. The
greater the distance of the underlying
asset of a loan from a bank, the greater
the risk.
Mr. Jackson believes a great many
banks that have tried to increase their
earnings either did not have the skills
and abilities or failed to use skills and
abilities that are imperative when ac
quiring “out-of-the-area” assets, i.e.,
loans.
F o r e m o s t among inadequacies
among out-of-area loans, says Mr.
Jackson, is a borrower’s inability to re
pay. Second among the inadequacies is
the excessive loan to true current mar
ket value of assets. T hird is inability of
the bank to properly supervise on an
ongoing basis the underlying collateral
of the loan.
On a scale of one to 10, Mr. Jackson
ranks out-of-the-area loans as the most
prevalent problem facing banks in
Arkansas. He cites particularly those
banks characterized by regulators as
“requiring more than ordinary regula
tory supervision.’’
Mr. Jackson says that as state bank
ing commissioner, he has spoken to his
state’s bankers on 10 different occa
sions within the last year. On each
occasion, he cautioned them against
the temptation to “dive for garbage”
and has reminded them of the inherent
increased risk involved in acquiring
out-of-the-area loans without regard as
to whether they are direct placements
of the lending bank or whether they
are purchased from loan packagers or
participations bought via banks, S&Ls
or other financial institutions. Addi
tionally, he has issued a policy state
ment to the banks covering this matter
and, No. 2, ranking activity common
among banks “requiring more than

Banking on It. Penn Square Bank, Oklahoma City, was the tip of the
iceberg, which alone turned up $2 billion in bad loans, shaking up
Continental Illinois National, Chicago, and driving Seattle First Nation
al into the waiting embrace of Bank of America, San Francisco. Obvious
ly, a lot of earnings will be needed to overcome those write-offs. Banks
have been keeping unprofitable firms in operation, giving an unfair
advantage to these companies. By waiving interest and not requiring
principal repayment, they allow the firms to compete unfairly against
the strong ones.
The well financed have to make up for the weak in the industrial
sector. It’s better to bite the bullet in a rising economy, which now is
taking place in our country. The time has come for banks to stop
spoon-feeding the walking wounded and let them tiptoe into liquida
tion. Restructuring of a company’s debt can go only so far, and then the
examiners step in and you either can write it off or turn the debt into
future equity by taking stock that may have some value down the line in
a reorganization. Bank growth has had its eras of highs and lows. Banks
get caught up in the go-go highs that say put out more money; make
more profit, and let’s be another Citicorp. Now with money sloshing
around banking institutions from all the cash deposited through moneymarket accounts or whatever new account is available that month, they
again are out on the street pushing loans.
*

G et the M oney B ack. Banks don’t have to call a bad debt a bad debt.
They operate by rules of their own. Loan losses may be known, but they
can be written off whenever they see fit. Bad loans can be made good
magically by lending the delinquents more money — then, they can pay
the interest and be current. Technically, they can have all the bad loans
they want, as long as the auditors and examiners don’t squeal. Since the
depositors aren t alerted, they keep putting their money into the bank,
and everything goes merrily along, with assets increasing on the banks’
statements. If depositors want their money back, the bank doesn’t call
their loans; they just go out and pay to get deposits. What hurts banks is
a shortage of liquidity — ready cash to pay off those demanding their
money when they appear at the door. In years past, banking normally
was done on lending short 30-60-90-day notes and getting long-term
deposits. But this trend was turned around when banks started making
10-year loans to Poland and others, taking in 90-day CDs along with
getting OPEC dollars that were so volatile. Banks were borrowing short
and lending long, getting their big deposits concentrated in fewer and
fewer hands. Never have so many banks been owed so much by so few.
10

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Federal Reserve Bank of St. Louis

(Continued fr o m page 9)

MID-CONTINENT BANKER for August, 1 9 8 4

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11

average regulatory supervision,’ that
being churning the bond account.
According to Mr. Jackson, his de
partment has taken a variety of correc
tive actions when it has been deter
mined that banks engaged in out-ofthe-area lendings have done so in such
a manner as to constitute “unsafe and

unsound” banking practices. Actions
taken ranged from issuance of formal
cease-and-desist orders with tight time
perimeters for elimination of the outof-the-area loans to memorandums of
understanding and “jawboning” with
managements and directors at exit in
terviews.

Existing Regulatory Framework
Is Adequate in Bank Lending

Obviously, says Mr. Jackson, ac
tions implemented were dependent
on severity of the problems. In severe
cases, he issued official cease-anddesist orders. In moderate cases, he
issued memorandums of understand
ing (informal agreements). In slight
cases, he merely “jawboned” bankers
during their exit interviews.

Primary Problem Areas

Wisconsin’s banking commissioner,
William. P. Dixon, prefaces his re
marks on commercial-loan problems
by pointing out that his state is not
By Jordan L. Haines, Chairman
heavily industrialized; nor are there
Fourth National Bank, W ichita
large population centers outside of the
Milwaukee metropolitan area. Of the
URING 1978, in the wake of some disturbing revelations about
approximately 600 state/nationally
how a small bank in Georgia was transacting business, Congress
chartered banks in the state, an over
and the regulatory agencies reasserted the need for commercial banking whelming majority are community
to be governed by well-defined rules, particularly in the credit exten
banks with under $100 million in
sion-area. Lormal lending policies were mandated, boards of directors
assets. Only three banks have more
advised of added responsibilities and loan officers subjected to a fresh
than $1 billion in assets. Consequent
batch of compliance forms.
ly, says Mr. Dixon, commercial lend
The ensuing period has demonstrated, in certain publicized cases,
ing by Wisconsin banks usually in
that rules, if not made to be broken, are sometimes made to be ignored.
volves extensions of credit to small and
It seems evident that many of the problem loans now affecting “sophisti
medium-sized businesses.
cated” lending institutions might have been avoided by greater adher
Mr. Dixon has seen a noticeable in
ence to their own internal guidelines. Some of these actions presumably
crease in problem business loans re
were conscious; that is, taken as a calculated risk to gain market share or
ported in his staffs examinations dur
profitability when optimism was both credible and commonplace. In
ing the past two to three years, and
this quest for momentum, lines of supervision were blurred, loan docu
such loans are occurring in all areas of
mentation postponed and a sort of financial horse race conducted. In
the state and in all sizes of banks, in
some situations, junior officers apparently made judgments well beyond
dicating that contributing factors are
their scope and authority.
not confined to economic difficulties in
We are reminded that these unfortunate events, for the most part,
specific geographical areas. Even
occurred at large banks, whose resources should have permitted de
though problem business loans are on
tailed procedures for credit extension. They obviously didn’t mean to
the rise, he continues, the number of
have so much go wrong, but it did, and Congress again is questioning
banks with serious loan-portfolio prob
the ability of an entire industry to manage its affairs.
lems is small. He believes problems
What should those of us with community or middle-market orienta
with delinquent business loans are
tion take as the object lesson? To be sure, few banks have been immune
more attrib u tab le to loan-adm in
to ambitious practices fostered by competition and investor pressures.
istration abilities of particular bank
So where is the middle ground between “performance” and peril?
managements than to external forces
In our opinion, most problem loans have been caused by abnormal
such as unem ploym ent and a de
asset growth and over-reliance on unreliable economic scenarios. These
pressed economy. While a small numfactors appear to be the result of managerial attitude rather than regula
er of banks are experiencing businesstory deficiency and, as in many professions, have encouraged the
loan problems, Mr. Dixon says a much
thought that high risk-taking by a few is typical of all.
greater number are handling their loan
We believe the existing framework of rules and regulations for com
portfolios well and are enjoying steady
mercial-bank lending is quite adequate, particularly for the domestic
asset growth and reasonable profitabil
sector. While Congress has an acknowledged right to investigate and
ity.
correct perceived excesses in any area of banking, such effort should
Lending problems, says Mr. Dixon,
show that a very small proportion of lenders have acted imprudently,
fall into three primary areas in Wiscon
is
needed,
we
suggest,
is
a
review
by
given economic conditions. What
sin:
all bankers of sound credit philosophies and fundamentals. In this era of
1. Loan requests are not reviewed
deregulation and intensified competition, cannot the price of growth be
properly at the time of application.
too high? Should not quality in loans and in all asset categories be the
Historical financial information may
overriding objective in any bank?
not be analyzed properly; an appli
Most of us are aware of existing credit guidelines, both internal and
cant’s management ability may not be
external. A reappraisal of our ad h eren ce to these basic standards would
given sufficient consideration, or
go a long way toward rectifying what the public may believe is inade
chances for success of the business may
quate regulation. As lenders, whether trainee or senior officer, we
not be weighed properly.
might remember the skilled carpenter’s admonition: “Measure twice;
2. After a positive credit decision is
cut once.”
(C ontinued on page 28)

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Restating the Principles
O f Good Bank Lending
H IS YEA R marks the 70th
anniversary of R ob ert M orris
A ssociates’ (RMA) form ation in
Rochester, N. Y. Little did our first
members realize back then that, in
1984, RMA membership would grow
to include 2,700 financial institutions,
which account for nearly 90% of all
commercial and industrial loans ex
tended by U. S. banks. Nor could they
imagine their original membership
core of 64 individuals would grow to
the present nearly 12,000 men and
women devoted to promoting profes
sionalism in all aspects of the credit
process and in overall management of
risk.
Today, as in 1914, one of the pri
mary strengths of our organization lies
in our Code of Ethics governing the
exchange of credit information. RMA
membership also affords lending offi
cers the opportunity to meet with one
another, face-to-face, and to attend
first-rate educational programs. In the
past year alone, thousands of bankers
benefited from the many products and
services produced by the national
RMA organization. In addition, more
than 40,000 individuals attended RMA
educational seminars and meetings
sponsored by its 38 chapters and 39
subchapters nationwide.
I can imagine you saying to yourself,
“That’s all good and well. Rut if the
RMA really is providing so much
education and training, why do many
bankers still have more than their fair
share of bad loans?” You probably also
are wondering if we lenders haven’t
learned anything in the 70 years since
the RMA’s founding — decades that
brought us from the Great Depression
of the ’30s to the Great Digression vis
ited on the course of our global econ
omy by OPEC. Another question you
might ask is whether we have stayed
with the fundamentals of the credit
process. Still another question is
w hether those fundamentals have
changed in 70 years. There are no easy
answers to these questions.
The world has changed. Technology
has shrunk the earth. Today’s banker
Digitized for 14
FRASER
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Federal Reserve Bank of St. Louis

By Gienhall E. Taylor Jr.

Glenhall E. Taylor Jr.
is the newly elected
pres., Robert Morris
Associates, and vice
chairman/chief cred
it officer, Seafirst
Bank/Seafirst Corp.,
Seattle. He joined
both Seafirst orga
nizations in 1983 as
chief credit officer
and w as given his
present posts later
th at y e a r. Before
going to Seafirst, Mr. Taylor w as executive
vice president/chairman, credit policy com
mittee, Wells Fargo & Co., San Francisco,
from which he retired after 35 years of
service.

competes for both assets and liabilities
with domestic and foreign financial in
stitutions. Some of these are reg
ulated, some not. Competition should
lead to increased productivity in a
macro sense, which is good for all. Rut
the inefficient or poorly positioned
producer may find his market share
diminished, growth impeded and prof
its squeezed. This sometimes leads to
unhappy management decisions to
book assets that don’t quite meet ex
isting quality standards. It also may
induce management to follow the herd
and enter into transactions where the
risk is not fully understood.
The manager who resists temptation
and sticks to the basics may be viewed
as being unaggressive in his market
place. The adjective “staid” even may
be used to describe his institution. The
same m anager also stands a good
chance of never having to announce
“down” quarters because of loan losses
or huge increases in nonperforming
assets.
Our industry has changed. When
the RMA was formed in 1914, the
Federal Reserve System came into
being. At that time, there were 25,510
commercial banks with total loans of

$13.2 billion. At the end of 1983, there
were 14,796 banks with total loans of
$1.1 trillion. Capital is required to sup
port these assets, and, as you know,
there has been a tremendous growth in
our capital markets.
Abuses of the 1920s led to securities
legislation of the 1930s. This, in turn,
has brought 50 years of improved dis
closure and accounting and a new
breed of security analyst. All have
served to heighten attention paid to
earnings perform ances of corpora
tions. Unfortunately, much of the
focus has been on shorter-term results.
There has been competition for new
equity in the market. To that, add the
fact that most corporate executives to
day have helpings on their plates of
stock options, restricted share rights
and other bonus plans. These incen
tive-pay programs are designed to
award the high performer and benefit
the shareholder. Often, the reward is
determined by comparing an institu
tion’s performance as measured by
price/earnings, return on assets and
return on equity to its peer group.
Once in a great while, the pressure to
continue compounded growth in these
numbers might lead a manager to
abandon the fundamentals — tempo
rarily.
Individual transactions probably are
much more complex today, and the
officer who is a specialist in lending to a
particular industry is commonplace.
Part of the lender’s fundamentals in
clude “character, capacity and capital”
— the three Cs of credit. The 90-day
loan to be repaid from liquidation of
trading assets once was one of the more
common products on the shelf. An in
teresting development in more recent
years has been that those borrowers
with the first two Cs and lots of the
third C can borrow in the market more
cheaply than banks can.
As a result, we eith er have de
veloped new or enlarged on old prac
tices. Many banks are engaged in
asset-based lending or are financing
leveraged buyouts. To make these
deals, bankers have to stress a fourth

MID-CONTINENT BANKER for August, 1 9 8 4

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Federal Reserve Bank of St. Louis

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Federal Reserve Bank of St. Louis

RELATIONSHIPBANKING
In today’s highly complex business
environment, community bankers like Dean
Treptow, President, Brown Deer Bank, know
and understand the value of one-to-one
business relationships.
At First Wisconsin, we believe in build
ing long-term correspondent relationships
that are based upon a thorough understanding
of individual needs. Our primary objective is
to help each correspondent build profits. Our
officers are lenders who have the knowledge
and authority to make decisions. They are
there to meet your needs no matter how
simple or complex. Your correspondent officer
is a direct link to the full resources of First
Wisconsin.
If your bank is interested in providing
a broad scope of credit services to your com
munity, talk to First Wisconsin.
Dean Treptow knows the value of a
correspondent bank that understands oneto-one relationships:
“ My ability to fully serve the credit
needs of small businesses is of paramount
importance to me. To do it right, I look to
First Wisconsin for my correspondent support.”

Dean Treptow
P re s id e n t

Brown Deer Bank
Director and past president
of Independent Business
Association of Wisconsin,
SBA National Small Business
Banker of the Year, Chairman
of Wisconsin Governor’s Con
ference on Small Business.

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C, namely, CASH. We finally have
figured out that net profits plus depre
ciation as derived by accrual account
ing don’t repay a loan. Only the same
commodity we disbursed will do the
trick — and that’s cash. Some of us
forget that from time to time. The re
sult often is new additions to our otherreal-estate-owned (OREO) or other
personal-property-ow ned (OPPO)
accounts.
Some things haven’t changed. A
good lending officer still analyzes the
purpose of a loan to see whether it
makes economic sense to him as a
businessman from the perspective of
both the bank and the borrower. He
looks for the primary and secondary
source of repayment and designs a re
payment program synchronized with
the source of cash.
Next, he looks at the relationship
between the risk he is undertaking and
the reward for that risk. This is a sensi
tive topic. What is surprising is the
number of transactions in which a bank
has far more at risk than the borrower.
The only upside potential whatsoever
— if it can be called that — is to be
repaid the principal plus interest. The
banker could be viewed in these trans
actions as a nonvoting limited partner
with deep pockets willing to settle for a
1% or 2% return on his investment if
the loan is repaid or seen as a complete
fool if it is not.
The loan-portfolio manager still
struggles with diversification, and the
performance of some of us in this area
has been less than stellar. The three
basic elements are still there in manag
ing a loan portfolio once lending and
pricing policies are in place. In a small
bank, the three functions might be
done by two or three persons, in a
m o n ey -cen ter bank, by a cast of
thousands. Regardless, these func
tions include making the loans, moni
toring and collecting them. Today,
however, we’ve added a fourth func
tion that’s on the other side of the bal
ance sheet: funding the loans at the
right rate.
The risk of an interest-rate mis
match between the left and the righthand sides of the balance sheet might
be viewed in some respects as a “hid
den” concentration — and hidden it
was for many institutions. Results of
funding a long-term fixed-rate port
folio yielding 10% with short-term
money purchased at 15% are well
known to all of us and to the regulators.
W e’ve talked about making loans.
Let’s review the monitoring process
that not only pays attention to how
individual loans are performing, but
polices for concentrations. Concentra

tions by industry or geography often
are unavoidable for a small unit bank,
but a bank of any size must closely
analyze the risk inherent in the con
centration.
A well-managed portfolio should
have its risk diversified by industry
and by geographic location. This
should be done so there is no signifi
cant impact on the capital account or
income stream if unfavorable econom
ic or political events occur, having a
negative impact on the borrowers in
that segment of the portfolio. This is
more easily said than done. Further,

diversification itself can be risky. The
move to diversify can lead to the car
dinal sin oi doing business in markets
we don’t understand.
D oing business in m arkets not
understood can cause a newcomer
bank to be successful in its drive for
market share. Given the competitive
ness of today’s markets and the intelli
gence and enormous resources of some
of the players, this success could be a
sign that a bank is doing something
terribly wrong if its market share in a
given product or industry is soaring
(C ontinued on next page)

Bank's Internal Support System
Must Back Up Lending Activities
By Charles J. Kane
Senior Chairm an/CEO
Third National Bank
Nashville

growing, you run the risk of banks tak
ing undue risks to make up for these
lower spreads.
Has banking gotten “off course?”
We don’t think so. There have been
ITH respect to lending poli some well-publicized problems, par
cies, our bank is taking more ticularly in foreign loans, industry con
risks today than a few years ago, princi
centration in lending and some few ob
pally because of our concentration on vious cases of inappropriate manage
the “middle m arket,” that is, mid ment. Despite these situations, there
sized companies throughout our re still is trem endous undergirding
gion. While there is greater risk, there strength in the banking system. It’s my
also are tighter controls. Much of this view that all of us as bankers need to
lending is asset-based, and this type
give more concentrated effort to dem
activity requires a great deal of docu onstrating to our customers and the
mentation and a great deal of supervi public at large that we, in fact, deserve
sion. Our marketing effort has been
their confidence. There still is a posi
aggressive, but we have built the inter tive banking story to tell, from the
nal support systems to back it up —
perspectives of our customers, our in
monitoring, documenting and servic vestors and legislative/regulatory au
ing loans to control quality.
thorities. However, I do think that
The recession has had its casualties,
some of us need to go back and take a
to be sure, but we don’t believe it’s lesson on the basics of our industry and
accurate to blame the situation entire try and conform more to what we all
ly on the economy, with the possible
know and have learned from our past
exception of those who by design were
experiences.
into heavy single-industry concentra
With all that has happened in our
tions, such as the energy industry. We
industry in the past year, it certainly
believe we need to be smart enough to has made the job for legislators more
evaluate credits in the context of the
complicated for coming up with some
economy as it develops up or down.
type of proper legislation. I am afraid
Our bank is fortunate in that it oper that if we do get any legislation, it will
ates in a primary marketplace that is be piecemeal and not fully thought
diverse — so our customer base is out. However, I feel strongly that Con
varied as well, with no inordinate ex gress must act as it relates to nonbank
posure in a given industry group. Pric ing entities in the banking field. If ac
ing has become very competitive, and tion isn’t taken soon, I am afraid it will
in a lot of cases as it relates to the risk be completely out of control. My con
involved, unrealistic. Coupled with
cern is whether these nonbanking en
that, most of the large money-center
tities can wholly insulate their banking
banks and large regional banks and, to businesses from their other businesses
a d egree, ou rselves, are making
and affiliates. I am convinced that the
money available to Triple A credits on
way we are going, the central bank is
a short-term basis, sometimes at rates
losing a certain amount of control, and
of a quarter of a percent or lower over
these people theoretically are going
fed funds. As this type of lending keeps
unregulated. • •

MID-CONTINENT BANKER for August, 1 9 8 4

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Federal Reserve Bank of St. Louis

compared to others. The smart port
folio manager will monitor changes
monthly on an annualized growth-rate
basis and satisfy him self as to the
soundness of the new business being
generated. In doing so, he may discov
er to his happy surprise that his people
are doing something well and that
management and the board are satis
fied with the growth in market share.
Market share — a term with an upbeat
sound to it — also eventually may
translate to a term with the connota
tion of impending doom: to wit, con
centration!
Yes, the fundamentals still apply.
W hile they haven’t changed, they
have been augmented. As credit peo
ple, we know that even when the fun
damental rules are followed, things
still can go wrong. Reasonable assump
tions by reasonable men “gang aft
agley.” That’s one of the main reasons
we charge interest and set up loan-loss
reserves, Anyone in this business
knows there will be losses, sometimes
on old, valued accounts. What one
really hates to see is a loan loss from a
“dumb deal.” “Dumb deals” invari
ably show on examination that the fun
damental rules of credit granting were
at best bent and more likely broken.
My final comment is that despite all
the negatives you may hear and read
about, and the classic examples we’ve
all seen of how to “break the bank” by
ignoring the fundamentals, our indus
try is sound. Of the country’s 14,000plus banks, only 48 failed last year,
which was a difficult year at that. The
RMA annual R eport on D om estic and
In tern ation al C h arg e-offs showed a
composite 42 basic-point net-loan loss
New RMA O fficers
Glenhall E. Taylor Jr., author of
the accompanying article, is first vice
president, Robert Morris Associ
ates, and will advance to RMA presi
dent September 1. Mr. Taylor, vice
chairman/chief credit officer, Seafirst Corp./Seafirst Bank, Seattle,
succeeds Jack R. Crigger, executive
vice president, American National,
Chattanooga, Tenn.
Other RMA officers, who, along
with Mr. Taylor, were elected in the
association s annual election August
3, are: first vice president, Patrick L.
Flinn, executive vice president,
C itizen s & S o u th ern N ational,
Atlanta; and second vice president,
Edw ard J. W illiam s, treasu rer,
Brown Brothers Harriman & Co.,
New York City.
One of the four new RMA direc
tors is from the Mid-Continent area:
Paul C. Clendening, senior vice
president, Commerce Bank, Kansas
City.

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Federal Reserve Bank of St. Louis

to average loans as reported by 894
banks, an acceptable performance by
any measure given the severity of the
last recession. Energy-related prob
lems have been recognized and largely
accounted for. Although the economic
outlook for renewed inflation and fu
ture behavior of interest rates are high
ly uncertain, international-debt diffi
culties will be overcome. The borrow
ers are nations who belong to the world
community. They are managed by
people whose objective is to raise the
standard of living of their citizens by
developing, in some cases, the vast re
sources of their lands. The purpose of
the loans was productive, and the
prim ary source of repaym ent will
materialize. • •

Fall-Conference Program
Is Announced by RMA
Panel p resen tation s and smallgroup discussions will be among fea
tures to be presented at the Robert
Morris Associates’ 70th annual fall con
ference October 28-31 in San Juan,
Puerto Rico.
Topics to be covered by these pre
sentations and discussions will in
clude: strategic/tactical planning of the
total loan function; loan/credit admin
istration in multi-bank HCs; recent
legislative developm ents affecting
bank lending; innovations in commer
cial real-estate lending; prime-rate
perspective in 1984; generating/funding loans; agricultural lending; inter
national-debt restructuring; evaluating/managing interbank risk; pros/cons
of decentralized/centralized credit de
partments and their effect on the over
all loan portfolio and continuing education/training for lenders.
The conference also will focus on the
future of in tern ation al lending;
strategies for increasing productivity
in lending; leveraged buyouts; use of
micro-computers in lending/credit;
letters of credit; the director’s role in
loan-portfolio quality; improved ac
counting standards and their effect on
data supplied to bank-credit grantors
and profitability analysis.
Speakers will include the newly
elected RMA president, Glenhall E.
Taylor Jr., vice chairman/chief credit
officer, Seafirst Bank/Seafirst Corp.,
Seattle; Allan Sloan, senior editor,
F orbes magazine; and Sanford C. Sigoloff, chairman, Wickes Cos., Santa
Monica, Calif.
• Clifford R. Northup h as been
named a federal legislative representa
tive for the ABA. lie formerly held a
similar post with the Credit Union
National Association.

Loan Charge-Off Report
Published by RMA
Results of the 13th annual survey of
dom estic and in tern ation al loan
charge-offs of Robert Morris Associ
ates’ (RMA)-member banks have been
published.
Statistics for the domestic section of
the report are based on data contrib
uted by 894 RMA-member banks, in
cluding 73 of the nation’s 100 largest
institutions.
Total domestic loans charged off last
year were $4.6 billion, representing
.75 of 1% of the total average loans
outstanding of $616 billion. Dollars re
covered in 1983 totaled $1,037 billion,
adjusting the ratio of net charge-offs
downward to .58 of 1%.
The domestic section ranks highloss industries for 1983 by bank-asset
size, Fed district and nationwide. The
top three high-loss industries nation
wide by number of times cited were
investors (individual, personal bor
rowers), eating and drinking places
and general contractors-residential.
The top three high-loss industries
ranked by dollars charged off were all
in the petroleum/natural gas indus
tries.
Predictions of high-loss industries
for 1984 were ranked (1) eating and
drinking places, (2) general contrac
tors-residential and (3) subdividers
and developers.
International-section statistics are
based on data submitted by 144 RMA
member banks, 85 of which are among
the nation’s top 100 institutions.
Total international loans and de
posits charged off last year were $1.06
billion, representing .31 of 1% of total
average international loans and de
posits outstanding of $344.2 billion.
Dollars recovered in 1983 totaled
$124.6 million. After recoveries, ratio
of net charge-offs to average loans and
deposits outstanding was .27 of 1%.
Copies of the report are available
from the RMA Order Department,
1616 P hiladelph ia N ational Bank
Building, Philadelphia, PA 19107 at
$10 each for member banks and $15
each for nonmember banks.

• William C. Conrad, senior vice
president/manager, Detroit Branch,
Chicago Fed, has transferred to Chica
go, where he is responsible for the
Seventh D istrict’s automation resources/automated-payments systems/
electronic information. Roby L. Sloan,
senior vice president, Chicago Fed,
has transferred to Detroit as branch
manager.

MID-CONTINENT BANKER for August, 1 9 8 4

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MID-CONTINENT BANKER for August, 1 9 8 4

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Federal Reserve Bank of St. Louis

STATE

ZIP

PHONE

Enhancing
Loan-Documentation
Efficiency
IX MONTHS AGO, Billie Jean
terest while it promotes consistency
H ensarling, cash ier, Uvalde
through coordination of forms and
(Tex.) Bank, sought a way to enhanceprocess. It also generates management
loan-documentation efficiency. Her reports and complete loan lists.
objectives: to increase the accuracy of
“The LoanProcessor will be able to
loan calculations, accelerate the loan- handle everything we do,” Ms. Hen
documentation process and stand sarling predicts.
ardize loan forms.
Designed for compatibility with the
Today, loan d ocum entation at
IBM PC or IBM PC-XT, the LoanUvalde Bank is completed in less than
Processor requires no complicated
nine minutes with the help of an in computer commands or loading rou
novative software package that Ms.
tines. With only a few hours of on-site
Hensarling describes as “the most training and a working knowledge of
accurate loan-documentation system
the operations manual, a loan officer or
we have ever seen.”
other employee can acquire the skills
“Our employees love it, Ms. Hen necessary to complete any type of loan.
sarling says, expressing her enthu
siasm about the LoanProcessor®, a
loan-d ocu m entation system from
Bankers Systems, Inc., St. Cloud,
Minn. “Now we can process notes
much more quickly and have nice
clean documents for the credit files.”
In addition to being fast and accu
rate, the LoanProcessor met Ms. Hensarling’s third objective — standard
ization of loan forms — since it is com
pletely integrated with forms from the
same vendor, a feature no other loandocumentation system offers. For over Donna Hale, secretary at Uvalde (Tex.)
30 years, Bankers Systems has been a Bank, enters information on LoanProcessor
leading supplier of legal forms for the described in accompanying article. Looking
financial industry. Gradually, the on is Billie Jean Hensarling, bank's cashier.
firm’s progressive line has expanded to
include a variety of related products
and services, such as the LoanProcessor, designed to enhance the
efficiency of banking.
The LoanProcessor combines Bank
ers Systems’ legal and technical exper
tise plus years of experience. The re
sult: those features most valuable to
loan officers. In a single system, the
LoanProcessor’s capabilities include
everything from initial data collection
to storage and retrieval for over 25
categories of consumer, commercial
and real estate loans. It lends flexibility Less than nine minutes after entering in
to the loan-documentation process by formation into LoanProcessor, Ms. Hale in
offering several methods to accrue in serts loan form into printer.

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Federal Reserve Bank of St. Louis

“The LoanProcessor leads the oper
ator through the en tire loan-doc
umentation process,” Ms. Hensarling
explains, referring to the flashing cur
sor, which travels through the pro
gram, from section to section, like the
bouncing ball on “Sing Along With
M itch .’’ And because it is menudriven, the operator progresses
through the program by choosing
among the options that appear on the
screen.
To limit the number of keystrokes
necessary to complete the loan, the
LoanProcessor features automatic re
call. This allows the operator to indi
cate, with a single keystroke, that the
material to be entered is repetitive in
formation, previously entered in the
program. The LoanProcessor then
automatically inserts the correct in
formation. Beyond time savings, the
benefit of this feature, according to
Ms. Hensarling, is reduction in num
ber of errors.
“Enter the information once, and it
shows up that way everywhere. Enter
it by hand every time and you leave
more room for error,” she adds.
Ms. Hensarling claims completion
errors are uncommon — “The pro
gram has built-in protection features
— buffers that stop you from going any
further if you make a mistake.” For
exam ple, if the operator o v er
disburses a loan, a bell rings and “over
disbursement” flashes on the display
screen. Or forget an area code when
typing a telephone number, and the
LoanProcessor recognizes the omis
sion and leaves open parentheses so it
can be added later.
If information needs to be amended,
the process is quick and easy.
“If the customer has any objection to
the document, we can go back, change
the terms and have an alternative
document within a couple of minutes,”
Ms. Hensarling points out. By select
ing one of 10 special-function keys that

MID-CONTINENT BANKER for August, 1 9 8 4

This announcem ent appears as a m atter o f record only

T h is announcem ent appears as a m atter o f record only

E is e n h o w e r N a tio n a l B a n k

T h e B an k o f S an F ra n cisco

M id w e s t F i n a n c i a l G r o u p

S an A n ton io, Texas

H o ld in g C o m p a n y

P e o ria , Illinois

S an F r a n c is c o , C alifo rn ia

F i r s t o f A u s tin B a n c s h a r e s , I n c .
A u stin , Texas

is raising $ 1 0 ,0 0 0 ,0 0 0 in equity capital

has acquired
has m erged with

B ro ad w ay B a n csh a re s, In c.

is raising $ 1 .8 m illion equity capital

and
T h e undersigned acted as financial advisor
in this transaction

T h e undersigned acted as financial advisor

T h e undersigned acted as financial advisor to

in this transaction

B ro ad w ay B ancshares. Inc.

P r o s p e c t N a tio n a l B a n k
P e o ria , Illinois

San A n ton io, Texas

U n iv e r s ity N a tio n a l B a n k
P e o ria , Illinois
The undersigned acted as financial advisor
in this transaction

S h e sh u n o ff

Sh eshu no ff & Com pany, Inc.

S h esh u n o ff & Com pany, Inc.

Sh eshu no ff & Com pany, Inc.

Austin, Texas

This announcem ent appears as a m atter o f record only

T h is announcem ent appears as a m atter o f record only

T e x -F irs t B a n c s h a re s , In c.
H ou sto n , Texas
has acquired

I n d u s t r ia l B a n k

Sheshunoff

H ou sto n , Texas

F irs t F re e p o r t C o rp o ra tio n
F re e p o rt, Illinois
has acquired

M o u n t C a r r o l l N a tio n a l B a n k
M ou n t C a rro ll, Illinois,

T h e F i r s t N a tio n a l B a n k
o f S to c k to n

and

S to ck to n , Illinois

N o r th w e s t B a n k & T r u s t
H ou sto n , Texas

T h e undersigned acted as financial advisor
in this transaction

S h e sh u n o ff
Sh eshu no ff & Com pany, Inc.
Austin, Texas

T h is announcem ent appears as a m atter o f record only

B ra z o s p o rt C o rp o ra tio n
F r e e p o rt, Texas

has acquired

M e r c a n t i l e N a tio n a l B a n k
o f C o r p u s C h r is ti
C o rp u s C h ris ti, Texas

T h e undersigned acted as financial advisor to
Brazosport C orporation

S h e sh u n o ff
S h esh u n o ff & Com pany, Inc.
Austin, Texas

For the past decade an important part of our
professional services to the banking community has
focused on providing investment banking, legal and
regulatory services. Of interest, during the past one
and a half years, we have completed over 175 bank
valuations throughout the country. The following is a
brief overview of our services.
IN V E S T M E N T BA N K IN G S E R V IC E S

Bank Valuations
Stock for Stock Exchange Ratios
Fairness Letters
Mergers and Acquisitions

W eslaco, Texas
has acquired

T h e F i r s t N a tio n a l B a n k
o f W e s la c o
W e sla co , T exas,

H id a lg o C o u n ty B a n k a n d
T ru st C om pan y
M e rc e d e s, T exas,

N a tio n a l B a n k o f C o m m e r c e
E d in b u rg , Texas

W a rre n , Illinois
The undersigned acted as financial advisor to
First Freeport Corporation

S h esh u n o ff
Sh eshu noff & Com pany, Inc.
Austin, Texas

T h is announcem ent appears as a m atter o f record only

C o h u t t a B a n k in g C o m p a n y
C h a ts w o rth , G eorg ia

has acquired

W a l k e r C o u n ty B a n k
L afa y e tte , G eorg ia

The undersigned acted as financial advisor to

L E G A L AN D R E G U L A T O R Y S E R V IC E S

One-Bank Holding Company Formations
Multi-Bank Holding Company Formations
Capital Planning

Cohutta Banking Com pany

S h esh u n o ff
Sh eshu no ff & Com pany, Inc.
Austin, Texas
T h is announcem ent appears as a m atter o f record only

T h is announcem ent appears as a m atter o f record only

T e x a s V a lle y B a n c s h a r e s , I n c .

and

C itiz e n s B a n k a n d T r u s t C o m p a n y

For more information on these services, including
fee schedules for each specific type of engagement,
please call Alex Sheshunoff, Bob Walters or
Mike Morrow at (512) 444-7722.

B a n k In d ep en d en t
Sheffield, A lab am a

has acquired

B a n k F lo re n c e

SHESHUNOFF & COMPANY, INC.
P.O. Box 13203 Capitol Station
Austin, Texas 78711

and

C itiz e n s S t a t e B a n k
D on n a, Texas

F lo re n ce , A lab am a

T h e undersigned acted as financial advisor to
B ank Independent

The undersigned acted as finan cial advisor to
Texas V alley B ancshares, Inc.

S h e sh u n o ff

A D E CA D E OF HIGH PERFORM AN CE BAN KIN G LEADERSHIP

S h esh u n o ff

S h esh u n o ff & Com pany, Inc.

Sh eshu no ff & Com pany, Inc.

A ustin, Texas

T h is announcem ent appears as a m atter o f record only

C o m m e rc ia l B a n c s h a re s , In c.

T exas C e n tra l B a n c s h a re s , In c .

W h a rto n , Texas

San A n gelo, Texas

has acquired

A re a B a n c sh a re s C o rp o ra tio n

W h a rto n B an k an d T ru st C o .

T h e C e n tr a l N a tio n a l B a n k

H opkinsville, K en tu ck y

W h a rto n , T exas,

o f S a n A n gelo

T h e S e c u r i ty S t a t e B a n k

San A n gelo, Texas

N a v a so ta , Texas

and

F i r s t S t a t e B a n k o f M a g n o lia

T h e C e n t r a l N a tio n a l B a n k -W e s t

M ag n o lia , Texas

S an A n gelo, T exas

This announcem ent appears as a m atter o f record only

F irs t F re d e ric k C o rp o ra tio n
F r e d e r ic k , O k lah o m a

has acquired

has acquired shares o f its stock

F i r s t N a tio n a l B a n k o f H o b a r t
H o b a rt, O k lah o m a

The undersigned acted as financial advisor

T h e undersigned acted as financial advisor to
C om m en ça i B ancshares, Inc.

T h is announcem ent appears as a m atter o f record only

T h e undersigned acted as financial advisor

in this transaction

The undersigned acted as financial advisor to
First Frederick C orporation

in this transaction

S h e sh u n o ff

S h esh u n o ff

S h e sh u n o ff

Sh eshu no ff & Com pany, Inc.

Sh eshu noff & Com pany, Inc.

Sh eshu no ff & Com pany, Inc.

A ustin, Texas

Austin, Texas

A ustin, Texas

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

identify each variable of the program,
the operator can isolate a portion of the
document for amendment.
Simplifying the process to the last
stage, the LoanProcessor indicates
automatically which Bankers Systems
forms are to be used and the sequence
in which they should be inserted into
the printer. It is said to be virtually
impossible to use the wrong forms be
cause the printed information will not
align with the blanks.
In the printing stage, the LoanProcessor converts numbers to words
automatically. Accurate alpha-conversion is essential because, if the
alpha and numerical versions of a num
ber differ, i.e., if 1,000 is mistakenly
written as 100, it is the alpha (written)
version that is upheld. After printing,
the program can be stored for future
reference.
Federal, state and local regulations

can cause the greatest wear and tear on
software. Frequent updates can be
costly, but are necessary if loans are to
com ply with lending guid elin es.
Uvalde Bank combats unexpected ex
penses and unnecessary reprogram
ming delays by purchasing Bankers
System s’ annual m aintenance con
tract, Ms. Hensarling said. This en
sures prompt software modification for
any changes necessitated by law.
So far, Uvalde Bank has needed the
software update only once.
“When the LoanProcessor was in
stalled, we had forgotten to give the
programmer some information,” Ms.
Hensarling recalled, referring to a 25question form com pleted to assist
Bankers Systems programmers in cus
tomizing the software. “Bankers Sys
tems had the updates done and disk
ettes delivered within a m atter of
days.”

Bank HCs Association
Elects Woods Chairman

Mergers/Acquisitions Study
Is Undertaken by ABA
MAJOR STUDY of steps banks can take to execute mergers/
acquisitions more effectively than they are doing now is being
undertaken by the ABA. Ernst & Whinney, an international accounting/
consulting firm, has been appointed to conduct the research.
In announcing the project, explained Comerica Bank-Detroit Chair
man Donald R. Mandich, deregulation, increased competition from
both banks and nonbanks and growing complexity of banking that has
accompanied technological change all have contributed to the increase
in the rate of financial-services-industry mergers/acquisitions.
“This study,” continues Mr. Mandich, who heads a banker task force
directing the project, “is not intended either to encourage or discourage
mergers. Rather, it is aimed at making the process, when it does occur,
more beneficial and less painful to all bank personnel, directors, stock
holders and customers who may be affected.”
The study will provide a complete review of merger-implementation
requirements, starting with an analysis of the driving forces behind a
merger and clearly describing areas where action steps are necessary to
achieve a merger’s objectives.
“Every facet of a merger or acquisition -— including people, planning,
operations, products, distribution and financing — will be analyzed,”
says Mr. Mandich, who also is chairman of the ABA’s banking profes
sions council. “End products of the project will be a comprehensive
research report and seminars analyzing implementation issues in each of
these six areas. The project is due to be completed by this year-end.”
M. C. Nelson, Ernst & Whinney’s national partner in charge, finan
cial-services industries, says, “Providing this type of guidance to its
members is an important action by the ABA. Not only has the number of
mergers grown in recent years, but circumstances have varied as well.
Mergers of like-sized institutions such as Sun/Flagship (Florida); ac
quisitions of nonbank banks by banks such as BankAmerica/Sehwab
(California); and troubled-bank mergers such as Republic/First National
Midland (Texas) now are common. We believe the guidance provided
from this project will help bankers accomplish their merger objectives
and avoid many pitfalls.”
The project was initiated by the ABA’s corporate planning division,
but members of its chief financial officer/human resources/operations
and automation divisions and a representative from the Bank Marketing
Association also serve on the merger/acquisition-research-project task
force.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Prompt and courteous attention to
Uvalde Bank’s needs after delivery
gives Ms. Hensarling reason to believe
future updates also will be timely,
smooth and productive. Attention to
customer needs has helped to nurture
Bankers Systems’ image in the finan
cial industry. Now, with a 33-year-old
reputation to uphold, Bankers Sys
tems is dedicated to supporting and
servicing the LoanProcessor. Indica
tive of this commitment is Bankers
Systems’ toll-free consultation service
that connects customers to a staff of
experts whose sole responsibility is the
LoanProcessor.
Ms. Hensarling recalls discovering
several operational questions after the
LoanProcessor was installed. “But we
made use of the toll-free hotline . . .
and it worked out great! Any problems
we had were solved by the support
system in St. Cloud. • •

John W. Woods, chairman, AmSouth Bancorp, Birmingham, Ala., has
been elected chairman, Association of
Bank Holding Companies, headquar
tered in Washington, D. C. He suc
ceeds Will F. Nicholson J r ., president,
Colorado National Bankshares, Inc.,
Denver.
Other newly elected officers are:
chairman-elect, Kenneth L. Boberts,
chairm an, F irst Am erican C orp.,
Nashville (he will be in line to succeed
Mr. Woods next year); vice chairman,
John P. LaWare, chairman, Shawmut
Corp., Boston; and treasurer (for two
terms), Frank E. McKinney Jr., chair
man, American Fletcher Corp., Indi
anapolis.
Donald L. Bogers was reelected
president of the association and is its
chief staff officer.

Isban Named Chairman
O f BAI for 1984-85
Robert C. Isban, executive vice
president, Manufacturers H anover
T ru st, New York C ity, has been
elected chairman, Bank Administra
tion Institute, for the 1984-85 fiscal
year. He succeeds Rayburn S. Dezember, chairman, American National,
Bakersfield, Calif.
Th e new BAI chairm an-elect is
Marc J. Shapiro, vice chairman/chief
financial officer, Texas Commerce
Bancshares, Inc., Houston.
Two new d irecto rs-at-larg e are
Ashel G. Bryan, chairman/CEO, Mid
American National, Bowling Green,
O., and Dean E. Richardson, chair
man/CEO, Manufacturers National,
Detroit.

MID-CONTINENT BANKER for August, 1 9 8 4

FDIC Gives Its Views
On Lending Problems
EVERAL FACTORS are cited by
the FD IC as causes for banks’
lending problems; factors that have
affected these banks’ loan portfolios
adversely and placed pressures on
such things as earnings and capital ade
quacy.
According to Daniel Gautsch, assis
tant to the F D IC ’s public information
officer, deregulation of interest rates
on bank liabilities has increased fund
ing costs, placed pressure on bank
profitability and forced banks to look
closer at services they provide and how
they price them. Such concepts as netinterest-margin analysis, cost account
ing, asset/liability management and
bank marketing have taken on greater
importance as a result of deregulation,
says Mr. Gautsch.
In conjunction with deregulation,
competition for financial services has
intensified as financial intermediaries
and nonbank competitors make in
roads into traditional banking bus
inesses.
“We believe,” says Mr. Gautsch,
“additional com m ensurate powers
should be granted to com m ercial
banks to allow them to compete ade
quately in this rapidly changing finan
cial-service environment. Ry allowing
banks to offer a broader range of finan
cial services, such as investment bank
ing and life insurance, they not only
will be better able to diversify their
risks, but also offset costs of liabilityside deregulation.”
Coupled with the structural changes
occurring in the industry, economic
events have placed additional pres
sures on banks and their loan port
folios. Inflation, historically high in
terest rates and the 1981-82 recession
all have had an adverse impact. Prob
lems in the energy-production sector
are an example of how inflation-based
lending can have a severe impact on
financial institutions that abandon pru
dent lending principles. Problems in
this sector were created, in part, on
expectations of borrowers and lenders
alike that energy shortages would con
tinue because of an insatiable demand
and that future prices would increase

dramatically. This, Mr. Gautsch says,
encouraged speculation and over
lending. The unexpected oversupply
of energy products depressed prices,
and this, in turn, affected borrowers’
cash flow and ability to repay.
This failure to assure sufficient cash
flows for repayment also has been a
problem for agricultural lenders.
Farm income has declined in the last
three years, with rural communities
and industries serving agriculture suf
fering extensively in the most recent
economic downturn. Land and equip
ment values actually have fallen in the
past year, causing an impact on lend
ers’ collateral margins. In many cases,
lenders are faced with the difficult de
cision of whether to carry farmers

Problem-Bank Statistics
The number of F D IC eease-anddesist actions in force at year-end
1982 to year-end 1983 increased
from 106 to 249. In addition, the
FD IC initiated 26 termination-ofinsurance proceed ings in 1983,
bringing to 307 the number of times
it has taken such action since its in
ception in 1933. This increase in
number of enforcement actions out
standing is in direct relation to the
increase in num ber of problem
banks (those banks with a composite
rating of “4 ” or “5”) identified. For
year-end 1981 through 1983, the
number of problem banks identified
throughout the system has increased
from 223 in 1981 to 369 in 1982 to 642
in 1983 and presently stands at 714.
W hile the num ber of problem
banks and bank failures (42 in 1982;
48 in 1983 and 45 year-to-date) are at
historic levels, they still represent
only a small percentage of the 14,800
banks in the system, roughly 90% of
which are rated “1” or “2” on the
F D IC ’s rating system. In addition,
the FD IC insurance fund has grown
over this period and now stands at
approxim ately $16 b illio n . The
FD IC says it believes the system is
sound and is prepared to deal with
any problem that may arise.

MID-CONTINENT BANKER for August, 1 9 8 4

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Federal Reserve Bank of St. Louis

another season or liquidate their col
lateral positions and thus further de
press local land/equipment values.
Historically, high interest rates have
had a great impact on marginal bus
inesses and stretched what once were
good credits to the limit. Following the
extremely high interest rates of 197980, the U. S. experienced a deep re
cession, Mr. Gautsch states. While
certain sectors of the general economy
have recovered, others, such as agri
culture, energy production, forest pro
duction and real-estate development,
have not. Banks located in areas where
these industries are dominant also
have felt the impact.
Beyond problems associated with
domestic credits, banks that have
made large extensions of credit rela
tive to their sizes to debtor Latin
American countries, such as Argenti
na, Brazil, Mexico and Venezuela,
already have been impacted by these
offshore credits via declines in re
ported earnings. In addition, says Mr.
Gautsch, some loans to Argentina re
cently have been relegated to nonper
forming status. Fears of a possible
Latin American debtor cartel have
been reported and, if interest rates rise
dramatically, Mr. Gautsch fears such
action could exacerbate the interna
tional-debt situation.
Mr. Gautsch cites other items that
may be found in nonperforming loans
include: poor selection of risks on the
part of bank management; failure to
establish or enforce liquidation agree
ments; incomplete credit information/
overemphasis on income; lack of su
pervision; technical incompetence and
self-dealing.
Pronounced self-dealing practices
almost always are present in serious
problem-bank situations and in banks
that fail, he continues. Typically, such
loans are found in the form of overex
tensions of credit on unsound bases to
insiders or their interests.
Turning to supervisory tools, Mr.
Gautsch points to one that has been
developed in recen t years — the
F D IC ’s off-site-monitoring system,
developed in conjunction with addi21

tional information banks now are re
porting quarterly to the supervisory
agencies in reports of condition/income. As a surrogate for assessing risk
in bank-loan portfolios on an off-site
basis, the level of nonperforming loans
has been requested beginning with the
December, 1982, reports of condition
(call report). Call reports and reports of
income are available to the public on

request. To enhance further the pub
lic’s knowledge of the availability of
such information, the FD IC has issued
for public comment a statement of
policy regarding availability and use of
financial and other information by de
positors and other creditors of banks
and thrifts. The objective is to promote
better-informed financial/investment
decisions and, thus, more market dis-

Farmers' Financing Needs Must Be Met
During Time Before Turnaround Occurs,
Ag-Lenders Told at Farm Credit Meeting
HE IM PORTANCE of meeting
while credit demand was up slightly in
the current economic challenges of 1984 in the aftermath of the PIK pro
individual farmers with a single credit-gram, maintaining creditworthiness
delivery system as agriculture moves
remains a number one priority among
toward an inevitable turnaround was
both cooperatives and the St. Louis
stressed at last month s annual confer
Bank for Cooperatives.
ence of the Farm Credit Banks of St.
The economic challenges farmers
Louis.
are coping with in the Midwest were
Glenn Heitz, banks’ CEO, charac explained by John Schnittker, presi
terized 1984 as “certainly not the best
dent, Schnittker Associates, Washing
of times for agriculture.’ He added
ton, D. C.-based economic research/
that this year is a time of anxiety for consulting firm. He identified the ma
most farmers, a time of struggle for jor challenges ahead for agriculture as
many of them and a time of defeat for follows: “To revitalize agricultural
some — but not very many. The situa policy in 1985, to make it serve all of
tion is reflected in the fact that lending agriculture instead of a few giant
in both the Federal Land Bank and farmers; to reach farmers whose sur
Production Credit systems has de vival depends on public programs; to
clined during the first six months of reduce costs; to put farm policy to work
1984, while delinquencies, bankrupt on long-term remedial measures in
cies and foreclosures have increased
stead of stoking the fires of surplus pro
slightly.
duction and calling for emergency
He reminded the 2,500 agricultural
assistance at the same time; and to re
lenders attending the conference that
build the public reputation of farm
“well over 90% of the Farm Credit
policy.”
System’s individual borrower-owners
The Farm Credit System is witness
were meeting their financial obliga ing increased competition from com
tions.”
mercial banks, both on the lending and
The essential problem facing both funding sides of operations, said Peter
farmers and their cooperative Farm
Carney, CEO, Funding Corporation
Credit System was defined by Robin of the Federal Farm Credit Banks.
Lahman, banks’ chairman. He said
He added that, since late 1982, com
“being tied to the past is an almost mercial banks have been able to offer
guaranteed route to obsolescence in various types of insured deposits that
our current state of rapid and dramatic yield market returns. Bankings’ broad
change.’’
network of officers and substantial cus
He cited the recent reorganization tomer base enables the industry to
of operations in the Farm Credit Banks attract the resources of investors who
of St. Louis as evidence that, in the value market yields with little risk.
midst of difficult economic times for
The increased liquidity of the bank
farmers, Farm Credit System lead ing system means that commercial
ership had recognized the “need to banks, especially those in rural areas,
structure and position the system to be have more money to lend. The result
more effective in serving the expand was a substantial increase in farm lend
ing and changing needs of its member- ing by those institutions. As an exam
borrowers.”
ple, he said that non-real-estate farm
The impact of the adverse agricul loans outstanding at commercial banks
tural economy on farmer cooperatives increased by $3.3 billion, or 9.1%, in
in Arkansas, Illinois and Missouri was 1983, while similar loans held by the
discussed by Douglas Sims, banks’ ex Farm Credit System decreased by 7%.
ecutive vice president. He said that, — Jim Fabian, senior editor.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

cipline.
C orrective Actions. Use of reason
and moral suasion remain the primary
corrective tools of the FD IC , says Mr.
Gautsch. However, its board has been
given broad en forcem en t powers
under Section 8 of the Federal Deposit
Insurance Act. On an informal basis,
the FD IC may ask a bank’s directors to
adopt a board resolution or enter into a
memorandum of understanding with
the FD IC regional office that outlines
the corrective action the FD IC be
lieves to be necessary to correct prob
lems identified at the most recent ex
amination. Typically, this is in con
junction with the state authority and
may or may not involve a meeting with
the bank’s directors. Of course, in the
case of problem banks, the FD IC also
coordinates its actions with the Comp
troller of the Currency and Fed on an
ongoing basis.
On a formal basis, the F D IC ’s board
has the power to issue case-cease-anddesist actions (Section 8(b)) and, if
deem ed necessary, to invoke im
m ediately a temporary cease-anddesist action (Section 8(c)). The most
severe action available to the FD IC is
termination of deposit insurance (Sec
tion 8(a)). In addition, the F D IC ’s
board has been given the power to sus
pend or remove a bank officer or direc
tor or prohibit participation by others
in bank affairs when certain criteria can
be established (Sections 8(e) and (g)).
To assure greater uniformity of ac
tion and help assure that supervisory
efforts are directed to banks most in
need of them, the F D IC ’s board, along
with the other federal financial-insti
tution regulators, adopted and has util
ized for several years the Uniform
Financial Institutions Rating System.
Under this system, each financial in
stitution is accorded a composite rating
of “1” through “5 ,” with “1” represent
ing the highest rating and, conse
quently, lowest level of supervisory
concern. Current FD IC policy pre
sumes that either an informal or formal
administrative action will be taken on
banks with composite ratings of “3 ,”
“4” or “5 ” unless specific circum
stances argue strongly to the contrary.
— Rosemary McKelvey, editor.

• Neil P. Thompson has been ap
pointed senior vice president in charge
of systems/services management at
Master Card International, Inc., New
York City. He is responsible for plan
ning, design and controls of MasterCard system s developm en t. He
formerly was with Oroweat Foods C o.,
Greenwich, Conn.

MID-CONTINENT BANKER for August, 1 9 8 4

Where should you be September 13?
Join John J. Detterick, Gerald Greenwald, Alfred E. Kahn, Allan Munro, John
Naisbitt, Joseph Pinola, John S. Poelker, Charles E. Rice, F.G. "Buck" Rodgers,
Charles Schwab, Robert Townsend, and others - plus hundreds of your colleagues
- in Denver, Colorado for a landmark meeting of the financial services industry.

Jr~ \

BANÇ ADMINISTRATION INSTITUTE/

In Denver
September 12-14,1984________ _

Across theiContinent
September 13,1984____________

An unprecedented meeting for executives who listen.

A satellite teleconference broadcast live to over 30
convenient sites across the continent.

For three days this September, the U.S. financial commu
nity will turn its attention to Denver, Colorado. Hun
dreds of executives - from bankers to brokers - will meet
to examine success stories of industry leaders who are
parlaying today's market conditions into profit.

MONEY TALKS is a landmark meeting. A conclave so sig
nificant and timely, that no single meeting site can ac
commodate all those who can benefit from hearing about
what it takes to succeed in today's financial environment.

It's MONEY TALKS, Bank Administration Institute's An
nual Meeting, an unprecedented assembly of decision
makers from virtually every sector of the marketplace:
banks, savings and loans, brokerage houses, insurance
companies, investment firms, and credit unions.

Recognizing this, the Institute has drawn upon its exten
sive experience as the industry-leader in teleconference
programs. The result is the MONEY TALKS teleconference,
broadcast live from the assembly floor to key locations
across the continent.

In addition to hearing prominent general session speak
ers, participants will be able to choose from among some
30 concurrent sessions. Each features a national author
ity who will address a topic critical to understanding
today's changing environment. The latest in products
and services will be on display in the Exhibition Hall.
And there will be numerous spouse attractions, plus a
special Barbara Mandrell show.

Now, everyone can view the key general sessions and
profit from the business and money-making insights of
fered by the forum's outstanding selection of speakers.
Call for times and locations nearest you.

Program Registration Fee:
Institute Member: $455 (Spouse: $190)
Nonmember: $500 (Spouse: $210)

Program Registration Fee:
Institute Member: $135
Nonmember: $170

Wherever you are - whether in Denver or at one of the
teleconference sites - you should be listening when, on
September 13, MONEY TALKS to you.

For im m ediate registration or information, ca ll the Education Hotline:
1-800-323-8552 (In Illinois, 1-800-942-8861), or 1-312-228-6200.
BANK ADMINISTRATION INSTITUTE
60 Gould Center, Rolling Meadows, IL 60008

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

MONEY TALKSSMis a service mark owned by Bank
Administration Institute, Rolling Meadows, Illinois 60008, U.S.A.

There's only one locally-own
If you’re an independent bank,
you’ve probably noticed it’s harder
to keep your head above water
these days.
According to a 1983 survey by
a leading consulting firm, 74% of
CEO’s in banks with assets of over
$100 million expect their banks to
acquire another bank within five
years.
In this period of deregulation,
mergers and acquisitions have
become a common occurrence. So
so that in Rochester, New
Digitizedmuch
for FRASER
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Federal Reserve Bank of St. Louis

York, the only remaining locallyowned commercial bank is First
National Bank of Rochester.
Deregulation is here to stay. To
help make sure you are, consider
the proven alternative: a franchise
with First Interstate Bancorp.
Franchising:
the profitable partnership.
Currently, the First Interstate
Bank system is the 7th largest in
the nation, with assets of over
$43 billion. Together with our fran-

chisees, we have over 1,000 fullservice banking offices in 14 states,
making us one of the largest retail
banking systems in the country.
As a franchisee of First Interstate
Bancorp, you have access to these
vast resources.
First Interstate’s goal is to use
technology and product innovation
to deliver unmatched financial
services all over the United States.
As a franchisee, you’ll benefit
from many of these services. For
example, you’ll be included in the

1bank left in Rochester today.
Teller Item Processing System
(TIPS), an on-line multi-office
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eges in any First Interstate office.
In addition, you’ll gain access to
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international trading and data
processing.
Franchising:
the success story.
Our success in the market
place
speaks for itself. Currently,

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Federal Reserve Bank of St. Louis

First Interstate Bancorp has
franchise agreements in 6 states,
including Colorado, Hawaii,
Alaska, Montana, Wyoming
and Wisconsin.
Operations in these states
represent a total of 21 banks
with 68 offices. By the end
of 1984, their combined
assets will total $2.5
billion.
Find out more about
how you can become part
of First Interstate Bancorp’s

successful franchise program by
calling John Dean, President,
First Interstate System, Inc.
(213)614-3043. ‘

First
Interstate
Bancorp

Brokerage service
from the bank
you already take stock in.
You met us as Memphis Bank & Trust, and came to know us as the bank that
offered you more correspondent services from a more experienced staff.
Now we have a new name to reflect the whole area we serve,
Midland Bank & Trust, and a new service to help
you grow with us.

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Digitized for26
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Federal Reserve Bank of St. Louis

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Take advantage
of the Bankers Investment
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bank department you’ve always been able to take
stock in. Give Lynn Hobson, Gus Morris, Jim Newman,
Ron Ireland or Tom McKelroy a call,toll-free, at 1-800/238-7477.
In Tennessee, 1-800/582-6277.

MID-CONTINENT BANKER for August, 1 9 8 4

What Is My Bank Worth?
By Robert O. Dunkel
FE W years ago, I gave a sympo
sium on one-bank holding com
panies, and near the end of the m eet
ing, one of the members of the audi
R obert O . D anket is vice president, corpo
ence asked, “What is my bank worth in
rate finance, Howe, Barnes & Johnson,
this multi-bank environment?” This
Inc., Chicago. His article is reprinted with
question had crossed my mind before; permission from Illinois B an ker.
so my answer was not irresponsible. I
told him that banks in Illinois are very
cheap compared to banks in Texas and
California, which are known to sell at use book-value ratios rather than the
three or four times book value. I said price/earnings ratio, which is mean
that an excellent earning bank located ingless if the target bank is operating at
in a market area that will have good a loss. Many sellers contemplating the
solid growth probably will sell at two sale of their banks have reasoned that if
the bank across the street sold for
times or more book value.
Naturally, everyone in the audience 125% of book value, their bank (a bet
throught his bank was worth two times ter bank, of course) is worth at least
book value. This may be one reason 150% of book value.
In spite of the current interest in
multi-bank activity has been slow to
purchase accounting and valuation of
date.
But why the fascination with book assets/liabilities, including a valuation
value? Book value, unfortunately, has of the deposit base, stated book value
become an industry standard in eval is not fair-market value. A bank that
uating and pricing bank mergers/ac- has a third of its assets in 25-year, 10%
quisitions. The general feeling is that mortgage loans and another third in
the higher the book value, the lower 15-year municipals may report the
the return to the purchaser and the same book value as a bank with a third
better the offer to the seller. Consul of its assets in fed funds and another
tants, investment bankers and secur third in flo atin g -rate com m ercial
ities analysts have attempted to make loans. When all other balance-sheet
comparisons of mergers/acquisitions items are identical, the second bank
by using book value. Because all banks certainly is worth more in today’s er
have a book value, advisers continue to ratic and high-interest-rate environ
ment, whether purchase or pooling
accounting treatment is used.
The most compelling evidence for
abandoning book value is detailed in
Exhibit 1. Bank A and Bank B, identi
cal in size and earnings, are different
Exhibit 1
only in their equity accounts and equiBank A
Bank B
ty-to-asset ratios. Bank A has an equiAsset size
$50,000,000 $50,000,000
ty-to-asset ratio of 6%, and Bank B has
Equity-to-asset ratio
6%
10%
an equity-to-asset ratio of 10%. Assum
Equity
$ 3,000,000 $ 5,000,000
Return to assets
1%
ing the hypothetical purchaser pays
1%
After tax earnings
$ 500,000 $ 500,000
150% of book value, incurring the
Purchaser pays
financing cost of 12% at a 46% tax rate
750%» o f bank
$ 4,500,000 $ 7,500,000
and amortizing goodwill on a straightTarget bank's
line basis over 40 years, the resulting
earnings
$ 500,000 $ 500,000
return of the purchase-price invest
Financing 12%
(pretax)
-291,600
-486,000
m ent will vary from —0 .65% to
G o o d w ill over 40
+ 3.8%.
years
-37,500
$-62,500
One conclusion that can be made
Retained by
from Exhibit 1 is that it is harder to buy
purchaser on
an overcapitalized bank than an under
investm ent
$170,900
$(48,500)
capitalized bank. However, an over
3.8%
(0.65'
capitalized bank should earn more
than an undercapitalized bank or its

MID-CONTINENT BANKER for August, 1 9 8 4

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Federal Reserve Bank of St. Louis

owners probably shouldn’t be in the
banking business. A second conclusion
is that the price-to-book-value ratio is
not a suitable yardstick for pricing
banks with different level-of-equity
strength.
Exhibit 2 removes the equity dif
ferentiation from the two banks of
identical size and presents them all
with book-value ratio of 8%. These
banks, however, differ in their profita
bility. Bank X earns 0.75% on assets,
and Bank Y earns 1% on assets. A
hypothetical purchaser pays 150% of
book value, incurring the same financ
ing and goodwill expenses as those in
Exhibit 1. In this variation, a return on
investment to the purchaser will vary
significantly.
The price-to-book value again is not
a suitable yardstick for pricing banks
with different levels of profitability.
Because book value has no relationship
to fair-market value and because equi
ty strength and profitability dramati
cally affect the return of the purchaser,
the book-value ratio is a meaningless
standard for evaluating and pricing
mergers/acquisitions.
W ill we stop using book value?
Probably not. But rem em ber that
earnings and market location are the
keys to valuation. Book value does not
count. • •

Exhibit 2
Bank X

Bank Y

Asset size
$50,000,000 $50,000,000
Equity-to-asset ratio
8%
8%
Equity
$4,000,000 $4,000,000
Return on assests
.75%
1%
After tax earnings
$375,000
$500,000
Purchaser pays
150% o f bank
Target bank's
$375,000
$500,000
earnings
Financing 12%
-388,800
-388,800
(pretax)
G ood w ill over 40
-50,000
years
-50,000
Retained by
purchaser on
investm ent

$(63,800)

$61,200

(1.06%)

1.02%

lem is the most serious, especially dur
ing the recent recession, when a num
Lending Problems
ber of long-time successful businesses
(C ontinued fr o m page 12)
ceased to exist, due primarily to high
interest rates and declining sales. Mr.
Dixon suggests that proper monitoring
made, many loans are not structured of these credits would have alerted
properly at their inception. Realistic banks to existing problems in many
amortization programs may not be instances when there still was time for
established relative to the borrower’s the banks — and often the borrowers
cash-flow cap abilities, and, many — to liquidate businesses without loss
times, sufficient thought may not be es or with reduced losses.
given to secondary rep aym ent
To correct these procedural prob
sources. Adequate collateral, includ lems, Mr. Dixon’s office has encour
ing personal guarantees and assets, aged banks, both informally and for
may not be obtained regularly, and, mally through enforcement orders, to
when it is obtained, improper or in retain qualified senior lending officers
complete documentation may result in and support p erson n el, to adopt
a bank’s losing collateral.
meaningful loan policies adequate for a
3.
A loan, once placed on a bank’sbank’s size and type and to implement
books, may not be monitored properly detailed loan-review systems.
during its term. Failure to obtain and
Mr. Dixon summarizes: “The sever
analyze periodic financial statements ity of commercial- or business-loan
and to make on-site visitations at the problems experienced by banks often
borrower’s place of business may re is inversely related to the knowledge
sult in a bank’s not being aware that a and expertise of bank management.
problem loan exists until the borrower Loan portfolios have deteriorated
defaults or the situation has become rapidly in recent years in banks admin
hopeless. Litigation and liquidation istered by weak management; yet,
usually result, and all the errors dis problem-loan portfolios often have
cussed in these three areas are magni shown significant improvement once
fied.
placed under the guidance of capable
Mr. Dixon believes the third prob management. • •

Howe, Barnes & Johnson, Inc.
Investment Bankers Since 1915
We are specialists in:
One-bank holding companies
Mergers and acquisitions
Valuations
Tax planning

Call Bob Dunkel at
312/930-2900
Howe, Barnes & Johnson, Inc.
135 S. LaSalle
Suite 2040
Chicago, IL 60603

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Federal Reserve Bank of St. Louis

Brookhart Scheduled
To Be Installed
As BMA President
Smith W. Brookhart III, president/
CEO, Centerre Bank, Branson, Mo.,
will be installed as Bank Marketing
Association president during the asso
ciatio n ’s 69th annual convention
September 16-19 in New Orleans.
Other new officers are: first vice
president, John A. Russell, vice president/marketing director, Banc One
Corp,, Columbus, O.; and second vice
president, Michael P. Sullivan, vice
president, corporate communications,
F irst Union N ational, C h arlotte,
N. C.
The BMA’s current president, Barry
I. Deutsch, senior vice president,
Mellon Bank, Pittsburgh, will serve on
the BMA’s board and executive com
mittee as immediate past president.
A M id -C o n tin en t-area banker,
James B. Watt, will serve a three-year
term on the board. He is chairman/
CEO, MidAmerica Bancsystem, Inc.,
Fairview Heights, 111.

St. Joseph Market Day
Set for September 5
ST. JO SEPH , MO. — First Nation
al and First Stock Yards banks’ 28th
annual “Market Day at the Yards” will
be held September 5.
Activities will begin with a tour of a
St. Joseph industry. Guests will have
lunch in the stockyards area before ad
journing to the St. Joseph Country
Club for an update on the agribusiness
economic situation/forecast. This will
be followed by the annual grain/livestock panel discussion moderated by
James F. Reynolds, president/general
manager, St. Joseph Stockyards. The
usual “attitude-adjustm ent period”
and steak fry will conclude the day.
The two host banks are affiliates of
F irst Midwest Bancorp, In c ., St.
Joseph.

Benjamin Ryan Sr. Dies
Benjamin H. Ryan Sr., former
pres., Independent Bankers Asso
ciation of America, died June 10. He
headed the Illinois Bankers Associa
tion in 1951-52. At the time of his
death, he was ch ., Middle State Ban
corp, East Moline, 111. He also was a
two-term mayor of East Moline.
Mr. Ryan joined State Bank, East
Moline, after World War I and be
came its pres, in 1941. He retired as
an active banker in 1965, but con
tinued as a director. His son, Ben
Ryan Jr., is pres, of the bank.
MID-CONTINENT BANKER for August, 1 9 8 4

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O a ttL

A/L Management:
Where Can Bankers
Go for Help?
AXIMIZE income; control risk.
Interest-Sensitivity Report, outlines
Essentially, this is what asset/ the development of a hypothetical
liability m anagement is all about.
$ 150-million commercial bank’s sensi
However, a brief definition like the tivity report. The RMA says such re
above doesn’t begin to tell how to ports have become increasingly impor
match assets and liabilities, a task tant to bankers because, since June,
th at’s extrem ely im portant in the
1983, in reports of condition/income,
rapidly changing rate and regulatory all federally regulated banks are re
environment in which banks must quired to submit data on the interestoperate today.
rate sensitivity of their assets/liabiliHere are sources to which bankers
ties.
can turn for help in A/L management:
The booklet offers descriptions of re
* * *
lationships among such elements as
R o b e r t M orris A ssociates (RMA) rate maturity, loans/leases, net-inoffers:
terest-bearing deposits and compo
1.
A monograph, “Asset/Liability nents of the zero-rate core.
Management From the Credit Per
Copies are $7.50 each for RMAspective.” This booklet is designed to m em ber-banks and $10 each for
help commercial lenders/credit offi nonmember-banks.
cers understand the implications of
3. A session of the RMA’s 1984 loanA/L management as it applies to then- management seminar September 23banks. It’s divided into two sections:
28 will be devoted to A/L manage
The first section deals with the
ment. Harry Rlythe, finance profes
evolution and current status of A/L sor, Ohio State University, Columbus,
management, including definitions of will discuss “Asset/Liability- and
its primary problems and components.
Capital-Management Policies and Sys
The second section discusses the tem s.” His talk will be followed by a
distinction between the way core bank lecture by Thomas C. Hoster, vice
deposits and managed bank deposits
president, Chemical Bank, New York
are handled, dynamic (long-term) ver City, on “A Banker’s Perspective of
sus static (short-term) approaches to A sset/Liability M an ag em en t.’’ A
rate sensitivity and roles played by group discussion will be held after the
each of the major functional areas of talks. This portion of the seminar will
the bank, as well as major segments of be held in the afternoon of September
the loan portfolio in relation to the A/ 24. The seminar is designed especially
L-management process.
for senior-level commercial bankers.
Copies are $20 each for RMATuition payment for the seminar is
member-banks and $28.50 for non $1,150 per student for RMA-member
member-banks.
banks and $1,350 for nonmembers.
2.
A booklet, “Zephyr National 4. An audio-cassette tape on “Asset/
Rank: A Case Study for Preparing an Liability Management and Funding

Asset/liability management plays
an extremely important part in the rapidly changing
regulatory environment of today. Help for
bankers in this area can be found in programs, publications,
seminars, workshops and conferences offered
by trade associations and A/L specialists.
30

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Federal Reserve Bank of St. Louis

C on strain ts of Loan P ricin g and
Term s,” recorded in 1982 during the
RMA’s fall conference. The speaker,
Harvey N. Gillis, executive vice presi
dent, Seattle-First National, focuses
on how interest-rate sensitivity/funding considerations can be translated
into action for loan pricing/maturity
determination.
Tapes are $12.50 each for RMAm em ber-banks and $15 each for
nonmembers.
For information on any of this RMA
m aterial, con tact: R o b ert M orris
Associates, 1616 Philadelphia National
Bank Building, P hiladelph ia, PA
19107. Telephone: 215/665-2850.
*

The In depen den t B ankers A ssocia
tion o f A m erica (IBAA) is conducting a
spread-analysis and asset/liabilitymanagement workshop September 2627 at the Omaha (N eb.) M arriott
Hotel.
Primary focus is the practical ap
plication of spread-analysis, liquiditymanagement and A/L-management
techniques to each registrant’s bank.
Participants will plan investment
portfolios to assure more liquidity and
earnings, control the cost of opera
tions, develop product pricing and
evaluate methods of automating the
A/L-management process. Ways to
improve the interest spread and re
duce the impact of interest-rate fluc
tuations also will be presented.
Registration fee is $395 for IBAA
members and $495 for nonmembers.
Contact: Independent Bankers Asso
ciation of America, P. O. Box 267,
Sauk Centre, MN 56378. Telephone:
612/352-6546.
*

% *

The American B an kers Association
(ABA) offers these publications on A/L
management and related topics:
1. C o m m u n ity -B a n k F in a n c ia lP erform ance G u id e. The ABA says this
guide is a comprehensive financialperformance/planning tool, giving
techniques and step-by-step instruc
tions on how to improve bank perform
ance. Worksheets, exhibits and charts
help calculate key measurements (gap,
spread, interest sensitivity and more)
and assist in peer-group comparisons.
Order No. 271500. Prices are $47.50
for ABA m em bers and $72 for
nonmembers.
2. M icro-C om puter M odeling to Im
p r o v e C om m u n ity -B an k F in a n c ia l
P erform an ce. Designed as a compan
ion piece to the preceding publication,

MID-CONTINENT BANKER for August, 1 9 8 4

BANK SERVICE

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a service of L F. Rothschild,
Unterberg, Towbin. We have a
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We assign a team of experts
to examine how your banking
activities and bond portfolio work
together. We review your rate sen
sitive assets and liabilities, your tax
situation, your overall rate struc
ture—everything that effects per
formance. We probe the ways all
these activities are contributing
(or failing to contribute) to your
bank's overall goals.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Then we come back to
you with an objective, thirdparty recommendation.
It demonstrates steps
that can strike a chord
between your banking objec
tives and bond portfolio.
For example, we might
show you how to reduce your
market exposure without de
creasing performance. Or how
to gain some tax advantages
through bond exchanges.
We also offer two other inno
vative products that complement
your BANK SERVICE® analysis.
Our Portfolio Managers System
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and more. Then there's a Fixed
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BANK SERVICE'S®
total orchestration of
bond portfolios with banking
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that's why the substantial majority
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this pu blication leads the reader
4. Funds M anagem ent Under D e The ABA says this is the only such
through the steps of formatting work regulation. This publication contains conference designed for commercial
sheets and formulas up on a micro information the ABA says is valuable to bankers. The program will consist of
computer, using VisiCalc T software. funds managers, investment commit general sessions and topical work
The book is described as a handy and tees and bank staffs. It discusses in full shops, which will be focused on such
useful reference tool in using a micro the Depository Institutions Deregula subjects as A/L management, invest
computer to streamline the A/L-man- tion and Monetary Control Act of 1980 ment strategies and sources/uses of
agement decision-making process.
as well as the impact of deregulation funds. Individual topical workshops
Order No. 020900. Prices are $47.50 and changing economic environment.
relating to the funds-management
for ABA members and $72 for non It’s a collection of articles by leading function will be directed toward var
members.
authorities, with a section on “Asset/ ious-sized banks. Audience participa
3.
F u n d s-M a n a g e m e n t-S o ftw a r e Liability Management for the F u tion will be encouraged following each
R esou rce D ir e c to r y . This directory ture.”
workshop discussion.
Order No. 271000. Prices are $20 for
lists management-consulting firms, re
The price before January 1 is $455
search organizations, banks and asso ABA members and $30 for nonmem for ABA m em bers and $595 for
ciations and includes a description of bers.
nonmembers.
5. M a n ag em en t o f C o m m ercia lth eir services. Such inform ation,
9.
An ABA chief-financial-officer
according to the ABA, will provide Bank F u n ds. Designed for bank mana seminar is planned for September 24bankers with a handy resource en gers and lending/investment officers, 26 at New York City’s Waldorf Astoria
abling them to identify which firms can this publication discusses sources and Hotel. This program is designed for
be of assistance in various aspects of uses of funds, loan portfolio/policy, in executive officers responsible for the
the bank investm ents/funds-m an- vestm ent portfolio, money-market totality of bank-financial management.
agement-planning process. Specific assets/liabilities, determining/manag- A/L management will be the topic of
areas of interest to ABA members in ing liquidity needs, coordination of AJ the final general session.
clude, but are not limited to: (A) A/L L-management spread, capital man
Prices are $425 for ABA members
m anagem ent; (B) financial/funds- agement and managing the money- and $550 for nonmembers.
management decision-making models; position and funds-management poli
For information on any of these ABA
(C) bond-swap models, both govern cy.
publications, conferences or seminars,
Order No. 052900. Prices are $22 for contact the ABA’s Banker Education
ment and municipal securities; (D)
financial-futures hedging models; (E) ABA members and $33 for nonmem Network at 202/467-6738.
bers.
arbitrage; (F) economic forecasting.
No catalog number as of presstime.
* * *
6. The Use o f Personal C om puters in
Prices are $25 for ABA members and Conducting B ank-P erform ance A naly
$37.50 for nonmembers.
ses . This report summarizes results of a
N ational B ank o f C om m erce, Mem
recent study on use of personal com phis, offers:
puters as an aid for bank-performance
1. ALMS Asset/Liability Manage
analysis. It covers buying tips and ment System, which is available in
measuring bank financial performance separate modules and enables users to:
and has examples of A/L-management
• Determine the highest incomemodels for personal computers.
producing mix of fund sources and uses
Order No. 271600. Prices are $3 for by using ALMS Optimization.
ABA members and $4.50 for nonmem
• Establish monthly balance sheet
bers.
and income budget, adjusted for sea
7. A s s e t/L ia b ility M a n a g e m e n t. sonal and trend factors by using ALMS
Written by James Baker, chairman/ Simulation.
president, James Baker & Co., Okla
• Measure the gap between ratehoma City, this publication analyzes sensitive assets and rate-sensitive
utilization of A/L m anagem ent to liabilities and determine financial ex
achieve bank goals. The book contains posure to interest-rate changes.
tactics and strategies to enable banks
• Examine bond-swapping strat
CALL THESE SPECIALISTS
to cope with the dramatic forces that egies to increase bond yield and in
confront them, including changed de terest income and reduce rate sensitiv
Harold E. Ball • Carl W. Buttenschon
posit
composition, increased cost of ity.
John E. King • Milton G. Scarbrough
time deposits, growth of non-interest
• Determine an effective hedge to
expense, improved management in reduce income exposure and rate sen
1 - 800- 527-5511
formation and volatile interest rates.
sitivity.
Five A/L-management methods are
• Produce daily, monthly, quarterly
detailed: experience; asset allocation; and yearly financial statements to re
conversion of funds; liability man port balance sheet and income position
agement; and Baker. A leader’s guide and determine the variance between
for seminar format is available.
actual and budgeted balances.
Order No. 169100. Prices are $18 for
2. ALMS periodically holds semi
ABA members and $27 for nonmem nars covering topics such as What is
bers.
A/L management? Why is A/L man
8. The ABA will hold a conference agement important? What information
P .0. Box 660274, Dallas, Texas 75266-0274
on bank investments/funds manage does a bank need to effectively manage
A member company of
Republic Financial Services. Ir
ment February 12-15, 1985, at the rate sensitivity? How are A/L manage
ip Westin Bonaventure, Los Angeles. ment and budgeting related? and How

For faster
service on

BANK
CREDIT
INSURANCE

INDUSTRIAL

LIFE INSURANCE COMPANY

numi

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Federal Reserve Bank of St. Louis

MID-CONTINENT BANKER for August, 1 9 8 4

Were an employment
agency for banks, but
we’re better than that.
We’re a bank.

If you’re looking for a mid-level
to upper-level executive and don’t
want to look but once, com e to us.
We're the only bank in America that
operates an employment agency for
banks, so when you describe the
position you want filled, we know
precisely the qualities, skills and back

ground the individual you’re looking
for must possess. We’re so confident
we can do the job, that in the unlikely
event you should not be content
with the person we select, we will
refund your fee. Call Jo e Zegler or
Linda Reh at 501-378-4257 or tollfree in Arkansas 1-800-482-8450. Or

MID-CONTINENT BANKER for August, 1 9 8 4

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Federal Reserve Bank of St. Louis

write to Union National Bank Per
sonnel Consulting Agency, P.O. Box
1541, Little Rock, Arkansas 72203.

Union National Bank

OF LITTLE ROCK

Personnel Consulting Agency

IRA
One Day Workshop

can a micro-computer software pack
age help perforin these functions in a
tim ely, accurate and cost-effective
manner? Seminars are held on de
mand, about every six weeks.
For additional information, tele
phone ALMS at 901/523-3330.
*

S p o n s o re d B y

Covering
□
□
□
□

R egulatory Update
M arketing Techniques
Pricing Strategies
R ollovers, T ra nsfers &
D istribution
□ Hows & W hens of Forms
and Reports
□ S h o r tc u ts & T ip s in
O pening Accounts
□ A Look at the Future

Plus
□ Using M icro co m p u te rs
fo r IRA A n a ly s is and
A cco unting
□ W h a tto lo o k fo r in selec
ting a system

Instructor
Robert M. Martindale, form er
banker, consu ltant and IRA
expert, has conducted seminars
fo r BAI, AIB and NABW.

Dates and Locations
Sept. 12 — St. Cloud, MN
13 — Rochester, MN
19 — Waterloo, IA
20 — Beloit, Wl
27 — Davenport, IA
Oct. 3 — St. Joseph, MO
4 — Jefferson City, MO
11 — Lafayette, IN
31 — Decatur, IL
Nov. 1 — Evansville, IN

Tuition
$125 per person. Class size
lim ite d . Early re g is tra tio n
recom m ended.

Registration
Send check to :
C F G , Inc.
700 E a st O gden A venue
W estm ont, IL 60559
(312) 986-1006
1-800-248-0400

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

S y stem e C o r p ., O rlando, F la .,
offers an A/L-management system that
runs on an IBM PC XT and contains
the following features:
• Interfaces with Systeme’s other
financial applications (general ledger,
etc.) to extract input data.
• A full set of financial statements,
including balance sheets, income
statements, ratios, cash-flow summa
ries and gap reports that analyze both
the current gap and future gaps result
ing from projection data.
• Ability to test numerous operating
alternatives by running “what-if” sce
narios.
• User-defined account names tai
lored for each institution’s financial
statement.
• User-defined multiple-base rate
for simplifying calculation of interest
income and expense generated by
changing market-rate forecasts.
• A target-balance approach that
allows the model to calculate the new
volumes necessary to reach a predeter
mined growth, including an adjust
ment for seasonality trends.
• Production of a file of model re
sults that can be accessed by other soft
ware, such as LOTUS or VISICALC,
to generate user-defined reports and
graphics.
• Ability to consolidate the pro
jected financial statements of multiple
companies.
• A service whereby a major eco
nomic research firm will feed its latest
projections of rates directly into the
model, for a fee.
• Use of a modeling language that
allows the user to build his own
spreadsheet calculations.
• Ability to produce a report for the
user’s fiscal year, combining historical
months with projection months.
• A forecasting section allowing the
user to enter five years of historical and
projection data for up to seven years.
For additional information, call 305/
298-8180.
*

A dvanced Planning Systems, Inc.,
Arlington Heights, 111., offers:
1. BancPlan, a profit-planning sys
tem utilizing a computer profit-plan

ning model designed for small and
medium-sized financial institutions
that want a comprehensive planning
system.
Features include a report package
designed to enhance the profit-plan
ning process; capacity to review
alternative strategies; profit planning
for the institution, its departments and
branches; monthly variance and analy
sis reports; and a summary program to
consolidate affiliates into a group plan.
Other services from the firm include
pricing policies and strategies, communication/reporting systems, cost/
operational control systems, merger/
acquisition analysis and sales/leaseback analysis.
2. This firm offers regional one-day
planning seminars and personalized
in-bank consulting on planning from
formation of an A/L com m ittee to
establishment of written policies and
mission statements through imple
m entation of a form al A/L-man
agement program.
For additional information, call 312/
392-1744.
*

Union Planters National, Memphis,
has a Prophet Financial Software Divi
sion that will hold four seminars in
1985 on risk management.
The following topics will be in
cluded in the seminars:
• Traditional risk management.
• Financial futures to hedge gap.
• The duration theory of A/L man
agement.
• Basis risk.
• Credit risk.
D ates and locations will be an
nounced by the end of 1984.
*

Olson R esearch A ssociates, Greenbelt, Md., offers:
1. Advanced financial planning,
profit planning and A/L cases at state
and national banking schools, includ
ing the ABA’s Stonier Graduate School
of Banking at Butgers University and
the Bank Administration Institute’s
School for Bank Administration.
2. Workshops/conferences at var
ious locations. The next workshop,
sponsored by Norwest Bank, Min
neapolis, will feature profit planning
for commercial banks. It will be held
September 20-21. The firm’s annual
Advanced Financial Planning Work
shop is scheduled for October 17-19 at
the College of William and Mary, W il
liamsburg, Va. Private workshops can

MID-CONTINENT BANKER for August, 1 9 8 4

,
Jim Stanley,
Kelly Mason
and Lauren Kingry.

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

See you at the
KBA Regional
Conferences.
The First Team will be traveling
to each o f the K B A Regional
Conferences. We look forward to
these meetings where we can
answer your questions and discuss
how our correspondent services can
fit into your bank's profit-oriented
strategies. See you there!

FIRST NATIONAL BANK

X !

First National Bank in Wichita
Correspondent Bank Division / Box One / Wichita, Kansas 67201 / IPhone: 316-268-1398 / Member: FD1C

be arranged.
3. The National A/L Management
Competition, jointly sponsored by the
Business and Management Founda
tion of Maryland and Olson Research
Associates. It offers bankers an oppor
tunity to compete against a national
group of participants in a computersimulated A/L-management case.
4. Financial texts are available
through a subsidiary, Ivy Press, Inc.
Titles include “Advanced Financial
Planning for Commercial Banks” and
“Asset/Liability Management: A Mod
el for Commercial Banks.”
For additional information, contact
Christine Stewart, manager, educa
tional services, 301/982-0400.
*

Financial Technology, In c., Chica
go, offers:
1. An A/L Management System with
Interactive Financial Planning, a mi
cro-computer-based program.
2. A/L-management seminars that
are “hands-on” workshops that over
view the concepts of the complete
planning and the A/L-management
process; A/L-management presenta
tions at trade shows and education
program s; a continuing-education
A/L-management system that’s avail
able on a monthly basis; an annual user
conference; and A/L-management/
profit-planning courses offered in con
junction with the Bank Administration
Institute.
For additional information, contact
Wendy M. Stockland at 312/280-0643.
*

CiSi N etw ork C o r p ., Van Nuys,
Calif., offers an A/L package called
ASTEK that is said to be capable of
implementing virtually any A/L-management strategy and simulate its im
pact on the balance sheet and income
statement for up to 60 periods ahead.
The system produces three kinds of
reports: (1) standard, (2) customized
generic and (3) special.
Standard reports include balance
sheet, income statement, rate, balance
mix, income mix, delta balance and
delta income reports. Customized
generic reports include liquidity,
ratio, gap, spread analyses and dura
tion analyses reports.
Reports can be printed at the ter
minal or personal computer or at a
computer center for next-day delivery.
Additional information is available
from David McClintock at 602/2488822.
* * *
36

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

F in a n c ia l T ren d s M a n ag em en t,
Bakersfield, Calif., is participating in
“Hedging Revisited” conferences in
Denver and Los Angeles on August
27-28 and September 10-11, respec
tively.
These two-day seminars provide indepth reviews of the ways a financial
institution can utilize hedging to pro
tect itself against major financial losses
caused by interest-rate fluctuation.
Speakers discuss the development of
an overall hedging program and the
liabilities and assets of both short- and
long-term programs.
Seminars utilize case studies, pre
sentations, a course workbook, how-to
examples and actual examples from the
field.
F or more inform ation, contact
Financial Managers Society at 312/
938-2576.
*

A p ach e E lectron ic Systems, In c.,
Oakbrook, 111., offers its MiniMax A/L
Management System, said to be a liter
al model in its orientation to the details
of daily transactions. A data base re
flecting the bank’s current position can
be updated with each day’s transac
tions, including repricing and maturity
or runoff information. Transactions
from independent workstations can be
input into temporary files. A file mana
ger then checks to see that the data
prove to the general ledger before
merging them into the master data
base. Interest rates can be input on a
daily basis. Quality and frequency of
data entry give the system the capabil
ity to produce nearly u p -to -th emoment interest-sensitivity reports.
For additional information, contact
the firm at 312/789-3330.
*

J . Keith Hughey Fr C o., Houston,
has A/L-management services that
offer process organization/im plem entation, subsystems review/enhancement, sensitivity monitoring/reporting, risk analysis/funds manage
ment, asset (credit services) pricing
and managed-liabilities pricing.
The firm specializes in developing
and implementing programs that can
be perpetuated by existing bank staff,
providing continuing management of
all or selected functions and working
with and through a bank to devise and
implant systems. It also can structure a
project-consulting format.
The firm also conducts a Financial
Services Roundtable, which is a forum
for accumulating and disseminating,

through surveys, data needed for dayto-day decision making by community
bank managements.
For additional information, call 713/
531-7500.
*

InnerLine, Arlington Heights, 111.,
offers two products that work together
to provide A/L-management assist
ance.
• Powers Financial Futures Hedge
Management offers three areas to
assist in hedge management — educa
tion, software and consulting. The
education area is geared to both the
novice and sophisticated hedger; the
software section provides information
on futures software packages and its
application, and the consulting section
provides the expertise of experienced
hedgers.
• Funds Marketplace provides rate
information, continuously updated,
nationwide. It is an interactive system;
buyers and sellers are brought to
gether by providing contact informa
tion to subscribers. It enables hedgers
to examine rates and see possible trend
developments.
For additional information, call the
Help Desk at 800/323-1321. • •

Swayze Foundation Announces
Fall-Seminar Schedule
The Orrin H. Swayze Foundation
for Advanced Banking Education,
Baton Rouge, has announced its fall
schedule of seminars. The Swayze
Foundation, which also conducts the
School of Banking of the South,
Louisiana State University, Baton
Rouge, was form ed to honor the
school’s founder.
The fall schedule is: August 19-22,
micro-computer applications work
shop for bankers, Baton Rouge;
September 23-26, strategic planning
— where are you and where do you
want to go?, Baton Rouge; October 710, commercial credit/lending work
shop, Springfield, 111.; October 28-30,
loan pricing — what is the cost of mak
ing that loan?, Baton Rouge; Novem
ber 11-14, commercial credit/lending
workshop, Baton Rouge; and Decem
ber 2-4, bankruptcies and effective
workout procedures, Baton Rouge.
For further information, contact:
School of Banking of the South, P. O.
Box 17680-A, Baton Rouge, LA 70893
(504/766-8595).

MID-CONTINENT BANKER for August, 1 9 8 4

Problems of Duration; Other Views
On A/L-Management Software
O ST bankers with m icro
computer-based asset/liability
(A/L) software probably would agree
with Lawrence A. Melsheimer, president/CEO of the $22-million Iberville
Trust, Plaquemine, La., who says his
micro-computer “spits out a lot of
answers we re not sure we have ques
tions for yet.’
Mr. Melsheimer says the financial
industry has yet to fully “digest” the
software available today and hardly is
prepared for some of the more esoteric
functions being debated in financial
journals. W ith respect to duration
analysis — one of the current buzz
words of the A/L-management field —
most A/L software suppliers agree.
Duration analysis could be a useful
management tool for bankers one day,
A/L software experts say, but only a
few highly sophisticated financial in
stitutions presently are calculating
durations and they are doing so pri
marily as an academic exercise. No
banker appears to be basing manage
ment of a bank solely on duration con
cepts, they say. Duration analysis is
where gap analysis was about five years
ago, says one software supplier.
At that time, gap analysis still was on
the fringes of acceptability within
banking circles. Of course, the whole
concept of A/L management only came
of age during the 1970s, a decade of
highly volatile interest rates. In many
ways, A/L management has yet to fully
mature and has undergone a host of
strange permutations during its de
velopment. Finding bankers who will
agree on a simple definition of what
A/L management is or what a good A/L
model should do is difficult.
Originally, A/L management at
tracted bankers because is seemed a
method of keeping control of interestrate risk. As software suppliers en
hanced capabilities of their products,
and some innovative bankers de
manded improvements of their own,
the A/L management umbrella was re
quired to shelter a growing range of
uses and abuses of financial modeling.
Today’s A/L software can produce
what-if calculations for any set of time
periods or group of assets or liabilities a

banker might designate. Literally hun
dreds of different A/L reports can be
produced. But are bankers using their
increasingly sophisticated financialmodeling tools to manage their banks
more wisely?
Duration analysis seemingly would
be an important tool in the banking
industry’s quest for sounder manage
ment. Calculations of duration are not
an especially daunting task, but cap
turing data to feed the model and using
the numbers the model produces can
be enormously complex.
Duration of a bank’s assets is the
sum of the time-weighted present
values of the associated future cash
flows divided by the non-weighted
present values of the same cash flows.
The ratio thus produced is the duration
of the set of assets in question.
Proponents of duration analysis say
maturity-gap A/L-management ap
proaches ignore the time value of
money. Equivalent cash flows are pre
sumed to have equivalent value re
gardless of their timing. Theoretically,
a bank that mismatched maturities,
but synchronized durations, could re
duce interest-rate risk to nothing.
M oreover, say proponents of the
theory, a bank that kept durations
matched also should be able to safely
handle higher levels of leverage.
Leveraging advantages of a duration
approach are said to be an especially
important competitive angle for small
er financial institutions with lower
equity ratios than larger institutions.
Therein lies one of the problems

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with duration analysis. Smaller banks
presently are among those least pre
pared to handle duration analysis, soft
ware vendors say. No criticism of offi
cers of smaller banks is intended by
that comment. Most software vendors
confirm ed what M i d - C ontinent
B anker ’s research for this article
showed. A number of banks in the $50million-and-below range are doing
some surprisingly sophisticated things
with their A/L models.
Software suppliers speculate that re
turns from duration analysis may not
justify the expense and time a small
bank with comparatively limited re
sources would have to invest, howev
er, especially since bankers now have
more variable-rate instruments with
which to reduce interest-rate risk.
Some bankers who have done research
on duration analysis believe the theory
suffers from a number of other flaws.
Cash-flow assumptions used with a
duration model can’t be seat-of-thepants guesses. Substantial variances in
durations can be created by relatively
small adjustments in cash-flow projec
tions. This suggests that bankers could
get themselves in deep trouble if their
assumptions about future cash flows
were in error. Most bankers just aren’t
prepared for that degree of fine tuning,
one software supplier said.
With a duration model, the yield
curve for a bank’s assets must stay par
allel to the liabilities they’re matched
against. O therw ise, duration mis
matches occur. Another problem with
duration models cited by critics of the
theory is the relative rarity of the zerocoupon instruments the model sug
gests bankers use to match with longer-m atu rity (but equ al-duration)
assets. Nor are bankers likely to stop
monitoring net-interest margins for
the sake of an as yet unproved theory.
Duration analysis probably would be
come another layer of effort — not a
substitute for — a bank’s current A/L
management efforts.
“One reason duration isn’t catching
on is that when you put a pencil to the
time and effort required to get the data
you need, you begin to see you are
going to offset any gains you might
37

Scott C. U lb rich ,
a .v .p .,
N orw est
Bank, Minneapolis:
Graphics aren't get
ting attention they
deserve.

get,” says Robert Brown, senior vice
president, Liberty National, Oklaho
ma City.
Joe Messinger, vice president, First
Wisconsin, Milwaukee, says lie’s not
sold on duration because h e’s not
heard of anyone yet who’s using it to
increase profits. He might change his
tune, he suggests, if he starts hearing
of bankers who have applied the
theory successfully. For now, h e’d
rather devote his efforts to learning
how to use financial futures in gap
management.
“That’s worth spending time on,” he
says.
Some software vendors suggest
duration analysis is the banking indus
try’s next great quest for a golden num
ber — or as one software supplier
called it, a “neutral god” — that will
take the mystery out of bank manage
m ent in an era of u ncertain ty .
Although the in terest in duration
among bankers has been tepid thus far
and the value of the concept is un
proved, A/L-software suppliers aren’t
ignoring the theory. A few A/Lsoftware firms say their models already
permit bankers to calculate durations,
and other software houses say they are
considering adding such a capability.
Rather than rushing out to take
advantage of such enhancements, A/Lm anagem ent con su ltan t J. K eith
Hughey, president of J. Keith Hugh
ey, Inc., Houston, says most bankers
need to refine and understand what
their present A/L models are telling
them. He says that as practiced at most
banks, A/L management still is more
“form than substance. ” Unless bankers
feel confident about duration analysis,
they can safely ignore the concept for
the time being, he says.
“If you define your gaps and make
intelligent pricing decisions, you’ll be
all right,” he says. For this level of
analysis, a simple A/L model may work
best, he adds. Adding too many bells
and whistles can distract bank manage
ment from its central task.
Despite their general antipathy to
ward duration analysis so far, bankers
are finding uses for other A/L-software
enhancements. Among the more com
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mon needs cited by bankers MCB
talked to were:
Interfaces With Other FinancialManagement Software. Some bankers
who have discovered the links be
tween futures transactions, strategic
planning and other elements of bank
operation to A/L management are find
ing a need to manipulate the same data
set with different software packages.
Integrated software capable of han
dling A/L modeling and an expanding
array of other bank micro-computer
applications is available today. Soft
ware vendors also say they are working
to widen the range of software their
products interface with. The need for
careful planning and purchasing in
buying A/L software has not di
minished, however.
“I consider A/L-management soft
ware a 10-year investment,” says John
Searles, vice president, Citizens Bank,
Providence, R. I. “I ’m not using all the
capabilities of the software currently,
but over time, I could.”

John
B ru b ak er,
p res./C EO ,
First
N at'l, Sprin g field ,
III.: Whether banker
uses gap or duration
techniques, balance
sheet can't alw ays
be p erfe ctly b a l
anced.

Micro/Mainframe Links. Initially,
most A/L modeling was done on an
on-premises or data-service-center
mainframe. The micro-computer per
mits bankers the convenience of A/L
modeling without tying up their main
frame. Some research suggests, in fact,
that A/L modeling is the primary
reason bankers purchase m icro
computers. Despite the convenience
of the personal computer, there still is
a need to transfer data back and forth
between the micro-computer and the
mainframe. Establishing the appropri
ate communication links is not easy or
cost-free. Even so, progress is being
made on this front, bankers and soft
ware suppliers agree. Easier micro-tomainframe links are on the horizon,
says Liberty National’s Mr. Brown.
“The mainframe people are starting
to realize they are there to maintain
data for other people to use, not for
them to control,” he says.
Simpler A/L Reporting/More User
T raining. A p ictu re is worth a
thousand words and — it might be
added — numbers. A/L-management
reports sometimes ignore this truism

and innundate their audience with
page after page of columns of numbers.
A/L-software suppliers warn that such
reports often are misunderstood or go
unread. Particularly in presenting A/L
m anagem ent data to persons un
schooled in the principles of A/L man
agement, graphic representation of
data can be more meaningful than the
raw alphanumeric data itself. Today’s
technology permits A/L-management
personnel greater flexibility in inter
weaving graphics, tabular matter and
text in a manner that increases the
reader’s understanding. Some A/Lsoftware packages have b u ilt-in
graphics capabilities; others must in
terface a general business spreadsheet/
data base package with graphics capa
bilities like Lotus 1-2-3.
Says Scott Ulbrich, assistant vice
president, Norwest Bank, Minneapo
lis: “Graphics aren’t getting the atten
tion they should in community banks.
They could be used to present in
formation to the board in a form it will
understand. The board doesn’t need to
look at pages of figures when one pic
ture will present the information it
needs.”
Perhaps the greatest service soft
ware suppliers can provide bankers is
product simplification and user train
ing. Some software companies are re
sponding to that need with regular
user seminars, newsletters and im
proved on-screen tutorials that tell the
banker not only how to use the model
to extract information, but how to in
terpret information the model pro
duces.
Expanded core memories, wider
availability of less expensive hard disks
and other hardware enhancements
give bankers opportunities to utilize
more efficient A/L-management soft
ware, to access even larger data bases
and to take advantage of improved
user-friendliness. No discussion of A/L
m anagem ent would be com plete,
however, without at least a brief men
tion of one of the current buzzwords of
the computer industry, artificial in
telligence (AI).
Although the term too frequently is
misapplied to undeserving software,
diagnostic capabilities of a true A/L-

A/L m a n a g e m e n t
consultant J. Keith
H u g h ey: B an kers
sho u ld refin e a n
sw ers they're get
ting now.

MID-CONTINENT BANKER for August, 1 9 8 4

management AI system could be ex
tremely useful to a banker. Imagine
intuitions of the world’s top money
managers integrated into a system ca
pable of processing masses of data no
human mind could begin to compre
hend — all available to any community
banker at the touch of a few keys. In
fact, such a system would go a long way
toward meeting requirements of bank
ers searching for a “neutral god. ”
Alas, such an AI system likely will
remain a dream for a long time. Vagar
ies of a global economy so far are too
elusive for a single model or matrix of
symbols to capture, one software sup
plier says.
Even in a year of less volatile in
terest rates, good A/L management is a
useful tool to bankers, but probably
never will be a substitute for skillful,
common-sense bank management.
John Brubaker, president/CEO,
First National, Springfield, 111., says
that even with the most sophisticated
planning tools, bankers have to realize
their plans could “go out the window”
shortly after they are drawn up.
“No one could have envisioned a few
months ago that we’d have the level of
auto sales we re having or that housing
would fall off as rapidly as it has, ” Mr.
Brubaker says.
He adds that whether a banker is
using gap or duration techniques,
there is no way to get the balance sheet
to be always perfectly balanced. —
John L. Cleveland, assistant to the
publisher.

numerous speeches and testimony be
fore Congress, discussed in detail im
plications of problems that have arisen
and have warned of problems seen on
the horizon. As for the latter, Preston
Martin, the Fed’s vice chairman, has
voiced publicly warnings of potential
problems in connection with adjust
able-rate mortgages (ARMs) and realestate tax shelters.
Mr. O’Brien adds that, of course, it’s
not appropriate for the regulators to
dictate how banks should conduct
their business — within safe and sound
limits — or to take actions that allocate
credit.
Press interest in banks’ nonperform
ing loans may be due to recent regula
tory changes designating disclosure of
such loans, says an official of one of the
Federal Reserve banks. He points out
that experience with banks supervised
by his Reserve bank indicates the in
creased volume of nonperform ing
loans generally has resulted from
adverse economic conditions rather
than lowering of credit standards.
Loan losses usually lag behind eco
nomic recessions, and the recent se
vere recession had a devastating effect
on a broad sector of commercial-bank
customers. His bank’s records show
that a major portion of current nonper

forming loans represent workout prob
lems resulting from the recession.
Another important factor in his Re
serve district, he says, is the continued
depressed financial condition of the
agriculture industry. Because banks in
this area are heavily involved in agri
cultural lending, he expects to con
tinue to see a sizable amount of non
performing agricultural credits until
farming profitability improves.
This Fed official says most banks su
pervised by his Reserve bank have sur
vived the recession in sound condi
tions, and reserve levels generally are
adequate to support nonperforming
assets. Therefore, while the volume of
nonperforming loans is greater than
desirable, he doesn’t consider the mat
ter a serious problem for these banks.
• Sandra A. Waldrop has been named
associate director, division of bank su
pervision for planning/program de
velop m en t, F D IC , W ashington,
D. C. She succeeds Mary T. Mitchell,
who retired after 20 years with the
FD IC . Succeeding Ms. Waldrop as
Memphis Region regional director is
James E. Halvorson, who had been
regional director in Boston since last
November. He joined the FD IC in
1956 and Ms. Waldrop in 1966.

Federal Regulators
(C ontinued fr o m page 9)

"Setting the Style for Great Little Hotels "
posure and publication of information
quarterly on material-country expo
sure.
• Implemented uniform accounting
rules for fees on international loans.
Also to strengthen the banking sys
tem, the Fed and Comptroller, in
June, 1983, announced amendments
to their minimum-capital guidelines,
which originally were made public in
December, 1981. These revisions:
• Established a 5% minimum ratio
of primary capital to total assets for the
17 banking organizations designated
by the agencies as multinationals.
• Expanded the definition of sec
ondary capital in considering capital
adequacy of consolidated bank HCs.
These guidelines have since been
reviewed and reconfirmed.
Beyond these actions, says Mr.
O ’B rie n , the regu lators have, in
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W e t r e a t o u r b u s i n e s s tr a v e lle r s
w ith s ty le

...special rates; complimentary airport
transportation; welcome cocktail upon
arrival; homemade donuts and coffee
and the daily newspaper each morning.
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every facility and a sincere desire to
p le a s e. . . place us above all the rest. ”
The Floridian of Orlando

7299 Republic Drive (International Drive)
Orlando, Florida 32819
(305) 351-5009
U.S Toll Free 800-445-7299
Fla. Toll Free 800-327-0730

For Com m unity Banks

A Useful Tool
In Planning
Capital Adequacy
By Douglas V. Austin • Mark S. Mandula • Craig J. Mancinotti

an appropriate
level of capital relative to assets
is critical in today’s highly competitive
com m ercial-banking environm ent.
The definition of an appropriate capital-to-asset ratio for a particular com
mercial bank varies depending on its
size, but an adequate ratio normally
falls in the 7%-9% range.
In examining reasons banks should
focus on maintaining average capital
a in t a in in g

levels, it is imperative to understand
the implications of capital ratios out of
balance with the rest of the industry.
Overcapitalized, as well as undercapi
talized, depository financial institu
tions need to develop a capital pro
gram designed to bring their capital
accounts to appropriate levels. View
ing the negative factors associated with
below -average and above-average
capital ratios verifies the need to

Douglas V. Austin, BA, MA, PhD, JD , CFA, is professor of finance,
department of finance, College of Business Administration, University
of Toledo, Toledo, O. He has been admitted to the practice of law in
Michigan and Ohio, as well as a federal judiciary. In the early ’70s, Dr.
Austin chaired a government-appointed committee to analyze Ohio’s
banking laws. He has published three books and more than 150 articles
on professional subjects, including banking structure, competition and
performance. He is the senior coauthor of “The Management of Deposi
tory Financial Institutions,” which will be published in December by
Bankers Publishing Co. Dr. Austin is president, Douglas Austin &
Associates, Inc., headquartered in Toledo, O.
M ark S. M andula, MBA, is a vice president, Douglas Austin &
Associates, Inc., and a former instructor, department of finance, Uni
versity of Toledo, where he earned his BBA and MBA degrees. Mr.
Mandula has made professional presentations on stock valuation, dis
senter’s appraisals and bank-merger/acquisition valuations throughout
the country on behalf of the Bank Administration Institute and state
banking organizations. He has written several works and is considered
an authority on bank valuation. Currently, Mr. Mandula is senior author
of a computerized bank-stock-valuation model entitled “BANKW ORTH,” sold nationally by Douglas Austin & Associates.
C raig J . M ancinotti, BBA, is assistant vice president, Douglas Austin
& Associates. He received his BBA degree from the University of
Toledo and, in June, received his MBA degree. He is research director
for the Austin firm, which is a full-service financial-consultation firm
specializing in banking structures/competition-performance work for its
commercial-bank/S&L clients nationally. Capital-adequacy studies/
projections for retention of capital in the face of growing depository/
asset demands is a part of the strategic-planning work done on behalf of
the firm’s clients.
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actively manage a commercial bank’s
capital position.
D eclin in g p ro fitability often is
associated with relatively low capital
ratios. This can result from decreases
in nominal earnings, as well as a de
clining growth in operating profits.
In furthering the declining growth
in profitability perspective, consider
the undercapitalized institution. From
a purely academ ic standpoint, an
undercapitalized bank would refer to
an institution that does not have the
capital base to support the future ex
pected growth in deposits. For exam
ple, if a bank expected deposits to in
crease at an annual growth rate of 15%,
while net profit was expected to rise
10% annually, the bank’s eapital-toasset ratio will deteriorate. Therefore,
even though the bank would be earn
ing a respectable nominal return, its
capital base would be depleted if no
attempts were made to control the
bank’s growth.
To illustrate further the ramifica
tions of a low capita]-to-asset ratio,
consider the bank’s ability to pay di
vidends. A bank in a low capital-toasset position is somewhat limited in
terms of its ability to pay attractive
cash dividends to its shareholders. In
addition, deteriorating or relatively
low capital-to-asset ratios gain un
wanted attention from the regulators.
One might expect a capitally strong
bank to not have capital-position prob
lems. Although they do not encounter
the same problems of capitally weak
banks, they are faced with a different
set of unfavorable conditions.
Commercial banks operating with
relatively high levels of capital under
state return on equity (ROE). Consid-

MID-CONTINENT BANKER for August, 1 9 8 4

specifically deposits, relative to equity lar area in which the bank operates.
could be obtained without substantial This includes, but is not limited to,
ly impairing the bank’s risk level. Uti trends in population, housing, demo
lization of these “extra’ funds could graphics, per-capita income, retail
generate additional income. There sales, agricultural sector, employ
ment, unemployment and manufac
fore, additional incom e could be
generated without increasing equity turing. This analysis entails determin
capital whatsoever, thereby increasing ing nominal changes as well as per
centage changes in each of the specific
shareholder wealth.
For these reasons, implementation areas. Also, it is of equal importance to
of a capital program, with the primary analyze surrounding areas in this same
objective of bringing the bank’s capital respect. For example, if your bank is
position to an appropriate level, be located in the center of a particular
comes critically important. Should a county and it considers the boundary
bank choose not to continually monitor of its primary service area to coincide
its capital ratios, it’s exposing itself to with the county border, it’s imperative
to scrutinize the economics of each of
several potential problem s in the
the counties contiguous to the county
th ree-to -fi v e-to -sev en -y ear tim e
in which your bank is based, as well as
frame.
Following is an outline of a meth the state in which your bank is located.
odology that enables a bank to project This is important because it provides
its capital for a specified time, under the analyst with information as to the
relative economic performance of the
varying assumptions, and therefore
allows a bank to continually monitor its particular county, and it enables one to
estimate future growth patterns within
capital position.
1.
E conom ics o f M arket A rea. To a particular market area more accu
determ ine an appropriate level of rately.
2.
Analysis o f Com petition. In de
capital to attempt to maintain, it is im
perative to have an in-depth under termining future capital needs, it’s im
standing of the economics of a particu- perative to have the capability to pro
ject deposit growth accurately. Asset
and deposit growth are closely related,
and being able to estim ate asset
EXHIBIT 1
CAPITAL ADEQUACY ANALYSIS
growth will serve as a base from which
HYPOTHETICAL BANKING COMPANY
to project capital needs. In this phase
of gathering information, compilation
1984-1995
of commercial-bank, savings-and-loan
association and credit-union deposit
figures is essential. It’s necessary to
accumulate depository-figure informa
1 2 .001
ASSET GROWTH RATE (1979-1983)
tion over the most recent five-year
1. 001
R . O . A . A . (1979-1983)
period, at a minimum. Again, this in
8.00Z
REQUIRED CAPITAL I
cludes depository financial institutions
25.001
DIVIDEND PAYOUT RATIO (ASSUMED)
located within the particular bank’s
primary service area, as well as for
those institutions located in the sur
rounding areas (specifically, munici
DOLLARS IN ($000)
palities located within 20 to 25 miles of
150,000
DECEMBER 1983 ASSETS

er a bank with $50 million in assets and
$6 million in capital (12% capital-toasset ratio), which earns 1% on assets.
Earnings for this institution would
equal $500,000, which equates to a re
turn on equity figure of 8.33%. Alter
natively, if the industry average capital-to-asset ratio measured 8%, result
ing return on equity, utilizing the
same 1% return-on-average-asset fig
ure, would equal 12.50%.
Further, the internal growth rate of
capital for banks with relatively large
capital positions would be understated
when compared to a peer group of
banks. Again, consider two banks of
the same asset size, generating the
same earnings from those assets, yet
having different capital levels. The
bank with the greater amount of total
capital would experience a lower in
crease on a percentage-change basis
than would a bank having a lower
amount of actual capital.
This adverse effect on rate-of-return
ratios is a function of the leverage em
ployed by particular financial institu
tions. A relatively high capital posi
tion, as measured by the capital-toasset ratio, indicates that more debt,

$3,000

DECEMBER 1983 CAPITAL

PERIOD

DATE

1
2

31-Dec-84
31-DBC-35

3
4

3 1-D e c -a i
31-Dec-37
31-Dec-38

5
6
7
8
9
!0
11
12

31-Dec-39
3 1-Dec-?0
31-D ec-?1
31-Dec-?2
3 1-Dec-93
31-Dec-94
3 1-Dec-95

ASSET
GROWTH
12.00Z
12.0 01
12.002
12.002
12.002
12.002
12.002
12.002
12.002
12.002
12.002
12.002

TOTAL
ASSETS

RETURN ON
AV6. ASSETS

EARNINGS
$530
$594

$56,000
$62,720

1.002
1.002

$70,246

1.002

$665

$78,676
$ 8 8 ,117
$98,691

1.002

$745
$834

$110,534
$123,798
$138,654
$155,292
$17 3 ,9 2 7
$194,799

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1.002
1.002
1.002
1.002
1.002
1.002
1.002
1.002

$934
$1,046
$ 1 ,1 7 2
$1,312
$1,4 70
$1,646
$1,844

BEGINNING
CAPITAL

CASH
DIVIDEND

ENDING
CAPITAL

AMOUNT
DESIRED (SHORT)QVER
CAPITAL OF DESIRED
8.002
CAPITAL

CAPITAL
TO ASSET
RATIO

$3,000

$133

$3,393

$4,480

($1,083)

6.072

$3,398

$148
$166

$3,843
$4,341

( $ 1,1 75 )

6.13 2
6.182

$1B6

$4,900

$5,018
$5,620
$6,294

$208
$234

$5,525
$6,226

$7,049

($1,394)
($1,524)

$7,895

($1,670)

$262

$ 7,0 10
$7,889

$8,843
$9,904

$8,873
$9,976
$ 1 1 ,2 1 0

$11,092

$3,843
$4,341
$4,900
$5,525
$6,226
$7,010
$7,889
$8,873
$9,976
$11,210 *

$293
$328
$367
$412
$461

$12,593

$12,423
$13,914
$15,584

($1,2 78)

6.232

($1,832)

6.272
6.312
6.342

($2,015)
($2,219)

6.372
6.402

($2,44B)
($2,704)

6.422
6.452

($2,991)

6.462
41

your bank’s centrally located office).
After analysis of the growth of your
bank as compared to growth experi
enced by other depository financial in
stitutions, in addition to the economic
analysis, a reasonable projection of fu
ture deposit/asset growth can be
made.
3. Analysis o f Bank P erfo rm a n ce. To
integrate the relevant economic and
competitive factors prevalent in the
market area into the development of a
specific capital plan, it is essential to
analyze the bank’s past performance
objectively. This includes, but is not
limited to, analyzing trends in rate-ofreturn ratios, efficiency ratios, assetutilization measures, spreads, mar
gins, growth trends in terms of deposits/loans/assets and capital ratios.
Understanding the relative per
formance of the bank with respect to
the economy in which it has operated
and the competition it has faced is
essen tial to d evelopm ent of an
appropriate capital plan. Consider a
bank operating in an area that recently
has experienced dramatic economic
grow th. In addition, d epositoryfinancial-institution assets have in
creased at a rate approximating 12%
over the preceding five-year period.
Alternatively, the bank for which you
are developing a capital plan has exhib
ited a lackluster performance. Growth
in deposits has been 6% annually; loan
growth has been 15% in each of the
past two years, and profitability, in
terms of return on average assets, has
declined moderately from 0.90% to
0.80% during the past five years.
Further, economic growth is expected
to continue at significant levels. D e
velopment of an appropriate capital
plan may entail p rojectin g future
growth of the bank, in terms of deposits/loans/assets/profitability, at a
growth rate below what may be consid
ered an average growth rate for com
mercial banks located within the par
ticular market area. Depending on cir
cumstances specific to a particular
bank, this scenario may or may not be
appropriate, but nonetheless illus
trates the importance of integrating
economic variables, competitive fac
tors and relative bank performance
into development of an appropriate
capital plan.
4. Analysis o f Bank Policies/Future
Plans. Generally, a bank’s capital posi
tion can be influenced to a great de
gree by managerial decisions reflect
ing bank policies and future plans of
the bank.
The most recognizable subjective
determ inant of a bank’s internally
generated capital is the dividend poli
42

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Federal Reserve Bank of St. Louis

cy. Other managerial factors affecting thetical bank would be 6.27% as of D e
the bank’s capital position are of a less cember 31, 1988, if past five-year per
explicit nature.
formance ratios are repeated. This pre
It is imperative to model a bank’s sentation demonstrates the strength of
capital plan to its overall long-term a projection model, as even though the
strategic master plan. Does the bank relative performance of the bank dur
desire to maximize growth and subse ing the 1979-1983 period has been
quent market share or profitability? Is good, a continued trend of that nature
the bank planning a future acquisition would not be desirable.
program? Does the bank plan to utilize
The next step involves altering the
available vehicles by which to diver assumptions to conform to the future
sify? Does the bank plan to remain expected economic and depository
independent? Answers to these ques growth trends. This, of course, is a
tions will identify a desired end with subjective opinion based on the an
respect to future capital positioning. alyst’s interpretation of the preceding
However, the means by which to economic and competitive analyses.
achieve that desired end must be a
It should not be inferred that the
specifically outlined capital plan.
capital plan should end when these
5.
Im plem en tation . Given results ofvariables are plugged into the Exhibit
preceding analyses, projections of fu 1 model. Rather, this should serve as
ture deposit/loan/asset/profitability the starting point by which to deter
figures can be estimated. Projections mine precisely what needs to be done
then can be organized into a table for to achieve a desired capital position.
mat to calculate future expected capi This includes changing any or all of the
tal levels, based on given assumptions assumptions. Also, note this specific
example is based solely on perform
as presented in Exhibit 1.
As can be seen from this example, ance and does not include variables
the capital-to-asset ratio of the hypo- that would facilitate generation of
additional capital to engage in other
types of activities that may be planned
by the bank.
The specific capital plan put in place
by a particular bank could include, but
Swearingen, Ogden to
is not limited to, revisions of rates paid
Head Continental Illinois
on deposits, bank-lending policies,
dividend policies, projections of future
CHICAGO — John E. Swearin
gen, former chairman, Standard Oil
internally generated capital, plans for
Co. (Indiana), has been named chairexternal equity financing and/or debt
man/CEO, of a new HC to control
financing. Also, as noted, the capital
Continental Illinois Corp. and its
program must fit within the long-term
primary subsidiary, Continental Illi
strategic plan of the bank, as well as fit
nois National.
with
the economic-growth prospects of
Named chairm an/CEO of the
the area and the competitive posture of
bank is William S. Ogden, former
the bank.
vice chairman/chief financial officer,
Chase Manhattan Corp., New York
6. C on trol. Implementation of a
City.
long-term capital program in order to
Messrs. Swearingen and Ogden
meet future goals of the bank is not an
replace David G. Taylor, chairman/
end in itself. Also, it is necessary to
CEO,and Edward S. Bottum, presi
dent, both named bank vice chair{ continually monitor, update and re
m en, e ffe c tiv e August 13. T he
| vise, if necessary, the precise capital
program put in place. Changes in any
changes were made as part of a $4.5of the aforementioned variables will
billion government rescue package
for C ontinental arranged by the
have an impact on the bank’s ability to
FD IC . The plan had not been final
achieve its long-term goals. Therefore,
ized at press time.
this monitoring process is ongoing and
Mr. Swearingen is a long-time
critical to the success of the specific
director of Chase Manhattan Corp.
capital program.
He retired from Standard Oil last
7. Sum m ary. An appropriate capital
Septem ber. Mr. Ogden was with
program entails not only profitability
Chase Manhattan for 31 years, but
retired early last year to work for the
analysis, but it also must incorporate
Institute of International Banking,
such factors as econom ic-grow th
which he founded.
trends, the bank’s competitive pos
The F D IC is expected to “na
ture, overall bank performance and an
tionalize” Continental by buying as
analysis of bank policies and long-term
much as $4.5 billion in loans plus $1
goals. Within that framework, meth
billion in new preferred shares, con
odology presented in this article can be
vertible to an 80% stake in Continen
a useful tool for outlining a strategy to
tal.
strengthen a bank’s capital position.
MID-CONTINENT BANKER for August, 1 9 8 4

About Banks & Bankers
ILLINOIS
Continental Illinois National, Chica
go, has promoted the following: to vice
presidents — Robert F. Dieli, eco
nomic research; Mary Ann Lain, com
mercial-banking operations; Michael
A. Chiarito, check processing; James
A. Klute, controllers; and Eduardo
Monteagudo, personal-banking ser
vices; and to second vice presidents —
Stev e A. Saratore and Claudia
Sch u ltze, corp o rate planning/research/development; and Peter Katrein, commercial-banking operations.
Gordon B. B enkler and Leo A.
Knowles have jo in ed C ole-Taylor
Financial Group, Northbrook, Mr.
Benkler as a senior vice president/
product development manager and
Mr. Knowles as corporate controller.
Mr. Benkler formerly was with Con
tinental Illinois National, Chicago, and
Mr. Knowles was senior vice president/controller, G eneral Finance
Corp.
Bruce Hoover has joined Devon Bank,
Chicago, as vice president/auditor. He
formerly was a private consultant and
also is a retired partner, Peat, Mar
wick, Mitchell & Co., Chicago.
Midwest Fin an cial G roup, In c .,
Peoria, has elected David R. Leitch a
vice president. Mr. Leitch, a vice
p resid en t, C om m ercial N ational,
Peoria, will be responsible for the
HC’s public affairs/press relations/government relations.

INDIANA
Michael F . M cW hortor has been
named vice president responsible for
investments/funds management, Lin
coln National, Fort Wayne. He was
with BancOhio National, Columbus,
as vice president responsible for finan
cial planning. In other action at Lin
coln National, three assistant vice
presidents were named: Stephen W.
Demaree, Michael C. Marhenke and
John L. McArdle. Mr. Demaree went
to the bank in 1975, Mr. Marhenke in
1977 and Mr. McArdle in 1976.

Restructuring Announced
By South Bend Bank
SOUTH BEN D — 1st Source Bank
has announced creation of five regional
headquarters, expansion and improve
ment of automated-teller-machine ser
vice and realign m en t of several
branches. The program will cost $1
million.
Im plem entation of the program,
being directed by Senior Vice Presi
dent W. D. Jones III, personal bank
ing group, will be completed by D e
cember. New ATMs will be operation
al at several locations in September,
with existing 1st Source ATM locations
upgraded to incorporate the newer
units, using the latest in 24-hourbanking technology.
The regional centers, which were
designated on the basis of population
and business volume in surrounding
areas, will offer a full range of financial
services. In addition to main offices in
downtown South Bend and Mishawa
ka, services will be expanded at the
Airport, Roseland and Maple Lane
branches.
Branch realignment will include
consolidation of lower-volume branches
into more regionally located facilities.
The plan also calls for physical reloca
tion of the branch building at U. S. 20
and Bittersweet Road to a new location
at U. S. 33 and Bittersweet. This new
location will serve as the Osceola
Office when it opens later this year.
W illiam N. M cCallum has been
elected president, Lafayette Bank,
which he joined as manager, install
ment loan department, in 1961. Most
recently, Mr. McCallum was execu
tive vice president/secretary to the
board.

MICHIGAN
Manufacturers National, Detroit, has
announced these promotions: to vice
president, metropolitan loans, Victo
ria E. Docauer; to vice presidents, in
ternational banking, Ralph C. H eidjr.
and Konstantinos N. Voutsinas; to
second vice presidents/corporate ser

MID-CONTINENT BANKER for August, 1 9 8 4

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

vices officers, Beverly S. Burger, Mal
colm A. MacKay and Henry C. Seavitt;
to second vice presidents/account
officers, Thom as W. M illion and
Christopher J. Stearns; and to second
vice president/audit officer, Catherine
A. Kaiser.
J. Philip Lowman has been appointed
first vice president, national banking,
National Bank of Detroit, and Jack L.
Crawford has been named first vice
president, eastern metropolitan re
gional banking division. NBD also
appointed Garry J. Segal vice presi
dent, national banking. New second
vice presidents are: Melvin H. Cra
mer, Gary C. Dawley, Maria-Elena
Disser, Bruce E. Thomson, Frank J.
Dmuchowski, Bernadine T. Loeher,
Betsy M. Farner, Raymond W. Wise,
Anna P. Hoffman, James Rembacki
and Douglas T. Martin.
Virginia D. VanLeuwen has been
named vice president/personnel director/affirmative action officer, First of
America Bank Corp., Kalamazoo. She
had been assistant vice president/
affirmative action officer.
Robert A. Grenfell, Lawrence R.
K ushner, Em ily B. M ariucci and
Frederick R. Schwarze have been
promoted to vice presidents, First of
America Bank-Detroit.
Robert S. Colladay, senior vice presi
dent, personal trust, Comerica BankDetroit, has been elected a senior vice
president, Comerica, Inc., also in D e
troit. Also at the HC, these appoint
ments were made: to vice president,
corporate tax, Kenneth J. Schad; to
vice p resident, internal services,
Thomas C. Tisler; to assistant vice
president, Comerica Trust of Florida,
Craig W. Morrison; to assistant vice
president, Michigan corporate bank
ing, Timothy Otto; and to assistant vice
president, central loan administration,
Ernest M. Zarb. Marvin Sallen, presi
dent, Comerica Mortgage Corp., has
been named senior vice president,
Comerica Bank-Detroit. Also at the
bank, Ronald L. Mazyck was made
vice president and Gary Pierce assis
tant vice president, both in metropoli
tan corporate banking. These assistant
43

vice presidents were appointed by the
bank: John R. Sanders, United States
banking; Mary B. Barrett, employee
benefit trust; Susan C. Manning, trust
investment; and John B. Roy, consum
er loans.
Edward W. Ryan has been named
president/CEO, Old Kent Bank, Lan
sing. Most recently, Mr. Ryan was
assistant vice president, metropolitan
division, corporate banking depart
ment, Old Kent Bank, Grand Rapids.

Banking Commissioner
Appealing Decision
On His S&L Order
LANSING — Eugene W. Kuthy,
commissioner, Michigan Financial In
stitutions Bureau, has announced
plans to appeal a decision from the Ing
ham County Circuit Court that he
should have followed the rule-making
procedure rather than issuing an order
allowing a state S&L to buy, through
its service corporation, an insurance
agency.
Mr. Kuthy issued his order last
February 16, allowing Three Rivers
S&L, through its wholly owned ser
vice corporation, Alpha Financial,
Inc., to acquire Hackenberg-Schrieber Agency, Three Rivers. The agency
to be acquired would engage in selling
general types of personal and business
insurance.
The Independent Insurance Agents
of Michigan appealed Commissioner
Kuthy’s order to the Ingham County
Circuit Court, and the latter issued an
order reversing Mr. Kuthy.
According to Mr. Kuthy, the court’s
decision calls into question the entire
application process for all types of ser
vice-corporation activities of S&Ls.
Thus, he believes an appeal must be
made.
Although the Circuit Court didn’t
tell the commissioner he could not
allow that specific purchase to occur,
Mr. Kuthy says he hopes the Court of
Appeals would agree with him that he
has the statutory power to decide spe
cific requests from state S&Ls.

- MINNESOTA
Thomas E . Finley has joined First
Bank Minneapolis as vice president,
in tern ation al banking group. He
formerly was vice president, interna
tional-unit operations, Continental
Illinois National, Chicago.
F&M M arq u ette N ational, M in
neapolis, has promoted Lawrence S.
Podobinski to vice president, invest
44

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Federal Reserve Bank of St. Louis

Bank Sponsors Tennis
MINNEAPOLIS — Tennis on the
Plaza, sponsored by First Bank Min
neapolis, began its eighth season of
noontime tennis July 2.
The tournament, sanctioned by
the United States Tennis Associa
tion, features men and women sin
gles players from the corporate com
munity vying for more than $1,800 in
prize money. The top female player
will receive $250, and the male final
ist will get $500. Cash prizes also are
awarded to quarter- and semifinal
ists.
The two-week-long event is held
on First Bank Plaza. A regulationsize rubberized playing court is in
stalled over the granite plaza sur
face.
All events are free and open to the
public. Spectators are invited to
bring bag lunches or purchase food
at the tournament.

ments; David A. Stavenger to vice
president, retail administration; and
David A. Hoven to assistant vice presi
dent, investments. Mr. Podobinski
was an assistant vice president at F&M
Marquette National; Mr. Stavenger
was senior vice president/cashier,
M arquette National at University,
Minneapolis; and Mr. Hoven was an
assistant vice president, F&M Mar
quette National.
Bank Shares, Inc., Minneapolis, has
promoted Gary Ruhter to cashier at
Marquette Lake State, Minneapolis.
He formerly was an audit officer for the
HC.
Charles A. Russell, chairman, Norwest Bank Duluth, has been named its
CEO, and Robert M. Fischer has been
elected president/chief operating offi
cer. Dennis W. Dunne continues as
president/CEO until retiring August
31. Mr. Russell serves a dual role for
Norwest Corp., Minneapolis, both as
regional president of Region I and
chairman of the Duluth bank. Steven
J. Sertich, assistant vice president, has
been made director of human re
sources for the bank and Norwest
Corp.’s Region I.

OHIO
Richard K. Hite and A. Joseph Parker
have been elected vice presidents,
BancOhio National, Columbus. Mr.
Hite went to the bank in 1982 and Mr.
Parker in 1977.
Huntington National of Northeast
Ohio, Cleveland, has promoted the
following to vice presidents: David C.
Clarke, East Region administration;

Carmen J. Pappalardo, West Region
administration; Betty P. Waltz, per
sonal trust administration; and Diana
J. Willen (and manager), trust em
ployee benefits/custody administra
tion. Mr. Clarke has been with the
bank since 1968, Mr. Pappalardo since
1969 and Ms. Waltz since 1972. Mrs.
W illen join s the bank from First
National, Akron, where she had been
vice president/manager, fiduciary ser
vices.

Four-Bank Partnership
Results in Expansion
Of InstaNet Network
Four major Ohio-based banks have
formed a partnership to expand the
InstaNet electronic-banking network.
Joining the founders of InstaNet —
AmeriTrust of Cleveland and Central
T ru st, C in cin n ati — are C en tral
National, Cleveland, and Huntington
National, Columbus. Additional part
ners are to be announced.
AmeriTrust, Central National and
Central Trust now are mutually shar
ing access to their automated teller
machines, along with 100 other In
staNet members throughout Ohio, In
diana, Kentucky and West Virginia.
When Huntington National becomes
part of the network early next year,
customers of member institutions will
have access to about 550 ATMs serving
2.5 million card-holders throughout a
four-state region.
InstaN et-partnership banks also
have agreed to market a point-of-sale
electronic-banking program through
out Ohio.

WISCONSIN
Independent Bankers of W is.
Plan Convention for Sept.
The annual meeting of the Indepen
dent Bankers Association of Wisconsin
(IBAW) is scheduled for September
16-18 at the Radisson LaCrosse Hotel,
LaCrosse.
Speakers set for the program in
clude B. F. (Chip) Backlund, first vice
president, Independent Bankers Asso
ciation of America, and president, Bartonville Bank, Peoria, 111.; U. S. Rep
resentative Steven Gunderson (R.W is.); William Dixon, W isconsin’s
com m issioner of banking; Jam es
Hagerbaumer, economist, who will
address the economic outlook and the
election; Paul Hassett, president, Wis
consin Association of Manufacturers &
Commerce, who will speak on the
state’s business climate.
Also on the program will be John

MID-CONTINENT BANKER for August, 1 9 8 4

Bank Gives Scholarships

K om ives, Lake Shore Specialty/
IBAW, speaking on succession plan
ning for independent banks; a panel of
m arketing consu ltants who will
address marketing techniques and
approaches for independent banks;
and Lee Shelton, who will speak on
“Productivity Begins With You” at the
closing banquet.
Citizens Bancorp, Sheboygan, has re
ceived Fed approval of acquisitions of
three Wisconsin bank HCs: Bancorp of
Wisconsin, Inc., West Allis; S.B.W .
Bancorp, Inc., Waupun; and North
Side Bancorp, Inc., Bacine. Citizens
Bancorp shareholders have approved a
name change to First Interstate Corp.
of Wisconsin, reflecting the company’s
recent franchising agreem ent with
First Interstate Corp., Los Angeles.
Name changes for the HC and its affili
ated banks will take effect later this
summer.
James W. Eyster has been elected
p resid en t, M arine Bank Services
Corp., vice president, Marine Corp.
and executive in charge of its bank ser
vices group and senior vice president,
Marine Bank, Milwaukee. He also has
joined the management committee of
the HC. He succeeds Daniel J. Gan
non as president, Marine Bank Ser
vices Corp. Mr. Gannon now is senior
vice president/chief financial officer of
Marine Corp. Dr. Eyster formerly was
senior vice president, Marine Bank
Services Corp. He joined Marine in
1983 following service with Norwest
Information Services, Minneapolis.

• Rand McNally & Co. Patrick J. Sot
tile has been appointed general mana
ger of this Chicago firm’s financial sys
tems division. Most recently, he was
national sales manager for the division.

SELLING/MARKETING

Bank Treats Public
To Computer Show
Officers of F&M Bank Menomonee Falls
flank two of three scholarship winners who
were awarded $500 each as part of bank's
$3,000 annual scholarship fund, adm inis
tered through its education committee.
From I.: G . Mark Dignin, v.p./personal
banking mgr.; Sharon Farrow, personal
banking operations mgr.; Lawrence K.
Elton, e.v.p./chief operating officer; Jennif
er Gentine and Cindy Ann Weiss, schol
arship winners; Richard P. Klug, pres.; Alan
J. Kunz, s.v.p./personal banking.

L a rry E . Bickelhaupt has join ed
Brown D eer Bank as a commercial
banking officer. He formerly was with
Marine Bank.
• Brandt, Inc. John Dullighan has
been named executive vice president/
chief operating officer of this Watertown, Wis.-based company. He was
vice president/general manager.

Computers are the “hot’ products
and topics just about everywhere now.
Realizing this, Morton (111.) Commu
nity Bank held a two-day COM PUT
ER EXPO for businesspersons, home
users, students and others with an in
terest in computers. The show was
held at the High Tech Learning Cen
ter, located next door to the bank.
Major computer vendors in the area
featured displays of a wide variety of
personal/business computers. Qual
ified persons were available to answer
questions about computer lines they
handle.
Visitors to the show were given
demonstrations of hardware, including
telephone or modem connections with
data services in other cities. Compari
sons of features and costs of various
equipment could be made.

James L. Roberts has been elected
executive vice president, First Bank
Milwaukee. He formerly was with Balcor/American Express, Chicago.
Paul R. Trigg, president, Firstar Bank
Appleton, has been named CEO. He
joined Firstar in 1971 and has been
president since 1983. Howard C. W il
liams and Steven J. Franz have joined
the trust department as vice president/
senior trust officer and em ployeebenefits manager, respectively.
M arvin R. Swentkofske has been
elected first vice president/investment
group head at First Wisconsin Trust,
Milwaukee. He succeeds Willard L.
W heeler Jr., who has resigned. Mr.
Swentkofske formerly was president of
Seagate Capital Management, a sub
sidiary of Toledo (O.) Trust.
John Pelletter has been promoted to
assistant vice president/commercial
banking at M&I Bank of Madison. He
joined the bank in 1980.
MID-CONTINENT BANKER for August, 1 9 8 4

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Bankers
expect us to
provide financing from a
different perspective. We put
lendable resources to work quickly by
establishing the value of a customer’s assets
(tangible and intangible) and structuring a flexible
loan package. We’ll lend alone or in participation with you.
Remember our name.

Dial 1-800-BARCLAY.

Banking Scene
(C ontinued fr o m page 6)
raider, of course, makes a profit on the
deal.
Massive lawsuits filed against offi
cers and/or directors of an institution
can debilitate a financial institution in
many ways. Nine out of 10 banks now
carry D&O insurance, indicating that
most banks have taken some precau
tions to protect officers and board
members.
Jack Page of J. H. Blades & Co.
wrote in a recent article in Business
Insurance that bank-D&O coverage
should be realigned in event of major
changes in structure. He noted that
when two banks start talking merger,
for example, a possibility exists that
neither institution has high enough
limits on its D&O insurance. Higher
limits could be unobtainable after the
merger, he says.
Legal suits during merger negotia
tions frequently are started by dis
gruntled shareholders or staff mem
bers. If ever there were a good time for
a solid wall of D&O defense, merger
discussions are it. One bank I know of
thought it was well protected and dis
covered its insurer refused to pay the
claim.
In such critical matters, it isn’t good
enough to “think” you are prepared or
protected. You have to know.
I could go on describing all the terri
ble things that could happen to a bank,
but I fear I d only cause undue worry.
Besides, by now you get the point.
Even if you are the unluckiest bank
er alive, you are unlikely to have to
face every calamity we’ve described
here. But that doesn’t excuse you from
taking positive action to avoid such
calamities or keep the damage to a
minimum if they are unavoidable.

B A N K O P P O R T U N IT IE S
Comml Loan — IA, ND, MO, KS $25-35K
Instl. Loan — KS, MO, IA
$20-25K
AgriLoan — MO, KS, NE, IA
$25-35K
Correspondent Officer — MO, NE $30-35K
Second Officer — KS, MO
$30-40K
R .E. Loan — KS, IA
$25-35K
Additional positions available in midwestern
states for experienced bank personnel.

TOM HAGAN & A S S O C IA TES
of K AN S AS CITY
P.0. Box 12346 2024 Swift
North Kansas City, MO 64116

816/474-6874
SERVING THE BANKING INDUSTRY
SINCE 1970

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Federal Reserve Bank of St. Louis

Notice that I said “positive action.”
Worry alone will do you no good. On
the other hand, positive action to avoid
or contain potentially damaging cir
cumstances eases the mind. If you’ve
done all you can to prepare for a storm
and you still sink, you’re no less dead,
but at least you die with a clear con
science. The worrier who develops no
contingency plans goes down with a
load of “what-if” questions. This big
gest question generally is, “What if I ’d
taken action to prevent this disaster?
Of course, by then it’s too late.
For all our sophistication these days,
however, it is good to remember that
bankers are not good seers. How many
bankers can say they accurately pre
dicted the shape and texture of bank
ing in the 1980s as long ago as the early
1970s?
A few years ago, you could have
been laughed out of a room if you sug
gested to bankers that the prime rate
could conceivably climb above 20%.
That possibility hardly seems so amus
ing today.
Who could have predicted that the
demand-deposit ratio possibly could
double to more than 400 times annual
ly within four years? Some of the major
New York City banks are much higher
than the national average. In fact, the
average for all New York City banks
recently was listed as 1,621 times.
That, remember, is an average. Some
of the big banks probably are ex
p erien cin g dem and-deposit debit
ratios of more than 2,000 times a year.
Now consider the daylight-overdraft
problem mentioned earlier. Think of
all of that money — actually, electronic
blips — flashing around the world. I ’m
told that errors are not an insignificant
problem for the wire-transfer net
works.
I wonder if handling all those elec
tronic blips and computer printouts
representing billions of dollars makes
humans more or less sensitive to the
magnitude of their responsibilities.
Do they see those blips and computer
printouts for what they are — repre
sentations of real debt obligations that
must be settled daily?
Call me paranoid, but I wonder
about the electronic-fund-switching

system itself. Can it be compromised?
What would happen if it were?
It gives me great comfort to know
there is a banker out there somewhere
posing and finding more than superfi
cial answers to these questions. At
least, I hope such bankers exist and I
suspect that the public, troubled by
the recent rash of bank failures, would
be similarly comforted. That, in itself,
would do much to ensure the sound
ness of the banking system. • •

Correction
The June issue of M i d - C o n t i
B a n k e r contained an article,
“How Will the Midwest Be Affected
by In te rsta te B an k in g ?” It was
accompanied by a chart headed,
T h irty L a rg est C o m m ercialBanking Organizations in Midwest.”
Information for the chart supplied
to MCB contained one error. A list
ing indicated Central Bancorp (Mo.)
had total assets of $2,834,000 in 1982
as opposed to $1,682,000 in 1977;
the HC ranked 25th in both years,
and its capital to assets were 6.67%.
However, these figures were for
Central Bancorp of Cincinnati, not
Central Bancompany (Mo.)nent

Ind ex to A d v ertise rs
Arrow Business Services, Inc........................................

Centerre Bank, St. Louis .......................................... S / l l
Commerce Bank, Kansas City ...................................
7
Computer Fundamentals Group, Inc......................... 34
Federal Land Bank, St. Louis ................................... 43
First Interstate Bancorp., Los Angeles .......... 24-25
First National Bank, Lo u isville ...................................
5
First National Bank, Wichita ..................................... 35
First Oklahoma Bancorp., Oklahoma City . . . . S/15
First Wisconsin National Bank,
Milwaukee ............................................................ 14B-14C
Floridian of O rland o......................................................... 39
Fourth National Bank & Trust Co., Wichita . . . . S/l
Hagan & Associates, Tom ............................................. 46
Heller & Co., Walter E ...................................................... 13
Howe, Barnes & Johnson, Inc...................................... 28
Hutchinson (Kan.) National Bank & Trust Co.
S/3
Industrial Life Insurance Co.......................................... 32
Kansas State Bank & Trust Co., Wichita ............

S/4

Liberty National Bank & Trust Co.,
Oklahoma C it y ................................................................
2
MPA Systems ..................................................................... 44
Mercantile Bancorp., St. Louis................................ S/13
Midland Bank & Trust Co., Memphis .................... 26
Monroe Business Systems .......................................... 17
Rothschild, L. F., Unterberg, Towbin

We buy, sell and upgrade anywhere in the US.
Top prices paid for Brandt, Cummins and Glo
ry money processing equipment. Extensive in
ventory of FU L L Y W ARRA N TEED , rebuilt
coin sorting and wrapping equipment available
from stock at an excellent savings. NCR, IBM
and SHARP teller terminals bought and sold.
Many units discounted significantly. Contact:
Data Financial, P. O. Box 09054, Milwaukee,
WI 53209 (414) 351-5400.

Bank Administration Institute ................................... 23
Bank Board Letter ............................................................ S/7
Bankers Systems, Inc........................................................ 11
Bankers Training & Counsulting Co........................... 29
Barclays American/Business C re d it......................... 45
Boatmen’s National Bank, St. L o u is ...................... 48

North Central Life Insurance Co.................................

FINANCIAL EQ U IPM EN T
BOUGHT AND SOLD

•

2-3

.................... 31

Schooler & Associates, Don .......................................... 44
Sheshunoff Co....................................................................... 19
Son Corp................................................................................ S / l6
Southwest National Bank, Wichita ......................... S/4
Stifel, Nicolaus & Co., Inc............................................. S/5
Texas American Bancshares, Inc................................ 44
Travelers E xp re ss.............................................................. 14A
Union National Bank, Little Rock ........................... 33
United States B a n k e r.................................................... 14D
Whitney National Bank, New O rle a n s....................

Zahner & Co......................................................................... S / l2

MID-CONTINENT BANKER for August, 1 9 8 4

ForYour Bank,
Nothing Less W ill Do.
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Kittinger, including the Georgian Series
pictured here. And Baker, Gunlocke, Steelcase, Knoll...the who's who of office
furnishings. All the prestige names display
their best in our Memphis showroom,
complete with accessories, carpet, window
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Arrow’s staff of ten experienced bank

designers can make your bank a stunning
and workable showcase from the executive
offices to the customer, operations and data
processing areas.
Give us a call for a professional, costeffective proposal to meet your bank’s
building and furnishings needs.
We offer the best, and we know you expect
nothing less.

HRRCM2

BUSINESS SERVICES INC.
r
an affiliate of Midland Bank & Trust
3050 Millbranch, Memphis, Tennessee 38116
901/345-9861

MID-CONTINENT BANKER for August, 1 9 8 4

https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Boatmen’s Ted Smothers.
Operations Assistance
Overline Assistance.
Loan Participations.
Investments.

Boatmen’s Vice President Ted Smothers working
with Bob Menz, Chairman and President o f The
First National Bank o f Highland. Whatever your
correspondent needs, Boatm en’s has knowl
edgeable people to assist you. Call Ted Smothers.
He can help.

Correspondent Banking Division

THE BOATMEN'S
NATIONAL BANK
OF ST. LOUIS
314- 425-3600

Member FDIC