Full text of Mid-Continent Banker : The Financial Magazine of the Mississippi Valley and Southwest : December 1983 : Northern Edition, Volume 79, No. 12

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MID-CONTINENT BANKER

(IS S N 0 0 2 6 -2 9 6 X )


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

INCORPORATING MID-WESTERN BANKER

DECEMBER, 1983

NORTHERN EDITION

Asset-Based Lending

Agriculture
Issue

NORTH CENTRAL HAS TH E
PRODUCTS TH A T HELP YOU
SQUEEZE MORE PROFIT O U T OF

It's a tough, competitive world. And, you’re right in
the middle o f it. You have to hustle fo r every dollar.
And every dollar has to w o rk fo r you.
That's where we come in. W hen the pressure's on,
N orth Central can help you squeeze through.
How?
W e have insurance products specifically designed to
match your entire loan portfolio. Short-term. Long­
term. Revolving. Variable interest. Large o r small.
Installment. Agricultural. Commercial. Real estate.
You name it, we protect it. W ith products that are in
tune with your marketplace. That provide valuable
protection fo r your customers. And give you an im-


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Federal Reserve Bank of St. Louis

portant source o f fee income.
And N orth Central makes it easy fo r you.
We teach your staff vital sales techniques. And keep
them up-to-date on product and market changes.
We give you tools to track your profitability and
measure and control your insurance operations.
We take care o f the paperwork, so you’re free to
take care o f your customers.
The bottom line? W e install a proven system that
helps you squeeze virtually every last profit dollar
out o f your loan portfolio.
Ask your N o rth Central Life representative to
show you how it can be done.

North Central Life Insurance Company
NORTH CENTRAL LIFE TOWER. 445 MINNESOTA STREET. BOX 43139. ST. PAUL. MN 55164

Protection all ways

In Minnesota call 800-792-1030.
In Iowa, Wise., North and South Dakota 800-328-1612.
All other states 800-328-9117.

BankMate is here!

Now your customers can
bank at ATMs all over town
or all over five states.
BankMate, a regional network of shared automatic teller
machines, links together all the ATMs of participating
financial institutions. With it as one of your services, your
customers will be able to transact banking business at any
ATM in the entire BankMate system.
You can join BankMate even if your bank doesn’t have its
own ATMs. Your bank issues BankMate ATM cards that
allow your customers access to all the ATMs in the net­
work—a network that will extend into the five states of
Illinois, Iowa, Missouri, Kansas and Kentucky.


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Federal Reserve Bank of St. Louis

BankMate gives your customers accessibility to their
financial institutions in the places where they live and
work, day in, day out. Local accessibility throughout the
cities that cover a region of neighboring Midwestern
states. It’s this combination of regional and local access­
ibility that is truly the most useful.
For more information how to “plug-in” your ATMs to the
BankMate network, contact Jack Regan
at Monetary Transfer System, 220 So.
Jefferson Ave., St. Louis, Missouri 63103
(314) 231-1155

A Regional Shared Automatic Teller Machine Network

MID-CONTINENT BANKER
(Incorporating MID-WESTERN BANKER)

Volume 79, No. 12

December, 1983

IN THIS ISSUE
FEATURES
10 NEW DIRECTIONS FORESEEN FOR LENDERS

In asset-based financing
19 RESULTS OF ASSET-BASED-LENDER SURVEY

Problem-loan improvement, increase in bank-referral OKs
22 A-B LENDING A G R O W IN G BUSINESS FOR LARGE BANKS

Major commercial banks could dominate field
39 EQUIPMENT LEASING IS PROFITABLE FOR BANKS

High cost no longer a factor in offering service
42 SHOULD YOUR BANK CONSIDER A SALE-LEASE-BACK?

Advantages, disadvantages explained
48 MABSCO'S NEW AG-CREDIT PROGRAM

It can foster bank aggressiveness
50 FARM COSTS TO RISE NEXT YEAR

Results of survey of agricultural bankers
54 DEPOSIT INTANGIBLES:

Valuing the benefit of acquiring liabilities
60 MOST BANKERS FAVOR DIDC ACTION

To deregulate minimum-balance-deposit requirem ent
DEPARTMENTS
6 BANKING SCENE

8 OPERATIONS

28 STATE 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
MID-CONTINENT BANKER Editorial/Advertising Offices
St. Louis, Mo., 408 Olive, 63102. Tel. 314/4215445; Ralph B. Cox, Publisher; Marge Bottiaux,
Advertising Production Mgr.

Subscription rates: Three years $27; two years
$20; one year $12. Single copies, $2.50 each.
Foreign subscriptions, 50% additional.

MID-CONTINENT BANKER is published monthly by
Commerce Publishing Co., 408 Olive St., St. Louis,
Mo. 63102.

Commerce Publications: American Agent & Bro­
ker, Club Management, Decor, Life Insurance
Selling, Mid-Continent Banker and The Bank
Board Letter.

POSTMASTER: Send address changes to MID­
CONTINENT BANKER at 408 Olive St., St.
Louis, M0 63102.
Printed by The Ovid Bell Press, Inc., Fulton, Mo.
Second-class postage paid at St. Louis, Mo., and
at additional mailing offices.

4


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Federal Reserve Bank of St. Louis

Officers: Donald H. Clark, chairman emeritus,
Wesley H. Clark, president and chief executive
officer; James T. Poor, executive vice president
and secretary; Ralph B. Cox, first vice president
and treasurer; Bernard A. Beggan, David A. Baetz,
Lawrence W. Colbert and William M. Humberg,
vice presidents.

Convention Calendar
Jan. 15-18: Bank Administration Institute PATH Con­
ference on Productivity, New Orleans, Sheraton
Hotel.
Jan. 20-21: Equipment-Lease Seminar, New Orleans,
Marriott Hotel.
Jan. 31-Feb. 3: ABA Insurance & Protection National
Conference, San Francisco, Hyatt Regency Hotel.
Feb. 5-8: ABA National Trust Conference, San Francis­
co, San Francisco Hilton & Tower.
Feb. 5-8: ABA Telecommunications and Financial Net­
works Workshop, San Francisco, Hyatt Regency San
Francisco.
Feb. 12-16: Bank Administration Institute Bank Au­
ditors Conference, New Orleans, Hyatt Regency
New Orleans.
Feb. 12-24: ABA National School of Retail Banking,
Norman, Okla., University of Oklahoma.
Feb. 14-17: ABA Bank Investment Conference, Atlan­
ta, Atlanta Hilton & Towers.
Feb. 16-19: 56th Assembly for Bank Directors, Maui,
Hawaii, Hyatt Regency.
Feb. 26-29: ABA National Assembly for Community
Bankers, Phoenix, Hyatt Regency Phoenix.
Feb. 29-Mar. 2: ABA National Credit/Correspondent
Banking Conference, Phoenix, Hyatt Regency
Phoenix.
Mar. 4-7: ABA Trust Operations and Automation
Workshop, San Diego, Sheraton Harbor Island.
Mar. 4-7: Bank Administration Institute Security Con­
ference & Exposition, Washington, D.C., Sheraton
Hotel.
Mar. 11-13: ABA Corporate Commercial Marketing
Conference, Denver, Fairmont Denver.
Mar. 18-21: National Automated Clearinghouse Asso­
ciation 1984 NACHA Surepay Conference, New
Orleans, Fairmont Hotel.
Mar. 19-23: Bank Administration Institute Check Pro­
cessing Conference, Dallas, Amfac Hotel.
Mar. 23-24: Equipment Lease Seminar, Nashville,
Opryland Hotel.
Mar. 25-29: Independent Bankers Association of Amer­
ica Annual Convention, New Orleans, New Orleans
Marriott.
Mar. 25-Apr. 5: ABA National Commercial Lending
School, Norman, Okla., University of Oklahoma.
Mar. 28-Apr. 1: Association of Reserve City Bankers
73rd Meeting, Boca Raton, Fla., Boca Raton Hotel.
Apr. 6-10: Louisiana Bankers Association Annual Con­
vention, New Orleans, Hilton Riverside & Towers.
Apr. 8-10: Conference of State Bank Supervisors
Annual Convention Tarpon Springs, Fla., Innisbrook.
Apr. 8-11: ABA National Retail Banking Conference,
New York, New York Hilton.
Apr. 8-13: Robert Morris Associates Loan Mangement
Seminar, Columbus, O., Ohio State University.
Apr. 12-15: 57th Assembly for Bank Directors, Hiltonhead, S.C., the Hyatt on Hiltonhead at Palmette
Dunes.
Apr. 16-18: Ohio Bankers Association Annual Conven­
tion, Columbus, Hyatt Regency.
Apr. 29-May 2: Bank Administration Institute Account­
ing and Finance Conference, New Orleans, Fair­
mont Hotel.
May 2-4: Texas Bankers Association Annual Conven­
tion, Fort Worth, Hyatt Regency.
May 6-8: Oklahoma Bankers Association Annual Con­
vention, Oklahoma City, Sheraton Century Hotel.
May 6-9: ABA National Conference on Real Estate
Finance, Chicago, Hyatt Regency Chicago.
May 7-10: Annual Premium Incentive Show, New York
City, New York Coliseum.
May 9-11: Kansas Bankers Association Annual Conven­
tion, Overland Park, Regency Park Resort & Con­
vention Center.
May 11-12: Equipment-Lease Seminar, Louisville,
Hyatt Regency.
May 12-16: Arkansas Bankers Association Annual Con­
vention, Hot Springs, Arlington Hotel.
May 13-16: ABA National Operations and Automation
Conference, Washington, D. C., Washington Con­
vention Center.
May 13-16: International Monetary Conference, Phil­
adelphia, Westin Bellevue.
May 16-18: Alabama Bankers Association Annual Con­
vention, Calloway Gardens, Ga.
May 16-19: Independent Bankers Association of Amer­
ica, Seminar/Workship on the One Bank Holding
Company, San Antonio, Tex., Hotel St. Anthony.

MID-CONTINENT BANKER for December, 1983

[i* m

i

ar. «?»»,; k

Kenneth Otto, V.P. and Lisa Payne
o p e ra tio n s a n a lyst: c re a tin g a
profit vs. cost center at Cleveland's
AmeriTrust.

Computerized cash settlement is helping AmeriTrust
Achieve 62% savings in commercial deposit processing.

H o w B ran d t is helping
A m e r iTru s t, C le vela n a t u r n
productivity in to profit.
AmeriTrust. A 5.5 billion dollar institution on the move.
Kenneth Otto, Vice President and manager of the reserve
cash department and cash vault operations is one of the
movers. His objectives: create a profit versus cost center,
and attract commercial business through new and improved
services. Brandt is working with Ken and his team to
do just that.
One of the innovations at AmeriTrust was the installation of
ten computerized cash settlement stations. These systems
reduced manhours for processing of commercial deposits by
62%. As a result, the bank puts funds to work a day earlier
than before.

Consisting of a micro-processor central control unit linked to
currency and coin counters, the cash settlement systems
generate a detailed audit trail, eliminating the need for
manually prepared spread sheets.
At Brandt, we specialize in helping
AmeriTrust plan for the future.

MID-CONTINENT BANKER for Decem ber, 1983

like

For more information or a reprint on the AmeriTrust success
story, call or write today. We’d like to be part of your future.

BRANDT BRANDT, INC., P.O. BOX 200, WATERTOWN, WISCONSIN 53094

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

institutions

(414) 261-1780

5

THE BANKING SCENE
By Dr. LEWIS E. DA VIDS
Illinois Bankers Professor of Bank Management
Southern Illinois University, Carbondale

Whither Goes the Float?
itability. A rough approxim ation of
R U D E N C E suggests th at bankers
closely w atch em erging technolo­ w h a t th a t im p a c t w ill b e can b e
gies and legal developm ents th at areobtained by m ultiplying the average
changing the concept of float m anage­ daily float by some proxy such as the
federal-funds rate.
m ent in this country.
In th e figures below, showing data
As a group, bankers probably have a
on float for several years, some bankers
d eep e r understan d in g of th e concept
may find the daily float averages for
of float than m ost businessm en, and
1939 and 1941 to be alm ost unbeliev­
m ost banks have assigned responsibil­
ity for staying abreast of new develop­ able. The exhibit also shows that since
th e early 1970s, float has b een declin­
m ents in this area to som eone. M any
com m unity banks have yet to docu­ ing rath er than growing as it previously
was.
m ent th e probable use and associated
According to th e Federal Reserve
costs and alternatives of th e new elec­
B u lletin , o u tstan d in g R eserve bank
tr o n ic - n e tw o r k - p a y m e n t sy s te m s ,
float (in average figures) at various
however.

P

"Changes in regulations and new autom ated clearinghouses
that tend to reduce float time will adversely affect both the
cash-management strategies and balance-sheet ratios of some
corporations."

In th e sim plest sense, float trad i­
tionally has b een view ed by bankers as
m onies not available for investm ent
due to lags in th e check-collection p ro ­
cess. F or banks, F ed eral R eserve float
often arises during th e F e d ’s checkcollection process. To prom ote an effi­
cient paym ent m echanism w ith c e r­
tainty as to th e date funds becom e
av ailab le, th e F e d c re d its re se rv e
accounts of banks depositing checks
w ithin a specified period after th e d e ­
posits are received. M ore than the n o r­
mal am ount of tim e occasionally may
b e n e e d e d , h o w e v e r, to p ro c e s s
checks and collect funds from banks on
which the checks are drawn. This tim e
lag is float tim e. T he exact available
balance of a d epositor’s account g en er­
ally is com puted by d educting th e float
from ledger balances shown on th e
bank’s books.
In m any ways, th e F e d float has
b een a windfall to banks at large and its
passing due to new F ed regulations
will have a m ajor im pact on bank prof­
6


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Federal Reserve Bank of St. Louis

tim es during the past 44 years was:
D ecem ber, 1939 — $83 million; D e ­
cem ber, 1941 — $170 million; D ecem ­
ber, 1945 — $652 million; D ecem ber,
1950 — $1.1 billion; D ecem ber, 1960
— $1.7 billion; D ecem ber, 1965 —
$2.3 billion; D ecem ber, 1967 — $2
billion; D ecem ber, 1968 — $3.3 bil­
lion; D ecem ber, 1969 — $3.2 billion;
D ecem ber, 1970 — $3.6 billion; D e ­
cem ber, 1971 — $3.9 billion.
T hen, skipping to N ovem ber, 1982
— $2.7 billion; D ecem ber, 1982 —
$2.8 billion; and January, 1983 — $2.4
billion.
This year, the long-aw aited nation­
w ide test of autom ated-clearinghouse
usage for electronic cash settlem en t
and invoice handling by corporations
b e g a n . T h e N a tio n a l A u to m a te d
C learinghouse Association is a direct
challenge to the F e d ’s clearinghouses.
W ith th e exception of the N ew York
A utom ated C learinghouse (NYACH),
w hich is in the private sector, all others
have been F ed operated.

R a n k e rs sh o u ld n o t e x p e c t th e
N ational A u to m ated C learin g h o u se
A ssociation to have an im m ed iate,
dram atic effect on float, b u t it clearly is
im p o rta n t to th e in c re m e n ta l, sys­
tem atic reduction of float. The im pact
on some com panies and th eir banks
could be substantial.
Som e b an k s, for ex am p le, have
prid ed them selves on developm ent of
c h e c k -d isb u rse m e n t and collection
techniques that aid th eir custom ers by
extending the tim e it takes to collect
custom ers’ checks w hile speeding col­
lection of checks w ritten to the cus­
tom er.
W e’ve all heard stories of E ast Coast
corporations that extend th eir float by
draw ing checks on banks in far-distant
parts of the world. In reality, such inci­
dents probably are relatively rare, b ut
w ith huge sums of m oney involved, an
additional day or two of float can be
extrem ely profitable to some corpora­
tions. M anagem ent-advisory services
h av e c o u n se le d m any a c o rp o ra te
financial officer on m ethods of slowing
collection of ch eck -p ay m en t item s.
O ne certified public accountant I know
believes sophisticated float-m anage­
m ent techniques have p erm itted some
corporations to operate w ith negative
cash positions.
O bviously, changes in regulations
and new a u to m ated clearinghouses
th a t te n d to red u ce float tim e will
a d v e rs e ly a ffect b o th th e cash m anagem ent strategies and balancesheet ratios of such corporations. They
may find them selves having to borrow
th e additional cash they will require
from th eir banks.
A c c o rd in g to N A C H A , a p p ro x ­
im ately 16,000 financial institutions
currently are using its system to pro­
cess c u s to m e r s e ttle m e n ts . S ince
th ere are slightly few er than 15,000
banks in the U nited States, that means
that at least 1,000 o ther types of finan­
cial institutions are using the system.
D iscontent w ith the F ed system may
(C ontinued on page 8)

MID-CONTINENT BANKER for December, 1983

Rapid transit
Speed. It’s the essential ingredient of intelligent
movement of money. It’s also why more correspondents choose
the rapid transit system at Commerce.
Our day starts with
balance reporting at 5:00 A.M.
By 9:00, we’re on the phone
with customers, advising them
of how much money is immedi­
ately available for investment
and how much is deferred. Same
day available balance reporting coupled with timely information
on previous day’s ending ledger balance enables correspondents
to manage their funds position accurately and maximize profits.
What’s more, we handle exception items, exceptionally fast.
Other banks take weeks to get return items back to you. Our
unique post office box and special zip code allow us to handle these
items quicker. Fast turnaround on return items means less float as
well as minimal risk of embarrassment and loss.
In addition, we have a special problem-solving team for cash
letter adjustments. Our Special Adjustment Staff (S.A.S.) pays quick
attention to your problems. If an error has been made in the checks
sent to us for clearing, this special team quickly catches the error
and adjusts the correspondent for the proper amount. Large dollar
adjustments receive immediate priority.
Rapid transit at Commerce adds up to the best availability
schedule around. If you’d like to plug into our rapid transit system,

a & e ^ - ^ « entBanker *1*Commerce Bank
MEMBER FDIC

No one knows the value of
time better than Commerce.

MID-CONTINENT BANKER for Decem ber, 1983


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

of Kansas City

(816) 234-2000 • 10th & Walnut • Kansas City, MO 64141

7

OPERATIONS

New DP System Developed for Trusts

A

N E W stand-alone processing sys­
tem now is available for tru st op­
erations. Called T rustE ase, it is an
line, real-tim e, data-base system d e ­
signed to give tru st bankers software
capabilities n eed ed to handle calcula­
tions and reporting for investm ents,
adm inistration, cash-m anagem ent and
other tru st-related services.
A ccording to its creator, System atics, In c ., L ittle Rock, T ru stE a se
allows a tru st b anker to m anage secu r­
ities trading/control, fees, cash m an ­
a g e m e n t, s h o r t- te r m - in v e s tm e n t
f u n d s /m a s te r n o te s , r e m itta n c e s ,
capital changes, pension paym ents, interest/d iv id e n d collection and com ­
m o n - tr u s t- f u n d a c c o u n tin g . An
optional Em ployee-B enefit-A llocation
system also is available.
The system is a turn k ey installation
and usable on H ew lett Packard 3000
systems. System atics provides file con­
version, installation, on-site training
and on-call service represen tativ es to
T rustE ase users.

W ith this system , says Systematics,
posting and calculations are up to the
m inute, and vital reports and inform a­
on­
tion can be retriev ed on dem and, in­
cluding detailed adm inistrative and in ­
vestm ent reports, client reports and
m anagem ent/regulatory/audit reports.
‘T rustE ase provides software capa­
bilities th at appeal equally to small and
large bank tru st d e p a rtm e n ts,” says
Ray M aturi, System atics president. “It
is a dependable, responsive, econom ­
ical system . P lus, T ru stE a se gives
bankers all th e docum entation they
need to m anage tru st business effec­
tively in a system th at offers m atched
flexibility in form atting those reports
to best accom m odate both the bank
and its clients.
T rustE ase is th e first new tru st sys­
tem to be introduced by Systematics
since its acquisition last year of St.
Joseph Systems, South Bend, Ind. The
new system ’s introduction also marks
System atics’ full en try into th e soft­
ware and processing m arket. In addi-

tion to T rustE ase, the firm offers bank­
ers nationw ide a full range of bank
data-processing services, including re ­
m ote p rocessing, facilities m anage­
m ent and software sales.
According to Mr. M aturi, St. Joseph
S y stem s w as a v e te r a n tr u s t- p r o ­
cessing com pany, and its acquisition
h e lp e d S y ste m a tic s gain a special
understanding of tru st b ankers’ needs.
T he first installation of T rustE ase
was scheduled for N ovem ber. • •

Banking Scene
(C ontinued fr o m page 6)

be part of the reason.
T he F ed has been charged with sub­
sidizing its services to financial institu­
tions and unfairly com peting w ith cor­
respondent banks in o ther ways. C om ­
m ercial bankers probably feel m ore
com fortable using the private-sector
facilities than the F e d ’s, b u t about onefifth of all transactions are those of gov­
ern m en t and it is logical to expect that
those will continue to go through the
F e d ’s system.
B oth banks and th e ir cu sto m ers
have a vital in terest in the success of
th e private sector’s clearinghouse sys­
tem s. M ore than a few probably b e ­
lieve it is p ru d en t to wait until the
systems have been field tested before
EA RIN G S will b e h eld early in 1984 by Senator Jake G arn
c o m m ittin g th e m s e lv e s . F o r th is
(R.,U tah), chairm an, Senate Banking C om m ittee, on th e com ­
prom ise banking bill he intro d u ced ju st before C ongress adjourned for reason, the efficiency and accuracy of
th e new system s should be closely
the holidays last m onth. In essence, th e bill w ould allow banks and other
w atched. A major breakdow n would
financial com panies to com bine, subject to certain lim itations.
be a setback for the m ovem ent, b u t as
Senator G arn’s bill w ould allow bank H C s to acquire subsidiaries in
th e new system s continue to prove
the insurance, securities and real-estate fields. H ow ever, it differs from
them selves, bankers who have yet to
a Reagan A dm inistration-supported bill in th at it w ould prohibit m erg­
m ake a com m itm en t will be u n d e r
ers b etw een th e 25 or so largest banking organizations and o ther big
growing pressure to do so. • •
financial-services com panies.
The G arn proposal also w ould allow nonbank financial firms to acquire
New Facility Opened
“consum er b anks,” w hich w ould take deposits and make consum er
loans, b u t w ould have sharply restricted com m ercial-lending powers.
O w nership of such banks, how ever, w ould be subject to th e same
geographic restrictions applied to full-service banks ow ned by bank
HCs.
U nder th e G arn bill, a banking organization w ith m ore than 0.3% of
total U. S. dom estic deposits could not use m ore than 25% of its capital
to acquire a nonbanking financial com pany. The restriction w ouldn’t
p revent a bank H C from gradually building up insurance operations,
This is the new Daktronics m anufacturing
b u t it would pre v e n t a m ajor depository institution from simply buying a
plan t a t Brookings, S. D., w here a g rand ­
opening celebration w as held Novem ber
huge insurance or o th er financial firm and thus decrease com petition
19. The building contains 3 6 ,0 0 0 square
and increase concentration of financial pow er.

Compromise Banking Bill
Introduced by Jake Garn

H

feet of space and houses Daktronics' m a n u ­
facturing division and the sales, engineer­
ing and customer service departm ents.

8


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Federal Reserve Bank of St. Louis

MID-CONTINENT BANKER for December, 1983

You get the profits without the
problems when you get MasterCard,
and Visa programs from Marine.
That’s why more than 300 financial institutions in 35
states have come to Marine Midland for their MasterCard
and Visa programs. And why you should, too. Just look at
all we offer you.
□ The world’s best-used credit cards for your custom­
ers. □ Your organization’s name promi­
nently displayed on
the cards. □
prod­
uct development
problems and mini­
mal start-up costs.
□ Trouble-free service in
such critical areas as credit,
processing, customer service,
and marketing. □ Guaranteed
income from 7 different sources as
soon as you affiliate. □ Use of the cus­
tomer file. □ Access to new products and
services. □ A nationwide network of account
.officers and service representatives. □ Over 29
years’ experience in the development of credit card programs.
So whether you will be issuing credit cards for the first
time or are just ready to give up the headaches of processing
them yourself, do what so many financial institutions have
done. Get your MasterCard and Visa programs from Marine.
And get the profits without the problems. Call Jim Willman,
Sales Manager, (716) 843-5179. m a r in e m id l a n d b a n k ,n .a .

Make It happen with Marine.
MID-CONTINENT BANKER for December, 1983


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Federal Reserve Bank of St. Louis

9

In Asset-Based Financing

New Directions Foreseen
For Lenders in 1984
Opportunities — and Pitfalls — on Horizon
banks in asset-b ased len d in g , w ith
potential for being a plus as well as a
problem .
T he unpleasan tn ess of a w orkout
m ight encourage a bank to postpone
th e action, especially w hen a rela­
ral service for banks to offer. T hat is tionship orientation dictates how it will
tru e — for the m ost part. But th ere are adm inister an asset-based loan. U lti­
im portant practical and philosophical m ately, this can lead to unacceptable
c o n sid e ratio n s for a bank d ecid in g losses for th e a s s e t-b a s e d -le n d in g
w h e th e r to e n te r th e a sse t-b a se d - function.
On th e o th e r hand, banks som e­
lending business.
To begin w ith, the basic relationship tim es derive too m uch comfort from
betw een the borrow er and the len d er th e m anageability of th e perceiv ed
risks of asset-based lending and the
differs from o ther loan relationships.
In asset-based financing, the b o r­ effectiveness of the lending officer’s
row er usually is seeking funds for an te c h n iq u e s . U n d e r th o s e c irc u m ­
interim need, such as a period of rapid stances, the asset-based lending unit
growth, seasonal req u irem en ts, recov­ can evolve into a w orkout area.
T he growing in terest in asset-based
ery from a dow nturn or a leveraged
acquisition. And the short-term nature lending as an additional service to offer
of the borrow ing creates a transaction custom ers is creating another situation
of which banks and others deciding to
orientation on the le n d e r’s part.
The source of potential business re ­ e n t e r th e fie ld sh o u ld b e aw are.
lationships also differs som ew hat from T h ere’s a potential problem , and it can
traditional lending situations. In asset- b e sum m arized in th ree words — p eo­
based lending, contacts generally are ple, people and people.
A vailability of ex p erien ced assetm ade through business referrals from
accountants, attorneys, v en tu re capi­ based lenders has not kept pace with
talists, in v estm en t bankers, brokers th e rapid grow th of the industry. That
is an im portant consideration for orga­
and oth er banks.
E ven though th e relationship b e ­ nizations w anting to attract and retain
tw een the borrow er and len d er differs know ledgeable em ployees.
Staffing w ith experienced people is
from that in o th er lending, m ost banks
enterin g the field seem to be doing so essential to gain a presence in the m ar­
in anticipation of a long-term banking ketplace, given com petitive pressures
relationship. It is a valid consideration, that don’t allow the luxury of tim e to
becom e established. But banks may
b u t it raises some points for discussion.
M onitoring techniques used by an face an obstacle in attracting and k eep ­
asset-based len d er allow for early d e ­ in g e m p lo y e e s w ith a s s e t-b a s e d te c tio n of p ro b le m s. T h e le n d e r ’s lending backgrounds. People from the
tra n sa c tio n o rie n ta tio n en co u rag es in d u s try te n d to com e from lessearly response. Together, those factors stru ctu red backgrounds than that of
give the borrow er tim e to correct a m ost bank-lending officers and may
problem in the com pany’s operations. becom e frustrated in th eir new work
If the problem can’t be corrected, the situations. I t’s a som ew hat unnatural
len d ers have tim e to w ork o u t the m arriage that takes effort and conces­
sions on both sides.
loans.
T hen, too, a bank providing assetU npleasant as th e topic of loan w ork­
outs may be, it’s a critical concern for based lending needs a staff that can

Asset-Based-Lending Field:
Should Banks Enter It?
By Dennis B. Hirstein
s s e t - b a s e d l e n d i n g , once
k b e tte r known as com m ercial fi­
nance, is an old business gaining new
recognition. M ost sim ply described, it
is secured, m onitored lending w here
accounts receivable, and freq u en tly
inventory and eq u ip m en t, are taken as
collateral.
C om m ercial finance, along w ith the
rest of the financial w orld, has experi­
enced dram atic change over the past
decade.
In recen t years, m any com panies
saw th eir balance-sheet ratios, h isto r­
ically u s e d to d e te r m in e c r e d itw orthiness, collapse u n d e r th e im pact
of do u b le-d ig it inflation. B orrow ers
found it increasingly difficult to raise
w orking capital th ro u g h sh o rt-te rm
unsecu red loans. As th e n u m b er of
com panies able to m eet th e ir borrow ­
ing needs through conventional m eans
declined, in terest increased in com ­
mercial finance, or asset-based le n d ­
ing.
D uring th e sam e period, banking
has been undergoing its own changes.
W ith m any credit officers recognizing
nonperform ing assets and write-offs as
the ultim ate test of risk, th e ir strategy
has been shifting from m inim izing risk
to optim izing risk/rew ard. Against this
backdrop, banks are taking a fresh look
at asset-based lending.
At first glance, it would seem a natu-

A

Dennis B . Hirstein is president, Mercantile
Business Credit, Inc., a subsidiary o f M er­
cantile Trust, which is the lead bank of
Mercantile Bancorp. All three organiza­
tions are located in St. Louis.

10


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Federal Reserve Bank of St. Louis

MID-CONTINENT BANKER for December, 1983

dev elo p , s tru c tu re , close, m o nitor,
adm inister, process, audit and account
for business. In th e early stages, em ­
ployees can fill various roles. But this is
not the kind of business to be in a
position of always playing catchup on
staffing needs.
A p r o p e r ly sta ffe d a s s e t-b a s e d lending function is likely to have m ore
em ployees than alm ost any o th er area
of the bank. This distorts com parisons
on returns. H ow ever, th e bottom -line
contribution and th e re tu rn on earning
assets from th e asset-b ased -len d in g
area is likely to exceed results of o th er
bank operations.
If a bank can’t justify th e expense
and d o e sn ’t w ant to u n d e rta k e th e
potential problem s of establishing an
asset-based-lending function, another
suitable arran g em en t m ight be partic­
ipation w ith an established asset-based
lender.
T hat m eans you are relying on som e­
o n e’s help to adm inister a portion of
your b ank’s assets. T he alternative,
how ever, may be to lose a custom er
relationship altogether.

An intelligent selection will benefit
all participants, and the arrangem ent
may enable you to offer the service to
your custom ers w ithout th e expense of
setting up a full-fledged departm ent.
Take th e tim e to visit th e assetbased len d er and m eet the staff. F ind
out how they m onitor and adm inister
loans. Look at the asset-based le n d e r’s
experience w ith bankruptcies and liq­
u id atio n s. C o n sid e r y o u r p o te n tia l
p a rtn e r’s philosophy and its com pati­
bility w ith your own, keeping in m ind
th a t th e lending relationship is dif­
feren t for asset-based loans com pared
w ith traditional ones.
All these considerations are im por­
tan t in deciding w h eth er and how to
offer asset-based lending. In the next
few years, m ore banks probably will
e n te r the field and some will leave the
business. Successful units will make
highly attractive retu rn s on assets and
will be valuable contributors to th eir
banks’ business. F or those that are not
successful, asset-based lending well
may be th e most expensive new v en ­
tu re ever en tered. • •

Asset-Based Lending Transformed
By Economic, Business Changes
By Michael J. Litwin

Michael J . Litwin is senior vice president/
general manager, Central Commercial Fi­
nance Division, Walter E . Heller ir Co.,
Chicago.

changing the m arketplace and style of
c o m p e titio n . O f c o n c e rn to banks
seeking participation w ith asset-based
lenders is that not all these lenders
seem sufficiently know ledgeable about
risks of asset-based lending or dem on­
strate th e ability to extricate th e m ­
selves from bad situations.
This is due partly to th e asset-based
lending com m unity’s rapid expansion,
which is placing a strain on available
talent. M any new offices are opening
nationw ide, staffed w ith relatively in­
e x p e rie n c ed m anagers. This causes
some confusion in the m arket because
of im proper structuring of deals and
inability of som e m anagers to work
th eir way out of tough deals, eith er
because the deals initially w ere struc­
tu re d poorly or because th ey w ere
adm inistered incorrectly after the deal
was signed. W e ll c o n tin u e to see
num erous offices opening, closing or
consolidating in 1984.
A nother sym ptom of increased com ­
petition and new m anagers is the n ar­
rowing of in terest-rate spreads during
1983 and 1984. Today, supply and d e ­
m and have created a b u y er’s m arket.
Also, recession-caused excess capacity
in each le n d er’s operation is making
any m arginal in terest rate that contrib­
utes to overhead a rationale for len d ­
ing.

MID-CONTINENT BANKER for Decern]

r, 1983

M E R G E N C E from th e recession
and financial d ereg u latio n have
spurred dram atic changes in th e assetbased-lending sector. M ore aggressive
collateral valuation, en h an ced b u si­
ness analyses and increased com peti­
tion and proliferation of lending se r­
vices now are evident. Bankers now
m ust contend w ith a new lending e n ­
v iro n m e n t and m ay b en efit from a
perspective on w hat is h appening to
asset-based lending — and why.
L et’s exam ine th re e underlying d e ­
velopm ents and review th e ir im plica­
tions for bankers.
F irst is th e significant increase of
new asset-based len d in g o perations
during 1983 in m any areas of th e coun­
try. T here has b een a trem en d o u s in­
flux of bank subsidiaries, as well as
S&Ls, insurance and brokerage com ­
p a n ie s , in v e s tm e n t b a n k e r s a n d
others, including foreign banks, e n te r­
ing secured lending. T hey typically
bring th eir own philosophies and ex­
perience levels to th e business and are


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Federal Reserve Bank of St. Louis

LITWIN

HIRSTEIN

F in a lly , as th e n e w o p e ra tio n s
attem p t to build m arket share, we are
seeing a move away from p u re forcedliquidation-value collateral analysis.
B ecause this m eth o d typically p ro ­
duces the lowest collateral values, it is
b ein g rep laced by m ore aggressive
valuation and cash-realization m eth ­
ods. O ne m ethod is th e orderly li­
quidation approach, aim ing to locate
in terested buyers for specific pieces of
eq u ip m en t over tim e rath er than con­
ducting an auction of that equipm ent.
M any lenders also are having th e ir
appraisals done by m ore aggressive
appraisers. A nother is placing higher
values on work-in-process inventory
on the theory that it will be converted
to finished goods prior to liquidation.
W hile increased com petition and
aggressive pricing are positive for the
industry, bankers should not forget the
tra d itio n a l values. F acto rs such as
q u ality, d u rab ility , ex p erien ce and
staying pow er of the lenders are equal­
ly im portant to the decision. Bankers
should realize that th eir relationship
and credibility with the borrow er are
directly affected by the abilities of the
asset-based len d er adm inistering the
loan.
T he second key area is expansion of
financial-services orientation in term s
of pro d u cts and capabilities offered
clients. In H eller’s case, we increas­
ingly are recom m ending consultants to
our borrow ers in such fields as tu rn ­
around analysis, m arketing, inventory
liquidation, union m atters and restru c­
turing of trade indebtedness. W e aim
to locate com petent professionals who
can work closely w ith our borrow ers
for alm ost any business req uirem ent.
Associated w ith this is a m ore d e ­
tailed business analysis by m any le n d ­
ers w ith respect to com position of the
collateral base. For exam ple, we can
identify slow-moving and obsolete in­
ventories and may enhance the b o r­
row er’s cash flow by suggesting those
unproductive assets be liquidated. W e
also make some of H eller’s financial
m odels and projections available to
clients, so they may analyze th eir own
req uirem ents and structure a financial
package that contem plates th eir own
cash-flow needs.
(See next page)
11

T hese are positive m oves for the
banking industry th at should benefit
all concerned.
The third key force is an im proving
econom y, w hich brings added b u si­
ness and new practices to our industry.
From our perspective, gains in cus­
tom er receivables and inventories are
translating to a 20%-to-40% rise in tra ­
ditional loan usage in H e lle r’s C entral
Com m ercial F inance D ivision since
January of this year.
Accom panying this im provem ent is
a dram atic tu rn aro u n d in bank refer­
rals. D uring th e recession, m any bank­
ers w ere caught in the situation of sup­
porting th eir problem custom ers for
too long. By th e tim e an asset-based
len d er becam e involved, th e poor col­
lateral ratio and history of losses re n ­
dered that client unacceptable.
Today, banks are m ore aw are that
some problem s n eed to be referred to a
professional loan m anager, and th ey do
so earlier. T hey agree th at write-offs
and portfolio quality — not o u tstan d ­
ings — are critical factors in 1983.
Also, w ith th e recession e n d ed and
som e b a n k a c tio n ta k e n , p ro b le m
clients are in b e tte r financial condi­
tion. They typically are in a profitable
and positive cash-flow m ode. W e thus
are se e in g m o re re fe rra ls , h ig h e rquality referrals and increased bank
participation in th ese packages.
So as conditions im prove next year,
bankers should take a closer look at
th e ir portfolios — e sp ecially th e ir
lo n g -te rm p ro b le m loans. R eferral
may be a w iser option for som e transac­
tions than continuing to carry them .
Lastly, as b u siness im proves and
high in terest rates abate, we are seeing
an in crease in le v e ra g e d b u y -o u ts.
Such buy-outs are increasing in p o p u ­
larity as m ore and m ore en tre p re n eu rs
a re ta k in g a d v a n ta g e o f fin a n c in g
opportunities th at cu rren tly exist. As
the econom y im proves fu rth e r in 1984,
we expect m ore e n tre p re n eu rs will be
willing to take risks and will contact
financial-service firms like H eller for
financing assistance.
In sum m ary, we see these tren d s
generating fundam ental changes in th e
a sse t-b a s e d -le n d in g se c to r. In th e
past, collateral was valued conserva­
tively, and if th e deal could b e done on
that basis, th e loan was funded. Today,
we are w itnessing increased com p eti­
tion, aggressive loan structu rin g and
pricing, sophisticated business p rac­
tices such as cash-flow analysis, m arket
and industry evaluations and use of
consultants and financial m odels.
W e w elco m e n ew o p tio n s b ein g
afforded bankers, b u t counsel th em on
n o t se le c tin g th e “ q u ick -an d -easy ”
12


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Federal Reserve Bank of St. Louis

solutions. Look carefully at the pack­
ages — exam ine the capabilities and
staying pow er of the lenders. Verify
the firm ’s experience, experience and
experience. And consider your com-

fort level, now as well as for years
ahead. T hen take advantage of th e
m ost beneficial stru ctu rin g arran g e­
m ent for yourself and your clients in
1984. • •

A N ew D irection for 1980s:
The Leveraged Buy-O ut
By Frederick S. G ilbert Jr.
H E AM ERICAN corporate scene
m ay n e v e r b e th e sam e again.
W hile it still is too early to tell w h eth er
th e recent econom ic upsw ing is sus­
tainable, it nevertheless is tru e that
th e two recessions in the decade that
p reced ed it have m ade th e ir mark.
B u sinesses have trim m e d e x p e n d i­
tures at every level, from em ploym ent
to investing. W hole industries have
b e e n sh ak en o u t. B asic c o rp o ra te
strategy has shifted — from diversifica­
tion to selective acquisition.
In th e early 1970s, for exam ple,
RCA was a m odel of diversification.
Already the paren t com pany of a major
publisher and a m ajor car-rental sub­
sidiary, th e electronics giant w ent on
to purchase a m anufacturer of frozen
foods in St. Louis, a carpet m anufac­
tu re r and, eventually, one of the na­
tion’s largest financing groups. Today,
alm ost all these subsidiaries have been
spun off, and RCA is concentrating its
deploym ent of assets into areas it b e ­
lieves will do b e tte r — electronics and
com m unications.
If nothing else, th e econom ic hard
tim es of the late 1970s and early 1980s
have caused A m erican businesses to
take a long and careful look at th eir
com ponents. As a result, the recen t
flurry of activity on the m ergers and
acquisitions front is no flash in the pan.
Rather, it represents an im portant d e ­
velopm ent in th e grow th of the na­
tion’s economy.
In the first nine m onths of this year,
net m erger and acquisition announce­
m ents totaled 1,812, com pared w ith
1,772 for the same period of 1982, as
rep o rted by W. T. G rim m & Co. Im ­
pressive as the count may be, it re p re ­
sents som ething of an und erstatem en t,
since buy-outs essentially are private
transactions that do not req u ire public

T

Frederick S. Gilbert J r . is executive vice
president, Citicorp IndustrialCredit, Inc.,
Harrison, N . Y . This firm is a subsidiary of
Citicorp, New York City. M r. Gilbert re­
cently was elected first vice president,
National Commercial Finance Association,
headquartered in New York City.

disclosure. O f those reporting price,
h o w e v e r, d o lla r v o lu m es for such
transactions am ounted to $53.3 billion
for the first nine m onths of 1983, com ­
pared w ith $42.3 billion for the same
period in 1982.
At the cen ter of all this activity has
been the concept of the leveraged buy­
o u t, w hich is p a rtic u la rly p o p u la r
w hen prospective buyers of a business
unit are its incum bent m anagem ent. A
leveraged buy-out, or leveraged ac­
quisition, is the purchase of a com pany
(or a subsidiary or division of a com ­
pany) financed principally w ith debt.
The cash contribution of the buyers
usually constitutes only a small portion
of the purchase price, w ith debt-toequity ratios ranging from 4 :1 to 10:1
or even higher. It thus becom es very
a ttr a c tiv e to p o te n tia l b u y e rs —
w h e th e r in c u m b e n t m a n a g e m e n t,
v e n tu r e c a p ita lis ts o r in v e s tm e n t
bankers — who plan to pay back to­
day’s deb t w ith cheaper dollars tom or­
row, since in terest is tax-deductible
while dividends are not.
The seller, on the o ther hand, is
attracted by the fact that most or all of
th e purchase price is paid in cash.
W ith equity m arkets usually closed to
most com panies, the buy-out has re p ­
resen ted an im portant avenue of li­
quidity. Then, too, th e seller can in­
crease returns (or defer losses) by re ­
taining only a small portion of the d i­
vested business in p referred stock or
subordinated debt.
Last year, C IC financed the lev er­
aged buy-out of a division of Borden,
In c ., w ith a $6-million revolving line of
c r e d it s e c u re d by in v e n to ry an d
accounts receivable. The arrangem ent
was highly satisfactory to the parent
com pany, which did not w ant to com ­
m it additional funds in any product
area in which it could not m aintain a
dom inant m arket share. The invest­
m ent group was satisfied that it could
take over operations w ith little of its
own capital. And we, as lenders, w ere
optim istic about the investm ent, since
the m anagem ent group had substantial
ex p erien ce, a strong custom er/supplier base and a sound business plan.
O ne year later, despite a depressed

MID-CONTINENT BANKER for December, 1983

DEEDSNOnWORDS.
$120,000,000

$55,000,000

$140,000,000

THE C R O P M A T E C O M P A N Y
O M A H A . N E BR ASK A

C O N S O LID A TE D C IG A R C O R P O R A TIO N
N E W YORK. N E W YORK

CLEVEPAK C O R P O R ATIO N
W H IT E PLAINS. N E W YORK

$15,000,000
IN TE R N A TIO N A L P E R M A L IT E INC.
ONTARIO. C A LIFO R N IA

$15,000,000

$60,000,000

DATAVISION. IN C
D E TR O IT M IC H IG A N

C R O P P R O D U C T IO N SERVICES. INC.
TULSA. O K L A H O M A

ton nnn nnn

$15,000,000

M C C U L L O C H C O R P O R ATIO N
LO S A N G E LES . CA LIFO R N IA

W IL S O N FO O D S C O R P O R A TIO N
O K L A H O M A C ITY O K L A H O M A

U N IV ER SAL C O NC RE TE PRODUCTS. INC.
C O L U M B U S , O H IO

jo t

$10,000,000
A E O L IA N P IA N O S IN C
M E M P H IS . TENNESSEE

TODATEIN
1983

A R M S T R O N G CO NTAINERS, INC.
W ESTCHESTER. IL L IN O IS

nnn nnn

D O X S E E F O O D C O R P O R A TIO N
BA LTIM O RE . M A R Y L A N D

$14,000,000
BU TTE R IC K C O M P A N Y INC.
N E W YORK, N E W YORK

$100,000,000

$40 000 000

$14200,000

C H A TT A N O O G A G L A S S C O M P A N Y
C H ATTANO O G A, TENNESSEE

S IM P L IC IT Y M A N U F A C T U R IN G INC.
P O R T W A S H IN G TO N . W IS C O N S IN

H A Y W O O D M A L E C O M P A N Y INC.
NA SH VILLE. TENNESSEE

$5,000,000

$16,000,000

V A LLEY INDUSTRIES, INC.
LO DI. CA LIFO R N IA

N A T IO N A L PO LY PRODUCTS. INC.
M A N K A TO . M IN N E S O T A

M E C H A N IC A L TE C H N O L O G Y INC.
L A T H A M . N E W YORK

$20,000,000

$4,700,000

$10,000,000

S O U T H E R N G ENE RA L DIVERSIFIED, INC.
M IA M I. FLO RIDA

CH ES A P E A K E INDUSTRIES, INC.
N E W P O R T BEACH, C A LIFO R N IA

TAMCO
ETIW AN DA . CA LIFO R N IA

$60,000,000

$10,000,000

$32,000,000

PROCTO R-SILEX, INC.
KIN G O F PRUSSIA. PE NNSYLVANIA

1. B A H C A L L IN D U S TR IE S
A P PLE TO N . W IS C O N S IN

TR IC O A S T H O L D IN G C O R P O R A TIO N
LO S A N G E LES . C A LIFO R N IA

We believe in helping to redeploy
America's assets— one reason
we're providing over $1 billion
for leveraged acquisitions
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__________CITICORPO
CITICORP INDUSTRIAL CREDIT
INNOVATORS IN ASSET-BASED LENDING

ATLANTA. GA.
14041391-8581

BOSTON. MA.
1617) 722-6246

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1312) 993-3232

CINCINNATI. OH.
1513) 421-2030

CLEVELAND. OH.
1216) 443-6746

MID-CONTINENT BANKER for Decem ber, 1983

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Federal Reserve Bank of St. Louis

DALLAS. TX.
1214) 760-1829

HARRISON. NY
1914) 899-7583

HOUSTON. TX.
1713) 654-3471

LOS ANGELES. CA.
1213) 745-3701

NEW YORK. NY
1212) 702-4831

TOWSON M D
1301) 337-2600

13

econom y, th e new co m p an y ’s p e r ­
form ance has exceeded expectations.
Sales are strong; profits are b e tte r than
projected, and the com pany that was
itself a spin-off now is thinking serious­
ly of expansion and acquistion on its
own.
This is m ore than an isolated success
story. It is re p resen tativ e of a new
direction in A m erican business, one
that is not likely to be sharply changed
in the years ahead. F o r we have, in ­
deed, e n te re d an era of corporate re ­
structuring — w ith businesses in tra n ­
sition. The business th at spells unw ar­
ranted diversity to one com pany could
stre n g th e n a n o th er com pany’s posi­
tion in that field. O r it could stand on

its own u n d er new ow nership.
Exam ples of com panies that have
spun off business units for strategic
reasons abound: Beatrice Foods, Allis
C halm ers, Standard Oil of Indiana,
Esm ark, M cG raw -Edison, Allied and
G enesco are b u t a few. C iticorp In ­
d u stria l C re d it, alone, th ro u g h its
e ig h t re g io n al a sse t-b a se d -le n d in g
offices, has provided over $1 billion to
fin an ce re d e p lo y m e n t of A m erica’s
assets.
C u rre n t econom ic and business con­
ditions have brought to the forefront a
variety of m ethods for financing ac­
quisitions. And the leveraged buy-out
has proved to be an im portant tool in
effecting that new structure. • •

GILBERT

PREBLE

stabilize in terest rates and will allow
len d ers to gradually im p ro v e th e ir
spreads. In short, 1984 will becom e
m ore of a le n d e r’s m arket as dem and
for capital increases. And as businesses
begin chasing lenders again, both the
banking and the thrift industry should
benefit as m ore finance-industry peo ­
ple call on them looking for reasonably
priced funds via loan participations.
In 1984, we well may w itness the
tru e test of the banking industry’s com ­
tim es th e S&L people have experi­ m itm ent to asset-based lending. As the
By Allen A. Preble
enced in recent years. W hen com m er­ econom y continues to recover, sizes of
most business deals, as well as q u an ti­
cial lending was first legalized for the
AKE back-to-back recessions. Add
ty, will grow substantially. As that h ap ­
so m e s o p h is tic a te d c a s h -m a n ­ th r if t in d u s try , it o ffe re d th e m a
p e n s, th o se n ew co m ers w ho have
tem pting new way to p u t m oney out.
ag em en t tec h n iq u e s, drastically re ­
op erated in th e asset-based lending
H ow ever, S&L executives wisely are
duced inventories and low levels of
taking th eir tim e to research th e com ­ arena, un d er controlled grow th condi­
capital spending. Sprinkle in a little
tions in the past year or so, will have to
m ercial-loan area thoroughly before
econom ic recovery and an overflowing
they get involved in a big way. Initial ex ercise stro n g d isc ip lin e . If th ey
cup of com petition and w hat do you
don’t, and they ju m p on the economic
in dications are th a t u n til th e y feel
have? A b orrow er’s m arket and a diffi­
bandwagon to rapidly increase their
m
ore
com
fortable
w
ith
th
e
concepts
of
cult year for m ost asset-based lenders.
loan portfolios, they will be taking a big
th e asset-based-lending m arketplace,
That in a n utshell describes 1983, a
gam ble by exposing th em selv es to
they
m
ost
likely
will
continue
to
p
a
r­
year characterized by an upsurge in
losses. The potential for suffering loss­
com petition, particularly from lenders ticipate by offering reasonably priced
es u n der fast-moving business condi­
m
oney
to
th
e
larger,
established
fi­
new to th e m a rk e t, less b u s in e s s ­
nance com panies in exchange for solid tions will force m any of these less-ex­
lending activity and a fairly slow eco­
perienced lenders to honestly assess
security and good profitability.
nomic recovery through th e sum m er
th eir ability, and th eir desirability, to
M anufacturers and retailers played
m onths.
com pete in the asset-based-financing
it “close to th e v e st” d u rin g 1983,
By th e tim e 1983 had rolled around,
w hich g reatly re d u c e d d em an d for industry.
th e typ ical b u sin e ss b o rro w e r was
T he com m ercial-finance in d u stry
business capital. But that same game
m uch m ore sophisticated: H e carried
plan that helped businesses avoid b o r­ will wake up during 1984 to realize
few er in v en to ries; h e paid his bills
rowing last year will have to be rew rit­ banks can’t set up an asset-based len d ­
slow er, and h e u se d v arious cashing departm ent, police th e loans pro p ­
ten to allow them to stay com petitive
m anagem ent techniques to m ake his
erly and still make an acceptable o p er­
in 1984.
valuable cash w ork d o u b le-tim e for
The econom ic recovery, w hich has ating profit at spreads cu rrently being
him. At th e sam e tim e, foreign banks
offered by the industry. Industry loss­
been slow b u t steady throughout 1983,
and large dom estic banks w ere ex­
is being fed by increases in consum er es w ill h av e to b e re c o u p e d , and
panding th eir portfolios, particularly
volum e alone will not do it. The indus­
throu g h acquisition-financing deals, spending for th e m ost part. The ex­
trem ely low levels of inventories will try will have to im prove its spreads by
and num erous sm aller len d ers w ere
getting b e tte r rates along w ith m ore
jum ping into th e com m ercial-lending have to be rebuilt and balanced p ro p ­
erly to m eet increasing dem ands of volume.
m arket.
T hat offers bankers a real and im ­
consum ers who have loosened up their
W h ile m any co m m ercial le n d e rs
purse strings. The alternative is to lose m ediate o p p o rtu n ity . T hey can im ­
w ere w orried about additional com ­
custom ers, and lost sales m ean less p ro v e th e ir p r o f ita b ility a n d im ­
petition from th e savings and loan in­
m ediately increase th e ir spreads by
m arket share.
dustry during the year, th at fear nev er
To rebuild th eir inventories, busi­ participating w ith asset-based lenders
m aterialized, probably due to th e bad
on loans. In so doing, th e asset-based
nesses will have to stay cu rren t w ith
th e ir vendors from now on, and for lender will do all th e work and carry all
Allen A. Preble is senior vice president/
the overhead, and th e bank simply will
Chicago regional manager, business loans m any lesser-cap italized com panies,
provide n eed ed capital. Such arrange­
division, Associates Commercial C orp., a th at will m ean obtaining outside capi­
m ents should be highly profitable for
tal
to
finance
th
eir
growth.
This
in­
subsidiary o f Associates Corp. of North
bankers since th ere is little expense
creasing dem and for capital will help
America, Dallas.

N ew Ball G am e for Lenders,
Borrowers Looms for 1984

T

14


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

MID-CONTINENT BANKER for Decem ber, 1983

Mellon secured lending:
your bank’s quick response
participation source
We’ll help you keep valued customers
and attract new ones by expanding
your lending capabilities.
When a customer or prospect loan request exceeds
the credit limits you wish to establish, call on
Mellon’s secured lending services to bridge the gap
with a practical participation loan. You will limit
your risk, plus provide the working capital neces­
sary to satisfy your customer’s financial needs.
We make it practical for your customers and pros­
pects by constructing a flexible financing program
utilizing their receivables, inventory, equipment,
and real property as security to increase their
borrowing pow er... at competitive rates. We make
it practical for you by giving you a fast response
whenever such a situation arises. Our involvement
enables you to expand your lending capabilities,
which will help you keep your customers satisfied.
And help you add new ones, as well.
Mellon Financial Services Corporation. Nationwide.
Backed by the financial resources of the nation’s
12th largest banking organization. Contact Charles
Pryce or Tom Casey. Toll-free: 800-323-7338 (Illinois
312-986-2950). 1415 West 22nd Street, Oak Brook,
Illinois 60521.

Mellon Financial
Services
A Mellon Bank Affiliate

MID-CONTINENT BANKER for Decem ber, 1983


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

15

involved for them .
Asset-based lenders can add a real
comfort factor to bankers. W ith few
exceptions, bankers alm ost can b e t on
the fact they will get th e ir m oney back
from participation loans w ith experi­
enced asset-based lenders. The failure
rate is low. T hat will be an im portant
consideration in 1984 w hen bank cus­
tom ers begin d em an d in g m ore and
m ore services. Banks can’t close th eir
eyes and b et on th e outcom e during a
recovery. It will be ju st too com peti­
tive w hen consum ers rev things up.
The asset-based lending field is p eo ­
ple oriented. You n eed people to sell
and service clients; you n eed people to
adm inister th e loans and review the
collateral, and all those p eo p le are
costly for banks. In fact, few m id-sized
banks can produce th e volum e to be
able to afford th e necessary overhead
to com pete in th e asset-based-lending
industry.
Smaller banks have b een looking at
the asset-based-lending field because
of the great grow th p o tential it offers.
H ow ever, th e com plications, risks and
low potential for survival can be aw e­
some to the n eophyte lender. G en eral­
ly, small banks do not have th e ex p er­
tis e , an d m an y tim e s , th e y m u s t
stre tc h th e ir le n d in g g u id elin es to
allow them to handle an asset-basedlending deal. O n th e o th er hand, in
addition to all th e o th er well-known
benefits of participating in loans, such
arran g em en ts allow sm all and m id ­
sized banks to com pete w ith th e “big
guys” and go after th e larger loans
h ead -to -h e ad w ith th em . T hey can
operate q uite successfully in th e ir own
m arket niche and, at the sam e tim e,

extend th eir reach and influence by
working hand in hand w ith a strong,
experienced asset-based lender.
A sset-based lending is by its nature
dynam ic and exciting. And asset-based
lending opportunities should m ultiply
throughout the rest of this decade, p ar­
ticularly in th e acquisition-financing

Leveraged-Acquisition Financing:
Bankers, Proceed W ith Caution
By Stephen C. Diamond
everaged

L

a c q u is it io n s

a re a c u r r e n t d a rlin g of W all
Street. H igh visibility of a few success­
ful transactions has led to form ation of
lev eraged-acquisition funds and has
e n c o u ra g ed a n u m b e r of w ould-be
c a p ita lis ts to e x p lo re th is n e w e s t
m eans of getting rich quickly.
The slowdown in conventional comm e rc ia l/in d u stria l-lo a n g ro w th has
caused some banks to aggressively fi­
nance these acquisitions as a m eans of
growing portfolio. F or a relatively few
buyers and lenders, th ere will be vic­
tory at th e end of th e race. H ow ever,
m any participants — both buyers and
Stephen C . Diamond is chairman, First
Chicago Credit C orp., a subsidiary o f First
Chicago Corp. M r. Diamond currently is
president, National Commercial Finance
Association, but will move up to chairman
January 1. The story on his election to this
post and his photo appear elsewhere in this
issue.

— P e rso n n e l —
ASSET-BASED LENDING
Penn-Hill Associates is a national search
and placement firm specializing in assetbased lending professionals.
All inquiries are handled on a highly con­
fidential basis. All fees are paid by client com­
panies.
Interested parties should contact:

PHA

M

PENN HILL ASSOCIATES

Digitized for16
FRASER
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

area. Bankers who can do w ithout the
glam our will have a safe and practical
recipe to share in th e participation pie
in 1984! If they let th e solid, experi­
enced asset-based lenders do th e mix­
ing and baking, they can cut th em ­
selves as m any profitable slices as they
desire. • •

Michael Kohler
Vice President - C redit Search

1215 Black Horse Pike
Turnersville, N.J. 08012
Telephone: (609) 228-6750

lenders — will be losers. The reasons
are clear and will be discussed later in
this article. First, how ever, a b rief dis­
cussion of basics:
L everaged-A cquisition F in a n cin g .
B ro ad ly s p e a k in g , le v e r a g e d -a c ­
quisition financing refers to any type of
acquisition w here th e surviving com ­
pan y has a h ig h e r-th a n -tra d itio n a l
d e b t: w orth ratio. Financing can be se­
cured eith er by liens on assets of the
a c q u ire d c o m p a n y or u n s e c u re d .
Asset-based lenders dom inate the secured-financing segm ent, w hile v en­
tu re capitalists, insurance com panies
and com m ercial banks all are active
players in th e u n se c u re d segm ent.
W hile th e re is an obvious overlap,
unsecured financings te n d to be larger
and tend to involve g reater prem ium s
over book value than secured financ­
ings. This article will concentrate on
secured financings.
S ecured-acquisition financings are
not new. D uring the 1950s and 1960s,
a num ber of m ini-conglom erates w ere
p u t to g e th e r th ro u g h leveraged-ac­
q u isitio n fin a n c in g — th e n called
“bootstrap financing,” since often the
secured-financing vehicle p erm itte d
th e buyer to acquire a com pany w ith
no equity investm ent.
F ro m th e tim e le v e r a g e d -a c ­
quisition financing first appeared, cer­
tain trends began to evolve:
1. The m ost successful acquirers de­
veloped a netw ork to fin d potential ac­
quisitions. The g reater th e degree of
open bidding, the less the likelihood
that a shrew d b u yer w ould make the
deal — not necessarily because he was
seeking a bargain purchase, b u t b e ­
cause the g reater the n u m b er of b id ­
ders, the greater the probability of an
u n sophisticated b id d e r inflating the
p u rc h a se p rice. T he in creasin g in ­
volvem ent of the investm ent banker as
an interm ediary for th e seller has re ­
sulted in a general bidding up of pric­
ing for th e seller, b u t at th e same tim e
has decreased the ris k : rew ard ratio to
the buyer.
2. T he s tr u c tu r in g sig n ific a n tly

MID-CONTINENT BANKER for December, 1983

len d er will insist on a quick-sale d e te r­ aged, are generally th e most em otional
m ination of the value of those assets, in — and th e least price-sensitive — b id ­
o rd er to d eterm in e his dow n-side risk, ders. The prom ise of w ealth also has
and th en take an increm ental exposure brought out the finance and m arketing
based on his risk :rew ard assessm ent.
ty p e s w ho u n d e rs ta n d e v e ry th in g
A large p ercentage of appraisals today, about a business except how to manage
how ever, eith er are being m ade on it profitably. A sound len d er will insist
s o m e th in g o th e r th an a q uick-sale on e x p e rie n c ed o p e ra tin g m an ag e­
value or are being m ade by appraisers m en t and a m eaningful, articulated
who are not com petent to d eterm ine business plan that can be tracked by
th e quick-sale values. Today, we see b u yer and len d er alike. A b u y er who is
m ore of th e “tell us w hat you w ant and em otionally com m itted to m aking a
w e ll giv e it to y o u ’ a p p ro a c h to deal, financed by a len d er anxious to
appraisals than a len d er should feel increase his loan portfolio and who
com fortable with. A len d er who cannot hasn’t quantified his dow n-side risk is a
d eterm in e his dow n-side risk as a start­ com bination that can only make a sell­
ing point is by definition assum ing ex­ er salivate — and it’s happening m ore
cessive risk. N evertheless, th ere are a frequently.
3.
Business plans often are incom ­
3.
There has been a tre n d tow ard n u m b er of unsound lenders today who
lenders insisting th a t the b u yer be at disguise th eir incom petence by calling p le te . A so u n d b u sin e ss p lan w ill
th e m s e lv e s “ a g g re s s iv e ” an d w ho address sales, expenses and cash flow
risk . W h e n le v e ra g e d acq u isitio n s
m ake it m ore difficult to soundly struc­ in depth. The plan should be a living
w ere being m ade in th e 1960s, the
docum ent used on an ongoing basis by
b u y er often w ould invest no capital tu r e a c r e d it w ith an a p p ro p ria te
r
is
k
:
rew
ard
ratio.
borrow
er and len d er alike — not a
and offer no guarantee o th er than a
2.
P urchase prices g enerally are sales piece designed to attract financ­
guarantee against fraud. M ost sophisti­
escalating. In addition to an excessive ing. Since a se c u re d -le v era g e d ac­
cated lenders today a ttem p t to lock the
b u y e r in to th e tra n sa c tio n , n o t so n u m b er of am ateurs en terin g on the quisition is predicated on a borrow ing
m uch to create a secondary source of le n d e r’s side, unsophisticated buyers base, it is axiomatic that the borrow ing
repaym ent as to assure th at th e buy er are bidding prices too high, m aking base m ust support the com pany’s b o r­
some acquisitions financially unsound.
rowing needs on a daily basis. A fivewill stick w ith th e com pany and, if the
W o u ld -b e e n tre p re n e u rs w ho have year annual projection is wholly in­
com pany fails, will be cooperative in
not previously m ade an acquisition, adequate for this purpose. M onthly —
helping to m ove th e collateral. This
and m anagem ent groups anxious to and in some cases w eekly — projec­
n o rm a lly is a c c o m p lish e d th ro u g h
som e com bination of equity or su b ­ own a piece of w hat they have m an­ tions of borrow ing req u irem en ts vs.
ordinated d eb t and a full or lim ited
guarantee of paym ent or perform ance.
Recent Trends: Cause f o r C oncern.
In recen t years, som e p attern s have
em erged that should be cause for con­
Business Credit
cern for parties involved in leveraged
A n a f f ilia t e of
acquisitions:
affected both the purchase price and
the ability to obtain fin a n c in g . W hen
the entity being sold is a corporation,
the seller norm ally prefers a sale of
stock so that it can be assured that
th ere are no skeletons left in th e closet.
At the same tim e, if a tax-loss carry­
forw ard is involved, th e b u y e r also
m ay p r e f e r a p u r c h a s e o f sto ck .
H ow ever, a stock acquisition creates a
significant legal risk to th e lender. This
risk, w hich experienced secured le n d ­
ers have recognized for a considerable
period of tim e, will be discussed b e ­
low. S tructuring th e acquisition as an
asset acquisition, how ever, may in ­
volve recap tu re issues, w hich may, in
turn, affect th e purchase price.

1.
M ore lenders are over-advancing
on collateral. The underlying basis for
a secu red -acq u isitio n financing was
th at the value of th e collateral would
support th e credit in th e ev en t of the
b u y e r’s business failure — after the
usual hassle of handling a w orkout and
dealing w ith th e bankruptcy court. To­
day, a growing n u m b er of financial in­
stitutions e ith e r im p ro p erly analyze
th e collateral or m ake a significant
over-ad v an ce against collateral th a t
cannot be reco v ered unless th e ac­
quisition is successful. A d elib erate
over-advance based on cash flow is
understan d ab le as long as th e pricing
takes into account the additional e le ­
m en t of risk. To th e extent such addi­
tional risk is being assum ed w ithout
appropriate pricing, th e decision b e ­
com es less understandable.
B ey o n d th e c o m p re h e n sio n of a
sophisticated lender, how ever, are ex­
cessive loans pred icated on unsound
assum ptions reg ard in g collateral. A
cu rren t m ajor soft spot today involves
valuation of fixed assets. An intelligent
MID-CONTINENT BANKER for Decem ber, 1983


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.

17

differences in the good-faith language
borrow ing base are essential to len d er o th er hand, m eans the com pany m ust
and buyer alike. T urnaround analysis survive. If it doesn’t, the len d er will from the federal statute, it clearly ar­
ticulates issues involved in all stock
requires a line-by-line explanation of have his lien attacked, unless he can
acquisitions.
cost — and designated headcount re ­ prove good faith, w hich im plies due
Conclusion: Proceed Intelligently.
ductions. The list is incom plete, b u t diligence, which, in turn, im plies a d e ­
th e p o in t is th a t w ith o u t a w e ll- tailed sensitivity analysis of the b o r­ This article is not in ten d ed to lead one
to conclude that leveraged-acquisition
form ulated business plan, th e le n d e r is row er’s business plan. O ne w ould be
financings are inherently bad. It is in­
hard pressed to argue that he exercised
ill-advised to proceed.
ten d ed to lead one to d eterm in e that
4.
Risk assessm ent is increasingly due diligence if all he did was review
superficial. An honest, know ledgeable th e borro w er’s business plan w ithout unsound analysis will lead to losses and
that in the credit business, too m uch of
risk assessm ent is critical to th e se­ testing the assum ptions or confirm ing
a good thing can, in fact, be harmful.
cured len d er who is structu rin g a se- p ro je c te d expense red u ctions. This
elem en t of legal risk essentially is w hat O ne can only hope that in th eir desire
cured-leveraged acquisition financing.
The risks are concen trated in th ree th e now famous case of U nited States o f to build portfolio, lenders do not make
areas: (1) business risk, (2) collateral A m erica vs. G leneagles In v e stm e n t th e sam e m istak e w ith le v e ra g e d C o ., Inc. (565 Fed. Skpp. 5 5 6 — M id­ acquisition financings that they have
risk and (3) legal risk.
m ade in the not-too-distant past with
The business risk involves both th e d le D istric t of P ennsylvania) held.
respect to real estate investm ent trusts
com pany’s o p e ra tin g efficiency and A lthough this case was brought u n d er
and energy loans. • •
a sse t-m a n a g e m e n t ca p a c ity , tr a n s ­ a state statute of frauds that has certain
lated into cash-flow projections.
The collateral risk revolves around
assessm ent of real collateral value and
determ ining how m uch to stretch to
make the deal. T hese both are areas of
ju d g m e n t, a n d d if f e r e n t p la y e rs
u n d e rs ta n d a b ly can have d iffe re n t
appetites.
By David P. Eckstein
The third area of risk is legal, and
here th e stakes are high. If a len d er
H E R E is an adage used occasional­
bets the w rong way on a legal issue, he
ly in everyday life that draws a
may find his loan e ith e r to be u n se­
close correlation to th e com m ercial­
cured or (worse yet) su bordinated to all
other d e b t and equity claims against lending arena, “Spare the rod, spoil
the company. T here is no conceivable th e c h ild .” This all-im portant adage
justification for one to take a legal risk suggests that a lack of discipline by
of this m agnitude unless he is being asset-based lenders, as well as borrow ­
com pensated as a v en tu re capitalist — ers, potentially could result in a less
ECKSTEIN
and yet it is being done m ore fre q u e n t­ than secure financing arrangem ent.
C om m ercial-bank len d ers are b e ­
ly than m any w ould like to adm it. L et
us, at th e risk of oversim plifying, ex­ ginning to recognize th e im portance of allowed com m ercial-bank lenders to
good collateral m anagem ent. T radi­ en ter into loan transactions form erly
plain.
bypassed for m ore conservative financ­
If an acquisition is stru ctu red as an tionally, asset-based lenders w ere the
ing arrangem ents.
com
m
ercial-finance
com
panies
th
a
t
asset acquisition, legal risks norm ally
F o re s ig h te d a sse t-b a se d le n d e rs
are m in im al, assu m in g c o m p e te n t prom oted th eir expertise in participa­
recognize
th e n eed to m onitor and
counsel is docum enting. But if th e ac­ tions w ith com m ercial-bank len d ers
control collateral, b u t cannot justify a
quisition is a stock acquisition, busi­ w h ile en jo y in g tre m e n d o u s profits
full tim e, in-house staff. An in-house
ness considerations are so closely in­ over th e year. T here is no need to
staff is not cost effective; it cannot be
sh
a
re
a
c
re
d
it
w
ith
a
co
m
m
ercialte rtw in e d w ith legal considerations
that attorneys are not co m p eten t to finance com pany to obtain good col­ tu rn ed off and on at w ill. It is expensive
judge th e d egree of risk. T hat is b e ­ lateral m anagem ent; 100% of the earn ­ to m aintain and train a staff of in-house
examiners. Collateral C ontrol can p ro ­
cause the B ankruptcy C ode’s frau d u ­ ing asset can be retained w ith use of an
vide that staff, provide periodic or con­
le n t-co n v e y a n ce sectio n s — w hich in d e p e n d e n t th ird -p a rty c o lla te ra l
tinuous exam inations as re q u e ste d ,
have b e e n in c o rp o ra te d in to m ost m anager. Along w ith p u ttin g m ore
provide m onitoring and control sys­
states’ statutes of frauds — req u ire a dollars to work w ith added security,
business analysis. Again oversim plify­ th e com m ercial borrow er can obtain a tem s, provide tim ely and yet accurate
inform ation systems. Collateral C on­
ing, if a stock acquisition is involved, m ore attractive financing rate.
W h y consider an independent col­ trol also will verbally discuss findings
the target com pany m ust: (1) be sol­
directly w ith the len d er and the b o r­
vent at th e tim e of acquisition and (2) lateral m anager? Being in d ep en d en t
row er, th e re b y re lie v in g th e bank
have adequate working capital to sus­ allows th e collateral m anager to be
tain its o p e ra tio n for a re a so n a b le objective — the “Call it as you see it” from the b u rd en of supporting a staff of
approach. O ver the past 65 years, C ol­ exam iners and allowing the bank the
period after acquisition.
convenience of tim e to do w hat they do
The solvency test is passed if the lateral C ontrol has assisted asset-based
best, lend money.
fair-m arket value of assets exceeds all lenders in m onitoring and controlling
In d e p e n d e n t co llateral m anagers
liabilities and contingent liabilities — trading assets used for repaym ent of
can
help unbankable borrow ers b e ­
and evaluation is not on a basis consist­ loans. This invaluable experience has
com e bankable or rem ain bankable.
e n t w ith GAAP (generally accepted
ac c o u n tin g p rin c ip le s). A b u sin e ss David P. Eckstein is assistant vice presi­ F or th e borrow er, a len d er will be
m ore receptive to a loan request or an
dent/regional operations manager, Col­
a n a ly sis o f s o lv e n c y is e s s e n tia l.
(C ontinued on page 24)
A d e q u a te w o rk in g ca p ita l, on th e lateral Control C orp., St. Paul.

Good C ollateral M anagem ent:
H o w Banks Can Achieve It

T

18


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Federal Reserve Bank of St. Louis

MID-CONTINENT BANKER for December, 1983

Asset-Based-Lender Survey
Shows Problem-Loan Improvement,
Increase in Bank-Referral OKs

A

SSET-BASED lending firms are:
i
• A pproving m ore bank refer­
rals;
• foreseeing an im provem ent in the
problem -loan situation;
• working w ith banks in th e areas of
m ergers/acquisitions, according to re ­
sults of a survey conducted by M id C ontinent B anker .
The outlook for 1984 indicates that
asset-based lenders will be involved
prim arily in servicing bank clients w ith
loan participations and financing w hen
banks have reached th e ir policy limits.
O th e r services asset-based lenders
will provide banks next year include
(in d escen d in g o rd e r of frequency):
m anaging an d /o r m o n ito rin g loans,
evaluating collateral, p roviding col­
lateral reports, reconciling collateral
inventory w ith borro w ers’ records, liq ­
uidating loans in bankruptcy situations
and h e lp in g b anks e sta b lish b ro ad
guidelines for loans.
T he small n u m b e r of asset-based
lenders that are approving fe w e r bank
re fe rra ls in d ic a te d th a t th e y w e re
approving 25%-35% of referrals at the
p re s e n t tim e w h en th e y had b e e n
approving from 40%-50% p rio r to th e
onset of th e problem -loan situation.
Reasons asset-based lenders see the
problem -loan situation im proving in ­
clude th e following:
• The econom ic u p tu rn will reduce
u n e m p lo y m e n t as th e re s u lt o f in ­
creased production.
• People are g ettin g sm arter and
doing w hat is necessary to im prove
th eir econom ic situations. This will re ­
sult in a reduction of problem loans.
• Low er in terest rates, d ue to the
econom ic u p tu rn , will have a salutary
effect on problem loans.
• Banks are doing a b e tte r job of
evaluating cred it situations.
• The general econom y is im prov­
ing, led by consum er spending and
even some capital expenditures.
• T here has b een enough tim e to
identify m ost problem situations. Im ­
p ro v e m e n t sh o u ld c o n tin u e as th e
econom y recovers.
• Econom ic im provem ent is h e lp ­
ing p o rtfo lio q u a lity . L e n d e rs are
adm inistering portfolios w ith m ore ex­
pertise.
• Collateral values are im proving.
• M ost problem or p otential p ro b ­

lem loans have b een identified and
program s for liquidation are in place.
S u rv e y p a rtic ip a n ts w e re ask ed
w hat asset-based lenders can do to
k e e p p ro b le m lo an s from g e ttin g
worse. Responses include the follow­
ing:
• P roper asset-based lending m eans
c o n sta n t loan m onitoring. P roblem
loans receive a rating that forces them
to be constantly w atched and evalu­
ated by loan officers who often provide
guidelines and suggestions to im prove
cash flow and receivables collection. If
an u n secured loan is in trouble, it often
can be aided by an infusion of capital
through a secured loan based on value
of assets.
• Becom ing familiar w ith the opera­
tions of problem -loan firms and w ork­
ing out solutions to m inim ize exposure
to both len d er and debtor.
• C ontinuous m onitoring and close
association w ith com pany and princi­
pals can point out dangerous trends
and policies that may be reversed or
changed in tim e.
• W orking w ith good m anagem ents
in viable tu rnaround situations. Stop
m aking advances in poorly m anaged
d eteriorating situations. Close m oni­
toring of loans w ith appropriate actions
and advice.
• Close m onitoring of problem -loan
situations so that collateral-to-loan re ­
lationships don’t deteriorate.
• Good controls and swift reaction
to dow nturns.
• Reacting quicker in an advisory/
assistance capacity.
• Paying attention to collateral, by
w atching trends in the borrow er’s op­
eration, by generally guiding the op­
eration of the firm and by learning to
say NO!
• Securing the loan on a collateral
form ula and th en m onitoring the cash
and collateral to keep the correct rela­
tionships.
• The en tire collateral-m onitoring
system provides b etter, m ore cu rren t
inform ation. Take action w ith borrow ­
ers to overcom e w eaknesses.
• B etter loan adm inistration, m ore
selective at tim e of origination, m ore
realistic credit limits and lines.
• By controlling a com pany’s cash,
th e len d er can stop it from building
excessive inventory. The result will be

MID-CONTINENT BANKER for Decem ber, 1983


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Federal Reserve Bank of St. Louis

low er carrying costs and a leaner op­
eration.
• B etter m onitoring of collateral via
greater expertise in auditing, apprais­
ing collateral, collection of accounts
payable.
• C loser m onitoring of overall op­
eration, increased sensitivity to cli­
e n t’s cash flow and taking im m ediate
corrective action once a problem has
been identified.
• G etting closer to the custom er on
a daily basis.
• Being careful to not overload the
applicant. The best of credits seem to
b e c o m e b a n k ru p ts b e c a u se of n ot
being able to m eet th eir obligations.
A sset-based lenders had answers to
th e question, “W hat can asset-based
lenders do w hen a borrow er chooses
b an k ru p tcy ?” T he following sugges­
tions w ere contributed:
• Make a rational decision w h eth er
to continue financing if the borrow er
has taken the C h apter 11 route.
• Make sure th e borrow er is fully
and legally secured.
• Analyze the d eb to r’s program for
signs of a retu rn to profitability; ana­
lyze the d eb to r’s cash-flow needs vis-avis collateral coverage; te st for th e
probability of the d e b to r’s heirs to be
able to retu rn to a profitable operation,
and decid e w h e th e r to finance th e
debtor.
• Aid the bank in liquidating col­
lateral; e .g ., collecting accounts re ­
ceivable, liquidating o th er assets, find­
ing potential purchasers of assets.
• P ossibly le n d d e b to r fu n d s to
bring a deb to r out of bankruptcy.
• A tte m p t to d ev elo p an atm o s­
phere of cooperation w ith th e borrow ­
e r rath er than an atm osphere of an ­
tagonism.
• D on’t panic. W ork w ith the le n d ­
e r’s own counsel, appraisers and staff
to fully u n d e rs ta n d th e situ a tio n .
A ttem pt to work the borrow er out of
bankruptcy. Be p rep ared to liquidate
collateral if necessary.
• N othing should be done in most
cases.
• D ecide to finance the d eb to r in
such a way as to be able to continue to
fully adm inister th e loan.
• M onitor the situation closely and
obtain legal advice at each step taken.
• Take prom pt necessary legal ac­
tion to p rotect the investm ent. Try to
work out a program to liquidate the
pre-bankruptcy loan and provide D IP
financing.
• W ork w ith th e debtor, creditor
com m ittee and tru stee to ensure that
an e q u ita b le so lu tio n is arra n g e d .
T here is no substitute for an experi­
e n c e d , k n o w le d g e a b le b a n k ru p tc y
19

attorney.
• B ecause of th e ir co n stan t loan
m onitoring, asset-based len d ers can
assist in recognizing a problem -loan
situation as early as possible — w hen
there still is ad equate equity for b o r­
row er and len d er to recover th eir in­
vestm ents. E xperience enables assetbased lenders to advise on plans to
stream line operations, use existing in­
ventory to com plete w ork-in-process
and em phasize collection of accounts.
The survey tabulation revealed that
asset-based len d ers are m ost happy
w ith the following types of loans:
• L o an s to m a n u f a c tu r e r s a n d
wholesalers that have b een in business
at least th r e e y ears an d th a t have
accounts receiv ab le, in v e n to ry and
m achin ery and e q u ip m e n t th a t are
ea sily e v a lu a te d a n d m o n ito r e d .
Reason: E stablished businesses have
an operating history and proved cash
flow. Tangible assets w ith a proved
value provide the b est and m ost easily
m anaged collateral.
• Loans well secured by m arketable
collateral. Reason: In case th e le n d e r’s
ju d g m en t is incorrect on credit, the
collateral can get th e len d er out quick­
ly• L e v e ra g e d b u y -o u ts and tu r n ­
arounds if m anagem ent is capable and
forthright.
• Those m ade for grow th and expan­
sion purposes. Such accounts have a
track record and can w eather setbacks
that may occur.
• Acquisitions and leveraged b u y ­
outs.
• Fully secured loans w ith a reason­
able operating perform ance. Reason:
These loans will continue in business if
o p e ra tin g tre n d s c o n tin u e . If th e y
don’t, th e re ’s collateral to support the
loans.
• Loans w ith no fixed assets, b e ­
cause of b e tte r liquidity.
• L enders are happiest w ith clean,
p ro fita b le c o m p a n ie s b o rro w in g
against assets w ithin th eir spheres of
specialty.
• Loans w ith a good balance b e­
tw een collateral, financing and m an­
agem ent. W hy? Because th e re are no
losses!
• The b est loans are those against
working-capital assets, w here th e p e r­
centage advance on inventory isn’t too
ag g ressiv e and th e firm is m aking
money. W e p refer a m ore aggressive
advance to a profitable com pany rath er
than a collateral loan to a firm th a t’s
losing m oney. Reason: Chances of liq­
uidation are higher w ith th e latter.
• Revolving lines secured by c u r­
re n t assets. W hy? I t’s possible to m oni­
tor these loans m ore closely and th e
20


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Federal Reserve Bank of St. Louis

rates are good.
• Loans of from $5 million to $10
million w ith clean balance sheets from
relatively young com panies (three to
five years) that have need for increased
working capital. Reason: I t’s easier to
adm inister and docum ent such loans.
T hese loans also are fairly profitable
because they have b e tte r margins.
• Those loans w ith good receivables
and/or inventory, good m anagem ent,
healthy grow th and a profitable opera­
tion. Also a relatively high leverage
rate. W hy? Minimal credit risk and a
fairly p erm an en t relationship exist as
long as leverage rem ains high. — Jim
F ab ian , senior editor.

Annual Statement Studies
Published by RMA for '83
The 1983 edition of “Annual S tate­
m ent Studies” has b een published by
R obert M orris Associates. T he book’s
p rim ary section contains com posite
balance sheets and incom e data on 331
different industries.
The book aids com m ercial loan and
credit officers and credit analysts in
analyzing th e ir cu sto m ers’ financial
sta te m e n ts. It en ab les a b an k er to
com pare a firm w ith a general, nation­
w ide financial profile of that firm ’s p ar­
ticular industry.
The book contains five years of com ­
parative historical data, along w ith c u r­
re n t data, for each industry. This fea­
tu re enables users to discern trends in
th e financial data for m ost of the indus­
tries over a five-year period.
T he book also provides 16 com m on­
ly used ratios, p resen ted as m edians
and quartiles, for 313 of the industries,
all b u t co n tracto rs, w hich have 13
ratios. All figures are for fiscal closing
dates b e tw e e n Ju n e 30, 1982, and
M arch 31, 1983.
R M A -m e m b e r b a n k s s u b m itte d
m ore than 77,000 financial statem ents
of th eir borrow ing custom ers to g en er­
ate data for th e book. S tatem en ts,
w hen sent to RMA, w ere identified
only by line of business and not by
com pany names.
This y ear’s edition contains two sup­
p lem en ts. O ne is a com p reh en siv e
directo ry that lists o th e r sources of
com posite financial data for m ore than
400 industries. T he o th er consists of
ratios for consum er and installm ent
sales-finance firms, p rep ared by two
banks.
C opies are available from RMA,
1616 P h ila d e lp h ia N a tio n a l B ank
B u ild in g , P h ila d e lp h ia , PA 19107.
P ric e s are $29.50 for n o n m e m b e r
banks and $10 for m em b er banks.

Commercial-Loan Workship
Set for Chicago by RMA
A w o rk sh o p title d “ C o m m ercial
Loan D o cu m en tatio n ” will be held
May 13-16, 1984, in Chicago by Robert
M orris Associates. Registration is open
to personnel from non-RM A m em ber
banks, although those from m em ber
banks will receive preference.
T he w orkshop is designed for com ­
m ercial credit and loan officers, ad­
m inistrators, review ers, trainers and
oth ers co n cern ed w ith th e n eed to
p ro p e rly co m p lete com m ercial-loan
tran sactio n s. In d iv id u als a tte n d in g
should have a general familiarity with
com m ercial lending and w ith notes,
collateral and regulations.
T he workshop will cover concepts,
req u irem en ts and problem s of docu­
m entation. It also will focus on adm in­
istra tin g good d o cu m en tatio n p rac­
tices w ithin banks.

A/L-Management Monograph
Available Through RMA
A new m onograph designed to help
com m ercial lenders and credit officers
understand the im plications of asset/
liability m anagem ent as it applies to
th eir work in the bank has b een p u b ­
lished by R obert M orris Associates.
“Asset/Liability M anagem ent From
th e C redit P erspective” is divided into
tw o sections: an overview and th e
mechanics.
T h e first sectio n d eals w ith th e
evolution and cu rren t status of asset/
liability m anagem ent, including def­
initions of its prim ary problem s and
com ponents. It focuses on planning
th e future course of th e bank; provid­
ing for adequate funding through the
lowest cost mix of funds sources; allo­
cating resources am ong assets; and
positioning the bank to adapt its asset/
liability activities profitably to future
conditions.
T he second section discusses the
distinction betw een the way core-bank
deposits and m anaged-bank deposits
are handled; dynam ic (long-term) v er­
sus static (short-term ) approaches to
rate sensitivity and the roles played by
each of the m ajor functional areas of
the bank, as well as the m ajor seg­
m ents of the loan portfolio in relation
to th e a s s e t/lia b ility -m a n a g e m e n t
process.
M onographs are available at $20
each for RMA m em bers and $28.50 for
no n m em b ers from th e RMA O rd er
D e p a r tm e n t, 1616 P h ila d e lp h ia
National Bank Building, Philadelphia,
PA 19107.

MID-CONTINENT BANKER for December, 1983

shouldn’t be a guessing game.
And you thought you knew where the collateral
was.
Why run the risk of doing ail your usual thorough
paper work and documentation and then find your
collateral has gone to market? Without your knowledge.
That’s where Collateral Control comes in.
Whether it’s agricultural products, manufactured goods
or anything that can be counted —Collateral Control
will help your bank secure working capital loans.
Today’s creative lenders are putting together
more and more loan packages that include a revolving
line of credit against receivables and inventory. And
in the process they’re discovering what some banks
have known all along. That asset-based lending can be
perhaps the most secure form of lending.
See how your bank —with the help of Collateral
Control —can grow and profit with asset-based lending.
Do not assume that you have a situation too
difficult to manage. If you can put a fence around it or
a roof over it, Collateral Control has the service to fit
your specific need.

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

Write us today. And get control of your loan
collateral.

COLLATERAL
C O N TR O L
CO R PO R A TIO N
Now available —comprehensive all new collateral manage­
ment booklet.
Send me a free copy.
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Institution

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Address_____________________________ _______________
City----- ___ _______ _____ State.

----- Zip--------------

Mail to: C O L L A T E R A L

Corporate Office
444 Lafayette Rd.
St. Paul, MN 55101
1-800/328-4136

CO N TRO L
C O R PO R A T IO N

Asset-Based Lending:
A Growing Business
For Large Banks
AJOR m o ney-center banks have
O ne prom inent convention partici­
been en terin g th e asset-based- pant, who p referred not to be id en ti­
fied , a d m itte d th a t, lik ely , ban k s
lending business at a fast clip during
the past few years. M any banks are w ould begin to dom inate the assetforming th eir own divisions, operating b ased-lending field, w hich form erly
them as separate d ep a rtm e n ts from was th e private dom ain of the in d ep en ­
w ithin the bank or as a wholly ow ned d en t finance company. The latter b o r­
division of a bank holding com pany.
row ed its funds from a bank, reloaned
The field form erly was occupied by them to a com pany considered “u n ­
old-line finance com panies known as bankable” and th en gradually brought
c o m m e rc ia l-fin a n c e firm s, su ch as th at com pany back up to a profitable
W alter H eller, Associates C om m ercial basis w here it could be re tu rn e d to the
C orp., G eneral E lectric C red it C orp., banker as an unsecured borrow er.
H e also cautioned that because com ­
etc. Now it is not uncom m on to see this
field invaded by nam es such as C om ­ petition was so fierce in th e field today

M

. . . It's possible the asset-based-lending field will be domi­
nated in a short time by major commercial banks and their
wholly owned subsidiaries, operating with or without the names
of the banks.
m ercial F in an ce D ivision of SouthTrust Bank of Alabama, Birm ingham
(fo rm e rly B irm in g h a m T r u s t N a­
tional); C iticorp Business C redit, Inc.;
Shawm ut (Boston) C red it Corp. and
many others like these. Also, w here it
is not clear w h eth er a form er “in d e ­
p e n d e n t” is ow ned by a bank, b u t
operating u n d e r its old nam e, a close
look at the corporation usually will re ­
veal a bank ow ner in th e background.
This is a tre n d th at is likely to con­
tinue, and it’s possible th e asset-basedlending field will be dom inated in a
short tim e by m ajor com m ercial banks
and th eir wholly ow ned subsidiaries,
operating w ith or w ithout th e nam es of
the banks.
This tren d was revealed last m onth
at the annual convention of th e N ation­
al C om m ercial F in an ce A ssociation
(NCFA) held in Chicago. At tim es, it
was so m ew h at difficult to find th e
nam e of an in d e p e n d e n t finance com ­
pany on the badge of a delegate, and
w here one did find an in d ep en d en t, a
bank ow ner q u ite often lurked in the
background.

22


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Federal Reserve Bank of St. Louis

and banks w ere rushing pell mell into
the business, th ere could be some dif­
ficulties in th e years ahead. The old
independents, he w arned, had learned
th eir “tricks of the tra d e ” the hard way
and have m anaged to survive. H e sug­
g ested th at some banks would stub
th eir toes and th en eith er retire from
th e field or pull back on th eir financing
ventures.
T o d ay , in d u s tr y m e m b e rs —
w h eth er they be bank ow ned or p ri­
vately ow ned — are looking long and
hard at leveraged buy-outs available as
corporations divest them selves of u n ­
profitable divisions. T here have been
some unusual success stories, as well
as failures, in this field over th e past
year. O ne speaker noted that A utom a­
tic Sprinkler Corp. is one of the shin­
ing examples of a leveraged buy-out
th at had b een stru ctu red successfully
by an association m em ber. G eneral
H ousew ares and Triangle Corp. are
o th er success stories in the field, b u t
m em bers also could point to various
failures.
All the firms rep resen ted acknowl­

edged they are looking for buy-out re ­
ferrals from the local banker. They rec­
ognized the im portance of the local
banker in knowing w hen a “suspect”
can becom e a prim e target for a buy­
out. They also like the local bank as a
w atchdog on the credit, local m anage­
m ent, plus inform ation on any change
in direction the local com pany m ight
make.
Association m em bers acknowledged
that while th ere may be a general p at­
te rn to so-called “financing d e a ls,”
they indicate that m any innovations
had been tried, all w ith a goal to m ain­
tain in g th e solvency of a com pany
w hile it struggles to repay financing
debt.
Today, these association m em bers
adm it, th e re is a scarcity of “good
d eals” available, and they fear that
some rates being charged will be in­
adequate to cover financing costs and
earn a profit for the lender. But they
still look to the local banker as a partici­
pant and as a “feed er” for asset-basedlending propositions of all types.
R e tirin g C h a irm a n M e lv in E.
R ubenstein told association m em bers
th a t if th e a s s e t-b a s e d fin a n c ia lservices industry is to continue to pros­
per, lenders m ust channel th e ir trad i­
tional aggressiveness tow ard breaking
into new m arkets rath er than reaching
for greater risk in m ature m arkets. The
N CFA chairm an challenged industry
leaders to tap the vast potential in the
in te r n a tio n a l m a rk e tp la c e , u rg in g
them to undertake a long-term com ­
m itm ent and to have the courage to
break new ground in the foreign arena.
W hile pointing to th e in d u stry ’s en ­
v ia b le re c o rd in in n o v a tin g m any
financing techniques, such as lever­
ag ed b u y -o u ts, th e N C F A official
nonetheless chided th e industry for its
reluctance to p en etrate the potentially
rew arding service sector of the econ­
omy, w hich g enerates tw o-thirds of
th e Gross National Product and pro­
vides seven of every 10 nonfarm jobs.
W ith its history of financing innova-

MID-CONTINENT BANKER for December, 1983

■

M ilw aukee’s B eautiful Lakefront

Why does a bank in Milwaukee
have its data processing done in Pittsburgh?
rrWe went with Mellon four years
ago. W ed make exactly the same
decision today ”
William Kroeger
Executive Vice President
H eritage Wisconsin Corporation

Heritage Wisconsin Corporation
is a multibank holding company,
one of nearly 200 financial institu­
tions in 16 states that use Mellon’s
Datacenter Services.
"We went with Mellon originally
because the cost of developing our
own system would have been

@

overwhelming,” says Kroeger.
"Today that decision seems even
wiser in light of the growth in as­
sets and activity we’ve had since
then. In my opinion, Mellon’s on­
line systems are absolutely the
best available anywhere.”

commitment. Mellon’s Datacenter
shares in those resources, giving
its customers a distinct financial
and competitive advantage.
If you’re concerned about main­
taining cost-effectiveness while
providing the new services that
staying competitive demands,
Mellon was one of the first banks
compare your processing costs
to apply electronic systems to
and capabilities with those pro­
banking, in 1955, and we’ve been
vided
by Mellon’s Datacenter.
in the forefront of development
ever since. A staff of more than
Just call Dick Meyer, vice presi­
500 bankers who are data-process­ dent, (412) 234-4861. Or write to
ing professionals, supported by an him at Mellon Bank, Datacenter
annual development budget in
Division, One Mellon Bank Cen­
excess of $40 million, ensures that ter, Pittsburgh, PA 15258.

Mellon Bank
B an k ers help in g b an k ers com p ete.

MID-CONTINENT BANKER for Decem ber, 1983


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

23

New NCFA Officers

DIAMOND

DORGAN

S te p h e n C. D iam o n d w ill take
office as chairm an and R ichard J.
D organ as p resid en t, N ational C om ­
m e r c ia l
F in a n c e
A ss o c ia tio n
(N C F A ), J a n u a r y 1. T h e y w e re
elected to the posts last m onth at the
N C FA ’s 39th annual convention in
Chicago. T he association is th e trad e
arm for th e asset-b ased financialservices industry.
Mr. D iam ond is chairm an, F irst
Chicago C red it C orp ., and, in his
N C F A p o st, su cceed s M elvin E.
R u b en stein , ex ecutiv e vice p re si­
d en t, R osenthal & R osenthal, N ew
York City. Mr. D iam ond had b een
th e group’s p resid en t th e past year.
Mr. D organ is group vice p resi­
d e n t, W ach o v ia R ank, W in sto n Salem , N. C. H e m oved up from
N C FA first vice presid en t.
O th e r new officers are: first vice
p resid en t, F rederick S. G ilb ert Jr.,
executive vice p re sid e n t, C iticorp
Industrial C redit, H arrison, N. Y.;
vice p resid en t, H e rb e rt E. R uben,
se n io r vice p re s id e n t, W a lte r E.
H eller & C o., N ew York City; and
treasu rer, R obert M. G rosse, vice
p resid en t, Irving T rust, N ew York
City.

tion, said Mr. R ubenstein, th e indus­
try surely can develop th e will and
know -how to finance service in d u s­
tries.
“New m arkets m ust be sought b e ­
cause of th e changing n atu re of the
industry. W ithin a decade, our in d u s­
try has m oved from an environm ent of
lim ited com petition, rapid grow th and
attractive yields to a situation of in ­
tense com petition, larger and riskier
credits and narrow ing spreads. W hile
com petition can and should be healthy
and constructive, m any lenders are fol­
lowing a seductive piper. Too often,
lending basics are being com prom ised
in a frantic effort to obtain a larger and
larger share of m a rk e t,’ th e N C FA
chairm an challenged.
Mr. R ubenstein is executive vice
p re s id e n t, R o sen th al & R osenthal,
Inc., of New York City.
T he N CFA proudly poin ted to one
of the success stories of its own m em 24


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

bers during an industry-aw ards ce re ­
mony.
The award recognized a small cor­
poration in M iami, today know n as
Cosm o C om m unications, w hich had
b een financed initially by one of its
m em bers, Congress Financial Corp.
T he com pany increased its sales from
th e first year of $5.2 million and a net
incom e of $241,000 to sales of $32.1
m illion and p rofits of $2.8 m illion
seven years later.
W ith constant m onitoring by C on­
gress Financial, and through its len d ­
ing expertise, the com pany w ent p u b ­
lic a short tim e ago, selling $39.6 m il­
lion in stock. The chairm an of the com ­
pany, Joel New m an, a C uban im m i­
grant, received the award on behalf of
his com pany, w hich today is one of the
w orld’s largest m anufacturers of digital
electronic clocks. — Ralph B. Cox,
publisher.

RMA Says Chapter Rewards
W ill Strengthen Services

Collateral Management
(C ontinued fr o m page 18)
increase in the cu rren t line of credit if
he has the added com fort of third-party
collateral m anagem ent. This is esp e­
cially tru e in grow th com panies, sea­
sonal b u sin esses, tu rn a ro u n d com ­
panies or com panies involved w ith ac­
quisition financing. C ollateral C on­
trol’s systems are designed to provide
security, service and, in th e case of
c e rtific a tio n s e rv ic e s , g u a ra n te e s
needed to consider a credit w here re ­
paym ent comes from tu rnover of trad ­
ing assets. O ur collateral-m anagem ent
program s can be used separately or in
concert w ith another. The len d er can
have ongoing, day-to-day coverage,
w ith exam inations perform ed by a p ro ­
fessional staff.
Collateral C ontrol’s role as collateral
m anager is supported by a $50,000,000
legal liability/fidelity bond. W e back
up our services this way so th e le n d e r’s
exposure to risk is pro tected and the
borrow er gets th e w orking-capital loan
he needs.
A sse t-b a se d le n d e rs w ill b e r e ­
quired to becom e m ore im aginative
an d in n o v a tiv e to m e e t th e ev erincreasing com petition in the lending
m arketplace. A sset-based lending is
here to stay and to grow. Com m ercialbank lenders would be wise to consid­
er third-party collateral m anagem ent
as a strategic key to developm ent of a
profitable secured-loan portfolio, as
well as the missing ingredient to effec­
tively e n te r th e asset-based lending
arena. • •

R obert M orris Associates has im ­
p le m e n te d a p ro g ram d e sig n e d to
m otivate its chapters and groups (sub­
chapters) to strengthen th eir adm inis­
trative functions and to continue ex­
p a n d in g th e e d u c a tio n a l p ro g ram s
they offer to m em bers locally.
W illiam H. Sayre, 1983-84 chair­
m an of th e association’s chapters divi­
sion council, said the new “C hapter/
G roup S tandard of E xcellence P ro­
g ra m ” will give reco g n itio n to th e
chapters and groups that attain certain
m easurable standards of perform ance.
Mr. Sayre is executive vice p resident,
Fidelity Bank and Fidelcor, F idelity’s
p aren t com pany, Philadelphia.
A pproved by the RMA board, the
program should help m ore precisely
identify those activities chapters and
groups can conduct that will support • BBC Manufactured Buildings, Inc.
th e association’s ed u catio n al ob jec­ This firm has announced developm ent
tives and provide maxim um benefit to of Telleron, described as a new con­
th e m em bership. C onceived by the c e p t for a m a n u fa c tu re d , lim ite d national ch apters division, th e p ro ­ service financial facility. It is a com ­
gram was developed by a subcom m it­ p le te tu rn k e y facility th a t can b e
te e of the division council headed by opened and operating w ithin days of
n atio n al D ire c to r Jo h n L an g elan d , delivery to a site. It can be finished
president, Zions F irst National Bank, w ith a variety of exterior m aterials and
Salt Lake City, Utah, and a form er includes a total interior package, even
p resid en t of the association’s M oun­ specialized m ovable fu rn itu re. T he
new Telleron is an autom atic facility
tain States C hapter.
The program is to be incorporated p ro v id in g fo r te l l e r a n d /o r n ew into th e annual reports that all associa­ accounts capability and designed w ith
tion local units will file w ith th e nation­ an optional rear-d riv e-u p configura­
al chapters division next sum m er. All tion that can be a single ATM, ATM
ch ap ters and groups th at achieve a plus after-hours depository or teller
specified nu m b er of points will receive window. An interior sliding glass wall
certificates of m erit at the 1984 fall con­ perm its 24-hour access to th e ATM
ference in P uerto Rico. The certifi­ lobby w hile securing th e teller/new cates will recognize th e high standards accounts area. W rite: BBC Manufac­
of excellence in serving th eir m em ­ tured Buildings, Inc., 12690 60th St.
N orth, C learw ater, F L 33520.
bers.
MID-CONTINENT BANKER for December, 1983

Th is Four-Volum e

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Regular Price: $ 1 5 .0 0

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and how to prepare them so that newspaper and magazine
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Federal Reserve Bank of St. Louis

25

What Corporate Customers
Expect From Their Banks
By Reece A. Overcash Jr.
H E R E ’S a full-scale war going on in
Chairman and CEO
the financial ind u stry to win th e
Associates Corp. of
hearts, m inds and m oney of those who
North America
need financial services. T hat war is not
Dallas
being fought in th e consum er arena
only. C om m ercial operations also are
at stake.
Two m ajor factors eventually will di­ novative technological services will
vide w inners from losers — m arketing enjoy th e lion’s share of our business.
strengths and technological advance­
L et m e define some of th e elem ents
m ents.
th at co ntribute to m arketing expertise.
T he b attle th a t’s b ein g w aged to W e believe a m arketing plan is indis­
build consum er relationships is only pensable in developing a relationship
th e tip of th e iceb erg . F o r banks, b etw een a bank and a corporation.
S&Ls, Am erican Express, Sears, M er­ C arefully conceived and d ev elo p ed
rill Lynch, T he Associates — for all of m arketing plans reflect, first, a neces­
us — th e w ords of John Paul Jones sary u n derstanding of th e bank itself,
could not be m ore appropriate: “W e its p h ilo s o p h ie s a n d c a p a b ilitie s .
have only begun to fig h t.”
Second, it reflects an understanding of
And th e com petition for corporate our com pany and, very im portantly,
accounts also is going to accelerate.
our industry.
Take The Associates as an exam ple.
Finally, a w ell-conceived m arketing
W e re a $5-billion financial-services plan recognizes our specialized needs.
c o m p a n y w ith e n o rm o u s r e q u ir e ­ T he Associates is different from Exxon,
m ents. W e cu rren tly have ju st u n d e r AT&T or G eneral M otors. M arketing
$2 billion outstanding in com m ercial plans are not interchangeable. Each
paper, w ith every dollar backed for li­ custom er should be treated as unique
quidity purposes by a line of cred it or and special.
revolving-credit facility. O f our top 20
D eveloping a long-standing, m ulti­
com m ercial-paper custom ers, six are fa c e te d c o rp o ra te re la tio n s h ip r e ­
banks.
q u ires a long lead tim e. M arketing
About 15% of th at p ap er is supplied p la n s m u st b e d y n am ic an d goalth ro u g h m a s te r-n o te a rra n g e m e n ts o r ie n te d . T h e y m u s t b e u p d a te d
provided prim arily by bank tru st d e ­ annually to reflect new inform ation or
p artm en ts. All of our 696 dom estic changing conditions. C lient contacts
branch es re q u ire local banking se r­ will develop some new area or reveal a
vices. W ith our extensive com m ercial new insight into th e cu sto m er’s re ­
paper and branch netw ork, we need q u ire m e n ts . R eco g n izin g th e lead
efficient cash -m a n a g em e n t services tim e involved, m arketing plans re ­
nationw ide. W e have m ore than $2 bil­ q u ire sh o rt-ran g e, as w ell as longlion in long-term d e b t and we need range goals.
corporate tru stees and paying agents.
Almost 50% of our asset-based loans
w ere referred to us by banks or are in • Product m anagem ent in banking —
participation w ith one or a group of w hat it is, why it’s practiced and how it
banks. T here is a place for virtually all affects th e bottom -line profitability of a
our financial services in th e banking bank’s products and services — is the
com m unity, through referrals, partic­ subject of a new publication from the
ipations, joint v en tu res or purchases. Bank A d m in istratio n In stitu te . I t ’s
A year ago, one of our in-house p u b ­ called “P roduct-M anagem ent H an d ­
lications fe a tu re d an a rtic le title d , book: A Practical G uide for the Bank“ Som e o f O u r B e s t F r ie n d s A re P roduct M anager,” and it costs $24 for
BAI m em bers and $36 for nonm ernB anks.” T hat about sums it up.
Bankers are in te re ste d in our b u si­ bers. W rite: Bank A dm inistration In ­
ness. I expect th e com petition to grow stitute, P. O. Box 70157, Chicago, IL
and I ex p ect th o se banks w ith th e 60673.
strongest m arketing program s and in-

T

26


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Federal Reserve Bank of St. Louis

Part and parcel of bank m arketing is
th e bank’s overall image and rep u ta­
tion. How the bank positions itself and
its operating character are im portant
facets of m arketing.
Each bank has an image or rep u ta­
tion in the m arketplace. W h eth er it is
a g g re s s iv e o r s le e p y , r e ta il or
w holesale, w ell-m anaged or not, such
im ag es, a c c u ra te or n o t, m an ifest
them selves in the relative success of
th e institution. In w orking our way
th ro u g h im age and re p u ta tio n , we
attem p t to make an accurate assess­
m en t of the bank’s philosophies and
attitudes. W e are concerned w ith the
com m itm ent of the bank to its defined
m arket, our industry, and ultim ately,
our firm.
How well a bank is able to m arket its
skills is becom ing a point of increasing
im portance. F or exam ple, is the bank
perceived to have a strong analytical
and p ractical u n d e rsta n d in g of th e
econom y, its m arket area and our in ­
dustry?
Dom estically, our operations range
from coast to coast and are im pacted by
regional as well as national economic
conditions. As a result, we value the
in put of our regional banks. They know
and understand th eir m arkets, and by
sharing that know ledge we are b e tte r
eq u ip p ed to address those m arkets.
That, for one reason, is w hy we have
resisted having our account handled
by representatives of loan-production
offices that have sprung up in Dallas
and Houston.
By being serviced out of the bank’s
hom e office, we receive the view point
w e n eed in our business. In m any
cases, the representative stationed in
Dallas may not have w orked for the
bank in the M idw est or on the W est
Coast and cannot provide the regional
flavor we seek.
A banking relationship includes a
balanced com m itm ent of short- and
long-term credit facilities. Short-term
facilities are easy to com e by. Term
c o m m itm e n ts are th e p ro d u c ts in
need, w hich are a bit m ore difficult. In
th e late 1970s, we used our banks to
fund m ore than $500 million in syndi­
cated m edium -term fixed-rate loans.
(C ontinued on page 58)

MID-CONTINENT BANKER for December, 1983

We turn on a dime
so you can turn a larger
profit.
When money is expensive, so is the tronic access to your account for
time funds are idle. T h a t’s why so
maximum flexibility. You can get
many banks rely on Northern
a fresh update every 15 minutes
Thist Bank for profit-enhancing
if necessary—and move money
correspondent services. Our exper­ within hours rather than days.
tise in getting funds to work
Add to our sophisticated
quickly and profitably has earned equipment the best in personal
us the reputation of being a pre­
attention and responsiveness, and
miere processor for correspondent you get Northern Trust’s ideal
banks. In fact, in independent
combination of quality and effi­
surveys, The Northern Trust
ciency. A dedicated staff of profes­
consistently ranks among the top
sionals assures you personal
three cash m anagement providers attention in all transactions.
in the industry.
We’re also ready to assist you
The latest in computer tech­
in handling your investments.
nology assures check collection
And our experienced Bond
and safekeeping th a t’s accurate
D epartm ent representatives
and fast. Our Cashline Balance
are always on hand to provide
Reporting System gives you elec­
knowledgeable advice.
W ith N orthern Trust Bank
behind you, you can count on
better service for your customers.


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

And a better bottom line for your
bank. For more information,
contact Curtis E. Skinner, Senior
Wee President, N orthern Thist
Bank, 50 South LaSalle Street,
Chicago, Illinois 60675. Telephone:
(312) 630-6000. Member F.D.I.C.

The more you want
your bank to do,
the more you need
The Northern.

Northern

Thist
Bank

About B anks & B ankers
ILLINOIS
Continental Illinois
Announces Changes
In Internat'l Depts.
C H IC A G O — C ontinental Illinois
National has form ed several new bank­
ing departm ents. As a result, it has
b ro u g h t to g e th e r th e in te rn a tio n a l
b a n k in g s e rv ic e s d e p a r tm e n t an d
offshore units of m ultinational-banking
services and sp e c ia l-in d u strie s s e r­
vices.
The th ree new d ep artm en ts, estab ­
lished N ovem ber 1, are: E urope/A fri­
ca-M iddle E ast d ep artm en t, h ead ed in
L ondon by Jean -L o u is R ecoussine;
Asia/Pacific d e p a rtm e n t, h e a d e d in
Tokyo by John A. McAdams; and Latin


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

Am erica d ep artm ent, headed in C hi­
cago by Thomas D ow en Jr. All th ree
m en are senior vice presidents.
Leo C. deG rijs, executive vice p res­
ident, who headed the form er in tern a­
tional banking services dep artm en t,
has been nam ed chairm an of the coun­
try exposure com m ittee and has major
m anagem ent responsibility as head of
a new sovereign-risk-credit-m anage­
m ent unit.
A lfred E. M iossi, ex ecutive vice
p r e s id e n t/d ire c to r of in te rn a tio n a l
affairs, is assum ing th e additional re ­
sponsibility of m anaging and coordi­
nating relationships w ith foreign cen ­
tral banks. H e reports to David G.
Taylor, vice chairm an of th e bank.
D rew E. W aitley, senior vice presi­
dent, continues to m anage th e AfricaM iddle E ast division from Chicago and
reports to Mr. Recoussine. W. D enis

W right, senior vice p resid en t, who
previously headed th e Latin Am erica/
Canada group, reports to Mr. deG rijs
and continues to oversee C anadian in ­
ternational-banking activities pending
reassignm ent w ithin th e b an k ’s do­
m estic sector.
G lobal funding/foreign exchange,
which w ere in international banking,
are being reassigned to bond/treasury
services in a gradual transition and are
being rep o rted to Senior Vice P resi­
d en t Robert D. M cKnew.
M essrs. deG rijs, D ow en, McAdams
and Recoussine are reporting to Ex­
ecutive Vice P re sid e n t E dw ard M.
C um m ings until he retires at yearend. Then, they will rep o rt to E xecu­
tive Vice P resident E dw ard S. Rottum.
In o th er action, C ontinental Illinois
C orp., the bank’s H C, has appointed

Vice P resid en t S tep h en D. Balsamo
general m anager of its C ontinental Illi­
nois Corp. financial-futures subsidiary
and m anager of th e portfolio services/
financial futures division of C o n tin en ­
tal Bank. H e reports to Senior Vice
President M ichael O. Bigg, who is re ­
sponsible for securities trading/public
finance. M r. B alsam o jo in e d C o n ­
tinental in 1972 and, since 1982, had
b e e n h ead o f th e b a n k ’s financialfutures-brokerage operations in L on­
don.

$30-million loan over 12 years to the
bank. Because the retailer is expand­
ing its financial-services capability, its
m a n a g e m e n t b e liev es th e re is th e
potential for confusion as it relates to
ow nership.
F o u n d e d in 1919 as C om m unity
State, th e bank changed its nam e in
1931 to Sears-C om m unity State and,
in 1957, to Sears Bank & T rust Co.

C o rp . a n d , fo llo w in g re g u la to r y
approval, will buy and sell futures con­
tracts for correspondent banks, p e n ­
sion-fund m anagers, insurance com ­
panies and corporations, as well as for
N orthern T rust itself.
D onald L. Raiff, senior vice p resi­
d e n t in charge of N o rth ern T ru st’s
treasury d ep artm ent, has b een nam ed
p resid en t of th e new subsidiary.

Discount Brokerage
Bought by Bank HC

Name, Marketing Thrust
Changed at Sears Bank

C H IC A G O — N o r th e r n T ru s t
C orp., p aren t of N orthern T rust Co.,
has signed a definitive ag reem ent to
buy all th e shares of stock of Jerom e
H ickey Associates, Inc., a Chicagobased discount-brokerage firm. Fol­
lowing regulatory approval, the firm
will becom e an H C subsidiary.
The H ickey firm also has an office in
Scottsdale, Ariz. Pending F ed approv­
al, it will provide brokerage services
for N orthern T rust custom ers.
N orth ern T rust Co. has form ed a
wholly ow ned subsidiary to execute
financial-futures transactions on the
floors of th e Chicago Board of Trade
and C hicago M ercan tile Exchange.
T h e n ew fu tu re s-c o m m issio n m e r­
chant will be nam ed N o rthern F u tu res

Harris Trust, Chicago, has prom oted
Randall B. Becker, Roger A. Molzahn,
B ruce F. O sb o rn e and C harles H.
Davis to senior vice presidents. P atri­
cia W hitehead H uizenga was elected a
vice president. She was an assistant
vice president. M essrs. Becker, Mol­
zahn and O sborne are in th e banking
dep artm en t and Mr. Davis in credit
adm inistration.

C H IC A G O — S e a rs B an k has
changed its nam e to U nibancT rust and
is taking a fresh m arketing direction
designed to serve m id-size com panies.
T hrust of th e new m arketing p ro ­
gram is aim ed at firm s in th e $5m illion-$50-m illion range. T he new
nam e was selected, says D onald D.
T hornburg, ch airm an/president of the
bank and p resid en t of its H C, M idland
Bancorp, Inc., because it conveys “a
sense of individuality, a uniqueness of
character. ”
The nam e change satisfies an ag ree­
m en t betw een th e bank H C and Sears,
R oebuck & Co., w hich is to provide a

Magna Group, Inc., Belleville, has re ­
ceived stockholder approval of a re ­
capitalization plan th at allows th e HC
to change its par-value com m on stock
from $4 to $2 and to increase the n um ­
b er of shares of new com m on stock
authorized for issuance from 2,000,000
to 10,000,000 shares. M agna G roup
form erly was F irst Bancorp of B elle­
ville, Inc.
D an H ein e has b e e n p ro m o te d to

Continuity of people. Continuity of policy.
Continuity of commitment. That’s what corre­
spondent banking means at Drovers. With some
banks, it’s a sideline. With others, only the large
metropolitan relationships are sought and
serviced. Not so at Drovers. We seek strong, long­
term relationships with banks in towns like
Sandwich. Or Watseka. Or Varna. (You know who
we mean.) So call John Crotty. Or Kathy Hardy.
Or Max Roy. Or Andy Ruments. Or Frank Bauder.
Or Jim Carmody. Professionals sensitive to over­
line situations. Professionals sensitive to the
agricultural sector. Professionals sensitive to you.
Toll-free 1-800-621-8991.
In Illinois, 1-800-527-2498.

ft*»* Drovers Bank

of Chicago.

47th & Ashland Ave., Chicago, IL 60609 • 1-312-927-7000.
MEMBER FEDERAL RESERVE SYSTEM AND FDIC.

MID-CONTINENT BANKER for December, 1983


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

29

p re sid e n t/C E O , N o rth w e st Illinois
Bancorp, Inc., and its principal su b ­
sidiary, State Bank, both of F reep o rt.
H e form erly was executive vice p re si­
den t of th e bank, w hich he joined on
graduating from college 15 years ago.
At 36, Mr. H eine is th e youngest p resi­
dent in th e bank’s history.

INDIANA
Indiana N atl Bank Tower
To Be Sold to Realty Firm
JMB R ealty C o rp ., C hicago, has
agreed in principle to purchase th e 37story Indiana N ational Bank Tower,
Indianapolis, along w ith th e balance of
the block on which th e tow er is lo­
cated. S eller is M etropolitan S tru c­
tures. As part of th e transaction, In d i­
ana National will cancel its leasehold
in terest in th e tow er for approxim ately
$40 million.
T he b ank’s share of th e proceeds
from the proposed cancellation of its
leasehold interest is expected to have a
positive im pact on th e bank’s capital
and incom e, according to bank C hair­
man Thomas M. M iller.
“The increase in capital, to g eth er
w ith any proceeds received from the
p re v io u sly a n n o u n c e d $ 2 5 -m illio n
adjustable-rate p referred stock offer­
ing, still in registration, will p u t In d i­
ana National in a stronger position to
take advantage of expansion o p p o rtu ­
nities as they becom e available,’’ Mr.
M iller said.
Plans are to conclude th e transaction
by the end of this year.
The bank will continue to occupy
th e tow er. T h e b u ild in g was com ­
p leted in 1970. M etropolitan Life In ­
surance Co. p u rchased it on a sale/
lease-back basis and th e bank had an
option to purchase th e building in 1995
for approxim ately $12.5 m illion. In
cancelling its leasehold in terest and
continuing to lease only th e space it
now occupies, the bank relinquishes
its purchase option.
Irwin Union Bank, C olu m b u s, has
elected John L. C arr and M atthew F.
Souza assistan t tru s t officers. Both
joined the bank in O ctober, 1982.
Ronald L. Douglas has jo in ed F arm ers
National, R em ington, as auditor. H e
form erly was auditor at F irst National,
Logansport.
M idw est C om m erce Banking C o .,
Elkhart, has elected Jam es E. Stringfellow senior vice p re sid e n t/a u d ito r
and appointed Craig Bush vice president/corporate-fee products m anager.
Mr. Stringfellow jo in ed the bank in
1963; Mr. Bush is new to th e bank.
Digitized for30
FRASER
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

MICHIGAN
N ation al Bank o f D etro it has a p ­
p ointed Millie S. Barnes, Barton W.
Bock, D avid R. Borger and Andrew H.
H e in e c k e se c o n d vice p re s id e n ts .
N ew assistant vice presidents include
L yle F. D a h lb e rg , A nn W. Rock,
S te p h e n M. C astle, L isa K ingsley
Carlson and Joseph K. Thom pson.
Larry J. Reimann has joined Peoples
National, Bay City, as assistant vice
p r e s id e n t/c o m m e r c ia l lo an s. H e
form erly was w ith Bank of the C om ­
m onw ealth, D etroit.
Pacesetter National, Cassopolis, will
m erg e into P a c e se tte r B ank-South­
w est next year. The resulting bank, to
be called Old K ent Bank-Southw est,
will be h e ad q u artered in Niles.
Steven D. Crandall has rejoined Old
K en t Bank, G ran d R apids, as vice
p resid en t responsible for the coordina­
tion of corporate-w ide training and d e ­
velopm ent. H e originally joined the
bank in 1978 and most recently has
b e e n w ith F inancial Shares C o rp .,
Chicago.
Robert E. Hughes has been prom oted
to executive vice president, M anufac­
tu rers Bank, D etroit. H e is responsi­
ble for dom estic com m ercial-lending
d epartm ents. H e joined the bank in
1958.
Donald L. Grill has been nam ed vice
president/agricultural loans at F irst of
A m erica Bank-M ichigan, Kalamazoo.
H e form erly was w ith Key State Bank,
Owosso.

TAETS

DANIELSON

officer in the east/w est correspondent
banking division. Mr. Taets form erly
was a vice presid en t at B renton Bank,
Clarion, la.

1st Bank System, Norwest
To Share Minnesota ATMs
F irst Bank S ystem and N orw est
C orp., M inneapolis, have signed a let­
te r of in ten t to share all M innesota
ATMs and to develop and m aintain an
electro n ic point-of-sale system th at
would enable custom ers to use their
bank cards for direct paym ent at retail
stores.
U n d er th e ATM sharing arrange­
m e n t, th e 665,000 card h o ld ers of
F irst Bank System and N orw est w ould
be able to make w ithdraw als from any
of the ATMs in F irst Bank System ’s
Fastbank or N orw est’s Instant Cash
ATM networks. T he two bank HCs
have 310 ATMs in M innesota, 216 of
which are in the Twin C ities m etro ­
politan area.
Paige W inebarger has b een appointed
assistant vice p resid en t at Bank Shares
Inc., M inneapolis. She form erly was
assistant com m issioner of banks for
M innesota.

OHIO

MINNESOTA
First Bank M inneapolis has nam ed
John R. D anielson senior vice president/finance and planning. H e joined
th e bank in 1972, com ing from Irving
T rust, New York. Judy Bradford has
joined th e bank as vice president/natural resources and M ichael Taets has
been nam ed a correspondent banking

4-H Funds Solicited
Thom as O lson, p re s id e n t, F irst
N ational, Starbuck, and chairm an,
M innesota B ankers Association 4-H
cam paign com m ittee, has kicked off
a cam paign to su p p o rt th e M innesota
4-H ju n io r lead ersh ip program . In a
le tte r sent to 750 association m e m ­
b e r banks in M innesota, Mr. O lson
said th at this y ear’s goal is $18,000.
T he funds will assist th e 9,000 youths
who are involved in 4-H leadership
program s annually.

Bank One's Jubilee
Is First Introduction
Of Visa Electron Card
Bank O ne of C olum bus’s “Jubilee’’
card — said to be th e first Visa E lec­
tron card to be issued in the U. S. —
will be usable in autom atic banking
eq u ip m en t Lazarus d ep artm en t stores
will install in C olum bus-area outlets.
Bank O ne will participate in Visa’s
electro n ic point-of-purchase ex p eri­
m ents planned for 1984. “Bank O ne
will in tro d u ce th e Ju b ilee E lectron
card program initially in several m em ­
b er banks of Bank O ne Corp. in Ohio
and later this fall at Bank O ne in Co­
lum bus,’’ according to R obert Potts,
bank chairm an and a director of Visa
USA and Visa International.
In announcing that the Jubilee card
will replace th e bank’s existing 24 Self

MID-CONTINENT BANKER for December, 1983

IT’S A COM PLETE PROGRAM .
IT W ORKS.
NOW ALL IT NEEDS IS Y O U ....


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

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

DANIEL G. PRISKE

President and Chief Executive Officer

CITIZENS NATIONAL BANK AND TRUST MARSHFIELD, Wl
A First Wisconsin
Correspondent Banking Customer

MEET
FIRST W ISCONSIN
Accelerated Check Collection

EXPERIENCE.
/'V

“ It's what my customers rely on,"
says Dan Priske, president and
chief executive officer of Citizens
National Bank and Trust.

J*È-

And when Dan's customers
deposit more than a million
checks throughout the year, his
bank turns to First Wisconsin
for ways to increase profitability
and streamline check collection
operations.

>4

Working together, we construct
ed a Cash Letter Analysis
report to examine their complex
check collection function, and we
offered recommendations about
how Citizens National could min­
imize transportation charges,
reduce check clearing fees and
improve funds availability.

mm

:■


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

When you want to streamline
your check collections, whether
large or small, talk to First
Wisconsin. Or ask Dan Priske,
he knows the advantage of w ork­
ing with a bank that clears more
than a hundred million checks
each year.
That's experience.
p g g

¡s u
FIRST WISCONSIN
MORE BANK FOR YOUR MONEY

an*

F D IC

c FW N B 1983

Service Card, Mr. Potts said the card
eventually will be usable in all Bank
O ne banks in Ohio and could replace
checks or cash at m em b er stores. U n ­
like the Visa card, th e Jubilee E lectron
card is a d eb it card and can be used
only in an electronic term inal. It is
d e s ig n e d to b e th e f irs t g lo b a lly
accepted, m u ltipurpose-paym ent card
that contains technologies enabling it
to be used exclusively in electronic te r­
minals.
The agreem en t w ith F e d e ra te d D e ­
p artm en t Stores, ow ner of th e Lazarus
chain, includes installation of Jubilee
ATMs in C olum bus stores. T he first
installations will be m ade this fall.
Bank O n e’s participation in Visa’s
pilot m erchant point-of-sale program
means that a cross-section of retailers
in central Ohio will be selected for in ­
stallation of several h u n d re d electronic
term inals. C ustom ers w ith acceptable
Visa cards — including th e Bank O ne
Jubilee card — will be able to com ­
plete card transactions faster through
the new point-of-sale term inals, Mr.
Potts says.

Money Station Members
Announce Participation
In Home-Banking Pilot
M o n ey S ta tio n , I n c ., m e m b e rs
jointly have announced plans to p a r­
tic ip a te in H o m e B a n k in g I n t e r ­
change’s (HBI) in-hom e-banking pilot
project, thus expanding th e scope of
the project in Ohio.
“The addition of M oney Station to
the HBI p roject effectively will expand
and enhance th e scope of the project
both operationally and geographical­
ly,” said John H anschm idt, executive
vice presid en t, BancOhio, th e in stitu ­
tion that initially announced th e pilot
project. A m inim um of 200 H B I te r­
minals will be used during the test
scheduled to begin in April of next
year.
These term inals will be placed by
National City C orp. and Society Corp.
in Cleveland, BancOhio in C olum bus
an d I n t e r s t a t e F in a n c ia l’s T h ird
N ational in D ayton. F irs t N ational
Cincinnati C orp. and Fifth T hird Ban­
corp, C incinnati — o th er M oney Sta­
tion m em bers — will be participating
in the test at th e research level.
T he en tire H B I project will involve
a p p ro x im a te ly 2 ,0 0 0 te r m in a ls in
hom es located in various cities across
th e U. S. and C anada. Financial in ­
stitu tio n s lead in g th e p ro je c t have
assets of $153 billion.
M oney Station was form ed in May of
this year and w hen fully operational
will provide card-holders of m em b er
organizations w ith w hat is said to be
the largest ATM netw ork in Ohio.
34


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

First-Knox National, M ount Vernon,
has prom oted Ian W atson to vice p resi­
d e n t and Phyllis A. Higgins to assistant
vice president. They joined th e bank
in 1973 and 1969, respectively. Mr.
W atson is responsible for th e bank’s
new d ep osit/investm ent services divi­
sion.
BancOhio National, C olum bus, has
elected R obert W. O w en, Steven W.
Seely, Raymond M. C horey and T erry
D. C oreno vice presidents, and Amy
R. Edw ards, Richard K. H ite, W illiam
R. M anning Jr. and A drian V. W allace
assistant vice p residents. Ms. Edw ards
also has b een nam ed affluent-m arket
m anager for the bank’s retail banking
group.
Eight bankers joined the board of the
Ohio Bankers Association last m onth.
T hey are: H. E ug en e Sm art, p resi­
dent, State Bank, D efiance, serving a
one-year term as OBA treasurer; O li­
v e r W . W a d d e ll, c h a irm a n , F ir s t
National C incinnati C orp., and p resi­
d e n t, F ir s t N a tio n a l, C in c in n a ti;
D aniel E. W asham , p resid en t, Banc­
Ohio National Jackson Area, Jackson;
Tiney M. M cCom b, p resident, F ran k ­
lin B ank, C o lu m b u s ; R ic h a rd G.
Elliott, p resident, C om m ercial & Sav­
ings Bank, M illersburg. C harles L.
McKelvy Jr., p resid en t, F irst N ation­
al, Toledo, is a director-at-large. OBA
T rust Division P resid en t L u th er IT
H odge, senior vice presid en t/sen io r
tru st officer, P rovident Bank, C incin­
nati, and OBA T rust D ivision F irst
Vice P resident Stuart N. Parsons, vice
p resid en t/tru st officer, Park National,
Newark, are serving one-year term s on
th e OBA board.

WISCONSIN
C itiz e n s B ank, S h e b o y g a n , has
appointed John S. W illiams assistant
vice p resident, business banking d e­
partm ent, dow ntow n office. H e most
recently was assistant vice p resid en t,
com m ercial lending, Bank of Lansing,
Mich.

Eliot Grant Fitch Dies
E liot G ran t F itch, re tire d ch air­
m an , M a rin e N a tio n a l E x ch an g e
B an k a n d M a r in e C o r p ., M il­
w aukee, d ied last m o n th at th e age of
88 following a b rie f illness.
H e served th e M arine organiza­
tion from 1923 to 1972. Both his
father and g randfather w ere associ­
ated w ith N ational E xchange Bank,
w hich m erged w ith M arine N ational
in 1930. H e was elec ted p re sid e n t of
th e m erged bank in 1942 and ch air­
m an in 1965.

Firstar Bank Appleton has appointed
Paul R. Trigg president. H e will be
responsible for th e tru st, corporate
banking and retail banking divisions of
F irstar banks in A ppleton, G reenville
and Valley Fair. Mr. Trigg began his
career w ith F irstar in the tru st d e p a rt­
m en t in 1971, b u t from 1971-1977
w orked in th e tru s t d e p a rtm e n t at
American National, E au Claire, before
returning to Firstar.
Union State, K ew anee, has prom oted
Steven W. D rab to cashier. Mr. D rab
joined th e bank in 1977 as assistant
cashier, previously having served w ith
F irst National, W aukesha.
Thom as F. N ovotny has b e e n ap ­
pointed vice p resid en t at Valley Trust,
A ppleton. H e previously was associ­
ated w ith C itizens T rust, Sheboygan.
Marine Corp., M ilwaukee, plans to
sell up to $60 million of its securities to
Prim ary C apital Investors C. V., a p ri­
vately held investm ent firm based in
the N etherlands. The securities con­
stitute prim ary capital as defined by
the F ed and will be available for use in
fu n d in g M a rin e ’s grow th. P rim ary
C a p ita l In v e sto rs is c o m m itte d to
purchase additional securities up to a
maximum of an additional $40 million
during a seven-year period covered by
the agreem ent, b u t M arine is u n d er no
o b lig a tio n to p la c e th e a d d itio n a l
securities.
Citizens Trust, Sheboygan, has p ro ­
m oted H enry Blacharczyk to regional
vice presid en t and W ayne S tretsbury
has jo in e d th e firm as e m p lo y e e benefits officer. Allan Jurss and R obert
K rueger have b een prom oted to assis­
tant vice presidents.
F irst Bank M ilw aukee has n am ed
James R. Saer senior vice p resident/
corporate banking and P eter E. Raskind vice president/strategic planning.
John W. B rennan has b een appointed
vice president/executive and profes­
sional banking and Jerry L. B enston Jr.
has joined the bank as an assistant vice
president/hum an resources. Mr. Saer
form erly was p resid en t, dow ntow n d i­
vision, H eritag e Bank, M ilw aukee,
and Mr. Raskind form erly was with
H arris Trust, Chicago.
Farm ers & C itizens U nited Bank,
S auk C ity , h as p r o m o te d C a rla
B reunig to assistant vice president/operations and nam ed Alan J. R uetten
branch m anager.
Appleton Bank has opened a new fullservice office at 1500 N orth Casaloma
D rive nam ed the G rand C hute office.
The bank now has th ree offices.

MID-CONTINENT BANKER for December, 1 9 8 3

Some
safekeeping advice:
Go Mid-west,young man.

MID-CONTINENT BANKER for December, 1 9 8 3

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

That advice holds for mature
men. And ladies of all ages. You
see, some bankers think there’s onlyone city for Safekeeping. They
need good reasons to consider Safe­
keeping west of the Hudson River.
At Continental Bank, w e’ve
got the reasons. Good ones. And
lots of them. Take something that
can affect your P&L. Like m atur­
ing securities. Other banks make a
big hoop-de-lah about nextday cash availability. We skip the
hoop-de-lah. And give you imme­
diately available fu n d s... 90% of the
time. Your funds can be reinvested
before most banks even pay out.
How about sub-accounting?
Your bank offer that? We do.
Our correspondents get one main
account. And 999 sub-accounts to
assign to customers or other bank
departments. An important extra
that saves time and headaches
come audit time.
Want more good reasons?
How about quality transaction
service at a penny price? Or an
immediate response to inquiries
that’s hard to find elsewhere?
----^ Maybe it’s time to start
thinking Big O nion... not Big
Apple. Call Robert C. Vasko
in Chicago. At (312) 828-4046.
We’ll work to get your
Safekeeping business. And w e’ll
work to keep it.

CONTINENTAL BANK
C o n tin e n ta l Illinois N ational B a n k an d T ru s t C o m p a n y of
C h ic ag o , 231 S o u th La S alle S tre e t, C h ic ag o , Illinois 60693
A tla n ta • B o sto n • C h ic ag o • C le v e la n d • D a lla s • D e n v e r
D e tro it • H o u sto n • L os A n g e le s • M in n eap o lis • N e w York
St. L o u is • S a n F ra n c is c o • S eattle • W hiteJP lains

35

Insurance-Agency Powers Granted
Bank Holding Company by Fed
N W H A T m ay b e a p r e c e d e n t­
s e ttin g m o v e , th e F e d has
approved the application of th e $45.2million W h itew ater (W is.) Bancorp,
Inc., to engage in general insuranceagency activities. The H C plans to con­
duct these activities in its subsidiary
bank, First C itizens State, W hitew a­
ter, which had total deposits of $39.2
million as of last M arch 31.
U n d e r p u b lic -in te re s t factors set
forth in section 4(c)(8) of th e Bank
H olding C om pany Act of 1956, th e
F ed — to approve a bank H C ’s req u est
for any kind of activity — m ust d e te r­
m ine that the proposed activity “is so
closely related to banking or m anaging
or conducting banks as to be a p ro p er
incident thereto. . . .’’ In this regard,
th e Fed previously had not found the
sale of general insurance by bank HCs
w ith less than $50 million in assets to
be an activity closely related to bank­
ing w ith in th e m e a n in g of sectio n
4(c)(8) of th e BH C Act.
H o w e v e r, in 1982, C o n g re s s
am ended that section by adopting T i­
tle VI of the G arn/St G erm ain D eposi­
tory Institutions Act. Title VI am ends
the BH C Act by prohibiting bank HCs
and any of th e ir subsidiaries from p ro ­
viding insurance services as a p rin ci­
pal, agent or broker, w ith certain ex­
ceptions: 1. Any bank H C may w rite
credit life, accident/health and u n e m ­
ploym ent insurance. 2. Any bank HC
with assets of $50 m illion or less may
w rite or sell any type of insurance. 3.
A ny in s u ra n c e -a g e n c y a c tiv ity e n ­
gaged in or approved by th e F ed on or
before May 1, 1982, is grandfathered.
Left standing was the regulation that
populations of cities in w hich these
activities are conducted m ust be g reat­
er than 5,000. W h itew ater’s popula­
tion, according to th e F ed, is 12,038.
T he F e d a n n o u n c e d th a t on th e
basis of the term s of th e statute, an
examination of the legislative history of
the G arn/St G erm ain Act and the facts
of record, it concluded th at th e sale of
general insurance by a bank H C w ith
consolidated assets of $50 m illion or
less is an activity closely related to
banking and is not p ro h ib ited by the
G arn /S t G erm ain A ct’s p ro v isio n s.
H ow ever, Title V i’s legislative history
states such activities m ust be te rm i­
nated if the H C ’s assets exceed $50
million. The H C th en m ust divest it­
self of such activities.
W hile th e F ed concluded th at the
insurance-agency activities proposed

I

36


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

by th e W hitew ater bank H C are closely
related to banking, it also had to d e te r­
m ine that allowing such activities “can
reasonably be ex p ected to pro d u ce
benefits to the public, such as greater
convenience, increased com petition
or gains in efficiency that outw eigh
possible adverse effects, such as u n due
concentration of resources, decreased
or unfair com petition, conflicts of in­
terests or unsound banking practices. ”
In this regard, th e F ed view ed the
proposal as pro-com petitive and in the
public in terest because de novo entry
will provide g reater convenience to
the public and increased com petition
in the provision of insurance services
in the geographic area to be served
(the state of W isconsin). In granting
approval, the F ed po in ted out that
given the relative ease of entry into the
m arket for insurance-agency activities,
possible adverse effects, such as undue
c o n c e n tra tio n o f re s o u rc e s or d e ­
creased or unfair com petition, appear
to be lim ited.
The F ed thus d eterm in ed that the
public w ould benefit, rath er than be
adversely affected, by granting insur­
ance pow ers to W hitew ater Bancorp.
This approval is academ ic in W is­
consin, w here state law for some tim e
has allowed state-chartered banks, no
m atter w hat size, to sell all kinds of
insurance. According to a spokesper­
son for the W isconsin insurance com ­
m issioner, m ost banks that sell in su r­
ance have separate entities w ith staffs
of licensed agents.
H ow ever, in o th er states that have
no such laws, the F e d ’s approval of
insurance pow ers for a bank H C could
open th e door to granting such approv­
al to oth er bank HCs.
In a d d itio n , an A d m in is tra tio n introduced bill — th e Financial In ­
stitutions D eregulation Act of 1983 —
w ould, if passed, allow bank and thrift
H Cs to underw rite and sell insurance.

Manufacturers Bank, Detroit,
Participates in Food Program
M anufacturers Bank and th ree of its
D e tro it-b ased affiliates jo in ed o ther
local area businesses in lending assist­
ance to th e city’s unem ployed through
a four-w eek food program last m onth.
T he program , nam ed M anufactur­
ers “C an” Care, was launched w ith a
$5,000 corporate contribution to the
G re a te r D e tro it C h a m b e r of C om ­
m erce “F eed the H ungry P rogram ,”
followed by food and m onetary con­

tributions from bank em ployees. Bas­
kets w ere statio n ed at each of th e
bank’s branches to enable custom ers to
contribute food.
“T he n atio n ’s lingering econom ic
plight has had an especially devastat­
ing effect on D etroit and southeastern
M ichigan,” said D ean E. Richardson,
the bank’s chairm an. “This is a tim e
w hen those of us who are able to help
need to step forward and assist those
who are less fo rtu n ate.”
B rochures containing inform ation
about health care for the unem ployed,
ways to avoid u tility shut-offs and
budgeting m aterials w ere available at
th e b ank’s branches to assist custom ers
and the general public.

Shareholder Services
Subcontracted to Harris
By Chemical Bank
Chem ical Bank, N ew York City, and
H arris Trust, Chicago, have en tered
into an a g re e m e n t w h ereb y H arris
Bank will subcontract shareholder ser­
vices for C hem ical’s corporate custom ­
ers. Term s of the agreem ent w ere not
disclosed.
W h en th e su b c o n tra c tin g a g re e ­
m ent is fully im p lem ented over the
next 18 m onths, H arris T rust Co. of
New York, a new firm, will be one of
the major processors of shareholders in
the U. S., according to Thomas Jacob,
Chem ical senior vice president. The
new firm is h e a d q u a rte re d in New
York City, and John D oran, vice p resi­
den t of Chem ical, is its president. H e
has m ore than 20 years’ experience in
shareholder services.
Mr. Jacob stresses the strategic sig­
nificance of the agreem ent, w hich cov­
ers serv ices such as sto ck -tran sfer
agent, co-transfer agent, stock reg ­
istrar, d iv id en d -rein v estm en t agent,
proxy processor and agent in stock
transactions for corporate m ergers/acquisitions. Not affected by this agree­
m ent are C hem ical’s registrar/transfer/
paying-agency services in regard to
deb t securities, including m ortgagebacked securities.
Victor M. W oldridge, H arris Bank
senior vice president, points out that
since C hem ical has chosen to w ith­
draw gradually from the stock-transfer
business, his bank is eager to provide
continuity of service to C hem ical’s cus­
tom ers. H e also says th ere is a m arked
tren d tow ard consolidation of stocktransfer operations in th e banking in­
dustry. M any shareholder processors
are leaving the business, he continues,
because of low m argins, unwillingness
to m ake n ecessary system s in v est­
m ents or stock-transfer services don’t
fit w ithin overall corporate strategy.

MID-CONTINENT BANKER for December, 1 9 8 3

Competition Now on All Sides,
Regulator Tells Bankers
T’S ridiculous for all banks in W is­ m odities and futures brokerages, te le ­
consin to have to be exam ined ev­ com m unications, real estate brokerery 12 m onths by law, w h e th e r poorly a g e /d e v e lo p m en t, in clu d in g eq u ity
or well ru n and w h e th e r th e re are lending and non-full-payout leasing,
problem s in th e ir loan portfolios and m ay all b e re a litie s for W isconsin
m anagem ent practices or if th e re are banks.
none. This was th e opinion given by
H e also told bankers to expect some
th e state’s com m issioner of banking, changes on limits on geographic ex­
W illiam P. Dixon, at C itizens Bank of pansion. To bankers, he said these
Sheboygan’s annual b an k ers’ forum at changes “will req u ire you to expand
th e A m erican C lub in Kohler.
your vision so that you no longer think
of yourself as a retail banker or som e­
one involved in dealer lending, real
William P. Dixon,
estate m ortgages or the like. If you are
Wisconsin commis­ not m eeting the needs of th e public by
sioner of banking, is engaging in m arketing and selling your
shown speaking at
services, you will be left b ehind in the
annual bankers'
forum sponsored by banking field of the fu tu re .”
H e suggested that th e changes be
Citizens Bank, She­
boygan, Wis. Photo view ed as opportunities and that bank­
taken by Gary Peters ers m u st choose d irections, decide
of Sheboygan Press. policies and set targets for the decade
ahead.
Citizens bankers forum , in its 24th
R e c e n tly in tr o d u c e d le g is la tio n year, is a yearly review of banking
w o u ld p e r m it th e c o m m is s io n e r’s changes, challenges and opportunities
office to accept federal-bank exam ina­ for co m m unity b ankers th ro u g h o u t
tions in place of state exam inations and W isconsin.
to le n g th e n th e ex am in atio n cycle
In th e afternoon sessions, topics,
beyond its c u rre n t 12-m onth period conducted by officials of C itizens Ban­
for w ell-run banks.
corp, th e bank’s $585-million H C , in ­
Turning to th e futu re of banking, clu d e d : “ P ro v id in g F in an cin g S er­
Mr. Dixon rem in d ed his listeners that, v ices,’ by G. Thomas Rogers, head of
for many years, banks o p erated in an Citizens capital group; “P reparing for
insulated, p ro tected environm ent, b u t T om orrow ,” a discussion of regulatory
now the clear separation th at existed changes and constraints, by Rawson S.
betw een banks and o th er financial and Price, head of C itizens’ com pliance/
com m ercial firms and th at lim ited any p ro d u c t d e v e lo p m e n t team ; “ Cash
com petition has eroded. H e pointed M anagem ent for C om m unity B anks,”
out that banking now is operating in a by LeRoy Bloechel, senior vice p resi­
predatory, com petitive enviro n m en t den t, C itizens M anagem ent Services
w ith c o m p e titio n co m in g from all C o r p .; “ D a ta P ro c e s s in g in R eal
sides.”
T im e, by a team of ex p erts from
H e cited som e im portant factors that C itizens data cen ter, and “In d u stry
are shaping the m arketplace for the T r e n d s ,” by R ic h a rd D . P a u ls,
rest of this decade: technological in ­ Citizens Bancorp chairm an.
novations, rem oval of d ep o sit-in terest
T he event was coordinated by Jacob
ceilings, relaxation of branching and C. H ilpertshauser, vice p resid en t re ­
o ther geographical lim itations and e n ­ sponsible for correspondent banking.
try of nonbank financial-service p ro ­
viders into previously sh eltered bank
lines.
'Open-Door' Policy
As a result of th ese changes, he con­ Instituted by Bank
tinued, Small banks nationw ide have
suffered a massive decline in profita­ On Student Loans
bility for 1982. In W isconsin, he said,
Com m ercial National, Chicago, has
th e n u m b e r o f “ p r o b l e m ” b a n k s announced an “open-door” policy for
reached its highest level in 50 years.
stu d e n t loans in an effort to help col­
Mr. Dixon said th e federal govern­ lege students m eet the growing cost of
m ent has done little about som e of the education.
areas of regulation faced by bankers.
In this program , the bank offers an
H ow ever, before th e end of th e d ec­ u n d e r g r a d u a te s tu d e n t a $ 1 ,0 0 0 ade, he believes it’s possible th at com ­ $2,500 loan or a g ra d u a te stu d e n t

I

MID-CONTINENT BANKER for December, 1 9 8 3

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

$1,000 to $5,000 a year, w ithout the
norm al p rereq u isite of having a savings
or checking account at C om m ercial
National.
In clu d ed in the “o p en -door” stu ­
dent-loan program is a reduced loan of
8%-9% to a first-tim e borrow er, d e­
pending on the beginning date of in ­
struction. Also, in accordance w ith Illi­
nois state law, both part- and full-tim e
students are eligible, b u t m ust reside
in the state or attend an accredited
college or university in Illinois.
After graduation, a stu d en t has up to
10 years in w hich to repay the loan.

Bank Provides Teaching Guides

More than 200,000 teaching aids explain­
ing "The Vatican Collections: The Papacy
and Art" exhibition at Chicago's Art
Museum were donated to Chicago-area
schools by Continental Bank recently as
part of its social-responsibility program.
Guides were prepared by the Chicago T rib ­
un e's educational services office and dis­
tributed to schools. David G. Taylor (2nd
from r.), e.v.p./treasurer, Continental
Bank, discusses guides with educators and
students at Lincoln Park High School. Exhi­
bition of Vatican Collections was made
possible in part by major funding by Conti­
nental.

Matching-Gift Program
Is Started by Bank
For Its Employees
F irst National, Lincolnshire, 111., is
encouraging its em ployees to becom e
involved in com m unity responsibility
through a new program . The bank is
m atching donations m ade by its em ­
ployees to th e ir favorite charity or
charities up to $100 p e r em ployee in
each calendar year.
T he only req u irem en t by the bank is
th at charities receiving the m oney be
qualified u n d er state and federal reg ­
ulations as nonprofit organizations.
The bank has been successful in in ­
volving m any of its em ployees in its
co m m u n ity -re sp o n sib ility program .
This has been in volunteer work in
com m unity institutions and was cul­
m in ated in an all-out effort by th e
bank’s staff in helping the Variety C lub
of Illinois in the annual th eater collec­
tion drive for La Rabida C h ild ren ’s
H ospital/R esearch C enter.
37

Field offices for the C entral D istrict
will be in Chicago, C leveland, C incin­
nati and Springfield, 111., w ith John R.
Powers, D avid G. Hoffman, Ashley
Lee and G ene W. F ern er, resp ective­
gional Office. O th er states in th e dis­ ly, serving as directors.
O N S O L ID A T IO N S have b e e n
The M idw estern D istrict Office now
trict are Illinois, M ichigan and W is­
announced by th e Office of the
supervises national banks in seven
C om ptroller of th e C urrency (OCC) consin.
in
D eputy C om ptroller Karen J. W il­ states, including banks in M innesota
two regions. The C leveland Regional
son
and D istrict A dm inistrator Larry and N orth and South D akota that p re ­
Office has been consolidated into the
C e n tra l D istric t, h e a d q u a rte re d in T. G erzem a will head th e executive viously w ere supervised by th e M in­
m anagem ent team that will run the neapolis Office. O th er states in the dis­
Chicago. The M inneapolis Regional
C entral D istrict Office. Mrs. W ilson trict are M issouri, Kansas, Iowa and
Office has b een in teg rated into the
previously was chief national bank ex­ Nebraska.
M idw estern D istrict, h ead q u a rte re d
H eading th e M idw estern D istrict is
a m in e r in th e O C C ’s W ash in g to n ,
in Kansas City.
The C entral D istrict Office will su­ D. C ., office and she has worked in the an executive-m anagem ent team con­
pervise national banks in six states, in ­ O C C ’s N ew York and San Francisco sisting of D eputy C om ptroller D ean S.
cluding those in O hio, Indiana and offices. Mr. G erzem a has served as the M arriott and D istrict A dm inistrator
Kentucky, w hich form erly w ere u n d er regional adm inistrator for the C leve­ P eter C. Kraft. Mr. M arriott form erly
was regional adm inistrator, M em phis
the jurisdiction of th e C leveland R e­ land area since 1973.
Office, and has w orked as d eputy re ­
gional adm inistrator and acting region­
al adm inistrator, Chicago office. Mr.
Kraft has been regional adm inistrator,
D enver Office, since 1980.
N ID E A RO O K ’ containing m ore than 75 full-color illustrations of
T h e M id w e ste rn D is tr ic t’s field
new and rem odeled financial facilities has been published by Rank
offices, which coordinate supervisory
Ruilding C orp. (RRC), h e ad q u artered in St. Louis.
activities w ithin the district, are lo­
The book is divided into seven sections that address various subjects
cated in Kansas City, M inneapolis and
inclu d in g “ m e e tin g co m m u n ity n e e d s th ro u g h b u ild in g design,
Omaha. D irectors of th e field offices
“achieving th e best v alu e,’’ “rem odeling” and “interior design, among
are Gary M. Rrickman, Kansas City,
others. A w ide range of sizes and architectural styles is included.
James J. G artner, M inneapolis, and
“This book was designed to be a th o u g h t starter for those who are
K ent C. Austinson, Omaha.
planning new or m odernized facilities, says Tom Spalding, RRC direc­
These moves are in keeping w ith a
tor of m arketing. “W e have intentionally k ept the text brief, relying on
n
a
tio n w id e p lan to reo rg a n iz e th e
top-quality photography to convey a broad spectrum of interior and
O C C ’s 12 regional offices into six dis­
exterior architectural solutions. W e don t expect this book to provide
trict offices so th at it can direct m ore
specific answ ers, since every situation is unique, b u t we feel it can
re s o u rc e s to b a n k s u p e rv is io n ,
provide a sense of direction. ”
strengthen bank surveillance and en ­
Photos in th e idea book re p re se n t m etropolitan and urban designs in
hance su p erv iso ry cap ab ilities, th e
all areas of the country, from a colonial type restoration to desertorganization says. • •
com patible facilities and highly energy-efficient buildings for the N orth­
west, according to Mr. Spalding.
Student Savers Learn, Earn
RBC spent a year assem bling th e book, th e whole idea of which is to
dem onstrate how a w ell-planned design solution can help a financial
institution m eet changing needs w ithin its com m unity,” Mr. Spalding
says.
Copies of th e book are available from Mr. Spalding, director of
m arketing, Bank Building C orp., 1130 H am pton Ave., St. Louis, MO
63139.

Comptroller Announces Consolidations
In Cleveland, Minneapolis Regions

C

Bank 'Idea Book' Published

A

Center layout of BBC Idea Book deals w ith "rem odeling for results." Before and
a fte r views of projects are included in the full-color publication.

38


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

Detroit youngsters are learn ing how to
h an dle and save m oney a t an early age
through a program developed by M an u fac­
turers Bank. Public school students in kin ­
dergarten through sixth grade are allow ed
to keep th e ir own deposit records and com­
p u te th e ir o w n in te re s t. Jean B u g a j,
teacher a t Stark Elem entary School, hands
check to W illia m Kendall for money he
saved. Looking on is Pat Darden, branch
o fficer, Jeffe rs o n -C o p lin M an u fa c tu re rs
Bank, and school p rogram coordinator.
Stark is one of three e lem entary schools
p articip atin g in program .

MID-CONTINENT BANKER for December, 1 9 8 3

Equipment Leasing:
A Profitable Product for Banks
is a profit­
able pro d u ct for banks, b u t until
recently, th e high cost of establishing
leasing operation has p re v e n te d m any
banks from en terin g th e m arketplace.
Sophistication necessary for book­
keeping, pricing, eq u ip m en t evalua­
tion and tax advice as well as co n ten d ­
ing w ith m ajor changes each tim e C on­
gress enacts new tax legislation has re ­
q u ired expensive start-u p costs and
new p erso n n el. Also, portfolio size
may be restricted by tax ap p etite or
m arket lim itations. C u rren tly , service
com panies, consultants and com putersoftware houses have com bined th e ir
efforts to provide services at reason­
able prices th at allow even th e sm allest
banks to be involved in e q u ip m e n t
leasing.
S tan d ard sta rt-u p for an average
b a n k is in th e n e ig h b o r h o o d o f
$300,000 to establish a leasing activity
and then $150,000-$200,000 annually
to m aintain a basic d ep artm en t. The
new alternative is th e service/consultan t firm, w hich will provide all th e
services necessary to conduct a leasing
operation and charge a fee (based on
lease-transaction size), usually about
150 basis points of each transaction.
Such firms rem ain in th e background,
acting only as an operations d e p a rt­
m ent, and do not becom e involved in
credit decisions or funding.
This new service allows bankers to
q u ip m e n t l e a s in g

E

By Terrence J. Winders
a
p u t th eir “toe in th e w ater” and test the
m arketplace and feasibility of e q u ip ­
m ent leasing at a m inim al cost.
If leasing does not take hold or the
tax appetite of th e lending institution is
reduced, th ere have been no heavy
start-up costs to am ortize. Also, the
bank has b een kept abreast of changing
tax laws, had training for its officers
and, m ost im portantly, has m ade a
profit on each transaction.
C o m m e rc ia l loans h av e y ie ld e d
banks the c u rren t prim e rate plus a risk
factor, w hile eq u ip m en t leasing has
enjoyed yields of 500-800 basis points
in excess of the prim e rate. W ith the
c u rre n t p rim e rate at 11%, leasing
yields are com m anding from 16-20%
d ep en d in g on m arket conditions and
eq u ip m en t leased.
T h e reason yields on e q u ip m e n t
leasing are g reater than yields on trad i­
tional lending is tied to the uneven
n a tu re of how tax co n sequences of
a s s e t o w n e rs h ip a n d e s tim a te s of
eq u ip m en t value at lease term ination
differ from one lending institution to
another. Leasing yields also have re ­
m ained high because of the unusual
risk leasing represents and lack of com ­
petition. Also, because the bank owns
th e le a se d e q u ip m e n t, it p ro v id es
additional incom e at lease term ination

w hen inflation or econom ic conditions
cause the asset to be of g reater value
than originally assum ed.
C o n te m p o ra ry tr e a s u r e r s an d
c o m p tro lle rs are u sin g e q u ip m e n t
leasing to organize th eir cash flows to
coincide w ith actual cost req u irem en ts
instead of being tied to specific w rite­
offs for depreciation and in terest that
have becom e inflexible and unm aneuverable. E q u ip m en t leasing is ex­
pected to rep resen t 60% of th e capital
goods m arket by 1985.
T he rate im plicit in a lease is the
effective cost the custom er pays after
credit has been given for th e benefits
of ow nership by the lending in stitu ­
tion. These variables to th e eq u ip m en t
lease may include use of investm enttax credit, accelerated depreciation or
value of the eq u ip m en t at lease te r­
m ination. E q u ip m en t leasing does not
alw ays involve tax co n sid e ra tio n s.
O w nership of the asset allows the le n d ­
ing institution to take the benefits of
ow nership at lease term in atio n (re­
sidual) w ithout necessarily retaining
th e investm ent-tax credit or deprecia­
tion. T h erefo re, eq u ip m e n t leasing
allows a lending institution to eith er
provide a tax lease or a non-tax lease
and still provide program s that m eet
th e unusual needs of m odern business.
T here are firms that will guarantee to
purchase eq u ip m en t from a bank at
lease term ination, allowing th e bank to

Terrence J . W inders is p resid en t, F irst Lease & E q u ip m en t C onsult­
ing C orp., Louisville, form ed in N ovem ber, 1982. This firm is a service
organization that supports efforts of banks and o ther financial institu­
tions to u n derstand and engage in eq u ip m en t leasing. Services provided
include, b u t are not lim ited to, training, lease pricing, docum entation,
bookkeeping, accounting and advertising. F irst Lease also evaluates
collateral and supports disposal of off-leased or repossessed equipm ent
and conducts leasing sem inars for bankers.
Mr. W inders form erly was senior vice president, F irst National,
Louisville, and, before that, p resid en t, Q uartel C orp., a San Franciscobased leveraged-lease-packaging firm.
H e is a key m em b er of th e Am erican Association of E q uipm ent
Lessors’ inform ation com m ittee, w hich gathers p ertin e n t industry data
for using to defend and prom ote equipm ent-leasing legislation in C on­
gress.
Mr. W inders has taught leasing classes, has spoken and w ritten on the
subject, has b een a consultant on eq u ip m en t leasing to m ajor corpora­
tions and has b een instrum ental in financial institutions’ m ergers/acquisitions of leasing firms.
MID-CONTINENT BANKER for Decem ber, 1 9 8 3

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

39

ANNUAL PRESENTATION OF MONTHLY NUMBERS

1983
1984
1985
1986
1987
1988

+ RENT

- COST

19,102
229,221
229,221
229,221
229,221*
310,119

1,000,000

PRE TAX
CASH FLOW
-980,898
229,221
229,221
229,221
229,221
310,119
246,105

1,246,105

TAXES
PAID
- 156,763
9,302
13,672
13,672
13,672
142,655
36,208

AFTER TAX
CASH FLOW

RETURN §
9.72%

- 824,135
219,919
215,549
215,549
215,549
167,464

0
-73,608
-58,889
-42,964
-25,421
- 9,015

209,897

-209,897

OUTSTANDING
BALANCE
- 824,135
- 677,823
- 521,163
- 348,578
- 158,449
0
0

*Includes sale of residual for 10%
Assumptions :
Equipment Cost: $1,000,000
Lease:
5 year
60 months (in advance) payments
Tax Rate: federal 46%;
Investment Tax Credit: 10%
(95%) 5 year accelerated depreciation
Accrual tax payer
Bank Yield: 18%
Customer Cost: 5.7%
Delivery: December 1, 1983

offer a non-tax lease and elim inate th e
residual risk.
An explanation of th e application of
sev era l v a ria b le s to an e q u ip m e n t
lease is necessary to explain th e basic
prem ise of an eq u ip m en t lease to show
how the yield is easily com parable to
th e in terest rate in a traditional loan.
V alues assig n e d to in v e s tm e n t-ta x
credit, depreciation and residual will
vary th ro u g h o u t th e year based on
actual delivery date or inception date
of the eq u ip m en t lease. A com m ercial
loan is repaid w ith principal and in ­
te r e s t. An e q u ip m e n t le a s e m u st
accept rental paym ents as rev en u e and
is offset for incom e-tax purposes by d e ­
preciation and investm ent-tax credit.
Therefore, cash flow in an eq u ip m en t
lease and the value it rep resen ts m ust
be dealt w ith in an after-tax en v iro n ­
m ent. F or exam ple, an 18% pretax in ­
terest rate can be expressed as a 9.72%
after-tax re tu rn (after federal incom e
taxes are paid). The chart above shows
how cash flow and yield analysis of an
equip m en t lease can be applied to th e
traditional re tu rn on investm en t the
same as in terest is calculated on a tra ­
ditional loan.

Breaking Down Yield
Presentation of cash flows on this
tax-eq u ip m en t lease shows th at th e
outstanding balance and th e 9.72% af­
ter-tax re tu rn can be com pared to any
conventional loan w ith identical repay­
m ent term s. An additional way to ex­
plain th e value of th e variables in an
equip m en t lease is to break down that
portion of th e yield that is identifiable
to each variable. Thus, we have:
40


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

by reducing his effective rate. Also, for
each 5% of additional value assigned to
the residual assum ption, the yield is
increased by 158 basis points or the
bank may choose to reduce the cus­
to m er’s effective rate. For instance,
two banks are com peting for th e cus­
to m er’s business and happen to be in
different states w ith different state-tax
rates; th eir conservative natu re causes
C ustom er Effective R ate
5.70%
th em to assu m e d iffe re n t resid u a l
In v estm en t Tax C re d it (10%)
7.68%
values, and they both expect to receive
A ccelerated D ep reciation
(ACRS)
1.03%
an 18% yield. T hen, th e custom er’s
E q u ip m en t Value at
rates will vary because of the different
T erm ination (10%)
3.59%
value of the variables selected by the
bank. For the first tim e, the custom er
Total Yield to Bank
18.00%
will have major differences in the rates
To show how variables in the e q u ip ­ he has been quoted; w hereas, had he
m ent lease take on different values, it req u ested in terest rates on a com m er­
is im portant to und erstan d that the d e ­ cial loan, variances from one lending
livery date of the eq u ip m en t also is a institution to another w ould have been
variable because in any tax year the minimal.
n u m b er of rentals paid equals th e total
E q u ip m en t leasing can be the most
revenue to be taxed in that year. D e ­ profitable portfolio in the bank, b ut it
preciation and investm ent-tax credit also can be the m ost com plicated one.
have a constant value the first year re ­ The changing stru ctu re of banking is
gardless of w hen th e eq u ip m en t is d e ­ causing m any bankers to reach out for
livered. T herefore, th e later in the tax new ways to hold on to existing busi­
year th e eq u ip m en t is delivered, the ness and to expand into new o p p o rtu ­
low er th e revenue, th ereb y increasing nities. H ow ever, special care should
th e tax savings to the bank for th at tax be taken that th e risks of eq uipm ent
year. H ere is an example:
leasing are understood along w ith the
rewards. E ven though profits are high
June
D ec.
Jan.
w ith eq u ip m en t leasing, th e risks are
5.70
5.70
5.70
C ustom er Rate
severe if the un train ed banker v en­
7.68
6.20
6.81
ITC 10%
tures into this com plicated product.
1.03
.42
.009
ACRS
E q u ip m en t leasing will continue to
3.59
3.35
3.14
R esidual 10%
grow at an increasing rate as the knowl­
Total Bank
edge of its advantages and banks’ abil­
18.00
16.28
15.05
Yield
ity to react to th e m arketplace im ­
Also, value of the variables in an p ro v e . E q u ip m e n t le a s in g w o u ld
eq u ip m ent lease can vary dram atically appear to be leading the charge of the
b e tw e e n le n d in g in stitu tio n s w hen changing e n v iro n m e n t banks m u st
th eir state tax rates and/or eq u ip m en t contend w ith as the industry reacts to
assum ptions are different, keeping in th e m any challen g es of th e 1980s.
m ind that the custom er who is p ro ­ E q uipm ent leasing rep resen ts a p ro d ­
vided a 5.7% effective rate is im partial uct that is on th e m u st list of many
to which lending institution he leases b an k s for th e im m e d ia te fu tu r e .
th e equ ip m ent from, because th e im ­ How ever, I highly recom m end that a
pact to him is constant. The lending b an k v e n tu rin g in to th is in d u stry
institution m ust consider that for each select one of the cu rren t schools or
1% of state-tax rate, th e yield is in ­ sem inars that address th e risks of the
creased by nine basis points or the business so that its future will be a
bank may reduce the custom er’s cost bright one. • •
MID-CONTINENT BANKER for December, 1 9 8 3

Profit from participation in equipment leasing —
one of the most rapidly expanding commercial financing
vehicles in the banking industry today.

will position your bank
in the $60 billion world of
equipm ent leasing —
immediately!

Strengthen your portfolio of customer services by
joining the increasing number of commercial banks and
thrift institutions that are joining First Banclease.
First Banclease provides marketing support, lease
portfolio management, internal reporting services, legal
and accounting expertise, and much more, through
programs tailored to meet your individual needs.
Satisfy your present customers, and attract new ones, with
your own full-time equipment leasing service. And
do it all with little or no increase in overhead.
For a d d i t i o n a l i n i o r m a t i o n c a l l or write:

Dan Coughlin
First Banclease Division
TriContinental Leasing Corporation
1 Mack Centre Drive
Paramus, NJ 07652
(800) 526-4672
In New Jersey (201) 262-9310
AFFILIATES HAVE BEEN PROVIDING SERVICES TO BANKS SINCE 1935
MID-CONTINENT BANKER for December, 1 9 8 3

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Federal Reserve Bank of St. Louis

41

Should Your Bank
Consider
A Sale-Lease-Back?
H E N m any bankers th in k of
By C. Frank Chauvin
sa le -le a se -b a c k tra n sa c tio n s,
And
they envision illiquid balance sheets,
Robert M . Dolgin
shrinking profits or even losses. But
the fact is, th e sale-lease-back te c h ­ C. Frank Chauvin and Robert M. Dolgin
nique m ight benefit any bank seeking a are partners in the St. Louis and Houston
lower cost of funding and im prove its offices of Ernst ir Whinney, respectively.
financial or tax position as well. T here The authors wish to express their apprecia­
are pitfalls, how ever, and careful plan ­ tion to Robert Haunschild o f Ernst l?
ning is n eed ed to achieve th e d esired Whinney s National Financial Services In­
dustries staff fo r his contributions to the
results.
Every bank wants to maximize ea rn ­ article.
ing assets. W ith th e sale-lease-back
technique, in m any cases a bank can some of those benefits may be passed
unlock funds tied up in fixed assets and on to the seller-lessee.
achieve low er o p eratin g costs. And
A d v a n ta g e s o f S a le-L ea se-B a cks.
funds derived from the sale may be The seller-lessee turns a fixed asset
into cash available for operating p u r­
redeployed into earning assets.
How a Sale-Lease-Back W o rks. A poses. The cash can be used to fund
sale-lease-back tran sactio n involves additio n al loans, re tire unfavorable
the sale of p ro p erty and a lease-back of debt, make acquisitions or serve other
the same p ro p erty by th e seller. U nder general operating purposes. T hat can
a typical sale-lease-back arrangem ent, result in an im proved financial position
the seller-lessee receives cash for the if the lease-back is not capitalized for
sale price of th e asset (usually bank real accounting purposes (i.e., an o p erat­
property or equipm ent) and agrees to ing lease). If the asset is sold at a gain, it
lease the p ro p erty from th e buyer. The usually is recognized over th e lease
lease agreem ent usually is long-term term , re su ltin g in increased fu tu re
— 10 to 30 years — and m ight provide earnings and capital. Accounting for
for escalation or renew al options as s a le -le a se -b a c k tra n sa c tio n s is d e ­
well as o th er term s.
scribed in Financial Accounting Stan­
T he b u y er-lesso r usually co n trib ­ dards Board S tatem ents 13 and 28.
utes a portion of th e sale price and
Because rental paym ents un d er a
finances the rest w ith a long-term loan sale-lease-back may be less than d e ­
from an u n re la te d th ir d p a rty . In p re c ia tio n and in te re s t charges in ­
effect, th e buyer-lessor is buying tax c u r r e d if p r o p e r ty w e re o w n e rbenefits — depreciation on th e p ro p ­ financed by debt, a sale-lease-back can
erty and in te re s t on th e long-term resu lt in lower operating costs. In a
debt. As an in d u cem en t to th e seller- favorable lease, the seller-lessee typi­
lessee to e n te r into th e transaction, cally can obtain a rate one to IV 2 p e r­

W

centage points less than it would have
to pay in the deb t m arket.
Some banks in over-sheltered tax
positions can use the sale-lease-back to
generate a taxable gain from appreci­
ated property. Also, cash from the sale
can be in v e ste d in taxable in v e st­
m ents, fu rther increasing taxable in­
come.
A sale-lease-back also can be useful
for a bank seeking additional ded u c­
tions. For example, a bank construct­
ing a new internally financed building
m ight find it advantageous to en ter
into a sale-lease-back. If a portion of
th e property is land, and the lease is an
operating lease, deductible rental pay­
m ents will include an am ount for use of
th e land; w hereas land ow ned would
not be depreciable.
For a bank holding com pany acquir­
ing property, a sale-lease-back can be
s tru c tu re d to avoid new long-term
d eb t on the balance sheet. That is the
case w hen the lease-back does not re ­
sult in capital lease accounting.
D isadvantages o f Sale-Lease-Backs.
A lthough a sale-lease-back allows a
bank to retain use of the property, re ­
linquishing ow nership and foregoing
fu tu re appreciation may not be the
b est approach for every bank.
Facilities planning will be signifi­
cantly affected. The bank norm ally will
becom e obligated to a long-term lease
that can result in less flexibility and
restrict m ovem ent. The lease agree­
m en t also may have restrictive escala­
tion and renew al features. And w hen
th e lease expires, the bank m ight have

Factors to Consider in a Sale-Lease-Back
Disadvantages

Advantages

•
•
•
•
42

Converts fixed assets into cash
Improved financial position
Reduced cost of financing
Opportunity to generate taxable gain


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Federal Reserve Bank of St. Louis

•
•
•
•

Rights of ownership given up
Long-term commitment usually required
Foregone depreciation deductions
Possible additional tax liabilities
MID-CONTINENT BANKER for December, 1 9 8 3

to move or renegotiate.
Leasing p ro p erty m eans giving up
the equity position, th e rew ards of fu­
tu re appreciation and th e opportunity
to renegotiate m ore favorable financ­
ing to reduce operating costs in the
future. Tax advantages of ow ning p ro p ­
erty also are foregone. If appreciated
p ro p erty is sold, th e resu ltin g gain
m ight result in additional tax liabili­
ties.
Regulatory C onsiderations. Several
bank holding com panies recently have
c o n sid e re d sa le-lease-b ack tra n sa c ­
tions as a m eans of increasing rep o rted
capital of subsidiary banks. In a typical
proposed transaction, th e subsidiary
bank w ould sell or dividend its p ro p e r­
ty to the p aren t com pany at net-book
value. The p aren t th e n w ould sell the
property to a th ird party w ith a lease­
back arrangem ent and reinvest p ro ­
ceeds of th at sale in th e subsidiary
bank, thus increasing th e bank’s capi­
tal. The gain on sale, n e t of incom e tax,
would be d eferred by th e p aren t com ­
pany and am ortized over th e lease­
back term .
T he d e sire d re s u lt — in creasin g
capital th a t w ould re s u lt from this
transaction — is p ro h ib ited by an in­
terp retiv e ruling of bank regulatory
agencies. T hat ruling req u ires th at a
dividend of pro p erty to a p aren t m ust
be recorded at actual c u rre n t pro p erty
v alu e. P ro p o s e d re v isio n s to callrep o rt instructions reaffirm th at posi­
tion.
W e u n d e r s ta n d th a t re g u la to r y
agencies will not p erm it exceptions to
that ruling for sale-lease-back transac­
tions, regardless of how th ey are stru c­
tured. W h e th e r th e p ro p erty is tran s­
fe rre d from th e b ank to its p a re n t
through a dividend or a sale, regulators
w ill alm ost c e rta in ly o b ject to any
accounting tre a tm e n t u n d e r w hich th e
bank records a gain or increases its
capital in an am ount g reater than the
gain recognized by its p aren t com pany
in accordance w ith GAAP (generally
accepted accounting procedures).
S u m m a ry . A sale-lease-b ack is a
som etim es-overlooked financial and
tax-planning tool available to m any
banks and bank H Cs. Potential b e n ­
efits from en terin g a properly stru c­
tu red sale-lease-back include:
• C o n v ersio n of fixed assets into
cash.
• Im proved financial position.
• A b ility to b e t t e r m a n a g e th e
bank’s tax position.
• R educed cost of financing.
C onversely, a bank m ust be willing
to accept th e term s of a lease ag ree­
m ent and give up th e advantages of
property ow nership.
Finally, although a transaction may

be a sale and lease-back for tax p u r­
poses, it m ight be treated differently
u n d er generally accepted accounting
p r in c ip le s a n d /o r re g u la to r y - a c ­
counting practices. Tax and accounting
advisors should be consulted about any
proposed transaction. • •
• The C onsum er Bankers Association
has scheduled its annual conference on
th e latest developm ents in financialinstitution products and services for
January 15-17 in Atlanta. Inform ation
is available from the association at 1300
N. 17th St., Suite 1200, Arlington, VA
22209.

• Jeffrey O wen has b een nam ed direc­
tor of th e ABA’s com m unity bankers
council. W ith the association 11 years,
M r. O w en had been director of the
state association division since 1979.
• A new A B A BancTraining videotape
is available. Called “Evaluating E m ­
ployee Perform ance Effectively,” it fo­
cuses on how effective perform ance re ­
views can help assure that em ployees
live up to th eir potential to handle
th e ir jobs skillfully and create new
profit opportunities. F or inform ation,
call: Jeanie H ow ard toll free, 1-800247-0010.

Info-Lease is here!
DECISIO N SYSTEMS, INC.
offers a computerized lease
accounting system that not only
manages your leasing and
accounting systems accurately and
efficiently, but also helps manage
your lease portfolio, equipment
and other im portant management
functions.
“IN FO -LEA SE” has been
developed over the past nine years
by Decision Systems and Norwest
Leasing, an affiliate of Norwest
Corporation.
“IN FO -LEA SE” is being used by
a large num ber of banks and
leasing companies throughout the
U.S. and is available via time­
sharing or on your own mainframe,
mini or microcomputer.
IN TERESTED ?
For information on “INFOLEASE” detach and mail or call.
D ECISION SYSTEM S, INC.
1850 Soo Line Building
Minneapolis, MN 55402

(612) 338-2585
A TTEN TIO N :
T hom as B. Quilling

N a m e _________________________________ T itle ______________
B a n k _____________________________________________________
A ddress __________________________________________________
City, State, Zip ___________________________________________

MID-CONTINENT BANKER for December, 1 9 8 3

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Federal Reserve Bank of St. Louis

43

Equipment Leasing Largest Source
O f Capital-Investment Funds
By Jack G. Hays

leasing industry, both lessors and les­
sees, that they can continue to grow
and prosp er in such a tum ultuous e n ­
ODAY, eq u ip m en t leasing has b e ­ vironm ent. It also is an indication of
come th e largest source of funds th e viability of the industry and the
for capital investm ent in th e U nitedim portance of the service it provides.
In a recent survey by the Am erican
States.
T he im p o rtan ce to this nation of A ssociation of E q u ip m e n t L essors,
1982 business volum e increased 19%
leasing to finance capital investm ent
over
1981, and prelim inary figures in­
has been dem on strated by actions of
Congress to provide increased capital- dicated 1983 will reflect an even larger
investm ent incentives through th e tax increase. Not all segm ents of the leas­
system w ith passage of th e Econom ic ing in dustry have ben efited equally
Recovery Tax Act (ERTA) in 1981 and from this increase, and those in the
Tax E quity and Fiscal R esponsibility m iddle m arket have struggled to p re ­
Act (TEFRA) in 1982. H ow ever, these vent a runoff of th eir portfolios.
The year 1983 continued to see new
two am endm ents to th e tax code have
entrants
into the industry in the form
created m uch confusion, w hich has
been com pounded by lack of regula­ of start-up com panies, insurance com ­
panies, m anufacturers and some con­
tions issued by th e Treasury.
ERTA, w ith the safe-harbor leasing so lid a tio n o f le a sin g a c tiv itie s via
rules, took th e approach of considering m ergers. Banks continued th eir strong
leasing as a tax transfer from a com pany p osition, w ith som e changing th e ir
that couldn’t use th e tax benefits in h e r­ strategy from leasing for th e ir own
en t in equ ip m en t acquisition to a com ­ account to b ro k erin g , d u e to th e ir
pany that could use th e benefits w ith­ changing tax position.
The 15% in terest exclusion included
out considering risks and benefits of
in TEFR A has caused some banks to
ownership.
TEFR A reflected the consensus that review th e ir tax strategy as leasing
ERTA was costing the U. S. T reasury prom ised a potentially higher effective
too m uch m oney and phased out the yield than tax-exem pt instrum ents.
W ith lack of capital expenditure and
safe-harbor lease and w ith transition
loan dem and generally down, pricing
rules reflecting m any special-interest
becam e very com petitive and leasegroups w ith various provisions having
different effective dates over the suc­ resid u al assum ptions becam e m ore
ceeding years. ERTA also created a a g g ressiv e. T h e se tw o factors will
“finance lease” in an attem p t to pacify place pressure on future earnings and
req u ire expert collateral m anagem ent
many lessee groups th at had prom oted
of lease portfolios. H edging of residual
safe-harbor leasing.
The leasing in dustry is considered a values is increasing through insurance
nonregulated industry. To th e extent and discounted sale of residuals. U n­
that it is not directly controlled by nor fortunately, hedging of the com peti­
reports to a regulatory agency or agen­ tive pricing is not as easily accom ­
cies such as th e F ed or C om ptroller of plished.
The year 1984 ushers in the era of
the C urrency, it is not except for those
participants th at are banks and bank th e “finance lease” created by TEFRA.
holding com panies. H ow ever, its ac­ It is C ongress’ and the lobbyists’ crea­
tivities are scrutinized by and p e rim ­ tion as a substitute for ERTA’s safeeters in w hich it m ust function are dic­ h arbor lease. As of this w riting, regula­
tions for the “finance lease” have not
tated by th e In tern al R evenue Code
with its m ultitude of T reasury regula­ b een issued, b ut that has not d eterred
tions, the Financial A ccounting Stan­ proponents and opponents from some
dards Board and various state laws. All h eated debate.
G e n e r a lly , th e “ fin a n c e le a s e ”
these are subject to change and/or in­
allows
a fixed-price-purchase option of
terpretatio n by C ongress, an agency of
no less than 10% of the original eq u ip ­
the governm ent and/or th e courts.
m e n t cost to th e lessor. H ow ever,
It is a trib u te to all participants in th e
m any of th e safe-harbor-lease rules
Jack G . Hays is president, AmSouth Finan­ apply and w ith o th er restrictions, les­
cial Corp., Birmingham, A l a a subsidiary sor benefits are reduced, th ereb y re ­
o f AmSouth Bank, also o f Birmingham.
ducing benefits passed to the lessee.

T

44


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Federal Reserve Bank of St. Louis

D uring 1984, a 40% cap is placed on
am ount of property that may be “fi­
nance leased by lessees, and lessors
may recognize the ITC equally over
only a five-year period and may reduce
th eir tax liability by only 50%. Until
th e regulations are issued, it is difficult
to d eterm in e the application of the “fi­
nance lease,” b ut it appears it will be
m ore attractive in those transactions
involving eq u ip m en t w ith a high re ­
sidual value.
In addition to the “finance lease,”
1984 undoubtedly will bring new laws
re g a rd in g leasing to g o v ern m en tal
bodies and o th er nonprofit entities.
T hese will be restrictive and attem p t
to curb w hat some perceive as abuses.
At th e p re se n t tim e, dem and for
lease transactions is m aterially greater
than the supply. But as dem and for
goods and services continues to rise,
dem and for increased capacity and re ­
placem ent of obsolete facilities will in ­
crease. This augurs well for the leasing
industry in 1984. • •

Community-Banking Assembly
Set for Phoenix in February
Speakers for th e ABA’s N ational
Assembly for C om m unity Banking will
include Charles Kuralt, CBS news cor­
respondent, and H ugh Sidey, form er
b u re a u chief, Tim e M agazine. The
m eeting will be held F ebruary 26-29 at
th e H yatt Regency H otel, Phoenix.
W orkshop topics will include realestate equity participation, discount
brokerage, financial futures, pricing
bank services, credit outlook for agri­
c u ltu ra l cu sto m ers, in cen tiv e com ­
pensation, profits through secondary
m ortgage m ark ets, diversifying the
m o rtg a g e p o rtfo lio an d e m p lo y e e
stock-ow nership plans.
Five m icro-com puter sem inars will
be offered daily during the m eeting,
and two hours of personal instruction
on a micro will be available to partici­
p a n ts. S e m in a r to p ics are “A sset/
L iability M a n ag em en t,” “A dvanced
S p r e a d - S h e e t P a c k a g e s ,” “ C ro ssSelling Bank Services,” “Board Room
R eporting” and “T rust A pplications.”
A ttendees also will be able to p ar­
tic ip a te in p e e r - g r o u p m e e tin g s .

• F. Rockwell Lowe, vice president,
C ontinental Illinois National, Chica­
go, has been nam ed m anager of the
b a n k ’s D allas reg io n a l office. M r.
Lowe, w ith C o n tinental Bank since
1975, has spent his en tire career th ere
in the U. S. banking services d ep art­
m ent.

MID-CONTINENT BANKER for December, 1 9 8 3

You can offer equipment leasing
without a leasing department.
We’re here to back you up.
Equipment leasing can be a very profitable busi­
ness. But it can also be a very complicated one.
You need to know the exact future value of equip­
ment, how to price the lease to your customer, how
to protect the equipment’s residual value, and how
to comply with the latest regulatory changes and
tax laws.

We’ll show you how.
At First Lease, we have years of experience in every
phase of equipment leasing. We’ll come to you.
We’ll show you how you can offer equipment leasing
without the expense of starting up and maintaining a
leasing department. You’ll be able to handle your
customer and your credit decisions without interfer­
ence. We’ll stay in the background, taking care of
the mechanics; your customer doesn’t know we
exist.
We’ll keep you abreast of changing rules and regula­
tions, provide accurate pricing guidelines, evalua­
tion and documentation programs. And most impor­
tant— we’ll take care of the bookkeeping. Your staff
will learn how to identify a potential lease customer.
We’ll support your marketing by teaching you to
make vendor calls, and provide you with ads and
brochures.


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Federal Reserve Bank of St. Louis

We’ll be your operations department.
First Lease provides you with a computerized
pricing system which incorporates all the variables
involved in lease pricing. You’ll be able to offer your
customers competitive prices while you increase
your profit yield.
We understand the special requirements of handling
documentation in a lease transaction— how equip­
ment location, use, and termination can affect your
profits— and how to avoid unexpected costs and tax
liabilities.
Our comprehensive knowledge of all types of equip­
ment allows us to accurately predict your residual
values. We also offer a Guaranteed Residual Pro­
gram to protect your investment.
Let us make equipment leasing a profitable product
for you. For an in-house consultation, fill out the form
below or call 502/423-7730.

AND EQUIPMENT CONSULTING CORR
420 Hurstbourne Lane • Suite 202
Louisville, KY 40222
Please have one of your leasing experts
contact me.
Name
Position
Company Name

Phone

Four Fact-Filled Manuals for The Bank Director
Every Director Should Have a Copy of Each One
B O A R D R E P O R T S . . . for The Bank Director

$26.00

More effective board meetings begin with effective reports. This 200-page manual
w ill help you determine the "quantity and quality'' of monthly reports needed by
directors so they (and management) can make proper decisions. Included are ex­
amples of reports most needed by directors who want to create policies that lead to
prudent management. Contains information on many topics such as effective re­
porting. . . reports to shareholders. . . report of examination. . . bank liquidity and
capital analysis. Manual illustrates various formats board reports can take. . . from
oral to detailed graphic presentation. Author: Dr. Lewis E. Davids.

P LA N N IN G T H E B O A R D M E E T IN G

$10.00

This 64-page booklet provides some workable agenda, suggestions for advance plan­
ning and also lists types of reports a board should receive monthly and periodically.
It emphasizes the need for informing the board as q u ic k ly and concisely as possible.
Contains a chapter outlining a "w orkable" board meeting, another on visual aids for
the board meeting. Also contains a model for minutes of the board, plus sample
forms to communicate status of bank to the board. An excellent "com panion" to
BOARD REPORTS. Author: Dr. Lewis E. Davids.

E F F E C T I V E S H A R E H O L D E R M E E T IN G S

$16.00

Before your next shareholder meeting, get ready for gadflies, activists and others
who may be planning to disrupt your program. Here's h o w to anticipate damaging
incidents, prepare tested countermeasures, turn potential disasters into a plus for
your bank. Details include handling of unusual actions (such as replacing a CEO) —
political contributions, laws and regulations directors may unwittingly break, stock
purchases, sales and disclosures, proxy provisions, etc. A checklist of meeting de­
tails. Promoting attendance. Stockholder proposals. Materials to mail. Agenda and
procedural rules.This book is a tested"how -to"of Annual Meetings from inception
to final reports, including personnel responsible for each step. 96 pages of "m ust"
reading for chairmen, directors and officers involved.

R E S P O N S IB IL IT IE S O F B A N K D IR E C T O R S

$11.00

This book is "rig h t" for today's banking problems. Due to the economic influence
banks have on their communities, the rapid growth of HCs and the ever-growing
"consumer" movement, directors must know what is expected of them and their
bank in terms of responsibilities to depositors, shareholders and the public. This
manual examines recent court decisions, investment return, continuity of manage­
ment, long-range planning, effects of structural changes on competition, and more.
Author: Raymond Van Houtte, president, Tompkins County Trust Co., Ithica, NY.

The BANK BOARD Letter
408 Olive St., St. Louis, MO 63102

QUANTITY P R IC E S
Board Reports

Planning The Board Meeting

2 - 5 ..................... $23.00 ea.
6 -1 0 .................... $22.00 ea.
Over 10 ............ $21.00 ea.

2-5 ............................. $8.00
6-10 ........................... $7.50
Over 10 ...................... $7.00

Please send:
____ copies. Board Reports

$-

____ copies, Planning Meeting
____ copies, Effective Shareholder Meetings

$-

____ copies. Responsibilities of Directors

$.

____ Total Enclosed

$.

Name & T itle _____________________________

Effective Shareholder Mtgs.

Responsibilities of Directors

2-5 ........................... $13.00

2-5 ............................. $9.00

6-10 ........................... $10.00

6-10 ................................ $ 8.00

Over 1 0 .................... $ 9.00

Over 10 ...................... $7.50


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Bank_______________________________ ____
Street________
City, State, Zip
(Please send check with order. In Missouri, add 4.6% tax.)

D irect-Equipm ent Leasing:
O ptions for Today's Bank
the participant that retains th e tax b e n ­
efits, is th e b est choice. A bank in that
position is trying to increase its o u t­
T H E E Q U IP M E N T -leasing boom standings and probably is willing to
is on and th e tre n d line is definitely leave its traditional “trade area’’ to do
up. E quipm ent-leasing arrangem ents so. The bank is buying lease paper, ju st
are replacing th e traditional com m er­ as it may buy F ed funds, com m ercial
cial loan and diverting billions of dol­ paper or conditional sales contracts.
lars of potential bank business. L eas­ The leasing firm w ould provide train ­
ing often is d escribed as a dynam ic, ing to th e accounting d ep artm en t, and
fast-growing, profitable and com plex the bank may or may not have recourse
b u sin ess. In th e p ast, leasin g was to the leasing firm. In this case, the
being handled by in d e p e n d e n t leasing bank receives only its base interest
com panies, e q u ip m e n t-v e n d o r p ro ­ rate, b u t because of its high liquidity,
gram s and larg er b ank-leasing su b ­ the yield available to it may be higher
than any o ther option available.
sidiaries.
P artn er “B ,” the leasing firm that
W ith in th e last five years, m any
will
pay a commission to a bank for
small and m edium -sized banks have
begun to p u rsu e th e leasing m arket originating a lease, is th e logical choice
aggressively. This has b een p ro m p ted for a bank heavily loaned up, in a
by the higher yields available and in ­ m inim al tax position and still has sub­
creased com petition w ithin th e finan­ stantial loan activity. This p artn er will
cial industry. An eq u ip m en t-leasin g provide th e bank w ith profitable fee
service will enable a bank to provide an incom e for generating leases in that
attractive lease package to build loyal­ area, yet not strain the bank’s lending
ty with existing custom ers and, at th e capacity. The leasing firm will provide
same tim e, will gen erate an additional training to loan officers so they are
reason for p rospective custom ers to com fortable in prom oting leasing to
th e ir trad itio n al loan cu sto m ers. A
choose your bank for all th e ir business.
A bank th at w ants to take advantage good P artn er “B will keep a low p ro ­
of th e leasing p o ten tial in its trad e file to ensure a continued strong bankarea, b u t is u ncertain how to e n te r the custom er relationship. For exam ple,
m arketplace in th e m ost econom ical any notices or invoices sent by the leas­
m anner, should co n sid er a leasing- ing firm should display th e b a n k ’s
nam e and address.
p a r tic ip a tio n p ro g ra m . T h e b a n k
The bank that wants to enjoy the full
should look for a p a rtn e r w ith leasing
benefits
of leasing, including the shar­
experience and a program th at fits the
ing
of
tax
benefits, should consider
bank’s needs.
P
artn
er
“C
.” The bank becom es co­
T here are th re e basic types of leas­
ing partners available in today’s m ar­ o w n e r and co-lessor of e q u ip m e n t
leased to its custom ers and enjoys all
ketplace:
A.
A leasing firm th at participates in th e tax benefits of the lease. Invest­
m ent-tax credits, depreciation ded u c­
the funding, usually retaining th e tax
tio
n s and p o te n tia l resid u al values
benefits itself.
B.
A leasing firm th at has funding allow you to a ch iev e su b sta n tia lly
already available, b u t will pay a com ­ h ig h e r yields than those achievable
th ro u g h len d in g . P a rtn e r “ C ” will
mission to th e bank for originating a
share w ith you the funding of the lease,
lease.
will
m anage the lease for you and will
C.
A leasing firm th at participates in
share
the tax benefits w ith you.
funding and tax benefits w ith the bank.
Before
a bank picks P artn er “A, ” “B
The p a rtn e r you w ant depen d s on
or “C ,” it should look at the flexibility
your tax and liquidity position. You
should choose a financially sound p a rt­ o f th e firm . As th e b a n k ’s n e e d s
change, can the p artn er still provide
n er — one th at will be in existence in
th e desired service? The problem s of
the future to help in any situation that
u sing th re e d ifferent p artn ers over
m ight arise and a p a rtn e r w ith w hich
your bank can have a long-lasting rela­ tim e could prove to be a nightm are. At
Collateral Financial Services, we offer
tionship.
all th re e types of partnerships, and the
For the bank in a minim al or zero tax
position and very liquid, P a rtn e r “A ,” bank can change from one to another
d ep en d in g on its cu rren t needs, yet
Dennis McCormick is vice president, Col­ still retain a relationship w ith one firm.
lateral Financial Services, Inc., St. Paul.
O u r program allows you to choose the

By Dennis M cCorm ick

MID-CONTINENT BANKER for December, 1 9 8 3

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

plan that b est fits your tax earnings and
strategy. You may elect to take none of
the tax benefits or, in some cases, to
take m ore of the benefits than norm al­
ly are possible. You also can vary the
term over which you receive your re ­
tu rn to enable you to b e tte r m atch
your leasing activity w ith your availa­
bility of funds or portfolio strategy.
The p artn er a bank decides to work
w ith also should be able to act as the
bank’s “back office. ” It should provide
com plete lease adm inistration, train ­
ing, m arketing and advertising assist­
ance while, at the same tim e, keeping
a low profile with the bank’s custom ­
ers. W hen the leasing laws change,
your p artn er should be able to adapt
q u ick ly to any ch anges n e e d e d in
d o cu m en tatio n or yield-analysis re ­
ports and provide retraining to all the
bank’s loan officers.
D ire c t-e q u ip m e n t leasing can be
profitable and is an excellent service
for a bank to offer. I recom m end that a
bank e n te r this new m arketplace and
that it use a leasing-participation p ro ­
gram such as the one offered by Col­
lateral Financial Services, Inc. • •

ABA Assists Backlogged FBI
W ith Fingerprint-Card Service
M ore than 15,000 fingerprint cards
have been processed m onthly by the
ABA’s security/risk-m anagem ent divi­
sion since the service was initiated in
O ctober, 1982.
The association began th e service
w hen the FBI suspended for one year
fingerprint-card processing for licens­
ing and em ploym ent purposes. The
suspension was designed to elim inate a
huge backlog that had resulted from
FB I adm inistrative problem s, includ­
ing understaffing.
Both banks and thrifts can subm it
fingerprint cards to the ABA, along
w ith a $12 fee established by the FBI
to fund the fingerprint operation. The
ABA collects the fee, verifies the cor­
rectness of the check am ount, makes
sure the cards are properly com pleted
and places the cards in batches for for­
w arding to the FBI.
T he FB I processes the cards and re ­
turns them directly to the financial in ­
stitution. If no FB I record is found, the
card alone is retu rn ed ; if th ere is a
crim inal record, the card is retu rn ed
along w ith the record.
It takes about 15 working days for a
card to be processed and re tu rn e d to
the sending institution. The FBI was
unable to process cards this quickly
before the ABA offered assistance.

47

MABSCO's New Ag-Credit Program
Fosters Bank Aggressiveness
EPRESEN TA TIV ES of th re e ru ­ same thing and make it run, I can see
ral banks say th at since agreeing that this (program) will give the farmto participate in a new agricultural- credit system some co m p etition,” he
credit program earler this year, th eir says. “My personal feeling is that the
banks have becom e m ore aggressive in program is going to grow out of the
pilot stage relatively quickly.”
seeking ag loans.
This fall, Bank of W isconsin had only
O ne of th e bankers, G erald M apes,
presid en t of th e 79-year-old Bank of 10 loans financed through MASI, b u t
Lakeview , M ich., recalls th a t u n til Mr. Raymond expects that to change
earlier this year, he had to funnel ag- next sp ring w hen farm -lending d e ­
loan custom ers seeking m ore than his m and picks up. For years, PCAs have
state’s lending lim it of $240,000 else­ had an advantage in com peting for
w here — usually to a production cred it large ag loans because th eir rates w ere
able to lag behind th e upw ard tren d of
asso c ia tio n . B ank o f L a k e v ie w is,
ho w ev er, am ong a se le c t g roup of in t e r e s t ra te s at b a n k s , h e says.
banks participating in an ag-credit cor­ Although Mr. Raym ond says he has a
poration that becam e fully operational
this year known as MASI (MABSCO
A g ric u ltu ra l S e rv ic e s , In c .). M id
America Bank Services Co. (MABS­ J im C. P o tte r is
C O ), w h ic h d e v e lo p e d M A S I, is e.v.p., MABSCO Agowned and operated by 12 M idw est ric u ltu ra l Services,
a g -c r e d it c o rp o ra state bankers associations. The MABS­ tio n t h a t e n a b le s
CO states are Arkansas, C olorado, Illi­ p articip atin g banks
nois, Iowa, Kansas, M ichigan, M in n e­ to b ec o m e m o re
sota, M issouri, N orth Dakota, O klaho­ c o m p e titiv e in the
ag-lend ing area.
ma, South D akota and W isconsin.
W % / J
Mr. M apes says he heard of MASI
through the M ichigan Bankers Asso­
ciation and im m ediately recognized it
as a “tool” that w ould p erm it his $32- good relationship w ith his local PCA
million bank to becom e m ore com peti­ that he expects to continue, he doesn t
tiv e w ith PC A s a n d o th e r la r g e r hide his desire to pursu e loans that
sources of credit. MASI was a concept norm ally would go to th e PCA. The
day of reckoning is com ing,” he says.
that “hit close to h o m e ,” he says.
At the $20-million M & I Bank of
Jim Raym ond, ag-banking officer at
C
a
m b rid g e , W is ., S h e ld o n A.
the $160-million Bank of W isconsin,
Janesville, has less difficulty covering Schieldt, a vice presid en t in charge of
the loans of his larger ag borrow ers, ag lending, also is m aking plans to
b ut he decided th at through MASI he snare m ore loans away from a highly
could im prove the yield on his ag-loan active PCA. “W e’re aggressively after
portfolio. As a result, he expects that th e ag m arket h e re ,” he says. “T here
Bank of W isconsin will becom e m ore are no two ways about that.
M e m b e rsh ip in M ASI has given
aggressive in pursuing ag loans.
MASI, w hich is backed by the $45- M & I the clout of a m uch larger bank,
billion, D utch Rabobank N ederland, Mr. Schieldt says. M & I ’s rates on ag
can participate up to 80% on an ag loan loans are lower than those available
that m eets R abobank’s tough cred it from th e PCA and Mr. Schieldt is us­
standards. Bank of W isconsin provides ing th at price differential to lure some
the rem aining 20% of th e loan at its long-tim e PCA custom ers to M & I.
O ne dairy farm er locked into a fiveregular rates and adds a half p e rc e n t­
age point or so to the highly com peti­ year repaym ent schedule and highly
tive rate charged by MASI. T he con­ restrictive loan provisions refinanced
cept, says Mr. Raym ond, is sim ilar to at M & I on a 10-year schedule at a
th a t of th e fa rm -c re d it system for low er rate, according to Mr. Scheildt.
which he w orked prior to joining Bank A lthough the local PCA tried mightily
to woo the farm er back, he stayed w ith
of W isconsin.
I’ve said that if we can duplicate that M & I.

!

48


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

A n o th e r fa rm e r fin a n c e d a loan
through the MASI program less out of
personal need than to encourage w hat
he considers an im portant alternate
source of credit, says Mr. Scheildt. Be­
cause the local bank handles all repay­
m ent transactions, the custom er need
never know of M ASI’s involvem ent,
b u t Mr. Schieldt prefers to let his cus­
tom ers know how th eir loans are being
financed. MASI has received consider­
able publicity in ag-finance publica­
tions and he reasons that it doesn’t h u rt
to let custom ers know that M & I,
C am bridge, is one of only 50 banks
across the nation participating in the
program . Farm ers also m ight o th er­
wise w onder how such a small bank has
access to such large reservoirs of capit­
al, he adds.
Since S ep tem b er, 1982, M & I s
loan portfolio has grown from $2 m il­
lio n to n e a rly $13 m illio n . S ince
F ebruary w hen M & I joined MASI,
90% — or nearly $3.5 million — of new
loans have been placed w ith MASI.
U nderstandably, the local PCA has not
r e a c te d w arm ly to M r. S c h ie ld t’s
forays in to its tra d itio n a l h u n tin g
grounds. Mr. Schieldt w orked at the
local PCA for several years and still has
friends there. They tell him he has
becom e a hot topic at PCA directors’
m eetings w here the routine these days
supposedly is “old business, new b usi­
n ess and w h a t’s S helly up to this
w eek?”
W hen speaking of his counterparts
at the PCA, Mr. Schieldt sounds not
unlike an arm y general preparing for a
big battle. “I m eet them in the tren ch ­
es daily,” he says w ith matter-of-fact
determ ination.
Jim C. Potter, executive vice p resi­
d en t of D es M oines-based MASI, isn’t
eager to have MASI portrayed as a
voracious p re d a to r. T he PCAs are
“valuable m em bers of the farm com ­
m unity” and MASI exists only to assist
rural banks and provide an alternate
c re d it source for farm ers, he says.
MASI does not advocate that its m em ­
bers go head-to-head w ith local PCAs,
b u t can’t stop them from doing so, he
explains.
I n te r e s t in M A SI is b u ild in g
th ro u g h o u t th e 12 M ABSCO states
and beyond, says Mr. Potter. Strong

MID-CONTINENT BANKER for December, 1 9 8 3

m arketing efforts in beh alf of MASI are
underw ay in M issouri and Arkansas,
th e only MABSCO states w h ere MASI
has thus far not signed up any m em ­
bers.
MASI recently agreed to take up to
10 m em bers each on a first-com e, firstserve basis from O regon and M ontana.
State bankers associations outside the
MABSCO family m ust re q u e st M ASI’s
involvem ent and dem o n strate th at the
m em bers they w ould p rovide to MASI
can be serviced in a cost-effective m an­
n e r. U n it-b a n k in g s ta te s w ith low
len d in g lim its te n d to b e th e b e st
candidates for future expansion, says
Mr. Potter. So far, MASI has extended
$20 million in cred it thro u g h its 50
existing m em bers, b u t Mr. P o tter ex­
pects a dram atic increase in those fig­
ures next spring.
L oans s u b m itte d to M A SI m u st
m eet some high standards for approv­
al. “They are n ’t looking to get involved
in any collection cases,’’ says Bank of
W isconsin’s Mr. Raym ond. “They are
looking for b etter-q u ality loans. ’’ Bank
of Lakeview ’s Mr. M apes says he has
not had any loan denials at MASI, b u t
adds, “I haven’t sent them any m argin­
al loans e ith e r.”
The opportunity to offer top-notch
credit custom ers access to large capital
pools at com petitive rates is w hat Mr.

M apes finds m ost ap p ealin g ab out
MASI. It was fru stratin g having to
send them to the local PC A, he says.
M ASI’s expertise in ag lending ex­
tends all th e way to Rabobank in the
N e th e rla n d s . R a b o b an k , th e 3 5 th
largest bank in the w orld, extends 90%
of th e agricultural credit in th e D utch
m a rk e t. T h a t e x p e rtis e is th e key
reason MABSCO tu rn ed to Rabobank
for backing.
Banks seeking to join MASI sign
p a rtic ip a tin g and o p e ra tin g a g re e ­
m ents w ith MASI and Rabobank and
p ay fe e s ra n g in g fro m $ 5 ,0 0 0 to
$14,500, depending on deposit size.
After acceptance, th e bank can im ­
m ediately begin selling loans through
MASI. Qualified loans subm itted to
MASI generally can be approved w ith­
in one w orking day, according to a
MASI brochure.
Because ag-loan dem and is expected
to outpace deposits, MASI is looking
forw ard to a b rig h t fu tu re . In th e
n o rth e rn M idw est, w hich suffered
m uch less than did th e southern p art of
th e nation’s m id-section in last sum ­
m e r’s drought, that future could be
expecially bright. W isconsin did not
p ro d u c e a b u m p e r crop, says M r.
Raymond, b u t farm ers w ere m aking a
profit on th e produce they w ere able to
sell.

3 Reasons I
your bank
should use
Doane’s
Farming
for Profit

This quality farm letter gives you
an effective, low-cost way to comm u n i c a te w ith y o u r f a r m
customers on a regular monthly basis with little effort on your part.

Farm ing for Profit gives farmers
vital marketing and management
facts to help them boost profits.
Facts produced by Doane Publishing,
with one of the top agricultural staffs in
the country - price researchers, experts
in crop and livestock production, law, fi­
nance, and government.

Farm ing for Profit establishes
you as t h e ag bank to use when it
comes to farm financial needs.
Each issue carries your bank’s attractive
head in g . . . and you get exclusive use for
your trade area.

Nor is it only a generally rosier farm
outlook that is bolstering MASI p arti­
cipants’ spirits. Statistics recently p u b ­
lished by th e U. S. D ep artm en t of
A griculture for 1982 show banks taking
a larger share of th e farm-loan m arket
from PCAs due to farm -debt restru c­
tu rin g and PCA re tre n c h m e n t. No
w onder rural banks w ith M ASI’s back­
ing are m arching m ore confidently into
the ag-loan m arket. — John L. C leve­
land, assistant to the publisher.

Backup Withholding Guide
“A G uide to th e In te re st and D i­
vidend Tax C om pliance Act of 1983”
is th e subject of a 14-page booklet
p u b li s h e d b y th e I n d e p e n d e n t
Bankers Association of A m erica.
T he booklet is d esigned as a plainE nglish sum m ary of th e new law ’s
r e q u ir e m e n ts , in c lu d in g b a c k u p
w ith h o ld in g , a n d offers p ra c tical
p ointers to banks on com plying w ith
th e new rules, says th e IBAA.
C opies have b e e n d istrib u te d free
to th e IBAA’s 7,000 m em b ers, and a
lim ited supply is available for g e n e r­
al distribution. W rite: IBAA, P. O.
Box 267, Sauk C e n tre , M N 56378.
E nclose 500 for each copy o rd ered ,
p lu s $1.50 to c o v e r p o sta g e and
handling for th e e n tire order.

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banks across the country use Farming
for Profit as a major p art of their adver­
tising and public relations programs.

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terhead to Sharon Degnan, Regional
Manager, Bank Services.
You’ll get full details about how this
effective - yet economical - marketing
tool can work for you. And you’ll get
complimentary copies of Farming for
Profit for the next six months so you can
see how much help it will be to your farm
customers and prospects.

DOANE PUBLISHING
11701 Borman* St. Louis, Missouri 63146
or call toll free 1-800-325-9519

MID-CONTINENT BANKER for December, 1 9 8 3

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

49

Farm Operating Costs to Rise Next Year,
Say Bankers Responding to Ag Survey
IG H E R operating costs are on
tap for th e nation’s farm ers next
year. D em and for farm inputs will be
up and suppliers are expected to pass
th ro u g h so m e w h a t h ig h e r p ric e s .
F urth er, overall cropping costs will be
greater since farm ers are expected to
be planting considerably m ore acres in
1984 than in 1983.
These are th e conclusions of a su r­
vey of bankers th ro u g h o u t th e nation
taken recen tly by D oane’s A g ric u l­
tural Report, a service of D oane P u b ­
lishing, St. Louis.
D oane asked bankers to describe
the financial condition of farm ers at the
end of the 1983 growing season as well
as m ake som e su ggestions on how
farm ers should plan for 1984, says Dan
H en le y , m an ag er, e d ito ria l o p e ra ­
tions, D oane Publishing.
Bankers said that a m ajority of farm ­
ers appear to be holding th eir own,
while others are in a b e tte r position as
they begin to plan for next season.
It should be noted, how ever, that
conditions vary w idely from one area of
the nation to another. The following
c o m m e n ts ty p ify th e ra n g e o f r e ­
sponses received by D oane:
• F arm ers in my area are in financial
tro u b le, th ough m ost will probably
survive.
• F arm ers h e re are m uch b e tte r off.
They have em erg ed from near disas­
ter, and close to 90% of them will make
up for earlier shortfalls in d e b t repay­
m ent.
The survey revealed that financial
p roblem s a p p e a r to be m ost w id e­
spread in th e South and Southeast,
w here farm ers have been plagued by
un u su al w e a th e r or low p ric e s for
several years. E ven so, bankers re ­
ported that, in some areas in those re ­
gions, fa rm e rs are in p r e tty good
shape, having b en efited this year from
tim ely rains and high crop prices.
Bankers rep o rted that M idw est crop
produ cers w ere struck h ard by the
drouth and m any who stayed out of the
paym ent-in-kind (PIK) program have
big problem s. M any of th ese farm ers
already w ere in financial binds and,
unfortunately, they chose full p ro d u c­
tion as th e favored route for reducing
th eir plight. PIK participants gen eral­
ly are in b e tte r shape than a year ago.

H

50


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

T hey h eld dow n th e ir cash outlays
while insuring an 80% crop on PIK
acres.
Fivestock p ro d u cers en c o u n te re d
low profits or losses most of 1983, and
those who will be buying feed will have
to pay m ore for th eir grain and su pple­
m ents. M any dairym en have not yet
felt the full im pact of th e dollar assess­
m ent but, w hen it strikes hom e, they
could find them selves in a squeeze.
Regardless of w hat new governm ent
program may evolve, milk producers
face a lower n et milk price in 1984,
bankers predicted.
In te re st rates are expected to hold in
th e c u r r e n t 13% to 14% ra n g e or
perhaps ease off one-half p ercen t to 1%
into next sp rin g ’s m ajor borrow ing
period, b ankers believe. N e v e rth e ­
less, rates will continue high.
They said that a revolving credit line
will help farm ers hold down th eir in ­
terest costs — if such a line is available.
By setting up for th eir maximum b o r­
row ing needs, farm ers can draw on
th e ir cre d it as needs arise and pay
down w hen they have th e cash to do
so.
Banks currently have plenty of loan­
able funds, and m any are seeking addi­
tional farm business. But they are ex­
pected to be selective of th eir borrow ­
ers, the survey revealed.

Ag Bibliography at ABA
A selective bibliography for agri­
cultural bankers, p re p a re d by th e
ABA library staff, is available free by
re q u e s t th ro u g h th e ABA agricul­
tu ral bankers division.
T he bibliography begins w ith a
listing of articles and publications on
th e general subject of agricultural
lending and moves on to asset/liability m anagem ent, b ankruptcy, com ­
p etitio n in agricultural lending and
co n tin u es on th rough a variety of
topics th at touch on areas such as
loan review , p roblem loans, smallbusiness lending and incentive com ­
pensation for loan officers. It con­
cludes w ith a list of publishers.
T he bibliography is available on
re q u e st by w riting to th e ABA’s agri­
cu ltural bankers division, 1120 C on­
necticu t A ve., N. W ., W ashington,
D C 20036.

Most banks have tig h ten ed up th eir
loan re q u ire m e n ts w ith in th e last
several years. Cash flow has becom e
the prim ary criterion for m aking loans.
As one banker said, “The days of eq u i­
ty lending are gone. W hile equity
helps a farm er ride out periods of low
earnings, it doesn’t generate cash flow
to m eet operating expenses, family liv­
ing costs and d eb t repaym ent.
Good financial records, sum m aries
and cash-flow p ro jectio n s have b e ­
com e essential for obtaining loans. In
the words of one banker, “Beginning
next year we will req u ire our custom ­
ers to update records at least q u a rte r­
ly, and we will review th eir situations
w ith them every six m o n th s.’’
M onitoring cash flow on a regular
basis perm its farm ers to make m ore
tim ely, sound financial decisions and
to correct abnorm al im balances before
they get out of hand, bankers said.
W hen putting to gether budgets and
m ak in g cash-flow p ro je c tio n s , i t ’s
helpful to p rep are several, using var­
ious com binations of yields, prices and
costs.
Bankers advise farm ers to give p ri­
m ary attention to paying down their
debts while focusing on production ex­
p en ditures again next year. This, of
course, depends on a given situation.
O ne banker advised, “Stress holding
capital im provem ents and expansion
to the essentials, w ith the idea of get­
ting through at least two good years in
a row before m aking major com m it­
m ents in this area. ”
Leasing is an alternative to consider
w h e n e q u ip m e n t or m a c h in e ry is
needed, bankers said. It allows farm ­
ers to obtain the use of an asset w ithout
having to borrow the funds to purchase
it outright. Total cost of leasing versus
buying should be com pared, taking tax
write-offs into account.
Land values showed some im prove­
m ent through the first half of 1983,
according to the F e d ’s survey of bank­
ers in several regions, b ut that was
before the dry w eather set in. Bankers
suggest that land values have for the
most part leveled off from the sharp
decline seen in 1982. Any recovery
m ost likely occurred in high-quality
land outside the major drouth area.
Poorer quality farm land and rangeland

MID-CONTINENT BANKER for December, 1 9 8 3

slid even low er in value.
Bankers said they think land values
will creep up during the next several
years. H ow ever, one com m ented that
land values may erode fu rth er if farm ­
ers plant fence row to fence row in
1984, causing com m odity prices to fall
back. If values do im prove, they may
do well to keep pace w ith inflation for
th e n e x t s e v e ra l y e a rs . F a r m e r s
shouldn’t rely on a sharp com eback in
land to build equity and provide m eans
for refinancing d e b t load, bankers said.

Top-Management Changes
Made at Two Levels
By Farm Credit Banks
The Farm C red it Banks of St. Louis
w ill re o rg a n iz e th e ir m a n a g e m e n t
staffs and create a senior-m anagem ent
team on January 1, 1984.
Purpose of the moves is to achieve a
m ore coordinated credit-delivery sys­
tem in the banks’ th ree-state service
area (Illinois, M issouri and Arkansas).
Reorganization of th e banks’ sepa­
rate m anagem ent staffs involves the
F ederal Land Bank (FLB), F ed eral In ­
term ed iate C red it Bank (FICB) and
Bank for C ooperatives (BC). A single­
m anagem ent stru ctu re will result.
G lenn E. H eitz will be C E O , Farm
C red it Banks of St. Louis, and chair­
m an of th e banks’ executive com m it­
tee. H e curren tly is p resid en t, F ed eral
L and Bank, a position he has held
since 1970.
K eith K. K en n ed y has b e e n a p ­
pointed p resid en t of both th e F ederal
Land Bank and th e F ederal In te rm e d i­
ate C re d it Bank. H e has served as
FIC B p resid en t since 1978.
Douglas D. Sims continues as p resi­
d en t, Bank for C ooperatives, a post he
has held since July, 1982.
In addition, both M essrs. K ennedy
and Sims will serve as executive vice
presiden ts of th e F arm C red it Banks of
St. Louis and will join Mr. H eitz as
executive com m ittee m em bers.
T he reo rg an izatio n stem s from a
board policy decision, adopted alm ost
a year ago, to coordinate m anagem ent
functions am ong th e th re e banks to
position them to serve th e ir farm er and
farm er cooperativ e borrow ers m ore
effectively and efficiently in a rapidly
changing agricultural and financial e n ­
vironm ent, according to Robin Lahm an, board chairm an.
N am ed to th e senior-m anagem ent
team are th e following: Sanford A. Belden, senior vice p resid en t in charge of
cred it and financially related services
for the F L B /F IC B system s; Ronald D.
D ozier, senior vice presid en t in charge
of superv isio n and review for local

Political-Action Committee
Is Formed by Bank HC

HEITZ

KENNEDY

L in c o ln F in a n c ia l C o r p ., F o r t
W ayne, In d ., has form ed a politicalaction com m ittee to p reserve the p ri­
v ate-en terp rise system and advance
the financial-services industry through
participation in the political process.
The H C owns Lincoln National Bank,
F ort W ayne.
The new com m ittee held a voterregistration drive at 12 bank locations
on the last business day a person could
register to vote in the city’s N ovem ber
mayoral election. A registrar from the
V oter Registration D ep artm en t was on
hand to handle the registrations.

SIMS

lan d -b an k associations and p ro d u c ­
tio n -c re d it associations; D onald L.
Stover, senior vice presid en t in charge
o f c o o p e ra tiv e le n d in g ; B re n t D.
B randvold, senior vice p resid en t in
charge of finance and m anagem entin fo rm a tio n sy ste m s for all th r e e
banks; and Jules R. Todt, senior vice
p resid en t in charge of corporate ad­
m inistration for all th ree banks.

IMPROVE YOUR HERD'S EFFIGIENliV
30% AND ROBE.
Hereford bulls produce more calves, more total
pounds weaned and reduce calving problems.
C A LV IN G
D IF F I­
C U LTY

BU LL
BREED*

CA LF
CR O P
PCI

W EAN ED
(RATIO )

HEREFORD

2.9%

97.3%

100

SIMMENTAL

14.9%

89.1%

96

LIMOUSIN

9.9%

91.7%

96

CHAROLAIS

18.4%

86.5%

95

"Compiled from Meat Animal Research Center Data (MARC)

MID-CONTINENT BANKER for December, 1 9 8 3

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

Hereford X Angus crossbred cows cut feed
costs by 30% over exotic crossbred cows.
F E E D R E Q U IR E M E N T S F O R D IF F E R E N T B R E E D C R O S S E S
(M A R C D A TA )

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CHAROLAIS CROSS COW

SIMMENTAL CROSS COW

•\

’ ,f

111%

130%

' * Ay
1

2

3

----------- 1—i— i—j__I_i__I ■■L. 1, I

4

j __I

Tons of feed required per cow per year.

All tilings considered...

H ER EFO R D

American Hereford Association • 715 Hereford Drive
Kansas City. Missouri 64101 • Phone (816) 842-3757

51

Increased Sales Are Forseen
For Farm-Equipment Products
I N C R E A S E D r e ta il d e m a n d for
farm -e q u ip m e n t p ro d u c ts is ex­
p e c te d in th e com ing y e a r by th e
eq u ip m en t’s m anufacturers. L eading
industry executives m ade such a p re ­
diction in statem ents p rep ared for th e
90th annual convention of th e F arm
and In d u strial E q u ip m e n t In stitu te
(FIEI) in Lake B uena Vista, Fla. The
F IE I, based in Chicago, is th e national
trade association of farm- and in d u s­
trial-equipm ent m anufacturers.
The statem ents p o in ted to sharp re ­
ductions in grain production and crop
carry-overs resu ltin g from th e p ay­
m ent-in-kind (PIK) program and th e
1983 drought as m ajor reasons for ex­
pecting im proved retail sales. Farm
prices have im proved as a result, and
planted acreage is expected to show a
sharp increase in 1984.
F IE I C h airm an-E lect M ervyn M an­
ning, vice p resid en t/g en eral m anager,
Ford T ractor O perations, expects th e

im p ro v e m en t in tra c to r d em an d to
take place prim arily in the m id-range
an d h ig h -h o rs e p o w e r fa rm -tra c to r
classes, w ith dem and for sm aller agri­
cultural tractors approxim ating 1983
levels. S trength was added to e q u ip ­
m ent dem and, h e said, because of re ­
duced g o vernm ent-support program s,
which resulted in increased planted
acres, higher farm incom e and con­
tin u ed em phasis on farm exports.
The outlook for com m odity prices
and cash receipts next year is m uch
im proved over this past year, accord­
ing to R obert A. H anson, D eere & Co.
The 1983 m arketing year will see the
sharpest decline of crop inventories on
record, said J. D. M ichaels, president,
farm eq u ipm ent group, International
H arv ester. H e said dem and should
show a unit increase of 15%-20% over
1983, w ith tillage eq uipm ent, tractors
and com bines expected to lead the re ­
covery.

Banker Supports SBA Loan Plan
GOVERNMENT-lending program that receives relatively little
support from the majority of U. S. banks could benefit from, but
doesn’t necessarily require, widespread participation from within the
banking industry in order to be successful, according to Embree K.
Easterly, chairman/CEO, Capital Bank, Baton Rouge, La.
Testifying before a subcommittee of the House Committee on Small
Business in Washington, D. C., Mr. Easterly stressed that the number
of banks participating in the Small Business Administration (SBA) loan
program isn’t proportionate to the number of businesses served by the
program.
“This program really is needed,” he said. “And it’s a good program.
We just haven’t been able to sell it to all the banks. But now we don’t
need to sell it to all of them. A few capable, enthusiastic banks with good
working knowledge of the program can handle the needs of small
businesses in the entire state,
“The SBA guaranteed loan program can do for small businesses what
the Federal Housing Administration and the Veterans Administration
have done for the housing industry,” Mr. Easterly said.
One of the most overlooked aspects of the program is the amount of
money it returns to the local community through taxes and other rev­
enues, he continued. A $350,000 SBA direct-participation loan made to
a Baton Rouge scaffold rental firm is one of the many such examples of
enhanced returns, he said. The company was granted the SBA loan after
being denied conventional financing. The government purchased 75%
of the loan. Today the firm has gross sales of more than $30 million
annually, employs 600 workers and has paid approximately $3 million in
taxes over the past five years.
Capital Bank loan specialists say that, with the advent of the sec­
ondary market for SBA loans, a good program was made even better.
Not only does the small businessman have access to bank resources for
needed funds, but the participating bank now can go to money centers
throughout the U. S. and attract funding to the local community through
sale of the guaranteed portion of the SBA loan. The bank retains a
servicing fee that makes the total transaction attractive, without increas­
ing the interest rate of the loan to the small businessman.

A

52


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

A prediction th at farm ers will place
an additional 40 million acres in p ro ­
duction next year was m ade by Roy W.
U elner, p re sid e n t, farm eq u ip m en t
operation, Allis C halm ers. H e forecast
that farmers w ould expand production
both to replenish crop inventories and
to m eet rising w orld and dom estic d e­
m and for grain.
O th e r s p e a k e rs fo c u se d on th e
b rig h te r outlook for farm -m achinery
sales in 1984. O ne speaker, Victor A.
R ice, ch airm an , M assey -F erg u so n ,
L td ., attrib u ted this to low er than an­
ticipated crops resulting in a sharp re ­
duction in grain supplies, rise in prices
and im proved farm incomes. Jerom e
K. G reen, p resident/C E O , J I Case
C o ., added that “Farm ers have not had
th e financial capability to replace aging
eq u ip m en t over the past th ree to four
years, b u t this situation should im ­
prove in 1984.”
H o w ev er, a w a rn in g cam e from
H ow ard L. B ren n em an , p resid en t,
H esston C orp., who said heavy dealer
inventories will cause a continuation of
com petitive conditions in the m arket­
place through m ost of 1984.
An increase of almost 35% was fore­
seen in four-w heel-drive tractor sales
for the U. S. next year, and hay and
forage-equipm ent m arkets will be o ut­
perform ed by sales of tractors, com ­
bines, planting, seeding and tillage
equipm ent.
A note of caution cam e from P eter
Perkins, vice president/group m ana­
ger, FM C C orp., who said, “The im ­
proved outlook m ust be tem p ered by
prospects of in terest rates increasing
and a m ore cautious retail cu sto m er.”
Joseph Zadra, chairm an/C E O , Gehl
C o., said that while dem and for farm
e q u ip m en t should im prove substan­
tially in 1984, it is unlikely to reach the
high levels of 1978-79. Joseph J. Lund,
president, Farm hand, Inc., foresees
an im provem ent in the in d u stry ’s sales
“simply because th ere is m ore m oney
a ro u n d .” H ow ever, he w arned that
few inventory risks will be taken and
the size of the increase will be low —
“m aybe 10%!”
L ittle incentive is seen by L. E.
Gage for producers to make capital in­
vestm ents in th eir dairy, b e e f or hog
system s. Mr. Gage, sales m anager,
agri-products division, H. D. H udson
M anufacturing Co., added that such
sales could rem ain at 1983 levels for all
or most of the year.
P e rh a p s th e o u tlo o k w as b e s t
sum m ed up by John E. Love, p resi­
dent, J. E. Love Co. H e said, “Most
indications point to a m uch im proved
agricultural econom y for 1984, ” but his
firm is viewing the com ing year with
“guarded optim ism .” • •

MID-CONTINENT BANKER for December, 1 9 8 3

Help Stamp Out Director Liability Risk
With These Board-Related Manuals
CORPORATE ETHICS ...W hat Every
Director Should Know. $26.00.Society

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MID-CONTINENT BANKER for Decem ber, 1 9 8 3

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

53

Deposit Intangibles:
Valuing the Benefit of Acquiring Liabilities
ITH T H E accelerating rate of
bank acquisitions, a strong in ­
terest has developed in determ in in g
the most advantageous accounting and
tax treatm en t for th e transaction.
Bank acquisitions in m ost, if not all,
cases entail paym ent by the acquiring
institution of a purchase price th at is in
excess of the n et book value of th e
acquiree. The tax tre a tm e n t th at may
be applied to th e excess purchase price
over th e n et book value of th e acquired
assets, w here th e excess is significant
to the transaction, can have a m ajor
im pact on th e econom ic feasibility of
the transaction.
W h e re th e ex cess is tr e a te d as
“goodwill,” th e am ortized goodwill is
n o t d e d u c tib le fo r tax p u r p o s e s ;
however, transactions are being stru c­
tu red that allow for a portion of the
excess to be allocated to th e deposit
base being acquired. The benefit of
acquiring an existing base of deposit
liabilities is thus assigned a value that
is recorded as an intangible asset. This
intangible asset can possibly be am or­
tized over its estim ated rem aining life,
w ith th e deductions taken for federalincom e-tax purposes.
In this article, we discuss th e back­
g ro u n d b e h in d d e v e lo p m e n t o f
valuing deposit intangibles and look at
an approach to establishing th e value.
• B a c k g r o u n d . W h ile th e r e are
num erous reasons w hy one bank may
acquire another, a significant benefit
in doing so is th e acquisition of an ex­
isting base of deposit custom ers. Such
a deposit base typically is th e result of
many years of effort and expense in
te rm s o f m a r k e tin g a n d d e p o s itacquisition efforts, bricks and m ortar,
m a in te n a n c e e x p e n se s etc. R a th e r
than incur sim ilar expenses to obtain
deposit funds via a new financial in ­
stitution, th e acqu irer can p rocure an
existing deposit base by purchasing an
established institution.
It can, th e re fo re , b e reaso n ab ly
argued that any prem ium paid for the
established institution is directly a t­
tributable to th e value of th e deposit
base. W hen this value is quantified
and useful life of th e deposit base is
calculated, th e value becom es a p o te n ­
tia l d e d u c tib le ite m fo r f e d e ra lincom e-tax purposes.
A contem plated acquisition may be
stru ctu red in a m u ltitu d e of ways in

W

54


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

By Rick L. Hamilton
And James M. Nickerson*
ord er to satisfy specific interests of all
parties to the transaction. The m anner
in which the transaction is structured,
how ever, may have significant im pact
on th e a c q u irin g b a n k ’s fe d e ra lincom e-tax liability. From the tax p e r­
spective, the acquisition may be struc­
tu red in one of th ree general m ethods:
a tax-free reo rg an izatio n , a taxable
purchase of stock or a taxable purchase
of assets.
Only in the case of a taxable p u r­
chase of assets may all tangible and
intangible assets be revalued to th eir
fair m a rk et value in reco rd in g th e
assets of the “new ” bank. This tre a t­
m ent affords the opportunity to m ini­
mize any recorded goodwill, which is
th e excess of the purchase price over
the fair-m arket value of n et assets ac­
qu ired that cannot be allocated to spe­
cific assets.
R ecorded goodwill m ust be am or­
tized over a period not exceeding 40
years for financial-reporting purposes
and th e am ortization cannot be d e ­
d u c te d for fed eral-in co m e-tax p u r­
poses.
F o r some tim e, the Internal Rev­
en u e Service had held that deductions
for th e a m o rtiz a tio n of in ta n g ib le
assets similar to goodwill would also
not be allowed. A 1974 revenue ruling,
how ever, stated that determ ination of
th e depreciability of assets rests w ith
establishing that the assets “have an
ascertainable value separate and dis­
tinct from goodwill” and “have a lim ­
ited useful life, the duration of which
can be d eterm in ed w ith reasonable
accuracy.”
W hile this ruling does not specifical­
ly address the issue of deposit intangi­
bles, it is the basis on which many
purchasers have taken the am ortiza­
tion of such a deposit intangible as a
deduction.
T he position of regulatory au th o r­
ities is set forth in a M arch 5, 1982,
F D IC position p ap er, “A ccounting
T re a tm e n t for P urchased C ore D e* Jim Nickerson and Rick Hamilton are
financial-institution consultants with the
St. Louis office o f Peat, Marwick, Mitchell
¿7 Co. M r. Nickerson is a senior manager
and Mr. Hamilton is a manager.

posit In tangibles,” and a D ecem ber
29, 1981, C om ptroller of the C urrency
banking circular, “Interim policy with
respect to the accounting treatm en t for
purchased core-deposit intangibles.”
The OCC and the F D IC , as one may
expect, tre a t th e issue in a sim ilar
fashion. The regulators allow the value
of core-deposit intangibles to be re ­
corded, based on a case-by-case d e te r­
m in atio n , as an “ o th e r a s s e t” and
am ortized over a period not to exceed
10 years. (Both of these docum ents set
fo rth specific p re p a ra tio n and p re ­
sentation requirem ents and should be
consulted by those in terested.)
The IRS and bank regulators thus
have illustrated at least some level of
acceptance to this approach and nego­
tiations w ith the IRS on the issue of
deductibility have m et w ith reason­
able success, w here the valuation is
properly prep ared and docum ented.
O n the o ther hand, those taxpayers
who have not been so well p repared
have not b een as successful.
• A p p r o a c h in g a D e p o s it-B a s e
Valuation. Issues surrounding the d e ­
ductibility of am ortized deposit p re ­
miums are yet to be firmly resolved. In
our opinion, how ever, th e acquirer
should p erfo rm som e key steps in
order to enhance the likelihood of suc­
cess if the deductions are challenged
by the IRS.
The following outlines points we b e ­
lieve are im portant as one co n tem ­
plates the valuing of core-deposit in­
tangibles.
E stim ating the B enefit. A prelim i­
nary calculation can be perform ed that
estim ates w h eth er valuing the deposit
base will result in any reasonable re ­
turn of tax dollars. The formula, which
can estim ate one year’s benefit, would
be:
E stim ated value of
deposit intangible
E stim ated life of deposits
x
Effective tax rate
By calculating th e p resen t value of
the estim ated one year’s tax savings
over deposit life, we can d eterm in e the
p o te n tia l b e n e fit of th e in tan g ib le
value of the deposit base. For this cal­
culation, the value of th e deposit base
typically can be estim ated at 6% to

MID-CONTINENT BANKER for December, 1 9 8 3

10% of total deposits and th e life of the
d ep o sit base gen erally ranges from
seven to 12 years. T hese, how ever, are
only “a v e ra g e s” an d actu al re su lts
could vary significantly. Also, while
this calculation rep resen ts th e p o te n ­
tial benefit th at may result, th e issues
have not yet b een fully resolved w ithin
the tax courts, and th e possibility exists
that all or a portion of th e deduction
will be disallow ed by th e IRS.
D eterm ining the Value o f the D e­
posit Base. T he dom inant conceptual
approach to calculating th e benefit,
simply stated, is th e p re se n t value of
th e after-tax difference, by year, b e ­
tw een th e cost of th e deposits and th e
cost of the alternative funds. D e te r­
m ining th e value consists of four steps:
1. D eterm in e the annual costs of d e ­
posit liabilities. T he annual costs will
consist of both in te re st expense and
m aintenance costs, n e t of any servicefee income.
2. O btain an estim ate of th e altern a­
tiv e -fu n d s co sts, re p r e s e n tin g th e
price th e acquiring bank w ould expect
to pay in th e capital m arket, including
acq u isitio n costs, for fu n d s o f like
am ount w ith sim ilar term s.
3. D e te rm in e th e after-tax differ­
ence b etw een th e cost of th ese two
alternatives.
4. The value is th e n d eterm in ed as
the sum of th e p re se n t value of th e
annual difference.
Perform ing a calculation of this na­
tu re can be rath er cum bersom e, w hich
has led to th e d evelopm ent and use of
m ic r o - c o m p u te r -b a s e d p ro g ra m s
(generally electronic spread sheets) to
perform th e analysis.
D eterm ining D eposit L ife . This area
appears to historically have been th e
m ost likely area of vulnerability to th e
IRS, and deductions have been dis­
allowed w here the taxpayer has failed
to carry th e b u rd en of proof th at the
asset has a lim ited useful life of ascer­
tain ab le d u ratio n . T he IR S ’s “ mass
asset” theory, w hich may be invoked
w here th e taxpayer has failed to carry
b u rd en of proof, holds that a n u m b er of
assets form ing an aggregate has no d e ­
term inable useful life, and that while
individual assets may term in ate and be
replaced, th e re is no m easurable loss
of value to th e whole.
A com m on approach to d eterm in in g
deposit life involves a detailed analysis
of historical deposit attrition rates. Sta­
tistical-analysis techniques th en can be
applied to modify results for the antici­
pated effects of deposit deregulation
a n d flu c tu a tio n s in in te r e s t ra te s,
w hich have been shown to have an
im pact on deposit life.
• Im pact o f D ereg u la tio n . As d e re g ­

ulation continues, it is anticipated the
cost of th e d ep o sit base w ill m ore
closely approxim ate th e altern ativ e
cost of funds that will ten d to reduce
th e value of the acquired deposit base.
C oncurrently, how ever, deposit attri­
tion, w hich appears to be correlated to
in te re s t rates, should b e re d u c e d ,
w hich will tend to increase the value.
As a result, the issue of valuing deposit
in ta n g ib le s could p ro liferate as ac­
quisitions of financial institutions con­
tinue.
• S u m m a ry. From our perspective,
w hile th e issues are yet to be fully liti­
gated, th e 1RS would have a difficult
tim e disputing the existence of deposit
intangibles w ith a determ inable useful

life. D eposit intangibles have b een
recognized by bank regulators and in
th e a u th o rita tiv e lite ra tu re of th e
accounting profession.
N evertheless, the taxpayer still is at
some risk of having all or part of the
d ed u ctio n d en ied . F o r this reason,
efforts should be m ade to assign as
m uch of the excess purchase price over
n et book value to the tangible assets as
possible.
T he potential benefit of assigning
the balance to the deposit base should
th e n b e re v ie w e d . E ach situ a tio n
should be analyzed separately, con­
s id e r in g th e in d iv id u a l tax a n d
accounting strategies of the in terested
parties. • •

Reagan Handling Economy Well,
Survey of Bankers Reveals
O D ERA TE IN C R EA SES in in ­
flation and em ploym ent levels
and a prim e rate hovering b etw een 9%
and 13% are on th e horizon in 1984.
T hese predictions resu lted from a sur­
vey of 220 b an k ers c o n d u c te d last
m onth at a sem inar in St. Louis spon­
sored by Peat, Marwick, M itchell &
C o .’s St. Louis office and L. F. R oth­
schild, U nterberg, Towbin, N ew York
City.
Responding bankers — who w ere
am o n g m o re th a n 400 b a n k e rs in
atten d an ce — also gave a solid en ­
d orsem ent to P resident Reagan and
his econom ic policies. Eighty-five p e r­
cent said “Reaganom ics” had b een suc­
cessful in controlling th e econom y,
while only 10% said Reaganomics had
had no effect and 5% said “unsuccess­
fu l.” If th e Presidential election w ere
held on th e day of th e sem inar, P resi­
d e n t R eagan w ould have b e e n the
choice of 60% of th e bankers polled.
Senator John G lenn of Ohio was the
top D em ocrat con ten d er in the survey
w ith 15% of the “votes” cast. F orm er
Vice P re sid e n t W alter M ondale —
w ith 14% of the response — was close
behind, however.
Two thirds of bankers polled said
th at inflation — as m easured by the
C onsum er Price Index — w ould in ­
crease m oderately next year, and 78%
said they expect m oderate declines in
u n em p lo y m en t. S ev en ty -th ree p e r­
cent said the high for th e prim e rate
next year w ould be betw een 11% and
13%, and 80% said they expect th e low
to be b etw een 9% and 11%. No one
pred icted a prim e rate above 15% or
below 7%.
D espite the potential problem s d e­
regulation could cause, 45% said they
expect earnings e ith er m oderately or

MID-CONTINENT BANKER for December, 1 9 8 3

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

substantially h igher than this year’s
during 1984. Only 22% expected earn ­
ings to be lower next year. In fact, 41%
said they see deregulation’s im pact as
positive and 30% said it will have no
effect. T w enty-nine p ercen t felt d e­
regulation will have a negative im pact
on banking.
Rankers w ere less optim istic about
long-term tre n d s, how ever. N early
th ree fourths of those surveyed said
th at the approxim ately 14,000 com ­
mercial banks currently in th e U nited
States will be red uced to below 10,000
by 1990, and 34% of that total said they
e x p e c te d th e n u m b e r o f banks to
shrink below 8,000. For th e m ajority
(64%), o ther banks still are the prim ary
sources of co m p etitio n follow ed by
thrifts (17%), o th er financial services
(13%), m oney-m arket funds (4%) and
credit unions (2%). O ver half said th eir
banks w e re o fferin g d is c o u n t-b ro ­
kerage services, and another 7% said
they in tended to initiate such services
w ithin the next six m onths.
Only 18% indicated they did not feel
p re p a r e d to co m p ly w ith b a c k u p ­
w ith h o ld in g leg isla tio n s ta rtin g in
January. The m ajority foresee a re l­
atively stable legislative p icture over
the next few m onths. Only 22% said
th e y see le g is la tio n s u b s ta n tia lly
changing the structure of th e banking
industry being passed by Congress b e ­
fore the end of the first half of 1984,
and 37% said they do not expect sub­
stantive changes before 1985.
Fifty-four p ercen t said they use an
in tern al p rim e rate or cost-of-funds
basis to set loan pricing, w hile 19%
said they base th eir rates on an ex ter­
nal prim e rate. T h irteen p ercen t said
they base th eir rates on those of com(C ontinued on page 59)

55

Deregulation, Profitability Share Spotlight
At BMA Convention in Atlanta
E R E G U L A T IO N and bank prof­
itability shared th e spotlight at
the recen t annual convention of the
Bank M arketing Association, held in
Atlanta.
“The banking in dustry is at th e stage
of fundam ental transition w here the
individual can m ake th e d ifference,”
said keynote speaker A rchie J. McGill,
presid en t/C E O , R othschild V entures,
Inc., New York. H e added that, in this
environm ent of change, survival will
be the critical activity.
N oting th at th e C hinese w ord for
“change” has two m eanings — danger
and opportunity — he stressed th e fact
that in an enviro n m en t of change it’s
necessary to be able to seize o p p o rtu ­
nity.
H e ad m itted th at change is difficult
because it requires both th e corpora­
tion and th e individual to alter w hat
they do and how th ey do it.
“The underlying dem and is a change
in attitu d e w here change is perceived
as good and an o p p o rtu n ity ,” he said.
“O therw ise, people will give lip ser­
vice to change and go back to do w hat
feels good.”
Mr. M cGill said IBM is a firm that
has been able to w eath er a changing
e n v iro n m e n t w ith o u t fo rsak in g its
th ree basic goals of excellence, service
and concern for th e individual.
“These are tim es of u nique o ppor­
tunity for everyone — not for a few.
These are tim es to m ake a fundam ental
difference in th e w o rld ,” he said.
A ddressing c u rre n t bank profitabil­
ity w ere m em bers of a panel, each of

D


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Federal Reserve Bank of St. Louis

Golden Coin Winners
S e c u rity P acific N a tio n a l, Los
A ngeles, won th e “b est of show ” tro ­
phy in th e 1983 G olden Coin awards
co m petition of th e BMA. T he b ank’s
e n try was titled , “T raining T echnical
T ru st Types of F ield Financial P lan­
ning — A G iant Step Into th e ’80s.”
It outlin ed th e evolution of a salestraining-and-m arketing program to
im p lem en t a field financial-planning
function by th e b an k ’s tru st officers.
Ju d g e s c ite d S e c u rity P acific’s
efforts to involve its personal tru st
staff in th e selling of a w id er variety
of bank services and use of th e b ank’s
re so u rc e s to in crease its share of
m ark et am ong affluents. T he p ro ­
gram g en erated m ore than 150 new business op p o rtu n ities for th e bank
and an actual new -business dollar
volum e of $300,000 in 16 w eeks.
Also w inning an aw ard was Norw est C o rp ., M inneapolis, w ith its
e n try , “E m p lo y ee A w areness and
E ducation P ro g ram .”
A m ong banks w inning m erit c e r­
tificates w ere F irst C itizens N ation­
al, T upelo, M iss.; Springfield (111.)
M arine; and U n ited N ational, Plano,
Tex.

whom cited the changing role of the
b a n k b r a n c h . P a n e lis ts in c lu d e d
D onald C. W aite III, M cK insey &
Co.; W illiam M. W eiant, F irst Boston
C o rp .; and D avid C. C ates, C ates
C onsulting Analysts — all from New
York.
The value of th e branch netw ork is
questioned by many, b u t its role has

L e a d in g B M A fo r
1 9 8 3 -'8 4 are (from
I.) Kenneth J. Pennebaker, treas.; Barry
I. Deutsch, pres.; and
Smith W . Brookhart
III, 1st v.p. M r. Penn e b a k e r is e .v .p .,
T w in C ity B a n k ,
N o rth L ittle Rock,
Ark.; M r. Deutsch is
s.v.p., M ellon Bank,
P itts b u rg h ;
M r.
B rookhart is pres./
CEO, Centerre Bank,
Branson, Mo.

changed, said Mr. W eiant. I t’s neces­
sary for banks to control non-interest
expense and to accelerate grow th in
earnings assets. H e also was concerned
that banks will e n te r deregulation with
a period of price com petition like that
which adversely affected th e recently
deregulated transportation industries.
“The role of the bank branch is to
bring in cu stom ers,” he said. “Banks
have broad custom er b ases.” H e rec­
om m ended that banks reduce transac­
tion costs in branches and generate
new revenues through th eir branch
systems.
Bank m arketers will be at the fore­
front in acceleratin g th e grow th of
earning assets, he said, “if banks are to
achieve profitability.”
Mr. W aite stressed th e im portance
of curbing n on-interest expenses as a
m ethod to im prove declining profita­
bility. But he w arned against closing
branches, since they offer a way for
banks to bring in business. H e said the
way to im prove profitability is to p ro ­
vide b e tte r service to m ultiple-m arket
segm ents. The difficult p art is to d e te r­
m ine how to push the profitability of
banks at a tim e w hen industry profits
as a whole are eroding.
Mr. Cates urged banks to develop
profit analytic tool kits that w ould cre­
ate profit consciousness at all levels of a
bank. Such an analysis w ould be m ore
than an accounting tool, he said. “I t’s a
decision-m aking tool to create a b o t­
tom -line discussion base” for setting
bank goals. H e said such a tool would
p ro vide th e ability to com pare one
bank’s perform ance w ith o th ers’.
Also ad d re ssin g p ro fitab ility was
Roger Guffey, Kansas City F ed p resi­
dent. H e said that, despite pressure on
th e banking in d u stry ’s n e t in te re st
m argins arising from deregulation and
new com petition, banking’s profit o ut­
look is still good.
H e asserted that the “Chicken L it­
tle ” syndrom e has no place in banking.
T he “profitability sky is not falling,” he
said.
M r. G uffey th in k s b a n k in g has
w eathered five years of deregulation
rem arkably well. Profits rem ain strong
am ong all sizes of banks, he said.
(C ontinued on page 58)

MID-CONTINENT BANKER for December, 1 9 8 3

FOR YOUR DIRECTORS — TO HELP THEM HELP YOU
No. 51 BUDGETING, FORECASTING
and PLANNING
Every bank must know WHERE it is
going and HOW to get there! Manage­
ment should “ map the course,” but
d irectors should play a role in estab­
lishing goals.
This m anual su p p lie s d ire cto rs
w ith tools they need to steer bank
policy in the best direction. Chapters
help directors establish “ m issio ns”
statem ents, trace stages of a plan­
ning process. Details HOW to per­
form financial planning, how to plan for
new services . . . how to “forecast.”

CONSUMER
Lending Policy

Techniques used by successfu l
banks are included, along w ith sour­
ces of inform ation and a bibliography
of references.

Price — $31.00
2-5 copies $27.50 ea. 6-10 copies $26.00 ea.

No. 101 DIRECTORS . . . Selection
Qualifications, Evaluation
and Retirement.
This 42- page manual answers key
questions concerning director selec­
tion, retention and retirement. Special
section: the prospective director and
how he should be expected to co ntri­
bute to the bank’s success. Includes
a rating chart.
Manual also contains a section
posing questions that a prospective
d irector should ask him self before he
accepts a bank board post.
Another section deals w ith the sen­
sitive nature of director retirement.
Age can be a guide but not an over­
riding fa cto r in this decision.

A Manual for Directors,
Manaoement and

This 192-page manual discusses the
merits of directors paying closer attention
to investment policies.
Poorly thought-out-and-executed in­
vestment policies can place a bank’s
capital in jeopardy, particularly during a
period of rising interest rates.
Should the board “ intrude” upon man­
agement prerogatives of the CEO in the
administration of the investment port­
folio? No, says the author, However, a
written policy, structured around the
bank’s deposit and loan “ mix,” can be
comforting during rising or falling interest
rates.
As an aid to management and the
board, the author presents numerous in­
vestment policy statements presently in
use by recognized well-run banks.

Price — $10.00

Price — $26.00

2-5 copies $8.00 ea. 6-10 copies $7.50 ea.

2-5 copies $23.00 ea. 6-10 copies $20.00 ea.

No. 210 MAXIMIZING
CORRESPONDENT BANK
RELATIONSHIPS
D irectors aren’t “ born correspon­
dent experts, but you can help them
catch up in a hurry, and it’s profitable
for you to do so. This 100-page manual
covers all facets of correspondent
banking. Clearings and flo at analysis
. . . loan p articip a tion s . . . lines of
credit . . . foreign exchange, etc. This
manual also helps directors APPRAISE
correspondent services — to make
certain you receive maximum service
at a com petitive price.
The manual also discusses several
federal regulations, including the con­
stra in ts imposed on “ insider” bank
lending by FIRA. A MUST for every
bank director.

Price — $16.00
2-5 copies $13.00 ea. 6-10 copies $10.00 ea.

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

C om m ittee in determ ining the nature
of such c o n tra c ts . The a u th o r
suggests that “ perform ance” can
and should be the key in rewarding
the executive. Charts and w orksheets
are included to help the com m ittee
arrive at “ fair and equitable” pre­
requisites as m otivating factors for
the bank executive.
An aid to w riting a NEW contract or
in REVIEWING existing contracts.

No. 220 — AN INVESTMENT GUIDE
For the Bank Director

No. 230 — CONTRACTS WITH BANK
EXECUTIVES
In many banks, salaries, bonuses
and fringe benefits of top manage­
ment are covered by contracts. Since
many contracts extend for periods of
five years they call for careful con­
sideration.
This 48-page manual discusses the
role of the board’s Com pensation

Price — $12.00
2-5 copies $9.00 ea. 6-10 copies $8.50 ea.

No. 240 — CONSUMER LENDING
POLICY
Bank directors don’t get involved in
lending, but they do help formulate con­
sumer-lending policy. Therefore, they
must be familiar with the dramatic in­
creases in personal bankruptcies and
new policies called for.
This 208-page manual includes an
array of consumer loan policies in force at
various-sized banks; provides checklists
of topics on installment-credit policy, pro­
cedures and policy components; model
application forms; Federal Reserve reg­
ulations; cost analysis of consumer op­
erations, plus a bibliography of reference
materials.

Price $26.00
2-5 copies $22.00 ea. 6-10 copies $20.00 ea.

Please Send These Management Aids:

copies
copies
copies
copies
copies
copies

$
$
$
$
$
$

(In M issouri add 4.6% tax)
Tax $ _______

The BANK BOARD LETTER
408 Olive Street
St. Louis, MO 63102
Name
Bank
Address
C ity ___

A B A -B M A
re p re ­
s e n ta tiv e s a t BMA
convention included
(fro m I.) W illis W .
A le x a n d e r ,
ABA
e .v .p .; R ichard M .
R o s e n b e rg ,
o u t­
going BMA pres, and
v. ch., W ells Fargo
Bank, San Francisco;
and Raym ond M.
C h e s e ld in e , BM A ,
e.v.p. ABA and BMA
merged recently.

“N evertheless, if deregulation places
additional p ressure on in terest m ar­
gin s, b a n k s w ill n e e d to look for
alternative sources of reven u e or for
opportunities to cut costs.” H e added
that m onitoring loan quality will b e ­
com e m ore im portant in light of c u r­
ren t asset problem s.
Banking profits will continue to rely
prim arily on traditional banking func­
tions such as taking deposits and m ak­
ing loans, he said. And he suggested
that “banking can ill afford to expand
into new activities if expansion m eans
ignoring traditional sources of profits.
Bank profitability could be h elp ed if
industry loan losses could be brought
down from th e 1982 level to longer-run
historical levels, he said. W ith such a
recovery, bank ROAs w ould im prove
by 5% to 9%.
“ W h e th e r b y c o n tro llin g risk s,
boosting fee incom e or reducing costs,
bankers do appear to have good o p p o r­
tunities to help resto re profitability
sh o u ld in te re s t m argins e ro d e fu r­
ther, Mr. Guffey said. “In general,
large banks m ight w ant to look first to
bolstering fee and service reven u e b e ­
cause reducing overhead may not be a
practical answ er for them .
“ M edium -sized banks also may find
increasing fee incom e is a practical way
to replace lost revenues, b u t reducing
overhead costs may offer these banks
th e g re a te st p o te n tia l b ecau se this
group has the highest ratios of over­
head to assets.
“Small banks appear to have th e big­
gest adjustm ents to m ake to im prove
earnings thro u g h fee incom e or re ­
d u c e d o v e rh e a d . H o w e v e r, sm all
banks have b een m ost successful at
m aintaining th e ir m argins and so far
have clearly perform ed well through
th e d ereg u lated e n v iro n m e n t,” Mr.
Guffey said.
A prom inent topic at th e convention
was th e recently approved affiliation of
the BMA w ith th e ABA. “This is an
h isto ric c o n v e n tio n ,” said B arry I.
D eu tsch , BMA first vice p re sid e n t
(now president). H e noted th at nearly

58


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Federal Reserve Bank of St. Louis

tw o-thirds of the BMA m em bership
w ho p a r tic ip a te d in b a llo tin g in
S ep tem b er approved and supported
th e m erger.
“W e m ade the right decision at the
right tim e ,” said Mr. D eutsch, who is
senior vice p resid en t, M ellon Bank,
Pittsburgh. H e said the m erger has
resulted in an increase in requests for
BMA services. “The bottom line is that
things are looking very bullish for the
newly m erged BM A,” he said.
ABA P resident R obert C. B renton,
p r e s id e n t, B re n to n B an k s, D es
M oines, la., called the union of the
BMA and ABA “an idea whose tim e
had co m e.” N oting the im portance of
increasing banking’s share of the m ar­
ketplace, Mr. B renton told the 2,000
bank m arketers attending th e conven­
tion that th eir job was extrem ely im ­
portant. “W e need that great w eapon
th at m arketing has to m eet th e com ­
petition of the fu tu re ,” he said.
M r. D e u tsc h assu m ed th e BMA
p re sid e n c y d u rin g th e co nvention.
M oving up to BMA first vice presid en t
was Sm ith W. Brookhart III, presiden t/C E O , C en terre Bank, Branson,
Mo. Serving a second term as treasu r­
er is K enneth J. P ennebaker, execu­
tive vice president, Twin C ity Bank,
N orth L ittle Rock, Ark. New second
vice p resid en t is John A. Russell, vice
presid en t/director of m arketing, Banc
O ne C orp., C olum bus, O.
In 1983- 84, th ere will be 23 serving
on the BMA board. From th e BMA,
th ere are six new directors, including
J. Douglas Adamson, senior vice p resi­
d e n t, P u rd u e N atio n al, L afay ette,
Ind.; D avid P. Andrew s, vice p resi­
dent, Am erican Bank of Pennsylvania,
Reading; M ary A. Brown, president,
H a rris C o u n ty B ank C y -F a ir,
H ouston; Sarah F. G urtis, vice presi­
dent, Sun Banks, O rlando, F la .; James
C. M o n tag u e, m a rk e tin g re se a rc h
officer, H arris T ru st, Chicago; and
D avid M. T hibodeau, first vice p resi­
d ent, T hird National, Nashville.
F ro m th e ABA, re p re s e n ta tiv e s
jo in in g th e b o ard in clu d e Paul M.

D iesel, vice p re s id e n t, M u ltib an k
F in a n c ia l C o r p ., Q u in c y , M ass.;
R o bert G. M illen, p re sid e n t/C E O ,
U nited C entral Bank, D es M oines,
la.; Frank O ldham Jr., director/chairman, executive com m ittee, Security
Bank, Paragould, A rk.; Ronald A. Phil­
lips, president, U nited Bank of SouthPark, L ittle to n , C o lo .; D o n ald R.
M acKay Jr., sen io r vice p re sid e n t,
L o u isian a N a tio n a l, B aton R ouge;
Sherrill E. W oods, p resid en t, F irst
National, Naples, Fla.; and P eter L.
Hood, executive vice p resid en t, F leet
National, Providence, R. I. — Law­
rence W. C olbert, vice president/
advertising.

Corporate Customers
(C ontinued fr o m page 26)
The days of identifying a large group
of banks that can agree on a satisfactory
fixed rate for a m ulti-year period prob­
ably are gone forever. H ow ever, indi­
vidual banks are w illing to com m it
m edium -term funds at a fixed rate.
W e are c o n sta n tly seek in g such
funds, and as banks gain increased ex­
p e r ie n c e w ith m o n e y -m a rk e t ac­
counts, we hopefully will see m ore
o p p o rtu n itie s to b o rro w fix ed -rate
funds for periods beyond one year.
To stre n g th e n o u r standby-credit
position, we have converted a large
portion of our bank facilities to revolv­
ing-credit agreem ents. To increase our
funding options, about 18 m onths ago
we added the flexibility of fixed-rate
term loans to o u r revolving ag ree­
m ents. These m atched-funded loans
fulfill requirem ents of both len d er and
borrow er equally.
As an illustration of the im portance
of m arketing to m eet custom er needs,
a regional bank recently recognized
the req uirem ents of a finance com pany
for subordinated debt. Analyzing the
product and our credit strength, the
bank capitalized on both an op p o rtu ­
nity and a need. W e now have some
valuable subordinated d eb t and the
bank has an attractive earning asset.
C redit com m itm ents from our banks
are the bottom line. From this evolve
c a sh -m a n a g em e n t and tru s te e se r­
vices. The lending lim it of a bank can
be a powerful force in our relationship
w hen com bined w ith creative and im ­
aginative thinking. W e search for new
ideas in term s of stru ctu re, pricing and
m aturity. O ver the past few years, we
have seen o u r banks resp o n d w ith
several innovations to m eet our ever­
presen t needs for fixed-rate lending.
In the future, we will see increasing
attention given to the technical side of

MID-CONTINENT BANKER for December, 1 9 8 3

c o rp o r a te - b a n k in g r e la tio n s h ip s .
T ech n o lo g y w ill n o t b e lim ite d to
breakthroughs in consum er lending.
In some cases, technological advances
will address non-credit bank services.
A h a n d fu l o f b an ks h av e d is tin ­
guished them selves in th e develop­
m en t of o u r cash -m an ag em en t sys­
tem s. Two years ago, we co nverted our
depository netw ork from depository
tra n s fe r c h e c k s to th e a u to m a te d
clearinghouse system . Som e of our
banks w ere thoroughly involved in the
conversion.
Today, we are constantly striving to
fine tu n e our cash system s. T hat can­
not be accom plished alone. A n u m b er
of our banks are w illing to spend th e
necessary tim e in Dallas to review our
sy stem a n d offer c o n s tru c tiv e im ­
provem ents based on our specialized
needs. In selecting cash-m anagem ent
banks, we w ant institutions th at are
b o th good and realistic about th e ir
capabilities.
W e continuously devote a great deal
o f tim e a n d e n e r g y to o u r b a n k relatio n s pro g ram . W e take a topdown approach. Bank relations begin
w ith me and filter th e ir way th ro u g h ­
o u t o u r fin a n c ia l-d e p a rtm e n t staff.
T hroughout each year, I m eet w ith
num erous senior bankers, both in D al­
las and in th e ir offices th ro u g h o u t th e
country and overseas. Last year, our
financial staff m et w ith bankers on over
1,200 occasions.
In retu rn , we expect a great deal
from our banks, probably m ore than
any o ther com pany. In addition to th e
traditional credit/operational services
provided by th e banking industry, we,
as a provider of financial services, m ar­
ket several services of our own to our
banks or to th e public jointly w ith th e
banks. W e count on our contact officer
to assist us in m arketing th ese services.

In placing em phasis on th e increas­
ing im portance of m arketing and tech ­
nology, I underline the fact that the
hum an elem ent has never been m ore
im p o rtan t. Each of our cred it rela­
tionships focuses on the calling officer
assigned to our account. R eferred to
to d a y in som e cases as th e “ re la ­
tio n s h ip o f f ic e r ,’ th is in d iv id u a l
orchestrates our relationship w ith the
bank.
N ot only does h e /sh e g u id e our
cred it req u irem ents through the maze
of internal credit, policy and pricing
com m ittees, he/she also manages the
expanding flow of bank officers who
have specialized interests in visiting
w ith us.
In addition to the contact officer, we
see representatives of the cash m an­
agem ent, corporate finance, corporate
tr u s t, in te rn a tio n a l an d e co n o m ic
areas. To accom plish realistic goals,
th e se calling officers m ust be welltrain ed , know ledgable, highly m oti­
vated and, above all, creative. Banking
has becom e so com plicated today and
th e n eed to identify individual custom ­
e r needs so great that m any banking
areas m ust share the responsibility.
As we review our bank relationships
and identify banks that have a signifi­
cant com m itm ent to us, and are thus
defined as major or lead banks, they
appear to fall into two distinct catego­
ries.
F irst, th e bank that, through the
contact officer, responds to our needs
as they arise. It does w hat is asked of it,
b u t doesn’t offer constructive or crea­
tive ideas. Business seem s to accrue to
such a bank because of its sheer size
and resultant m arket dom inance.
Som etim es we, and not th e bank,
have cultivated those relationships. In
m any cases, contact officers are m ere
order-takers.

'Consumer-Bank' Branches
Planned by Conglomerate
/ / r

O N SU M ER -B A N K ” branches are being planned by H ousehold International, P rospect H eights, 111., finance/insurance/
m erchandising/m anufacturing/transportation firm.
Six to eight such branches will open in California late this m onth.
Some of them will be co nverted offices of th e firm ’s H ousehold Finance
Corp. subsidiary. Besides th e consum er loans those offices now offer,
the branches are to offer savings and checking accounts.
The branches will be p art of H ousehold Bank, H ousehold In tern a­
tional’s federally ch artered S&L. Since its typical custom er is in the
m oderate-incom e level, H ousehold International will not offer stockbrokerage services through th e new banks.
O bjective of th e new -bank program , says G len O. Fick, vice p resi­
dent, investor relations, H ousehold International, is to design and test a
prototype operation th at will receive consum er acceptance, w herever it
m ight be placed.
MID-CONTINENT BANKER for December, 1 9 8 3

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

O n the o th er hand, th ere are banks
that have built a significant position
w ith our com pany by generating new
id e a s a n d a g g re ssiv e ly m a rk e tin g
th em , tailor-m ade, to our financiald ep artm en t staff.
W e consider contact officers as the
q u a rte rb a c k s in o u r re la tio n sh ip s,
co o rd in atin g th e efforts of a finely
tu n e d team in d e v e lo p in g a lo n g ­
standing and m utually beneficial rela­
tionship. I t’s im portant that efforts of
th e contact officer be b len d ed w ith the
bank’s m arketing plan.
D e v e lo p m e n t of c ap ab le callin g
officers, w ell-conceived and dynam ic
plans and integration of the two into a
viable calling program are applicable
to banks of all sizes that seek a share of
th e wholesale m arket.
The financial condition of our banks
is im p o rtan t. W e are in te re ste d in
capital adequacy and stru ctu re of our
banks, retu rn on assets and equity, as
well as the appropriateness of loss re ­
serves. T he ability to absorb future
shocks is extrem ely im portant.
Because of the com petitive clim ate
and fast-paced changes taking place in
fin a n c ia l s e rv ic e s , b a n k in g r e la ­
tionships have never been so im por­
tant. Those who concentrate on how to
im prove a relationship will prosper.

Reagan
(C ontinued fr o m page 55)
petitors, and another 10% use external
indices such as the T-bill rate. In set­
tin g d e p o s it ra te s on d e re g u la te d
accounts, 63% said they expect to use
asset yields and targ et spreads and
17% each said they would use cost-ofalternative sources of funds or com ­
petitors’ rates.
P resident Reagan’s decision to in ­
vade G renada was supported by 66%
of the respondents, b u t th e position of
th e peacekeeping force in L ebanon
was less en th u siastically en d o rsed .
Only 23% said they thought th e U. S.
role in Lebanon should be expanded;
51% favored m aintaining th e status
quo, and 26% said they favored pulling
the M arines out. • •
• T he A B A ’s c o n s tr u c tio n -le n d in g
w orkshop will be held F ebruary 8-10
at the M ariott H otel, D enver. O n the
program will be a discussion of ABAsp o n so re d re se a rc h on au th o rizin g
banks to engage in equity investm ents
in real estate and im plications for the
fin a n c ia l-se rv ic e s in d u stry . W rite :
L isa M aseny, C o n su m e r F in an cial
Services G roup, ABA, 1120 C onnecti­
cu t A ve., N. W ., W ashington, DC
20036.
59

AN MCB SURVEY

M inim um -B alance-R equirem ent D eregulation
Is Supported by M a jo rity of Bankers
OST BANKERS favor re c e n t
m inim um -balance-re­
q u irem en t deregulation m andated re ­
cently by the D epository Institutions
D e re g u la tio n C o m m itte e (D ID C ).
The action elim inated th e $2,500 m ini­
m um -balance re q u ire m e n t entirely on
deposits u sed for IRAs and K eogh
p la n s a n d w ill r e d u c e m i n i m u m balance req u irem en ts from $2,500 to
$ 1 ,0 0 0 on m o n e y - m a r k e t- d e p o s it
accounts, super N O W s and seven- to
31-day tim e d ep o sits of m ore than
$2,500 on January 1, 1985, w ith total
elim ination set for January 1, 1986.
The m ajority of bankers responding
to a M id -C ontinent Banker survey
about deregulation events also in d i­
cated they plan to take advantage, in
one way or a n o th e r, of th e D ID C
action; how ever, few said th e ir in stitu ­
tions would offer incentives to custom ­
ers as a way of taking advantage of the
changes.
Responses w ere m ixed on the d e ­
gree of in te n sity of p ro je c te d p ro ­
m otio n s to p u b lic iz e th e ch an g es,
although m ost are opting for “m o d er­
ate” prom otions.
M ost b a n k e rs e x p e c t to see in ­
creased cost of funds and m ore efforts
to com pete as th e “fruits of th e D ID C
action and they are alm ost unanim ous
in th e ir e stim a tio n th a t th e action
doesn’t favor thrifts over com m ercial
banks.
Most bankers said they will be h a p ­
py to see D ID C go out of existence, as
is expected to be th e case once d e re g ­
ulation is com pleted. H ow ever, a few
doubted th at th e com m ittee w ould go
away — that som e excuse w ould be
m ade to extend its existence and thus
enable it to continue to be a nuisance
to bankers.
Bankers w ere asked to explain why
they eith er approved or disapproved of
th e D I D C a c tio n . F o llo w in g a re
selected responses:
• I approve because I believe the
banking industry should have the right
to choose w hat it is w illing to pay for its
in v en to ry — G ilb e rt E. C o lem an ,
ch airm a n /p resid en t, S ecurity Bank,
Mt. V ernon, 111.
• I approve because elim ination of
controls on financial products is the
only m eans to allow banks to fully com ­
pete w ith nonbank financial services.

M

60


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Federal Reserve Bank of St. Louis

— Sm ith W. B rookhart III, president,
C en terre Bank, Branson, Mo.
• I approve because I w ant to make
decisions instead of following orders.
— Jam es A. T raber, executive vice
president, Victoria (Tex.) Bank.
• D isa p p ro v al was e x p re sse d by
A. A. B oem i, ch airm an, p re sid e n t,
M adison Bank, Chicago: The action is
too fast to thoroughly absorb. F u r­
therm ore, I’m beginning to question
th e w isdom of an activity th a t has
b ro k en th e back of an $800-billion
thrift industry and is in the process of
doing the same to m any banks. U nfor­
tunately, the entire th ru st of d eregula­
tion is to favor form ation of giant finan­
cial-service com panies w ith little con­
cern for a n titru st problem s, including
predatory pricing.
• I approve of total deregulation or
partial deregulation, as long as banks
are able to com pete fairly w ith non­
bank com petition at the same tim e. —
R. J. B r e id e n th a l Jr . , p r e s id e n t,
Security National, Kansas City, Kan.
A n u m ber of responding bankers ex­
pressed indecision about th eir banks’
plans to “take advantage” of th e D ID C
action. Among responses w ere the fol­
lowing:
• W e will react to the new regula­
tion according to our local m arket con­
sideration.
• W e will set our own m inim um s
and price accordingly, probably on a

Some Second Thoughts
One banker having second
thoughts on total deregulation is
A. A. Boemi, chairman/president,
Madison Bank, Chicago.
“As a former exponent of these
changes (deregulation), I’m ques­
tioning my wisdom. Consider what’s
happening to the airlines!
“We seem to be pointing toward
depository institutions becoming
parts of giant financial-services in­
dustries run by managements that
have no background in the fiduciary
responsibilities (that are) involved
when the public’s deposits are con­
cerned.
“A healthy American financial
structure is so important to the en­
tire world!”

tiered basis.
• W e don’t plan to “take advantage”
of the D ID C action because our p ri­
mary IRA vehicle has no m inim um and
we don’t push short m aturities.
• W e ll have to, due to com petition.
• W e will to the extent necessary to
rem ain reasonably com petitive.
Bankers w ere asked w hat incentives
they expect th eir banks to offer the
public in connection w ith th e D ID C
action. Among responses w ere the fol­
lowing:
• None at this tim e, at least until
loan dem and increases to allow us to
invest the funds profitably.
• The change is incentive enough.
Results expected from the d eregula­
tion activity include th e following:
• I don’t expect any great am ount of
activity. I’m assum ing th at some S&Ls
and banks will prom ote higher rates
perhaps, b u t th ere always is th e pro b ­
lem of im pacting the bottom line.
• M ore intensive sales efforts to se­
cure deregulated deposits.
• R ed u ced profit m argins in th e
long run, w ith few er banks, S&Ls and
credit unions. T here also will be great­
ly increased co m p etitio n and rapid
technology advances.
• Confusion from custom ers, b u t it
will be resolved.
• H igher n et-in terest costs and, as a
result, new or higher account fees.
• F u rth e r disinterm ediation of reg­
ular savings, higher costs and narrow er
spreads.
• M ore retu rn to th e depositor, low­
er profit m argins for banks and pos­
sibly riskier loan portfolios.
• It will give us a b e tte r opportunity
to com pete for all accounts.
• B etter asset/liability m anagem ent
by financial institutions should result.
Surveyed bankers w ere asked if they
consider th e D ID C action to favor
thrifts over banks.
• It favors only banks because it will
force thrifts to play u n d er th e same
rules that banks play under.
• U ltim ately , it w ill favor m ajor
m oney-center banks and large thrifts
th a t are su rv iv in g w ith reg u lato ry
accounting practices.
• It doesn’t favor thrifts, b u t it will
req u ire th em to becom e m ore like
com m ercial banks and adapt to greater
rate sensitivity of deposits.

MID-CONTINENT BANKER for December, 1 9 8 3

T he survey asked bankers for th e ir
opinions of th e ex p ected dem ise of
D ID C after financial-institution d e ­
regulation has b een com pleted.
• I seriously d o u b t if D ID C will go
out of existence. It will be used for
o ther m onitoring and pro d u ct lim ita­
tions. — G ilbert E. C olem an, presid en t/ch a irm a n , S ecurity Bank, Mt.
V ernon, 111.
• Hopefully, it will have com pleted
its function and will cease to exist. If
th ere are any tasks y et to b e com pleted
after total deregulation, o th er agencies
can handle them . — E. M. H orton,
p resid e n t, F irst N ational, C am den,
Ark.
• Hopefully, D ID C will sink q u ie t­
ly into th e sunset and disappear. —
Sm ith W. B rookhart III, p resid en t,
C en terre Bank, B ranson, Mo.
• D ID C should be re stru c tu re d to
look at creating fair com petition b e ­
tw een banks and nonbanks. — B. J.
B reiden th al Jr., p re sid e n t, Security
National, Kansas City, Kan.
• I think it should be total and im ­
m e d ia te . — C h a rle s C. B rin k ley ,
chairm an, N o rth east N ational, F o rt
W orth.
• I feel th e re will still be a n eed for a
centralized regulatory body. — A lbert
K. Sewell Jr., vice p resid en t, Citizens
National, In d ep en d en ce, Kan.
Some bankers resp o n d ed to D ID C ’s
expected dem ise w ith jubilation, using
words such as “hooray!,” “great!” and
“can’t w ait!” — Jim F a b ia n , senior
editor.

Interest-Rate Futures
Subject of Booklet
A new booklet, p ublished by A rthur
A ndersen & C o., describes and clar­
ifies accounting tre a tm e n t for interestrate-futures transactions as set forth in
th e Financial A ccounting S tandards
Board (FASB) statem en t released July
14. The booklet is called A ccounting
f o r In te r e s t-R a te F u tu re s: A n E x ­
planation o f the Proposed FASB S tate­
m ent.
In clu d e d in th e b ooklet are case
studies applying th e re c o m m e n d e d
accounting p rocedures to actual h ed g ­
ing situations and a b rie f overview of
im portant tax considerations.
According to an A rth u r A ndersen
spokesperson, hedging w ith interestrate futures — a m eans of m aintaining
profitability by hedging against risk in
a highly unstable econom ic clim ate —
clearly has becom e a pow erful new tool
for m oney m anagers. F or chief finan­
cial officers of banks and o th er financial
in s titu tio n s , p e n sio n -fu n d /p o rtfo lio
m anagers and o th ers, it affords th e
potential for p rotection against volatile

in te re s t ra te s, says th e accounting
firm. H ow ever, since th e inception of
interest-rate-futures contracts in 1975,
use of and accounting for these transac­
tions have been a topic of considerable
controversy.
Lack of clear-cut-accounting/financial-reporting standards, A rthur An­
dersen believes, has p rev en ted many
com panies and financial institutions
from using th e in te re st-ra te-fu tu re s
m arket as a hedging tool. As a result,
th e firm believes its new publication
should be of strategic value to the vast
and rapidly growing n u m b er of finan­
cial m anagers contem plating or cu r­
ren tly involved in h edging transac­

tions w ith financial futures.
The booklet is available by contact­
ing: A rthur A ndersen & C o ., D istrib u ­
tions Clerk, Room 1123, 33 W. M on­
roe, Chicago, IL 60603.
• The 1984 com m u n ity-b a n k execu­
tive-developm ent program of the ABA
has been expanded to th ree sessions:
M arch 5-8, H y a tt R egency H o tel,
M inneapolis; M arch 25-29, Colonial
W illiam sburg Lodge, W illiam sburg,
V a.; and April 9-12, Red Lion M otor
In n -Ja n tz e n B each, P o rtlan d , O re.
W rite: M eg Battle, C om m unity Bank­
ers Council, ABA, 1120 C onnecticut
Ave., N. W ., W ashington, DC 20036.

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MID-CONTINENT BANKER for December, 1 9 8 3

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

Asset & Liability Management
Market Analysis
Expert Testimony

61

COMPETITION

Real-Estate Variable Annuity on Scene
N E W in vestm ent in stru m en t that m arily on in c o m e -p ro d u c in g office
could m ean additional dollars buildings, shopping centers and m ulti­
industrial parks. So that day-tow ill b e d iv e rte d from c o m m e rc iaunit
l
banks now is on th e m arket and avail­ day cash needs of the account can be
m et, 10% of the assets are set aside in
able through D ean W itte r Reynolds,
c ash e q u iv a le n ts a n d a d d itio n a l
Prudential Bache, Shearson/A m erican
Express, Paine W e b b e r Jackson C u r­ monies invested in federally guaran­
teed m ortgage instrum ents (FHA and
tis, A. G. E dw ards and m any regional
GNMA). Incom e from loans is rein ­
brokerage firms.
vested on a day-to-day basis.
C a lle d th e H a rv e s t R e a l-E s ta te
Variable Annuity, it is d escribed as the
I t’s anticipated that H arvest m o rt­
gages frequently will contain participa­
first flexible prem ium no-load annuity
that offers both individual and in stitu ­ tion clauses that enable th e account to
tional investors an oppo rtu n ity to p ar­ share in gross ren tal increases and
ticipate in an entity th at acts as a len d er
p o s s ib le a p p re c ia tio n in p ro p e rty
values. R ental participations are col­
in the real-estate m arket. At th e same
tim e, the plan’s sponsors say it allows
lected at the end of the year, and p ro p ­
an investor to retain m any benefits of erty -a p p reciatio n p articip atio n s are
equity ow nership. Acting as bankers,
collected w hen the m ortgage is paid off
investors can profit from com petitive
or property sold.
T he H arv est spokesperson m ain­
return s of m ortgages available in to ­
day’s en v iro n m en t of red u ced infla­ tains it is the only known flexible p re ­
tion. According to a spokesperson for m i u m r e a l-e s ta te v a ria b le -a n n u ity
the plan, investors also secure ow n­ program in w hich an investor can earn
ership advantages through participa­ len d ers’ returns for as little as $5,000.
tions in both gross rental-incom e in­ In addition, contract ow ners have the
benefits of equity ow nership through
creases and appreciation in p ro p erty
participation in gross re n t increases
values.
and sharing in p roperty appreciation.
The H arvest A nnuity has a death
Finally, the spokesperson continues,
b enefit th a t g u arantees th e original
principal deposits or th e ir cu rre n t con­ th ese benefits are all the m ore extraor­
dinary because, in m any cases, inves­
tract value (w hichever is greater) if the
a n n u ita n t d ies b e fo re in co m e p ay ­ tors can qualify for tax advantages in
term s of th eir incom e from H arvest.
m ents begin.
Fees. T h ere’s no charge for entering
H e re ’s how th e H arvest plan works:
C u sto m e rs d e p o sit th e ir m o n ey (a th e annuity, b u t th ere is a $30 annual
m inim um purchase of $100 for tax- adm inistrative charge to m eet basic ex­
q u a lifie d p la n s , $ 5 ,0 0 0 fo r n o n ­ penses of accounting and reporting to
investors.
qualified plans) — w ithout brokerage
A fter th e first year, 10% of an inves­
fees — into th e In teg rated R esources
to r’s accum ulated value can be w ith­
Life In s u ra n c e Cos. acc o u n t. T h e
d raw n w ith o u t p en alty . An annual
account pools all deposits and makes
1.3% fee will be ded u cted to guarantee
com m ercial first-m ortgage loans, prith e annuitant purchase paym ents on
d eath and no increases in expenses and
P0SITI0NS AVAILABLE
to provide incom e for life.
Operations — KS, MO, IA ....................... $30K
H arvest charges a su rren d er fee for
Cashier/Controller— MO, KS, NE .......... $35K
Commi. Loan — KS, MO, IA, N E ............ $40K
w ithdraw ing m ore than 10% of the to ­
Agri Loan — MO, IA, NE ......................... $30K
tal accum ulated am ount in the first 10
President— MO, K S ............................... $0pen
Instai. Loan — KS, MO ........................... $18K
years. The fee is 7% if th e m oney is
Trust OffIcer— ND, KS, NE ................... $25K
w ithdraw n in years one through five;
Cash Mgm’t — MO ................................... $30K
5% in year five and 1% less for each
Additional positions available in midwestern states
year after the fifth year. S u rren d er fees
for experienced bank officers. All inquiries con­
fidential.
d isappear com pletely after the 10th
year.
Among states w here H arvest con­
TOM HAGAN & ASSOCIATES
tracts are available are eight in the
of KANSAS CITY
M i d - C o n t i n e n t a re a : L o u isia n a ,
P.O. Box 12346/2024 Swift
North Kansas City, MO 64116
M ichigan, M ississippi, M issouri, New
M exico, O klahom a, T en n essee and
816/474-6874
W isconsin.
SERVING THE BANKING INDUSTRY
SINCE 1970
R e s o u rc e s L ife I n s u r a n c e Co. ,

A

62

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Federal Reserve Bank of St. Louis

which issues the H arvest contracts, is a
wholly ow ned subsidiary of Integrated
Resources, Inc., a D elaw are corpora­
tion that is a financial-services com ­
p any engag ed in th e org an izatio n ,
m anagem ent and sale of investm ent
program s, prim arily involving lim ited
partn ersh ip s, and th e sale, re in su r­
ance and direct w riting of life in su r­
ance. Resources Life becam e a dom es­
tic New Jersey insurance firm in 1981
through a m erger with a newly form ed
N ew Jersey insurance com pany organ­
ized for such a purpose. Its hom e office
is in F o rt L ee. H ow ever, all com ­
m unications concerning the H arvest
plan are being handled in Resources
Life’s A nnuity Services Office in Kan­
sas City.
U n d e rw rite r of th e plan is In te ­
g rated C apital Services, In c., New
York City, also a wholly ow ned affiliate
of In tegrated Resources. • •

•

Index to Advertisers

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American Hereford Association ........................... 51
Arlington Resort H o te l....................................... S/19
Arrow Business Services, Inc................................ 63
Austin & Associates, Inc., Douglas ................... 61
Bank Board L e tte r........................... 25, 46, 53, 57
BankMate .............................................................. 3
Barclays American Business Credit ................... 17
Boatmen’s National Bank, St. Louis ................. 64
Brandt, Inc..............................................................
5
Centerre Bank, St. Louis ..................................... 31
Central Bank of the South, Birmingham ............ 29
Chubb Systems Midwest ..................................... S/5
Citicorp Industrial Credit ..................................... 13
Cole-Taylor Financial G roup........................... 28-29
Collateral Control Corp........................................... 21
Commerce Bank, Kansas City .............................
7
Commercial Nat’l Bank, Kansas City, Kan............. 33
Continental Bank, Chicago................................... 35
Decisions Systems, Inc.......................................... 43
Doane Publishing Co.............................................. 49
First
First
First
First
First
First
First

Alabama Bank, Montgomery ................... S/17
Lease/Equipment Corp.................................. 45
National CharterBank, Kansas City ............ 35
National Bank, St. Joseph, Mo................. S/15
Nat’l Bank of Commerce, New Orleans . . . S/9
Oklahoma Bancorp, Oklahoma City .. 37, S/7
Wisconsin National Bank, Milwaukee .. 32-33

Hagan & Associates, Tom ................................... 62
Independent State B a n k ....................................... 31
Liberty Nat'l Bank & Tr. Co.,
Oklahoma City ..................................................

2

Management Search, Inc................................... S/19
Marine Midland Bank, New York .......................
9
Mellon Bank, P ittsburgh....................................... 23
Mellon Financial Services ................................... 15
Mercantile Bancorp, St. L o u is............................. 27
Midland Bank & Trust Co., Memphis ............. S/13
North Central Life Insurance Co...........................
2
Northern Trust Co., Chicago ............................... 27
Penn Hill Associates, Inc...................................... 16
Third National Bank, Nashville ......................... S /l
Trlcontinental Leasing Corp................................... 41
United Missouri Bank, Kansas C ity ................... S/3
Whitney National Bank, New O rleans............. S /l 1

MID-CONTINENT BANKER for December, 1 9 8 3

For ibur Bank,
Nothing Less W ill Do.
Arrow Business Services offers you
Kittinger, including the Georgian Series
pictured here. And Baker, Gunlocke, Steelcase, K noll...the who’s who of office
furnishings. All the prestige names display
their best in our Memphis showroom,
complete with accessories, carpet, window
and wallcovering.
Arrow’s staff of ten experienced bank


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

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, cost*
effective proposal to meet your bank’s
building and furnishings needs.
We offer the best, and we know you expect
nothing less.

H R R 0144
BUSINESS SERVICES, IN C.

r

an affiliate of M idland Bank & T rust
3050 M illbranch, M em phis, Tennessee 38116
901/345-9861

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

B

W

Happy Holidays
M a y the w arm th a n d c h e e r o f the
H olid a y Season b e you rs fo r e v e r .

THE BOATMEN'S
NATIONAL BANK
O F ST. LOUIS