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MID-CONTINENT BANKER DECEMBER, 1 9 8 5 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis FEATURES Is th e W ork E th ic Dead? PC H o ld o u ts , Y o u r Days A re N um bered! Finding C o m m e rc ia l-F in a n c e E x p e rtis e Compare For Yourself. How Does Your Current Credit Insurance Company Measure Up To North Central Life? 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PAUL, MN 55164 In Minnesota call 800-792-1030 All other states 800-328-9117 MID-CONTINENT BAN KER Banking W ire Late-Breaking News From the World of Banking INTERSTATE A C T IV IT Y : M i c h i g a n h a s b e c o m e t h e s i x t h s t a t e i n t h e 1 8 - s t a t e MID-CONTINENT BANKER r e g i o n t o e n a c t r e g i o n a l i n t e r s t a t e b a n k i n g l e g i s l a t i o n . M i c h i g a n 's b i l l w a s w a i t i n g f o r t h e G o v e r n o r 's s i g n a t u r e a t p r e s s t i m e . The b i l l p r o v id e s f o r r e g i o n a l i n t e r s t a t e b a n k in g a s o f J a n u a r y 1 , 1 9 8 6 , w i t h I l l i n o i s , O h io , I n d i a n a , M in n e s o ta a n d W is c o n s in , and c o n ta in s a t r i g g e r d a te f o r n a tio n w id e b a n k in g o f O c to b e r , 1 9 88. Of th e s t a t e s n a m e d i n M i c h i g a n 's b i l l , I l l i n o i s , O h io a n d I n d i a n a a l s o h a v e p a s s e d l a w s , a n d W i s c o n s i n m ay b e c l o s e t o d o i n g s o . ( S e e s t a t e n e w s s e c t i o n f o r a r t i c l e o n n ew I l l i n o i s i n t e r s t a t e la w .) k k k CREDIT-CARD RATE CAP TO BE SOUGHT. L e g i s l a t i o n to p la c e a f e d e r a l cap on c r e d i t - c a r d i n t e r e s t r a t e s w a s e x p e c t e d t o b e i n t r o d u c e d b y S e n . A l f o n s e D 'A m a to (R . , NY) a t p r e s s tim e . T h e l e g i s l a t i o n w o u ld p r o p o s e t h a t r a t e s b e l i m i t e d t o f o u r p o i n t s a b o v e t h e i n t e r e s t r a t e u s e d b y t h e IR S w h e n i t c o l l e c t s d e l i n q u e n t p a y m e n ts a n d p a y s l a t e r e f u n d s . T h e IR S r a t e c u r r e n t l y i s 11%, w h i c h m e a n s t h e c a p w o u ld b e 15%. B a n k r a t e s now s t a n d a t 18% t o 20% . The s e n a t o r te rm s c u r r e n t b a n k r a t e s " l e g a l u s u r y " an d e s t i m a t e s c o n su m e rs a r e p a y i n g f r o m $2 t o $3 b i l l i o n m o re i n c r e d i t - c a r d - f i n a n c e c h a r g e s t h a n t h e y s h o u l d . S im ila r l e g i s l a t i o n h a s b e e n in tr o d u c e d in th e H ouse. * * * EX -FD IC CHAIRMAN AVAILABLE. W i l l i a m M. I s a a c ' s f u t u r e p l a n s w e r e c l o u d y a t p r e s s t i m e . He i s r e p o r t e d l y b e i n g c o n s i d e r e d t o h e a d t h e new F a rm C r e d i t S y s te m C a p i t a l C o r p . , t h e v e h ic le th a t w ill s e ll o ff th e F C S 's b a d a s s e t s . M r. I s a a c h a s h a d c o n s i d e r a b l e e x p e r i e n c e i n t h i s l i n e o f w o r k , s i n c e t h e FDIC i s h e a v i l y e n g a g e d i n d i s p o s i n g o f n o n -p ro d u c tiv e a s s e ts o f f a i l e d b a n k s. M r. I s a a c a l s o i s t h o u g h t t o b e c o n s i d e r i n g j o i n x n g a W a s h i n g t o n la w f i r m , w h e r e h e w o u ld h e a d a n a f f i l i a t e d c o n s u ltin g f ir m to a d v is e b a n k s on a b ro a d ra n g e o f f i n a n c i a l s e r v i c e s . k k k —- ,B AILQUT MEASURE f o r t h e F a rm C r e d i t S y s te m w a s a p p r o v e d b y t h e S e n a t e a s t h i s i s s u e w en t to p r e s s . T h e m e a s u r e w o u ld c r e a t e a l i n e o f c r e d i t w i t h t h e T r e a s u r y D e p a r t m e n t f o r u s e i f a n d w h e n t h e s y s t e m n o l o n g e r c a n r e l y o n i t s own r e s o u r c e s t o r e m a i n i n b u s in e s s . No a m o u n t o f c r e d i t w a s s p e c i f i e d . T h e b i l l a l s o w o u ld f o r c e t h e FCS t o p o o l i t s own a s s e t s b e t t e r a n d g i v e s t r o n g e r p o w e r s t o t h e F a rm C r e d i t A d m i n i s t r a t i o n , t h e FCS re g u la to r. The H o u se i s c o n s i d e r i n g s i m i l a r l e g i s l a t i o n . k k k BANKERS— RECEIVED TOP PAY RAISES IN '8 4 . A C o n f e r e n c e B o a rd s tu d y show s t h a t t o t a l c o m p e n s a tio n (in c lu d in g bonuses) r o s e 14% in c o m m e rc ia l b a n k in g , 11% am ong m a n u f a c t u r i n g / u t i l i t y f i r m s , 10% i n i n s u r a n c e , 8% i n r e t a i l i n g a n d 7% i n c o n s t r u c t i o n firm s . The re p o rt su rv e y s to ta l c o m p e n s a tio n re c e iv e d by th e fiv e h ig h e s t-p a id e x e c u t i v e s i n m o re t h a n 1 ,0 0 0 m a j o r f i r m s . :'c k k CONTINENTAL TO PAY P REFERRED-DIVIDEND ARREARAGES. C o n t i n e n t a l I l l i n o i s C o r p ., C h ic a g o , w i l l p ay f u l l p r e f e r r e d - d iv id e n d a r r e a r a g e s and d e c la r e th e c u r r e n t q u a r t e r l y d iv id e n d on MID-CONTINENT BANKER for December, 1985 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 3 th e c o rp o ra tio n ’ s a d ju s ta b le -ra te p re fe rred p r e f e r r e d s t o c k , c l a s s A. C o n t i n e n t a l B ank p a re n t. R e q u ire d a p p r o v a ls h a v e b e e n r e c e iv e d s to c k , s e rie s 1, and a d ju s ta b le -ra te w i l l p a y a $60 m i l l i o n d iv id e n d to i t s fro m t h e FDIC a n d C o m p t r o l l e r . A * Ä LEONARD B . MARSHALL, J R ., fo rm e r c o m m is s io n e r o f b a n k in g in K e n tu c k y and fo rm e r p r e s i d e n t , L i b e r t y U n i t e d " B a n c o r p , L o u i s v i l l e , h a s b e e n n am ed p r e s i d e n t / C E O , M id w e s t F i n a n c i a l G ro u p , P e o r i a , 1 1 1 . He s u c c e e d s W i l l i a m B a r n e s I I I , i n t e r i m p r e s i d e n t / C E O . M r. M a r s h a l l w a s K e n t u c k y b a n k i n g c o m m i s s i o n e r d u r i n g t h e t i m e 10 b a n k s c o n t r o l l e d b y t h e B u tc h e r b r o t h e r s w e re s o ld f o llo w in g th e c o l l a p s e o f th e B u tc h e r g ro u p . * * * A STATEWIDE VIDEO-BANKING PROGRAM h a s b e e n l a u n c h e d b y B an c One C o r p . , C o lu m b u s , 0 . U s e r s o f " A p p l a u s e ” w i l l b e a b l e t o i n q u i r e a b o u t b a l a n c e s i n d e p o s i t a n d c r e d i t —c a r d a c c o u n ts , CDs a n d in s ta llm e n t lo a n s ; tra n s fe r fu n d s b e tw e e n a c c o u n ts ; pay b ills e l e c t r o n i c a l l y ; r e o r d e r c h e c k s ; an d r e q u e s t s to p p a y m e n ts . The s e r v i c e w i l l be f r e e to i n d i v i d u a l a n d s m a l l - b u s i n e s s c u s t o m e r s u n t i l A p r i l t h r o u g h B a n c One s 20 a f f i l i a t e d banks s ta te w id e . * * * NEWLY-CONFIRMED COMPTROLLER R o b e r t L . C l a r k e w i l l b e a k e y n o t e s p e a k e r a t t h e ABA’ s 1986 B a n k I n v e s t m e n t s / F u n d s - M a n a g e m e n t C o n f e r e n c e F e b r u a r y 2 5 - 2 8 i n New O r l e a n s . C o n fe re n c e th e m e i s " T u r n i n g P a p e r i n t o P r o f i t . " T h e c o n f e r e n c e w i l l f o l l o w a new f o r m a t t h a t in c o r p o r a t e s t h r e e c o n c u r r e n t p ro g ra m t r a c k s c o v e r in g a l l s i z e s o f b a n k s . The t r a c k s a r e p o r t f o l i o m a n a g e m e n t, t r e a s u r y i s s u e s a n d c a p i t a l m a r k e t s a n d d e a l e r a c t i v i t i e s . For i n f o r m a tio n , c a l l 2 0 2 /4 6 7 -6 7 3 8 . •k k k MORE FOR L E S S : T h e a v e r a g e n u m b e r o f e m p l o y e e s n e e d e d by b a n k s t o g e n e r a t e $1 m i l l i o n i n n e t r e v e n u e s d r o p p e d f r o m 2 2 . 4 i n 1979 t o 1 5 . 1 i n 1 9 8 4 , a c c o r d i n g t o a r e p o r t b y C o le S u rv e y s , I n c . , B o s to n . C o m p e t i t i v e p r e s s u r e s o f t h e p a s t fe w y e a r s h a v e f o r c e d b a n k s t o lo o k f o r e f f i c i e n c i e s , and in c r e a s e d p r o d u c t i v i t y i s one r e s u l t , a c c o r d in g to C o le . AAA JO IN T BANK-TECHNOLOGY CONFERENCES h a v e b e e n s c h e d u l e d b y t h e ABA f o r F e b r u a r y 9 - 1 2 i n O rla n d o , F l a . T h e T e l e c o m m u n i c a t i o n s a n d F i n a n c i a l N e tw o r k s a n d V id e o B a n k in g I I I c o n f e r e n c e s w i l l b e h e ld s im u lta n e o u s ly to g iv e b a n k o p e r a t i o n s and te le c o m m u n ic a tio n s p e r s o n n e l a n o p p o r t u n i t y to e x p lo r e th e a p p l i c a t i o n s o f b o th r a p i d l y e x p a n d in g a r e a s o f fin a n c ia l p ro d u c ts /s e rv ic e s . T h e p r o g r a m s w i l l o f f e r m o re t h a n 25 c o n c u r r e n t s e s s i o n s and s e m in a rs . P e e r - g r o u p d i s c u s s i o n s h a v e b e e n ad d ed to th e p ro g ra m an d an e x h i b i t d is p la y w i l l be p a r t o f th e e v e n t. F o r i n f o r m a t i o n , c a l l 2 0 2 /4 6 7 -4 1 9 3 . MID-CONTINENT BANKER Volume 81, No. 12 (ISSN 0026-296X) E dito rial/A d v ertisin g offices: 408 Olive St., St. Louis, MO 63102; 314/421-5445. is p ublished m onthly by C o m m erce P u b lish in g C o ., 408 O live S t., St. Louis, MO 63102. M id - C o n t in e n t B a n k e r POSTM ASTER: Send address changes to M i d C o n t i n e n t B a n k e r at 408 Olive St., St. Louis, MO https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis December, 1985 63102. P rinted by The Ovid Bell Press, Inc., Fulton, Mo. Second-class postage paid at St. Louis, M o., and at additional m ailing offices. Subscription rates: T hree years $27; two years $20; one year $12. Single copies, $2.50 each. Foreign subscriptions, 50% additional. MID-CONTINENT BANKER for December, 1985 you W H EN W A N T TO GET IT D O N E , CALL A CORRESPONDENT W HO HAS BEEN T H . There are only a handful of correspondents who can say they’ve learned the needs of community banks firsthand. And his knowledge is now channeled into providing services like fast, efficient transit operations, bond and investment services and bank stock loans. The same responsiveness he provided to his bank cus tomers is now offered to you. Ernie Yake is one of them. He successfully m an aged Commerce Bank of Moberly. And before that, he headed a subur ban Kansas City bank on the Kansas side. So give Ernie a call at 234-2483. He knows how to get it done for you, because he’s already done it himself. Today, Ernie runs the Correspondent Depart ment at Commerce Bank of Kansas City. Ernie knows w hat bankers need. €* Commerce Bank of Kansas City“ GETTING IT DONE MID-CONTINENT BANKER for December, 1985 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 5 M1D-CON1 ì ì December, 1985/Volume 81, No. 12 In T h is I s s u e FEATURES 13 ‘Upscaling’ Asset-Based Lending Increase loan size, decrease number of loans 18 Asset-Based Lending for Mid-Sized Bank Among considerations: long-term commitment 24 Your Bank’s Security It’s more porous than you think! Mid-Continent Banker Staff W esley H. Clark Publisher John L. Cleveland Associate P ublisher/E ditor Lawrence W. Colbert Vice President/A dvertising Jim Fabian Senior E d ito r Joe Lawler Assistant E ditor Marge Bottiaux A dvertising Production M anager Nancy Gilbreath Staff Assistant Linda Brumitt Circulation M anager Commerce Publishing Co. Officers Donald H. Clark Chairman Em eritus Wesley H. Clark Chairman/CEO 40 Essentials of Bank Consumer Leasing It’s a growing, lucrative market for banks 44 Sound Collateral/Residual Strategies Improving collateral identification for commercial loans James T. Poor President/Chief O perating Officer David A. Baetz Executive Vice President Bernard A. Beggan Senior Vice President/Secretary DEPARTMENTS 29 State News Section Transitions taking place in the mid-continent area 35 Agriculture ABA ponders agri-future 37 Legislation/Regulation Dealing with examiners, congressional aides Lawrence W. Colbert Vice President/Treasurer William M. Humberg Vice President Commerce Publications American Agent & Broker Club Management Decor Life Insurance Selling M id-Continent Banker The Bank Board L etter 47 Strategic Planning ‘We contemplate no changes’ — II 49 Computers PC holdouts, your days are numbered Editorial/Advertising Offices 408 Olive St. St. Louis, MO 63102 314/421-5445 52 Marketing Marketing employee-benefit services 55 Human Resources Is the work ethic dead? 57 New Products/Services Help for security conscious 62 The Banking Scene Worldwide banking proposal 6 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis MID-CONTINENT BANKEB for December, 1985 Perspective Hot and Bothered A T T E N D IN G th e N ational C om m ercial Finance The sheer size of som e of th e m uch publicized Association (NCFA) convention in New leveraged buyouts (FBOs) seem ed m ind-boggling to O rleans last m onth, you began to u n d erstand w hat some long-tim e N C FA m em bers. How could it m ust be like to stand on ground zero at a anyone hope to liquidate assets supporting a nuclear-test site. m ulti-billion-dollar FBO ? they asked. O thers On th e one hand, being at th e c e n te r of attention w ondered w h eth er th e industry has available is gratifying, especially if you’ve traditionally been enough experienced personnel to adequately staff considered outside th e financial-services all of the firms that w ant to get involved in m ainstream . On th e o th er hand, you re not entirely asset-based lending. com fortable about your position if th e bom b should O ne panel of experts deb ated w h eth er go off. com m ercial lending is a p ro duct or a business. O ne T here is no denying that th e asset-based lenders wag suggested that it’s m ore like a virus. A nother who gathered in N ew O rleans had reason to said “it’s a living.” celebrate. T heir in dustry is hot. F everaged buyouts If an asset-based loan is done properly, it can have g arnered considerable m edia attention in the provide a very nice living indeed, w hich is why so past few m onths. A lot of people, especially banks, m any banks have been tem p ted to join th e ranks of seem to w ant to get into th e asset-based-lending the com petition. industry despite th e intensity of com petition. NCFA m em bership has grow n and th e New The message from New O rleans is that O rleans convention was th e association’s biggest asset-based lending req uires a certain deg ree of ever. expertise that not all lenders possess. Mr. D organ As N C FA C hairm an Richard D organ said in his urged a retu rn to the traditional hands-on lending keynote address, asset-based lenders have gone standards the industry tries to m aintain. T he new from being th e le n d e r of last reso rt to the len d er of com petition isn’t bad, he indicated, as long as it first resort. U nfortunately, th a t’s a rath er recognizes the in h eren t dangers involved in a risky uncom fortable position for th e com m ercial-finance business and follows tim e-proven principles for industry to be in. Mr. D organ was am ong those at success. W e should point out that Mr. D organ the convention who expressed som e cautionary works for the com m ercial-finance division of a bank. notes. In his keynote address, Mr. D organ invoked H e said he is concerned about th e possible images of the D epression a few tim es as a symbol of slippage of lending standards in th e industry. som ething he did not w ant to see rep eated . H e said Com m ercial-finance com panies have long prid ed he was confident that the mistakes of th e past could them selves on th e ir ability to spot w orthy loan be avoided, b u t he also sounded like a m an who custom ers that o th er lenders considered too risky, hears a bom b ticking som ew here nearby and is m onitoring th e cu sto m er’s perform ance and being anxious to defuse it. — John L. Cleveland, nim ble in liquidating assets if th e loan w ent sour. editor/associate publisher. • • See page 21 for a report on the NCFA convention Mid-Continent Banker Editorial Schedule — January-June 1986 JANUARY APRIL • ATM/POS Equipment Review • 1986 Economic/Legislative Forecast fo r Banks • Bank M arketing/Sales • Consultants' D irectory • State Convention Previews FEBRUARY MAY • Financial-Services Telecommunications, including Review of ATM N e tworks • Agri-Finance • • • • MARCH JUNE • State Convention Previews New Bank Products/Services • Review o f Bank Security Devices • Financial Planning Services O ffered by Banks • Financial-Services Software • M erger/Acquisition Report MID-CONTINENT BANKER for December, 1985 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Bank O perations Bank Equipment Review Human Resources State Convention Previews • 7 Finding Com m ercial-Finance Expertise th e docum entation of the loan pack age. It’s essentially a way to properly Editor/Associate Publisher negotiate w ith your custom er as to th e value of his assets, b u t unless the OO MANY banks are getting in person who engages th e appraiser volved in a sse t-b a se d len d in g has a level of com petence necessary w ith o u t a d eq u ate ex p erien ced h uto u n derstand it, th e appraisal isn t going to help you.” man resources to do th e job properly, U nfortunately, th e appraisal of the according to S tephen J. Davis, ex ecutive vice p resid en t and directo r of value of the assets at loan inception operations, E q u ip m en t F inance and isn’t th e same as the value th e assets Lease Division of ITT C om m ercial w ill h a v e if th e y h a v e to b e li quidated, a point banks unfam iliar Finance Co., St. Louis. “I don’t think th e re are enough ex w ith asset-based lending have been perts in this business to adequately known to miss. The asset-based le n d staff all of th e com panies and banks e r has to h av e ch a n n e ls th ro u g h w hich it can liquidate repossessed that w ould like to be in it, says Mr. assets. A broadly based asset-based Davis. D espite th e shortage of top-notch lending com pany has contacts around com m ercial-finance personnel, com th e nation through w hich it can dis m unity banks frequently find th e m pose of repossessed assets, says Mr. Davis. selves asked by valuable custom ers to extend asset-based loans. The bank m u st th e n d e c id e w hich is m ore onerous — refusing th e loan and risk There a re n 't ing loss of th e rest of th e cu sto m er’s business or adding a loan to its p o rt enough experts in the co m m ercial-fi folio it does n o t feel com fortable nance business to about. adequately staff the Mr. Davis says th e re is a b e tte r banks th a t w ould alternative. T he bank can tell th e cus like to be in it. — to m e r th a t it has a w ork in g re la Stephen J. Davis tionship w ith a com pany like ITT Com m ercial F inance th at has special expertise in asset-based loans. It thus “In fact, if we know a loan is going can keep the custom er happy, retain the expertise n e e d e d to evaluate and b a d ly , w e m ay m ake c o n tin g e n t adm inister th e loan and p articipate in arrangem ents to sell the inventory the loan to th e degree it wants. I t’s w hile th e case still is in court and we not uncom m on for a bank to partici have yet to take possession, ” says Mr. pate in 50% of th e loan, says Mr. Davis. A sset-based lending, if done p ro p Davis, while o th er banks feel m ore com fortable not participating at all. erly (i.e. “collected as well as m a d e ,” The loan can be stru ctu red in m yriad says Mr. Davis), can be extrem ely ways and each custom er and situation profitable. “ A ty p ic a l a s s e t-b a s e d loan — has to be evaluated individually. Asset valuation is one way an o u t ‘typical’ m eaning it’s a good risk and side com m ercial-finance com pany is adequately collateralized — ought to able to assist a com m unity bank. A carry a percentage to prim e of at least bank in Iowa may be able to get a fair four above p rim e ,” says Air. Davis. approxim ation of th e value of assets “And depending on w hat type of loan proposed as collateral if the assets are it is and th e relative level of loan to w ithin the bank’s m arket area. But invested equity in the com pany — w hat if th e assets are in Florida or I ’m thinking now of leveraged b u y Hawaii? Can the bank tru st th e work outs — you’re going to w ant w arrants of an appraiser in a distant city? Mr. as well. No purchaser equity m eans th at you’re m aking th e acquisition Davis thinks that w ould be unwise. “ A p p ra is e rs m ay te ll th e guy possible through the loan so you’re paying the fee exactly w hat he wants going to look for a participation in the to h e a r,” he says. “You’re going to com pany on that basis.” A com m unity bank is not likely to have to have an appraisal as part of By John L. Cleveland T 8 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis be asked to participate in some of the h uge leveraged buyouts that have garn ered so m uch press in recen t m onths, b ut it may face a situation in w hich a small local com pany has b e com e the target of an outside raider and needs capital for a m anagem ent buyout. In Air. Davis s view, it is always preferable to go w ith the ex is tin g m a n a g e m e n t r a th e r th a n attem pting to finance a takeover by a raider. “ T h e existing m an ag ers u n d e r stand the com pany and its custom e rs ,” he says. “T h e re ’s continuity, w hereas w ith an outside purchaser th e re ’s a possibility that th e existing em ployees and custom ers may not stay.” D uring the early loan negotiation, a bank may not wish to let th e cus tom er know of the involvem ent of an o u tsid e c o m m ercial finance co m pany. E v entually, th e com m ercial len d er will dispatch experts to the cu sto m e r’s facility to evaluate th e proposal, b u t if the bank wishes to keep the asset-based len d er in the b a c k g ro u n d in itially , th a t can be arranged. In fact, says Air. Davis, the bank can arrange to collect paym ents if it feels uncom fortable letting an outsider fill that role. “I would think that a bank w ould w ant us to service th e loan because th ese are service-intensive loans, says M r. D av is. “ T h e y r e q u ir e p e rio d ic re v ie w of financials and usually require periodic inspection of collateral. W e d o n ’t p reclu d e th e bank from servicing the loan, how ev er, if it agrees with us on servicing stan d ard s.” Mr. Davis said that banks n e e d n ’t fear that in utilizing a com m ercial fi nance com pany they are cutting the cord th at binds th e ir cu sto m er to th e m . T h e lo an a n d s e rv ic in g arran g em en t can b e s tru c tu re d to preserve the custom er’s ties to the bank, says Mr. Davis. D ocum enting and m onitoring the loan is crucial and it is here that the com m unity bank most needs the assistance of a com mercial finance com pany. H e recom m ends that the bank involve the com m e rc ia l fin a n c e c o m p an y e a rlie r rath er than later in th e negotiations. “ T h ese are to u g h d eals to p u t to g eth er and they take a long tim e to stru ctu re, he says. • • MID-CONTINENT BANKER for December, 1985 A BUSINESSMAN IS KNOWN BY THE COMPANY HE KEEPS... solvent A. E. G E 1Z L E R & C O ., INC. is all business. Our staff has no MBA’s, no lawyers, no accountants, no former lending officers. Just seasoned, prag matic businessmen who can diagnose the problems ... formulate a workable turnaround plan ... and gain the confidence of a debtor firm. We are businessmen who act as consultants rather than consultants who act as businessmen. Our lender-oriented business approach to successful turnarounds and work outs will work for you. A. E. GETZLER & CO., INC. A.E.GETZLER&CO..INC. MANAGEMENT CONSULTANTS Executive offices 295 Madison Avenue New York, N.Y. 10017 212-697-3616 MID-CONTINENT BANKER for December, 1985 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 9 TURNING BANKERS INTO SALES PEOPLE IT ’S NOT AN EASY JOB! WE CAN HELP L et SA L ES T R A IN IN G R E P O R T — the m agazine w ritten for you, the progressive financial institution o f the eighties — H E L P M A K E Y O U R JOB E A S IE R . SA LES T R A IN IN G R E P O R T w ill deliver tw elve m onths o f h e lp . Y ou w ill get proven financial sales techniques, w inning training program s and profiles o f financial institution successes. W e keep you up-to-date on new tren d s, d evelopm ents, products and services available to financial institutions. W e concentrate on sales ideas, how -to-techniques and in-depth coverage o f issues and program s that apply directly to your institution your em ployees — your career. Join thousands o f other trainers, m arketing directors and ch ief executive officers w ho have realized the im portance o f sales training. W e are confident you w ill find SA LES T R A IN IN G R E P O R T required m onthly reading. W e guarantee your satisfaction w ith a m oney back guarantee. If you already have a sales training pro g ram , or if you are planning one SA LES T R A IN IN G R E PO R T is your m agazine. S U B SC R IB E TO D A Y ! --------------------------------------------------------------------------------------------- 1 SPECIAL BONUS---- PLEASE SEND HELP. SUBSCRIBE NOW AND RECEIVE FREE SALES SKILLS DEVELOPMENT LEARNING PROGRAM Please start our subscription to SALES TRAINING REPORT and send us FREE the SALES SKILLS DEVELOPMENT LEARNING PROGRAM (A $95.00 Value). (Manual and 2Vi hr. cassette) A $95.00 Value Send us: □ □ 1 year for $48 □ 2 yrs. for $72 Payment enclosed □ Please invoice Institution_________________ ______________________ N am e_____________ ___ _______________________ _— T itle________________________________ _____________ Address______ ___________ ______ ___________________ C ity ____________ ______________ State_______ Zip Phone____________________________ ____________ Allow 6 to 8 weeks for the delivery of your first issue. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SALES TRAINING REPORT 1651 Lobdell, Suite 102, Dept. 132 Baton Rouge, LA 70806 1-504-928-8020 -Party Factoring 3 It Eliminates Risks, Financial Commitments N TOD A Y ’S co m p etitiv e banking e n v iro n m e n t, reg io n al an d local banks can gain a strong m arketing edge by offering cu sto m ers an accountsreceivable factoring service. Factoring can help a bank develop new business and expand c u rre n t p o rt folios w ith c o m p a n ie s in v o lv e d in m anufacturing, w holesaling and im porting. T hese com panies usually have a high volum e of cred it sales, req u ire advances for seasonal inventory b u ild ups and often are acquainted w ith th e benefits of factoring. M ost facto rin g o rg an izatio n s are ow ned by large m oney -cen ter banks. R egional an d local b anks have r e frained from offering th e service b e cause of th e significant adm inistrative b u rd e n s a n d th e risk o f b a d -d e p t assum ption. Since factoring is both a m anagem ent service and a financing tool, a large skilled staff and sophisti- I Mr. W agner is vice president, Heller Financial, Inc., Chicago-based factoring firm . Factor By Paul Wagner cated electronic system s are req u ired to d eliver cred it and collection ser v ic e s. M o re o v e r, b e c a u s e fa c to rs assum e th e cu sto m er-cred it risk for th e ir clien ts, re se rv e s m u st be set aside for nonpaym ent of purchased re ceivables. Today, how ever, a financing tech nique called a th ree-p arty agreem ent is making it possible for banks to offer factoring w ithout assum ing bad-debt risk and ad m inistrative bu rd en s. In fact, th e technique may allow a bank to stren g th en its collateral position by virtue of the credit protection afforded th e b an k ’s custom er and th e d irect flow o f p ro c e e d s o f th e fa c to rin g arrangem ent to the bank. T h re e -p a rty a g re e m e n ts allow a bank, its custom er and a professional factor to e n ter into a relationship. The ag reem en t enables the bank to offer a factoring service and make advances on factored receivables w hile th e fac Proceeds of Collections Pay Down Advances Payment of Invoice Customer Bank Advance Funding Invoices For Goods or Services MID-CONTINENT BANKER for December, 1985 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis tor assum es custom er bad -d eb t risk and perform s all credit, collection and accounting functions for th e b an k ’s custom er. To u n d erstan d how a th ree-p arty ag reem ent works, a review of a trad i tional factoring relationship is in order. T raditionally, businesses th at sell large volum es of goods on credit have used professional factoring services as an alternative to internal receivables m anagem ent and as a m ethod of con verting receivables into cash. A factor assum es responsibility for credit investigations, establishm ent of credit lines, assum ption of bad debt, collection of receivables and the en tire re c e iv a b le s -m a n a g e m e n t fu n c tio n . F or these services th e factor receives a fee o r “ c o m m is s io n ,” n o rm a lly am ounting to 1% of the client’s fac tored sales. T he factor also provides th e client w ith the option of converting receiv ables into cash prior to invoice m atu r ity dates. This allows clients to acceler ate cash flow and take advantage of Client 11 cash discounts and special purchases w hile providing funds for seasonal in ventory buildups. In a typical arrangem ent, a client subm its all proposed sales inform ation to the factor for credit review. The fac tor th e n indicates approval or n o n approval, in w riting, of th e proposed extension of credit by th e client to its custom er. The factor accepts th e credit risk of nonpaym ent by th e p urchaser of th e c lie n t’s goods — on ap p ro v e d a c c o u n ts . T h e c lie n t th e r e f o r e is assured paym ent on approved — u n disputed — accounts w h e th e r or not in voiced am o u n ts actu ally are col lected. As th e factor purchases receiv ables, the client builds up a credit bal ance w ith the factor called a reserve. The reserve is an asset of th e client, rep rese n tin g th e factor s contractual obligation to pay for p urchased receiv ables. As m entioned, a factor also can ex tend advances and/or open letters of credit for clients. T hese advances are secured by receivables sold to th e fac tor. In m ost cases, advances are 70% to 90% of th e outstanding receivables on the factor’s books, although at tim es overadvances are m ade to creditw or thy clients. The factor charges clients in te r e s t on th e s e ad v an ced funds, usually at 1% to 3% over prim e. W hen a bank enters a th ree-p arty agreem ent, it replaces the factor as the funding source. In such an agreem ent, th e factor continues to provide its tra ditional role of checking th e creditw or thiness of client custom ers. It also con tinues to approve or reject extension of credit to custom ers and makes all col lections of rem ittances w hile perform ing th e en tire accounting function. The factor, how ever, “unbundles th e financing com ponent from its fac toring package, allowing th e bank to provide advances against the proceeds of th e factoring arrangem ent. The factor assum es a first security in terest in the client’s accounts receiv able. The bank takes a second security in terest in the client’s accounts receiv able and an assignm ent of th e client s cred it balance at th e factor. R em ittances from th e client s cus tom ers still are sent directly to th e fac tor, who then w ires proceeds of the factoring arrangem ent directly to the bank eith er at the tim e invoices b e com e due or as th ey are collected. T hese rem ittances from the factor typi cally are applied against the bank’s re volving loan that is secured by th e re ceivables. The bank’s collateral posi- Let’s talk about expansion... THE PROBLEM: A small rural bank with a holding company whose debt was paid down wanted to expand by acquiring additional banks of similar character. Management learned that a slightly smaller agricultural bank in an adjoining county was coming on the market for bids and the directors were unsure as to a true value and whether or not the acquisition was in truth compatible with the existing subsidiary bank. The seller wanted to get out as quickly as possible, and we were called on to evaluate the target and assist in the negotiations. OUR APPROACH: Since time was of the essence, we immediately began tandem evaluations of the client, its subsidiary, and the proposed acquisition, and determined that the acquisition was not only compatible, but offered significant benefits. Working closely with accounts and a loan review team from a correspondent bank, we developed the true value of the target bank’s earning assets and projected its growth and earnings for the future. From these facts and projections we were able to establish a per share price which our client could justify and the seller could accept. THE RESULT: The first steps have been taken in a plan to become a multi-bank company serving a large number of rural counties in the state. We are now reviewing other potential acquisition candidates. SWOfPDSASSOCIATES. INC. PROFESSIONAL BANKING CONSULTANTS 4900 OAK 12 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SUITE 301 KANSAS CITY, MISSOURI 64112 (816)753-7440 tion is enhanced because the factor, not the bank’s client, assum es the risk of bad debt. T hree-party factoring relationships provide a bank and its clients w ith the advantages of a professional c re d it checking and collection network. T h re e -p a rty factoring is a highly effective financing technique that p ro vides num erous advantages to both a bank and its clients. A client com pany receiv es th e financial m an ag em en t services of a professional factor while benefiting from bank financing. The bank, in turn, is able to offer highly m a rk e ta b le fa cto rin g serv ices th a t allow it to pursue lending relationships w ith existing and prospective custom ers while strengthening its collateral position w ith little added adm inistra tive burdens. • • Asset-Based Financing Guide is Published A o n e -s te p re fe re n c e g u id e for fin a n c ia l o ffic e rs, a tto r n e y s an d accountants involved in asset-based lending has been published by M at thew B ender & C o., New York. Asset-Based Financing: A Trans actional Guide is a four-volum e work that provides treatm en t of th e practi cal, legal and com m ercial issues p e r taining to secured lending along w ith forms said to be previously unavailable in a single source. How ard Rude, editor-in-chief of the publication, has a q u arter century of lending experience. H e served as vice p re s id e n t/g e n e ra l co u n sel for C IT C orp., asset-based-lending firm. The G uide provides a step-by-step p ro ced u re for m ajor types of assetbased transactions, along w ith forms, checklists and o th er m aterials. C hapters included in th e first two volum es deal w ith gran tin g credit, A rticle 9, in tercred ito r agreem ents, in terest/usury, le n d e r rem edies and bulk sales. V olum es th re e and four deal w ith accounts receivable financ ing, factoring, in v e n to ry financing, financing lev erag ed bu y -o u ts, agri cultural financing, eq u ip m en t leasing and tax-oriented leasing. Form s in the volum es include joint loan agreem ents, d e b t subordination, intercreditor agreem ents and letters of in ten t and com m itm ent. Cost of the four-volum e set is $280. F or inform ation, call 800-223-1940. • N B D B a n co rp , D e tr o it, has changed the nam e of its asset-basedlen d in g subsidiary, A m erican B usi ness Finance, to N BD Business Fi- nance. The firm has offices in D etroit, G rand Rapids, C leveland and C incin nati. MID-CONTINENT BANKER for December, 1985 UPSCALING’ A sset-B ased Lending It’s Done by Increasing Loan Size, Decreasing Number of Loans ANY individuals in th e financial By Walter Macur c o m m u n ity c o n tin u e to feel Executive Vice President that asset-based lending is in trouble Exchange National Bank because of rapid expansion, due, in Chicago part, to financing leveraged buyouts. Once or twice a year, we h ear h o rror stories of an institution th at has d e • Legal docum entation should be cided to discontinue its asset-basedhandled by experienced professionals lending services because of heavy loss w ith a proved track record in this area es. of the law. If we w ere able to look b eh in d the • The financial plan of the buying scenes, we w ould find th at th e losses g ro u p sh o u ld b e a d e q u a te ly d o c are due to en try into th e business w ith um ented, be w ithin the control of the a staff that lacks the c red it and adm inis group and d em onstrate that th e target trative experience to properly stru c com pany can generate cash flow suffi tu re and m onitor th e business th ey pu t cient to service the debt. on the books. F o r exam ple, th e b e st plans are L enders desiring to be in th e assetthose th at rely on reducing expenses based-lending business should be p re and im proving operating efficiency. pared to spend th e m oney it will take The w eaker plans are those that rely on to bring in the n u m b e r of experienced increased sales to generate th e rev c r e d it a n d a d m in is tr a tiv e p e o p le enue n eed ed to service the debt. needed to m inim ize th e risks involved • C ollateral pledged to support the in this business. d e b t should have enough liquidation Statistics developed by th e National value to repay the d eb t if the business Com m ercial Finance Association in d i fails. cate that average losses will approxi A sset-based lenders cu rren tly are m ate 1% of average funds em ployed. ex p erien cin g a paradoxical financial To arrive at this figure, the 25% w ith s itu a tio n . W h ile th e y a re fin d in g the best experience are excluded, as are the 25% w ith the w orst experience. If your bank is in the asset-basedlending business, or if its m anagem ent wants to be in th at business, it’s essen ASSUMPTIONS: tial to recognize th at even th e m ost experienced staff will have b ad -d eb t Prime write-offs, so p ricin g m u st be high Transfer price of lender's funds enough to cover th ese expenses. Rate to borrower Financing leveraged buyouts can be profitable and risks can be m inim ized Number of relationships if the len d er insists th e transaction be Average funds employed done th e old fashioned” way. This Average size loan m eans th at th e following m ust be in corporated into lending policy: Interest income • The principals from th e buying Cost of funds group m ust be at risk; i.e ., th ey m ust Net spread over money cost provide equity and at least a lim ited Cost to service guaranty. % of average funds employed • The transaction should be stru c Cost per relationship tu red as a purchase of assets and, in a Profit very few cases, p u rch ase of capital Return on assets stock. M MID-CONTINENT BANKER for December, 1985 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis th em selv es ex p eriencing dow nw ard pressure on rates and upw ard pressure on expenses, they continue to enjoy both increased volum e and profit. This s itu a tio n d id n o t co m e a b o u t by chance. Rate Competition a Challenge Rate com petition always has been a challenge. Borrowers always have felt that in terest rates w ere too high and they continue to pressure th eir lenders for rate relief. This situation was som e w hat exacerbated during the recen t period w hen new asset-based lenders n eed ed volum e to cover start-up ex penses. For many of these lenders, the easiest way to build volum e and m ain tain credit quality was to quote lower rates (i.e., lower spread over prime). C o n seq u en tly , spreads w en t down; and, as everyone knows, w hen spreads go down, it’s virtually im possible to raise them again. To m itigate the resultant low er rev enue, a few lenders began to im ple m ent explicit charges for th eir field ex am in a tio n s. In itia lly , th e ir c lien ts Cost to Service $1 Million Loan Cost to Service $10 Million Loan 11% 10% Prime + 3% 14% 10 $10,000,000 $ 1,000,000 $ 1,400,000 $ 1,000,000 400,000 $ 200,000 $ 2% 20,000 $ 200,000 $ 2% 11% 10% Prime + 1.3% 12.3% 1 $10,000,000 $10,000,000 $ 1,230,000 $ 1,000,000 230,000 $ 30,000 $ .3% 30,000 $ 200,000 $ 2% 13 w e re asked to co v er o u t-o f-p o ck et costs for tra v e l, food and lodging. Some lenders now regularly pass on a p er-d iem charge for th e exam iner’s tim e. A nother m ethod of increasing rev en u e th at m any asset-based lenders have b een able to take advantage of lately is in le v e ra g e d b u y o u ts and E SO P/E SO T financing. U tilizing th eir special expertise by creating this type of financial package is w orth a p re m ium to th e p rospective borrow er. H o w e v e r, a fte r th e tra n s a c tio n is funded, o th er len d ers often are w illing U 11r ii Dimensional Data Inc. V i t Jm 783Q w Lawrence Avenue Norridge, Illinois 60656 Upscaling Is Solution IBM INVENTORY 4701 ’s 4 7 0 4 ’s 4 7 1 0 ’s 3 6 1 0 ’s 3 6 2 4 ’s saves BUY OR LEASE IBM 3600 & 4700 TELLER EQUIPMENT AND IBM ATM’S FROM US Your Installed Machines or Machines from Our Inventory am Call For A Quote Today! ( 312 ) 457-1700 Digitized for 14 FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis to step in and provide th e ongoing financing at a m uch low er rate than the one originally booked (which took into consideration developing th e original plan). F o r th is re a s o n , th e y c h a rg e a reaso n ab le fee, paid in advance to com pensate for th e experience, exper tise and creativity ex p ended in d e veloping th e package. A “norm al” rate for the ongoing financing becom es im perative. So m uch for rate pressures. O n the expense side, the m ajor item to consid er is com pensation. D uring the years of rapid expansion w hen new lenders w ere m oving into th e field, com pensa tion increased because of th e dem and for highly talented individuals at all levels of em ploym ent. Now, coupled w ith th e effect of inflation, th e com pensation line on the incom e and ex pense statem ent has a tendency to sky rocket out of sight. The solution? Upscaling, or increas ing th e average size loan and reducing th e n u m b er of loans handled. Studies of th e item s that affect expenses indi cate th at costs are driven by th e n u m b e r of loans in the portfolio, not n eces sarily dollar volum e. In o th er words, th e cost to service a $1 m illion account is alm ost the same as th e cost to service a $10 m illion loan. Therefore, w ith ris ing expenses and a shortage of experi e n c e d p e rs o n n e l, u p sc a lin g is th e logical and practical solution. L e t’s review some of th e im plica tions of upscaling. In the chart, n et spread over m oney cost is $400,000 and cost to service is $200,000. Profit is $200,000, approxim ately 2% on assets. If th e average-size account is in creased to $10 million, the cost to ser vice will increase som ew hat, b u t even if th e cost to service increases 50%, w h ic h is u n lik e ly , th e le n d e r can charge prim e plus 1.3% and have a profit of approxim ately 2% on assets. In this exam ple, n et spread over m oney cost is $230,000 and cost to se r v ic e is $ 3 0 ,0 0 0 ($ 2 0 ,0 0 0 p lu s 50% = $30,000). Profit is 2% on assets. U pscaling offers additional advan tages to b oth le n d e r and borrow er. W ith few er clients to handle, quality of service will be b e tte r and th e len d er has b e tte r control and, consequently, b e tte r safety. M ost lenders probably don’t w ant to service extra-large loans, b u t th ere will b e econom ies if the len d er is able to m o v e th e a v e ra g e size lo an from $100,000 to $200,000. It is highly unlikely that asset-based lending will experience a debacle such as th at experienced by R EITs a few y ears ago. O n th e c o n trary , assetbased lenders who continue to adapt to econom ic conditions, control costs and apply sound credit policy will continue to do well. A sset-based lending is not a glam or ous, get-rich-quick business. I t’s one th at requires sticking to th e basics. If this is done, respectable profits can be enjoyed year after year. • • D&O Liability Insurance Topic of New ABA Booklet T h e ABA C o m m u n ity B a n k e rs Council has developed a new Competitech, “Bank D irectors and Officers Liability Insurance: W hat You Have — If You Can G et It, ” to help bankers u n derstand director and officer in su r ance coverage. This issue of Competitech provides an overview of directors and officers (D&O) liability-insurance policies. It explains th e term s m ost com m only found in bank D& O policies, discusses th e scope of the coverage afforded by those policies and reviews the p roce dures typically followed by insurers in handling claims. Hardening Market Also covered in this publication are th e reasons for a hardening of the m ar k et for D& O coverage. Because many of the firms th at w rite D& O coverage for financial institutions are no longer doing so, it’s im portant to understand the reasons, state th e authors, Victor G. Savikas and D avid R. M elton, atto r neys and m em bers of the law firm of Karon, M orrison & Savikas, L td ., C hi cago and Miami. D irector and officer insurance poli cies provide a necessary form of p ro tection for th e bank, its directors and officers. H ow ever, given the presen t state of the m arket, a thorough u n d e r standing of th e coverage and coverage restrictions is necessary to make in form ed decisions w hen obtaining or ren ew in g policies, says ABA C om m unity B ankers C ouncil C hairm an, T. C harles B ru ere, p re sid e n t, F irst State Bank, St. C harles, Mo. Ordering Information For m ore inform ation or copies of this Competitech booklet contact ABA O rd e r P ro c e ssin g , 44-B In d u s tria l P ark D riv e, W aldorf, M D , 20601, (202) 467-4118. To order, req u est p u b lication nu m b er 024804. C ost of the issue is $30; ABA m em b er discounted price is $20. T h e ABA C o m m u n ity B a n k e rs Council rep resen ts th e nation’s 12,500 com m ercial banks w ith assets of $150 million or less. MID-CONTINENT BANKER for December, 1985 Asset-Based Lenders Can Benefit Most As Last Part of Bank to Computerize By Andrew H. Tananbaum, President program (at a potential cost of millions of dollars in expensive program m ing tim e), you save tim e and m oney by purchasing a tim e-tested package. SSET-BA SED lenders often regard autom ation A sset-based lenders don’t have to be pioneers in w ith th e sam e trepid atio n of a youngster w ho’s adopting com puter system s to enjoy th eir benefits. A picked last w hen sides are chosen for a sandlot baseball knowledge base of co m puter users in asset-based game. T h e re ’s a lot m ore p ressu re to perform w hen you lending already exists and is expanding. You can benefit get up to bat so you can prove you’re ju st as capable as from th eir experience. Institutions already using a everyone else. package can be an excellent source of counsel on how to Because th ey are new to using com puters and th eir proceed. banking-com pany paren ts already are highly A know ledge base exists within the banking com pany experienced in this area, asset-based lenders can feel on how to select, im plem ent and m aintain a software uncertain about changing from a m anual or old package. M any asset-based lenders are uneasy about com puter system to a new one. asking th eir in stitution’s D P d ep artm en t for help The ov erb u rd en ed in-house data-processing because they haven’t received it before. But asking for d ep artm en t already is devoted to m aintaining the counsel in purchasing a package is different from asking technically advanced system s of th e rest of th e bank; it for a program to be developed from scratch. The doesn t have tim e to create an asset-based-lending req u est should produce a positive reaction. D P system from scratch. departm ents accept th e necessity of purchasing T herefore, the initiative to com puterize falls to the packages and, in fact, have established procedures for asset-based-lending director, regardless of how well selecting and im plem enting program s. p rep ared he feels to m eet th e challenge. Indeed, th e experience of in-house D P professionals H e understands th at com puterization is an inevitable w ith corporate m ainfram e com puters provides a fact of life ra th e r than a luxury. C h ief reasons for this com pelling reason for asset-based lenders to choose a include th e increasing com plexity of th e business package that runs on th e existing m ainfram e rath er than environm ent, th e n eed to secure instant inform ation a micro or m inicom puter. W hen a micro or and the oppo rtu n ity to expand asset-based lending. m inicom puter is used in th e asset-based lending M anual and an tiq u ated m ethods are inadequate and departm ent, problem s that arise usually have to be profit-draining. But the decision to autom ate carries w ith it m any other decisions th at are difficult for those w ithout technical backgrounds. O ne m ajor challenge is selecting from a confusing variety of c o m p u ter hardw are and software. In spite of these obstacles, or p erhaps because of them , in th e past year asset-based lenders have been getting help. In particular, in d e p e n d e n t software com panies have beg u n paying attention to th e ir plight. These com panies now offer tested , pre-packaged solutions to com puterization. R ather than wait th re e or m ore years for in-house program m ers to develop a Century Data Services, New York City A Asset-based lenders have been getting help from independent software firms. MID-CONTINENT BANKER for December, 1985 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis taken up w ith th e hardw are v en d o r’s support services. W hen th e corporate m ain fram e is u se d , D P p e rs o n n e l manage the problem . In addition, dow ntim e is m inim al on the corporate m ainfram e because of th e high d e g re e of su p p o rt. A ssetbased lenders also benefit from secu rity m easures developed for th e m ain frame. W hile som e asset-based le n d ers like th e increased control th at an in -d ep a rtm e n t m ini or m icro gives, they acknowledge a tradeoff in term s of support, security and costs. The fact th at m ainfram e com puters utilize th e corporate database is attrac tive to asset-based loan subsidiaries of banks. They enable th e asset-basedle n d in g fu n c tio n to in te rfa c e w ith D D A accounts and th e general ledger. C o n sid e r also th a t a m ainfram ebased system enables netw orking of term inals all over th e country utilizing the corporate m ainfram e. As we move clo ser to an in te rsta te -b a n k in g e n v iro n m e n t, th is cap ab ility of tying togeth er branches in any location b e comes increasingly attractive. It is dif ficult to accom plish this w ith com put erized systems o th er than th e corpo rate m ainfram e com puter. Beyond Efficiency to Profits Adoption of a co m puterized system enables you to concentrate on m aking m oney and m anaging accounts. The following sections of this article d e scribe th e key areas of b enefit for the asset-based lender: • A ccount M anagem ent Control: How daily decisionm aking can reach higher levels, no m atter how large, or how com plex, th e asset-b ased loan portfolio. • Back-Office Efficiency: H ow th e com puterized system provides a foun d a tio n fo r tr a c k in g a n d u p d a tin g speedily and accurately, regardless of the nature of loan structuring. Account Management Control The com puterized system can con trib u te considerably to th e d egree of ongoing control th e asset-based loan o ffic e r o r a d m in is tr a to r h as o v e r account activities and th e quality of daily decisions and account evaluation. For exam ple, suppose you are in volved in a leveraged-buyout situation fin a n c e d p rim a rily th ro u g h a sse tbased loans, a prim e opportunity for business expansion. In such a situa tio n , th e co m p an y b u y in g c o n tro l m ore often than not borrow s substan tially all the funds n eed ed against the assets of th e business. And those loans are secured by several categories of collateral — accounts receivable, in ventory, eq u ip m en t, real estate, for example. If th e com pany has several 16 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis divisions, each may have its own cate gories of collateral. The overall loan to th e com pany and to each division may have limits tied to the collateral type, division, loan type and may have over all loan limits and overall overform ula loan lim itations. The job of tracking them all can be m onum ental. The system helps by making such a com plex transaction w ith so m any sub accounts, sublim its and overall lim its seem sim ple to look at in its com po n e n t parts and on the whole. T he loan m anager can get to the level of detail he w ants rapidly, w h enever he wants it, and absorb u p d ated inform ation on account status in ord er to make deci sions about loan disbursem ents and account evaluations. H e doesn t have to w ait w hile personnel w ade through Andrew H. Tananbaum is president o f Century Data Services, Inc., a New York firm that has developed, packaged and customized IBM main fram e computer systems fo r assetb a sed le n d e rs , in c lu d in g N C F A members w ith p o rtfo lio s in excess of $1 00 m illion. It also provides ser vices and systems fo r those w ith smaller po rtfo lio s. The company is a subsidiary of Century Factors, Inc., a 1 0 5 -y e a r-o ld firm spe cia lizing in commercial financing, factorin g and related credit-checking services. In addition, the com puterized sys tem should allow for troubleshooting via tren d analyses and exception re p o rts. H ow will a d e v e lo p m e n t or tre n d im prove decisionm aking? B e cause the system keeps an online (upto-th e-m in u te, accessible) history of th e account, preferably for the prior year, loan officers can spot variances and uncover p attern s indicating an im proving or deteriorating situation. F or exam ple, you m ight see th at this year an account’s sales are running at the same pace as last year, b u t a '’ /ances are mo 3 fre q u e n t and larger. T he com puter system should perm it you to analyze why, and react to this situation in an anticipatory way to offset p o te n tial problem s. Similarly, you should be able to capitalize on positive trends. A fu rth e r b en efit of th e co m p u t erized system is that it can co ntribute to the grow th of the asset-based loan portfolio and its profitability because added business can be handled by the c u rre n t system w ith o u t d isru p tin g p ro c e d u re s or re q u irin g ad d itio n al personnel. And it can be used for re gional expansion by m eans of local te r minals that have access to th e b ank’s m ainfram e and enable th e head office to centralize control. Back-Office Efficiency The asset-based loan officer or ad m inistrator wants the peace of m ind th at com es from know ing his backed g er cards or think of ways to get th e office operation can cope w ith routine inform ation out of old com puter sys accounting as well as special requests. tem s not designed to handle th e d e T he c o m p u terized system can give g ree of com plexity prev alen t today. T h e sy stem re d u c e s or e lim in a te s that to him. Exam ples: • Protect against o vera d va n ces. m echanical, repetitious staff work such W hen making advances, it’s necessary as detailed com putations or freq u en t for the loan officer to have access to the sequential searches or review through m ost u p -to -th e -m in u te inform ation large volum es of transaction data. possible. W ith a co m p u terized sys In addition, reports are geared to tem , you should be able to com e into th e needs of the executive who w ants th e office in the m orning and instantly th em , from “one-liners” on a portfolio have status reports on all accounts in or by exception (for th e use of senior overadvance or those com ing w ithin m anagem ent) to detailed reports for 5% of b e in g in o v e ra d v a n c e. You th e lo a n a d m in is tr a to r . A c c o u n tshould be able to check them th ro u g h status-exception reports and accountout the day, if you wish, and know that evaluation reports can be designed to th e most recen t transactions have been spot potential problem accounts on a p re d e te rm in e d frequency or on r e posted. Not all system s enable you to do quest. this. Some provide printouts that re T he value of this capability is evi p o rt only up to th e day, w eek, or d e n t by th e p ro fe ssio n a lism w ith m o n th b efo re — ex clu d in g re c e n t w hich participations can b e m anaged. transactions. C ontrast this w ith the T he institution m anaging the deal is advantages of having ready access to responsible for delivering to p artici th e inform ation. O ne institution, for p an ts p ro g ress re p o rts on th e seg example, holds all advance requests m ents of the deal it has sold. This is a until a critical point in the day — until critical test for any com puterized sys the latest transactions have b een post tem you are considering adopting. It ed, which is noon — early enough so it should give you the ability to provide still can m ake and im plem ent deci reports on any segm ent of the deal for sions on the same business day. an unlim ited n u m b er of participants quickly and accurately to m eet th eir W ith a m anual system , you’d have to physically go through th e ledger cards inform ation requirem ents. MID-CONTINENT BANKER for December, 1985 that only include transactions up to the last posting and may be far behind. In the w orst case, you’d have to call up everybody in th e organization who has w orked on th e account and ask them individually w h e th e r they had any re cent transactions. T h e c o m p u te r is v a lu a b le w h en th ere is increased availability due to a d d itio n a l co llateral, since th a t in crease will be posted im m ediately. Loan-Limit Enforcements A n o th e r b e n e fit o f th e c o m p u t erized system is in th e en forcem ent of loan limits th at p ro tect th e asset-based len d er from exposure beyond a p re d e term ined am ount. T hese limits can be built into th e com puterized system on a subaccount-by-subaccount basis and on a com bined account or collateral basis, no m atter w hat th e level of com plexity. In addition, overall overfor mulas and tem porary lim itations can be superim posed on existing availabil ity. • Sp eed tra n sa c tio n a l lo o ku p . W hile th e client is on the phone, the loan ad m in istrato r can im m ed iately check client records w ithout digging up several files so th at client inquiries on w h eth er certain transactions have b een posted are dealt w ith quickly. • G enerate additional fe e s. T he capabilities of a com puterized system enable you to u n b u n d le your charges or develop new charges on an u n b u n dled basis. • Maintain on-line records ofU C C filings, insurance policies and collater al appraisals. Because such inform a tion can be placed on th e co m p u ter system , th e re is ready access to w h ere you filed, w hen you filed, w hen filings expire, w hen you should refile and u p date appraised values. • Provide audit rem inders. T he sys tem provides m anagem ent w ith a tool to schedule, track and control tim e sp en t in auditing. • Close fa ster and collect fa ster — accurately. W e know of m ore than a few asset-based lenders on m anual or antiquated system s who are unable to send out m onthly in terest statem en ts to borrow ers and participants until th e 15th of th e following m onth. A com p u terized system can let you routinely send state m e n ts on th e first of th e m onth and also p rep are settlem en ts based on frequency dates. It also will g en erate custom ized statem ents th at include participation settlem ents. • Perform collection-day calcula tions. As asset-based lenders know, paym ents deposited today d o n ’t n eces sarily get cred ited th e sam e day. Each client has agreed upfront to th e n u m b e r of collection days for w hich in te re st can be charged and th e relative rate to be charged w ith resp ect to each collection date. N ot only should the co m p u terized system perform these calculations autom atically, it also may m ake it possible for th e lead len d er to offer a new structure that provides the benefit of added leverage in negotia tion. F or exam ple, suppose you offer th re e collection days and th e client in sists on two. You now have th e ability to go in-betw een (2.5 days) w ithout the back office complaining. • Back-value automatically. T he lag in p o s tin g tra n sa c tio n s so m e tim e s causes anguish for asset-based lenders w hen they discover on th e 15th that th e y have a transaction th at should have been posted on the second day of th e m o n th . In te rest/co llectio n days have to be recalculated m anually and th e re is room for error. A co m p u t e r iz e d sy s te m can p e rfo rm b ack valuing calculations quickly and accur ately. • Handles all kinds o f rate struc tures. W hen a client signs a contract, he agrees th at in terest will be based on th e beginning, end of th e m onth, or a day-to-day base rate, and on a contract spread, w hich will be calculated on b u sin e ss o r c a le n d a r days. C o n se q u e n tly , th e c o m p u te riz e d system should be able to follow all types of in te re st rates that an be m odified on an on-line basis. In addition, th e sys tem should allow for the sale of p a r ticipations at the loan rate or any o ther agreed-on basis. In addition, the com puterized sys tem should calculate in terest for loans th a t are s tru c tu re d w ith steps and splits and m inim um and m axim um rates. And it should do so on both the loan and participation sides. The user n eed only to e n te r th e contract in fo rm atio n sp ecify in g th e s tru c tu re once — and the com puter will take care of th e calculations. The system should be able to com pare th e rate schedule plus the contract spread w ith th e relative usury rate specified and use th e low er rate. • Accom m odates stru ctu rin g the sale o f participations. The leveragedbuyout business has increased the use of participations in, and syndication of, asset-based loans. A com puterized sys tem should facilitate the lead le n d e r’s sale of participations and serve as a tool for enhancing yield and maximizing outstandings. The system does so by enabling the len d er to apply the same concepts associated w ith th e lending side to th e sales side of a loan — such as buying and selling at a spread or for a fee, or even com pensating a partici p ant on a funded or unfunded riskparticipation basis, depending on the cost of funds. MID-CONTINENT BANKER for December, 1985 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis A utom ation in asset-based lending is no longer a luxury b u t a necessity. The benefits to be gained from adopt ing such systems begin w ith speed and accuracy. Today’s com puter software packages enable the asset-based len d er to anticipate rath er than react, in crease negotiating pow er because he can take advantage of situations m uch m ore rapidly and expand his business w ithout m aking an additional p erso n n e l c o m m itm e n t. T h e re s u lts are greater profits a 1th e ability to handle th e in creased o p p o rtu n itie s for ex panding business today. • • T H E L E A D IN G A SSET -BA SED LEN D IN G SO FT W A R E SYSTEM IS N O W A V A IL A B L E FO R T H E N EW IBM PC NETW ORK™. Now you can tie your IBM PC’s and IBM Personal Computer AT’s together allowing for Information to be shared. The Asset-Based Lending Manager Network™ is designed for banks and commercial finance com panies that require more than one terminal for processing and accessing information. Account officers and operations personnel can work simul taneously on up to 7 terminals. It's an economical solution from the nation’s most popular asset-based lending software company. Contact WSA today for more information on the Asset-Based Lending Manager Network™. W ILLIAM STUCKY & ASSOCIATES T H E L E A D E R IN A S S E T-B A S E D L E N D IN G S O F T W A R E One California Street. Suite 1200. San Francisco. California 94111 ( 415 ) 841-8454 17 Asset-Based Lending Among Basic Considerations: D ITO R ’S note: U ntil recently, asset-based-lending departm ents have b een lim ited to m oney-center and major regional banks. H ow ever, the service is being seen as attractive and practical by m id-sized institutions. O ne such operation is Landm ark Com m ercial C orp., a wholly ow ned subsidiary of Landm ark Bank, w hich is a subsidiary of Landm ark Bancshares C orp., a $995-m illion-asset HC head q u artered in St. Louis. L andm ark operates six banks w ith 21 locations in St. Louis, Kansas City and Springfield, Mo. Landm ark C om m ercial Corp. was established this sum m er by D ennis B. H irstein, president, and M ichael F. Tim m erm an, vice president. Mr. H irstein joined Landm ark in July and form erly was president, M ercantile Business C red it C orp., St. Louis. Prior to that, he was w ith H eller Financial, Chicago. Mr. T im m erm an joined Landm ark in S eptem ber, com ing from C en terre Bank, St. Louis, w here he was instrum ental in establishing th at bank s asset-based-lending departm ent. Landm ark C om m ercial expects to have $10 million in loans outstanding on the books by year-end. M essrs. H irstein and T im m erm an recently w ere interview ed by the editors of M i d - C o n t i n e n t B a n k e r on the considerations involved in setting up an asset-based-lending d ep artm en t at a m id-sized bank. * * * E Dennis B. Hirstein (I.) and Michael F. Timmerman serve as pres, and v.p., respectively, Landmark Commercial Corp., recently established asset-based-lending unit of Landmark Bank, St. Louis. hy do you feel U.S. regional banks are Q ■Wexpanding th eir com m ercial-lending activities into the asset-based-lending area? A For th ree basic reasons. First, the m arket is ■ expanding, particularly w ith the nu m b er of leveraged acquisitions taking place. Second, traditional com m ercial-banking margins have b een eroded through com petitive pressures from dom estic as well as foreign banks th at are expanding their lending activities, particularly into the “m iddle m arket.” A sset-based-lending m argins also have been u n d er pressure. H ow ever, they rem ain approxim ately 300 basis points hig h er than traditional loans; hence, asset-based financing offers an expanding m arket and a greater retu rn on assets. Third, m arket segm entation and product differentiation. In addition to leveraged acquisitions, the asset-based-lending m arket is m ade up of firms that are growing fast and experiencing seasonal or cycle fluctuations as well as those com panies that are coming back from periods of unprofitability. The needs in these m arket segm ents really have not b een successfully m et through unsecured and secured loans done on a “blanket-lien” basis. As a p roduct offering for these m arket segm ents, asset-based lending is another arrow in the com m ercial le n d e r’s quiver. By differentiating 18 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis MID-CONTINENT BANKER for December, 1985 for the Mid-Sized Bank Commitment Must Be Long-Term product offerings based on th e tangible value the m arket perceives, a hig h er price usually can be realized. Q Y ou allude to asset-based lending supporting ■ com m ercial lending as a m em b er of the com m ercial-lending-product line. Is it necessary th at it support the bank’s com m ercial-lending activities? No, b u t is sure helps to m aintain th e bank’s ■ com m itm ent. E stablishing an asset-based-lending unit isn t for everyone, not only from th e standpoint of m arket needs, b u t also from th e standpoint of its philosophy and culture, w hich often d oesn’t m esh with the gears of traditional com m ercial lending. Q W hat are the essentials for setting up and ■ operating a successful asset-based-lending operation? A Forem ost, th e bank’s senior m anagem ent m ust be ■ com m itted to asset-based lending and actively support it. It s easy to say, Sure, we re com m itted, b ut not q uite as easy to support th e activity due to some fundam ental differences from com m ercial lending. It s im portant th at senior m anagem ent be m ade aware of the key differences and be p rep ared to allow asset-based lending to be different. Q W hat are th e key differences and how does bank ■ m anagem ent handle them ? A A sset-based lending is deal o rien ted w here ■ com m ercial lending tends to be relationship oriented. The client has a n eed and we have cash at a com petitive price th at is packaged professionally. A nother difference: asset-based lending is m ore labor intensive and requires specific skills. The skills n eed ed to actively m anage collateral assets norm ally are not found in a com m ercial bank and m ust be developed through training. T rained people have to be in place before th e m arketing function begins and training people takes tim e, involves up-front costs and m ust be done continually — not only w hen starting up b u t on an ongoing basis. The th ird difference is th e approach to credit judgm ent. In asset-based lending, we often look at collateral assets from the standpoint of liquidation u n d er a worst-case scenario. G iven this, m anagem ent m ust u nderstand th at bankruptcy and liquidation d o n ’t necessarily m ean a loss of principal w hen collateral assets are actively m onitored as to quality and quantity. W e don t get into a lending situation assum ing we are going to liquidate th e client; but, by th e very n ature of the business, th e client norm ally will not have the equity position found in traditional com m ercial lending. MID-CONTINENT BANKER for December, 1985 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Therefore, the loan has to be actively m onitored and kept m arketable so, if a deteriorating condition persists, the loan can be red u ced and, m any tim es, m oved to another lender. Last, charge offs will occur. A sset-based lending has an elem ent of risk; how ever, loan pricing anticipates a level of charge offs, and n et charge offs should not exceed those of o th er business units w ithin the bank. Top m anagem ent handles these differences by having a high degree of confidence in the professionals m anaging the asset-based-lending unit. It takes effective com m unication to achieve this comfort level. Q You m entioned com m itm ent as a key elem en t for ■ success. How is this com m itm ent m aintained? A in the long run, through th e u n it’s contribution ■ to the bank in term s of quality earnings. It is im portant, particularly in th e beginning, that the m anager of the asset-based-lending unit rep o rt directly to the C E O or p resid en t in a m id-sized bank; or to the senior com m ercial-lending officer in a large regional institution. This level of visibility is necessary to m aintain active com m unicaton at the top. O ur top m anagem ent is involved in credit approval and, because we are a bank subsidiary, these people also are on our board. Thus, they know the type of business we are doing and they have a forum to exchange views. Q A Can staffing be found internally? People w ith the necessary skills and talent ■ will m ost likely have to be h ired from the m arketplace. This brings up the problem of finding qualified people in a com petitive m arketplace. T here is a shortage of qualified asset-based-lending personnel due to increasing dem and for this product, and this shortage will m ost likely drive up the cost of key em ployees. Associated w ith em ployee costs is th e fact that asset-based-lending-industry com pensation systems norm ally include incentive plans. T herefore, recruiting and retention of key people is partially d ep en d en t on com pensation system s com m ensurate w ith the industry. By not offering an incentive-com pensation system, m anagem ent runs the risk of training good people and losing them to another bank that does offer such com pensation. F o u r functional areas of an asset-based-lending unit to be staffed are adm inistration/credit, m arketing, operations and audit. I t’s not unusual th at th e top person in each one of these areas will com e from outside the bank; how ever, it is safe to say that initially these functional responsibilities can be com bined, th ereb y holding down costs. As th e unit grows, these areas should be fully staffed and head ed by professionals w ith “stre e t” skills. 19 Q Is it com m on practice for asset■ based-lending units to be set up as subsidiaries? A Yes, as evidenced by Citicorp ■ Industrial C redit, F irst Chicago C redit C orp., F irst W isconsin F in a n cial C orp., and m any others. All h a n dle asset-based lending thro u g h su b sidiaries, and m ost successful regional banks have followed this pattern . The reason is sim ple. O ur m arketing effort is d ire c te d tow ard atto rn ey s, accountants, investm ent bankers, v e n tu re cap italists and e n tre p re n e u rs . These professionals are keenly aware of the differences b etw een bank lines of credit and asset-based lending. The subsidiary status tells these profession als that th e bank recognizes th e le n d ing differences and th at th e clients they refer to us th at are highly le v e r aged asset-b ased -len d in g custo m ers will not be subjected to a b ank’s cred it analysis. transfers. If a new or existing loan does not m eet th e credit criteria established by the unit, it should not com e u n d er its m anagem ent. W e’ve seen many in stances of a loan transferred into a unit w hen th ere really is nothing that can be done for it. T here is a consideration that senior m a n a g e m e n t m u st ad d ress: U n d e r w hat circum stances does a loan belong in an asset-based-lending unit, p artic ularly new business? W e’ve seen in stances that, by policy, leveraged ac quisitions are autom atically candidates for th e asset-based unit. portant that a separate loan-approval process be in place. A separate credit process can facilitate a lending situa tion that has to be acted on in a tim ely fashion. W hat o th er areas are essential Q ■ for success in settin g up an asset-based-lending unit? A Standard operating systems and ■ procedures m ust be set up that provide for close m onitoring of col lateral assets. W h en you get rig h t down to it, one of the distinguishing factors betw een traditional com m er cial lending and asset-based lending is D o a sse t-b a se d -le n d in g differ■ en ces m e an ex iste n ce o f a dif the am ount of hands-on m anagem ent given to a client in term s of m aintain fe re n t c re d it policy from o th e r co m ing a handle on asset quality. For in m ercial areas? stance, this could include daily rep o rt ing and quarterly field audits. A few A sset-based lending is a specialgood software packages are available to ■ ty p roduct such as real estate, autom ate m onitoring collateral assets. energy and transportation. From that A nother critical factor is having an stand p o in t, a separate cred it policy adequate legal position through loan Is it tru e th e re is a ten d en cy to should be established that is realistic in ■ transfer hig h er risk and m ar relation to the needs of th e m arket an d c o lla te ra l a g re e m e n ts . In th e a s s e t-b a s e d -le n d in g o p e ra tio n s in place. W hile th ere is no substitute for ginal loans to an asset-based unit? w hich we have b een involved, we have cash flow in a lending situation, policy d raw n up sta n d a rd legal co n tracts should concentrate on good collateral Yes, how ever, asset-based lenddifferent from those of th e bank. W e ■ ing is a m arketing unit, not a values — it simply m ust stress asset also have chosen outside legal counsel quality! C redit policy should be th o r work-out group for existing m arginal oughly discussed w ith top m anage th at has liquidation and bankruptcy ex loans. The way to m ake sure th e assetp e rie n c e . T h e se p e o p le know th e based unit does not becom e a d u m p m en t so these individuals can live w ith courts and can develop ap propriate ing ground ’ is to give it th e right of first it. Because asset-based lending is a legal contracts. Loan contracts becom e separate credit product, it may be im refusal on all in te rn a l referrals and particularly critical w hen com plicated lending situations — such as leveraged buyouts — are undertaken. Executive Round Table for Bank CEOs A nother criteria in selecting counsel is responsiveness. O ur attorneys have H IE F executives of banks w ith $250 million — $5 billion in assets to be p rep ared to move fast if a loan will find a forum at ABA’s 1986 E xecutive Round Table, set for deteriorates. Finally, a realistic business plan — April 2-5 at th e Cam elback In n , Scottsdale, Ariz. This small m eeting, exclusively for m id-size bank C E O s, has as its approved by senior m anagem ent — core a series of w ide-ranging discussions on such issues as m ergers and should be established. The plan should state m easurable objectives, strategies acquisitions, strategic planning and financial delivery systems. “The issues facing banks of this size are som ew hat different than for and tactics. F o r exam ple, two key small or large banks, ” says Jam es H. D uncan, who serves as dean of the objectives could be to create m arket R ound Table. “This m eeting is a chance for peers to com pare th eir ing and financial plans and, in the case personal perspectives and assessm ents w ith others from around the of a start-up situation, a tim etable for im plem enting an asset-based-lending country. T he small m eeting size and inform al setting encourage a m ore candid gathering. M r. D uncan also is chairm an of F irst of Am erica unit. The strategy should focus on the areas just discussed. Bank C o rp ., Kalamazoo, Mich. The program opens W ednesday evening w ith a keynote address by W hat points w ould you stress to Fed eral R eserve Board G overnor M artha Seger. O n Thursday, the ■ a bank considering starting an program th e m e is “C ontro llin g Your O w n D estiny, featuring an asset-based-lending unit? a d d re ss b y P e te r M e rrill, p rin c ip a l, G o le m b e A ssociates, In c ., W ashington, D. C. M r. M errill’s rem arks will serve as the focus for T he m ost im p o rtan t thing to extensive roundtable discussions later th at day. ■ keep in m ind is that it s not a On Friday, E ileen Friars and W illiam G regor of th e M anagem ent short-term venture. It takes tim e to Analysis C en ter, C am bridge, M ass., will discuss T urning D elivery hire and train staff and establish cred i Strategies into a C om petitive A dvantage.” Following roundtables, they bility in the m arketplace. If the longwill re tu rn to lead a follow-up panel on this issue. range com m itm ent is th ere, the bank Registration for th e ABA E xecutive R ound Table is lim ited to 75 will end up w ith a m aterial advantage bankers. F o r m ore inform ation, call th e ABA Banker E ducation N et in developing m iddle-m arket custom work at (202) 467-6738. ers and will have a unit that can m ake a Q A Q A C Q A m ajor contribution to earnings. • • 20 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis MID-CONTINENT BANKER for December, 1985 National Commercial Finance Association Convention Report Now a Lender of First Resort EM B ER S of the N ational C om m ercial F in a n c e A ssociation Asset-Based Lenders (NCFA) gath ered in N ew O rleans last Struggle to Adapt m onth to celebrate w hat by m ost stan To a New Role dards has b een a terrific year, b u t few of the asset-based lenders in a tte n d ance could p re te n d th at th e ir in dustry By John L. Cleveland was w ithout problem s. Editor/Associate Publisher M ore than f,200 people a tten d ed th e 41st N C FA convention, and this in itself was indicative of som e of the m em b ers’ concerns. E xecutive D irec p ro d u ctiv e co rp o rate takeovers and LBOs is another cloud hanging over tor Leonard Machlis recalled th at 30 th e industry. years earlier w hen th e association had m et in N ew York City, th e re w ere only L everaged buyouts continue at a 47 m em b er com panies. Today th ere lively pace and now account for m ore are 225 m em b er firm s, 75% of w hich than half of the asset-based-lending in are banks or bank-connected. F o r the d u s try ,” he said. “M any LBOs and innovative asset-based le n d e r th e “pot m anagem ent buyouts (MBOs) are fi is getting b ig g e r,” Mr. Machlis said, nanced by lenders speculating on an b u t that issue was hardly in dispute. equity play because real assets to ser W hat was of concern is w h ere th e vice th e loans sim ply are non-existent. growth th e in dustry has experienced Some of these creative deals will work will lead. Speakers expressed concern out well; some w on’t. And new e n th a t th e e n try o f n ew c o m p e tito rs trants into asset-based lending will in m ight be stretching m anagem ent re tensify com petition and add fu rth er sources thin. In ten sity of com petition speculative p ressu res.” could resu lt in less rigorous lending A sset-based lenders have gone from standards, som e said. The size of some being lenders of last resort to lenders of today’s leveraged buyouts (LBOs) of first resort, Mr. D organ said, and seem ed m ind boggling to som e N CFA th e industry has yet to adapt to that m e m b e rs w ho w o n d e r e d a lo u d new role. A sset-based lending is no w h eth er th e in dustry m ight b e m oving less risky, he added, b u t th ere no long into realm s beyond w hat it can com e r seem s to be the “attention to d etail” fortably handle. In fact, th e re was con th at traditionally has b een th e assetsiderable d ebate over ju st w hat it is that the industry has becom e. O utgoing N C FA C hairm an Richard J. D o rg a n , g ro u p v ice p r e s id e n t, W a c h o v ia B an k , W in s to n -S a le m , N. C., w arned against a tre n d tow ard speculative LBOs w hich he said could trigger serious econom ic dislocations unless financial institutions stren g th en credit controls. U nsound loans have contribu ted to th e increase in th e b u si ness-failures rate to m ore than 100 p e r 10,000 — th e highest since th e D e pression, he said. Private d e b t in th e U nited States has doubled (to $7.1 trillion) since 1978, and — w hen com bined w ith th e im pact of th e grow th in public d e b t on the dollar — has exacerbated th e problem s of Am erican m anufacturing and agri culture, according to Mr. D organ. H e com plained th at th e rash of often un- M https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis based le n d e r’s hedge against default. N or can the industry rely on inflation to save it from its excesses. O nly by m aintaining tim e-tested , hands-on lending policies can assetbased lenders survive in the d e re g ulated financial m arketplace, accord in g to M r. D o rg a n . P r o te c tio n is t p ressu res are y et a n o th e r poten tial blight. If the nations owing billions of dollars to U. S. banks are unable to sell goods in the U. S. m arket, they will be unable to service th eir debt, he said. Product or Business? A panel discussion on w h eth er assetbased lending is a product or a busi ness may not have resolved the q u es tion to everyone’s satisfaction, b u t it d id p ro d u c e som e a g re e m e n t th a t asset-b ased len d in g is stratified by m a rk e t niches in w hich innovative players can thrive. O ne highly profitable m arket niche discussed at another panel discussion is e n te rta in m e n t-in d u stry financing. Panelists included in d e p en d en t film m aker Roger Corm an, film distributor John H yde and C om pletion Bond Co. P resid en t B ette L. Sm ith, all of Los Angeles, who attem p ted to persuade th eir audience that accepting th e p ro d u c e r’s presale of a m otion p icture as collateral and insuring that th e project is delivered as specified can make en- tertain m en t-in d u stry financing secure as well as profitable. T he panelists noted th at film m aking no longer is a W est Coast monopoly. F ilm -p ro d u c tio n crew s increasingly are venturing into th e h interlands for fresh locations and financing sources, they said. Survival in th e factoring business al ways has b een tough, b u t nev er has been tougher than today, according to F ra n c is X. B a sile , M a n u fa c tu re rs H an o v er C o m m e rc ia l C o rp ., N ew York City. H e m od erated a panel dis cussion on factoring th at included Vin cen t Arm ino, p resid en t, Slavenburg C orp.; M arvin N adler, vice presid en t, B ankers T ru s t C o .; an d B o b e rt S. Sandler, executive vice p resid en t, R e public Factors Corp., all of New York. M any factoring operations have lost m oney in the handling of im ports, p a r tic u la rly te x tile s, M r. B asile said. Panelists shared th e view th at longer distribution channels coupled w ith the style e le m e n t involved in im p o rted textiles (making liquidation of in v en tory difficult in th e event of loan d e fault) has created m ore risk at a tim e w hen in terest m argins are thin. F ac tors have little room for erro r in the conduct of th e ir business today, he added, b u t he expressed confidence National Commercial Finance Association Officers Frederick S. G ilb e rt Ch. Joseph E. M a ria n i Pres. th at factoring operations will continue to provide a service to traditional cus tom ers and to m arkets yet to be d e veloped. M any of the p attern s that have cre ated turm oil in the factoring business are discernible in th e rest of th e com m ercial-finance industry, R obert A. M iller, executive vice p resid en t, C on gress Financial C o rp ., N ew York City, said during a roundtable discussion on industry problem s. The factoring in d u s try ’s tro u b les began in th e late 1960s w hen financial institutions b e gan to target factoring firms for acquisi tio n . O nce n ew co m ers h ad g o tten th eir “foot in the d o o r,” they began an aggressive search for m arket share that Don’t get sw allow ed up. The most tempting targets for takeover attempts are those financial institutions which are basically sound. Fortu nately, they’re also the most likely candidates for a unique new form of protection, the Employee Stock Ownership Plan (ESOP). To find out more about the ESOP, contact America’s ESOP specialists for banks. We’ll give information, without ligation, and in strict confidence. BANKING CONSULTANTS OF AMERICA 6584 P oplar A venue O ther O ffices : S a 22FRASER Digitized for https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 38138-9990 (901)682-0611 *0, D allas, W a s h in g t o n , D.C. Richard J. Dorgan R etiring Ch. sent rates tum bling, according to Mr. Miller. “W e cut the cost of our product by a half from w hat it was 15 to 18 years ago,” he said, “and we did it at a tim e costs w ere skyrocketing. T he rest of th e com m ercial-finance industry currently is in a similar situa tion, said Mr. M iller, who indicated he foresees an era of consolidation ahead. “It’s going to be a different industry than we have now ,” he said. W illiam R. G ru tte m e y e r, p re s i dent, James Talcott, Inc., N ew York City, said that yields clearly are below acceptable levels considering th e risks involved. B oth h e and M r. M iller lam ented the shortage of skilled assetbased lenders. The industry has done a poor job of recruiting and training new personnel, they said. Mr. M iller said th e dim ensions of some recent highly publicized LBOs — such as the m ulti-billion-dollar offer for Beatrice — seem to have taken asset-b ased le n d in g into dan gerous territory. “W ho’s going to liquidate $8 billion (recent estim ates p u t the offer closer to $5 billion for B eatrice)?” he said. “T hat’s not our business; th a t’s th e world of W all S tre e t.” T he th ird panelist, G erald Blum, president, Trefoil Capital C orp., New York City, took a m ore upbeat view. “W e are a vibrant and good in d u stry ,” he said. “W e will survive.” In deed, Mr. M iller and Mr. G ru t tem eyer adm itted that m any com m er cial-finance com panies are offsetting declining rates w ith fee incom e and equity positions in th e com panies they lend to. D espite the industry’s concerns, the industry could point to num erous suc cess stories to dem onstrate its w orth. O ne of th e greatest success stories, C harles Bird (C. B.) Vaughan Jr., for m er professional dow nhill skier and founder of CB Sports, Inc., B enning ton, Vt., was honored for outstanding a c h ie v e m e n t th ro u g h use of assetb a s e d fin a n c in g . S in c e 1980, CB Sports sales have zoom ed by 443% and profits by 434%. • • MID-CONTINENT BANKER for December, 1985 What’s the Answer to an Asset-Based Lender’s Document Filing and Searching Problems? As an asset-based lender, you know how im portant Uniform Commercial Code docu ment filing and searching is. But you also know how time consuming and confusing the process can be. Y ou’re often faced with delays, questions about fees, returned checks because of incorrect amounts. You’re con fronted with forms being rejected because of improper completion, confusion about ap propriate forms, and making phone calls to monitor searches. Illinois Code Company gives you solutions with fast, reliable service. W hat’s the answer to those problems? The Illinois Code Company. • Familiar with up-to-date guidelines and procedures to make sure your request is processed quickly and efficiently you can free yourself from these tasks by let ting the Illinois Code Company do the filing and searching for you. • Nationwide network assures prompt ac cess to all state and county records across the country • All fees are paid in advance for you — no worries about incorrect payments • Courier services used, when needed, to speed your work along at no extra ser vice charge • Call you with status of your search — no more waiting and wondering Find out more about how the Illinois Code Company can answer your document filing and searching problems. Call Mark Timm toll free at 1-800-637-8605 (in Illinois, 217-529-5599) and ask about our trial offer for asset-based lenders. Illinois For more than 20 years, Illinois Code Company has been assisting firms across the country with UCC filings and searches as well as corporate filings and searches, tax lien searches, and judgement searches. Now MID-CONTINENT BANKER for December, 1985 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis r i Code Company rJL The Nationwide Filing/Searching Source 2901 Normandy Road, Suite 505 Springfield, Illinois 62703 23 YOUR BANK’S SECURITY IS MORE POROUS THAN YOU THINK! H e is quick to point out th at w hen he or his security p erso n n el p e n e tra te Editor/Associate Publisher bank security, they do so w ithout m ali cious intent. Im agine, how ever, how E C E N T L Y a m an e n te r e d a m uch dam age a crim inal could have Texas bank through a back door done at the Texas bank had he/she had and sauntered unchallenged through the same access and the same am ount th e b a n k ’s d ata -p ro c essin g d e p a rt of tim e, he says. m ent. “I have often w ondered w hy anyone From th ere, he head ed down a cor would go to th e trouble of robbing a ridor past a room w here ATM cassettes bank at gunpoint w hen you could get a w ere being loaded. H e noted, m atter lot fa rth e r and p ro b a b ly g et m ore of factly, as he passed th e room that at m oney if you w alked in w ith a clip least a q u arter of a m illion dollars was board and w earing a suit, he says. in view of anyone who took the same “You go in w ith a gun, you take a path and no guards w ere in sight. H e chance on being shot. Go in in a suit th en w alked into th e retail area of the and your chances of being caught and bank and stood b eh in d a bank teller as prosecuted are negligible. she cashed checks for custom ers. H e Mr. H arris says m ost bankers are w a tc h e d s e v e ra l tra n s a c tio n s tak e surprised w hen they discover ju st how place until, after about fO m inutes, a porous th e ir su p p o sed ly secu re in security guard took note of him and stitutions are. Doors that are supposed asked him if he could be of any help. to be locked frequently are p ropped H ad th e m an b een a crim inal, his open w ith a piece of wood so that bank natural reaction m ight have b een, No personnel don’t have to b o th er w ith thanks, I’ve b een helping myself. In keys. T elephone and electronic closets this case, the m an was no thief, b u t a frequently are plainly labeled. Secu security expert attem pting to d e te r rity eq u ip m en t provides the facade of m ine ju st how tight th e bank’s security security w ithout fooling anyone b ut was. His nam e is N orm an L. H arris, th e banker. president, H SH , Inc., a C olum bus, Mr. H arris recalls taking a tour of a O ., security firm that specializes in bank in C onnecticut w ith the C E O conducting security audits of banks. who was especially proud of his in stitu H e h ad re c e iv e d special clearance tio n ’s n ew e le c tro n ic su rv e illa n c e fro m th e b a n k ’s m a n a g e m e n t to equipm ent. The banker was boasting attem p t to p e n etrate the bank’s secu about how rigidly film from surveil rity. lance cam eras positioned at key loca H e found the Texas bank to be ridic tions around the bank was checked to ulously easy to gain access to and that d e te r m in e if any s tr a n g e r s w e re sensitive areas w here large am ounts of w andering around. m oney w ere handled virtually w ere S uddenly, Mr. H arris po in ted to u n protected. D on’t laugh, how ever, one of the cam eras and said th at som e because, according to Mr. H arris, he th in g looked funny ab o u t it. As it probably could p e n etrate your bank’s tu r n e d o u t, so m eo n e h ad sp ray ed security ju st as easily. shaving cream over th e lens so long ago “W e’ve never found a bank yet that it had h ard en ed into a sticky film so we couldn’t get into and go ju st about tough “we could barely pick it off. The anyw here we w anted, says Mr. H ar cam era contained no film and, in fact, ris. By John L. Cleveland T h a t’s th e o p in io n of an Ohio b a n k s e c u rity e x p e rt, w h o s a y s th a t h e d o u b ts h e ’d h a v e tro u b le g e ttin g in an d g o in g a n y w h e r e h e w a n te d in y o u r b a n k as long a s h e w o re a s u it a n d d id n ’t b ra n dish a w e a p o n . 24FRASER Digitized for https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis R MID-CONTINENT BANKER for December, 1985 Finally. The First Comprehensive Bank Consumer-Leasing Guide Is Here! If you are considering consumer-lease financing at your bank either as a p ro fit center or as a personal career and earnings oppo rtun ity — you can't a ffo rd to be w ithout this indispensible reference. Strengthen your present m arket share if you already offer consumer-lease financing. No other book is as complete, analytical, descriptive and filled with ideas. Included in the 47 chapters are sections on tax consid erations, balloon-note financing, data-processing requirements and more. W ritten over a three-year period, The Essentials o f Bank Consumer Leasing provides a comprehensive guide to understand ing and preparing consumer-lease program s. Reviews Are In. . . The Essentials o f Bank Consumer Leasing is the most definitive, complete presentation that has ever been made available to our industry . . . indispensible reading. . . " Michael Haslam, President BancAmerica Acceptance Corp. . . . most complete source o f inform ation on autom obile leasing that I have ever seen." Dale C. Miller V.P. and Regional Manager Wells Fargo Bank About the Authors Ronald S. Loshin is president of Bank Lease Consultants Inc., an in ternationally-recognized firm serv ing leading banks and other key participants in the leasing and auto-finance industries. His exper tise includes program design, marketing, financial analysis, data processing, mergers and acquisi tions and program evaluation. He conducted his doctoral studies at the University of California, Berke ley. Randall R. McCathren is execu tive vice president of Bank Lease Consultants, Inc. His areas of ex pertise include contractual, docu mentation and tax aspects of leas ing as well as the regulatory en vironment of the banking industry. He is a graduate of Yale University and the University of California, Berkeley, School of Law. ESSENTIALS OF BANK CONSUMER LEASING M ake payable to: Commerce Publishing Co. 408 O live St. St. Louis, M O 63102 □ Yes, I w ant the most comprehensive bank consumer leasing guide ever published. Send__ copies @ $195 each □ I want to take advantage o f your volume discount; send — copies (orders o f 3 -5, 10 % o ff; orders o f 5 or more, 2 5 % off). ____ Shipping and Handling $ 7 .5 0 T o ta l____ Name __ Company Address _ C ity ____ Phone __ MID-CONTINENT BANKER for December, 1985 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis State ZIP 25 had been tu rn e d off in a cost-cutting move. Security personnel at th e bank co n tin u e d to te ll m an ag em en t th a t they w ere m onitoring film from th e cam eras, h o w ev er. O f c o u rse , th e b a n k ’s C E O was e m b a rra sse d an d m ore than a little angry. The key to d eterrin g crim e is m ak ing the crim inal’s job m ore difficult. T elephone or electric closets th at are plainly labeled as such or cabinets and draw ers w ith a sign th at says “checks sto re d h e r e ” h e lp crim in als lo cate v u lnerab le areas m ore quickly, says Mr. H arris. The m ore obstacles you can p u t in th e crim inal’s way, th e less vulnerable th e bank will be to theft or vandalism , he adds. S o ftw a re s a fe g u a rd s th a t a llo w a c c e s s to s e n s itiv e d a ta b a s e s o n ly fro m s p e c if ie d p o in ts o f e n tr y t h a t c an be m o n ito re d a re a m o n g M r. H a r r is ’ re c o m m e n d a tio n s fo r c u ttin g d o w n on c o m p u te r c rim e . Training Personnel Bank p ersonnel — if not properly schooled — can ease th e crim inal’s path into the bank. Mr. H arris recalls th at he once tried to gain access to a b a n k ’s d a ta -p ro c essin g d e p a rtm e n t w ithout authorization and was stopped by bank security personnel. Shortly later, he struck up a casual conversa tion w ith a bank em ployee who tu rn e d out to be the bank’s data-processingd ep artm e n t m anager. H e followed the data-processing m anager into his d e p artm en t and was given an extensive briefing on how th e d ep artm en t func tioned. People like to be helpful to o th er people, says Mr. H arris. Ask a q u e s tion and they usually are w illing to tell you alm ost anything you w ant to know. U n fo rtu n ately , at a bank, such b e h a v io r can h a v e u n w e lc o m e sid e effects. H e tells m anagem ent th at if they w ant to get control of security at th eir banks they m ust train th e ir p e o ple not to talk about business to stran gers. I t’s okay to be helpful b u t not to give away vital inform ation th at a crim inal m ight use to cause injury to thebank or its custom ers. Bank p e rso n n e l rarely are given cross-training in o rd er to do som eone else’s job in th e ev en t of a vacation or illness. As a result, w hen a person is gone from th e b an k for p ro lo n g ed periods, th e ir desk sits u n u sed and constitutes an invitation to crim inals. Anyone can com e in and gain access to vital or sensitive inform ation, says Mr. Harris. Mr. H arris recom m ends th at banks cross train and periodically rotate p e r sonnel, not only to stop th e outside crim inal b u t also to discourage the in sider who has a ten d en cy to rip off his 26FRASER Digitized for https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis em ployer. People are m ore likely to be honest if they know that som eone else is going to be doing th eir job while they are away on vacation, says Mr. H arris. The Computer-Crime Problem C ongress is debating a far-reaching com puter-crim e bill because laws re garding crim es com m itted by com put er are so weak that a crim inal — if caught — stands only one chance in 27,777 of going to jail, says Mr. Harris. Financial institutions rem ain one of the prim ary targets of com puter crim inals and, by most estim ates, th e p ro b lem is w orsening at a staggering pace. According to Mr. H arris, th e average com puter theft th at was d etected was $430,000 less than th ree years ago, b u t is now e s tim a te d at m o re th a n $600,000. No one really knows how m uch is lost annually due to com puter theft, b u t estim ates range above $1 bil lion. Banks are especially vulnerable to com puter crim e because they have so m any u n p ro tected points of entry into th e ir systems, says Mr. H arris. H e re calls a M idw est bank that had a te rm i nal set up in an unguarded training area so platform personnel could be taught how to cross sell. Mr. H arris asked w h eth er the term inal m ight be used by u nauthorized personnel, b ut was assured that w hile the term inal was unprotected, the user could only get access to a dum m y file set up for training purposes. Mr. Harris sat down at the term inal and, after a few tries, found he had access to w hat h e th o u g h t was the dum m y file he d b een told about. As his fingers flew across the keyboard and custom er-account data scrolled up th e screen, Mr. H arris had to adm it he was im pressed by th e size and com plexity of the file th at the bank had set up only to train personnel. As it tu rn ed out, the inform ation on th e screen was real. In ad v erten tly , h e ’d gained access to th e bank’s central custom er-inform ation file. T he soft w are the bank had installed was so poorly w ritten that even som eone who was unfam ilar w ith the system could accidently stum ble into th e central database and cause all m anner of m is chief. “I could have done alm ost anything I w a n te d ,” says Mr. H arris, “transfer funds from one account to another, look u p c u s to m e r ’s b a la n c e s a n d add resses.’’ Software safeguards that allow ac cess to sensitive databases only from specified points of en try th at can be m onitored are am ong Mr. H arris’ rec om m endations for c u ttin g dow n on com puter crim e. Among others: L et people in the bank know th at th e in stitu tio n is closely m o n ito rin g th e potential for com puter crim e. H ave a “d isinterested th ird p arty ” — a secu rity audit firm — com e in to audit the bank’s com puter security procedures. Finally, have an external audit p ro gram set up to m onitor com puterized accounting procedures. External au ditors should have data processing as w ell as accounting experience, says Mr. Harris. C o m p u ter crim e flourishes because laws designed to p rev en t it are so weak and com panies are so unw illing to prosecute w hen they do d etect it, says Mr. Harris. O ne data-processing m an a g e r w ho h a d d iv e r te d at le a s t $400,000 into a shell corporation he ow ned before he was caught was fired by the bank, according to Mr. H arris. T he data-processing m anager was not prosecuted, how ever; nor did he have to tell his next em ployer w hy he left his past job. As far as Mr. H arris knows, th e m an is w orking in an o th e r job som ew here “getting ready to do the same th in g .” Mr. H arris did not have to say the obvious. That “som ew here’ could be your bank! • • MID-CONTINENT BANKER for December, 1985 Centerre’s Security Goes M odular Proprietary System Monitors Tower Complex H E N C e n te rre B ancorp., St. Louis, was planning Security-sensitive door access also is controlled by the w hat w ould becom e th e largest bank facility in console operator. Floors, m antraps and hallways leading M issouri, m anagem ent insisted on th e b est in security to bulk-cash-handling areas are m onitored by cameras. systems. The bank’s security officers, w ith the assistance Electric door-locking system s, even in access m ode, can of a security consultant, laid out tight and detailed be overridden by the operator if required. specifications covering all aspects of c u rre n t and anticipated security req u irem en ts. Several m ajor Security Sensors Report to Console security-equipm ent m anufacturers w ere considered for Security sensors throughout the building complex the project. report to the C O M SE C console in the The H C makes its h ead q u arters in 14 floors of security-operations center. If an alarm is activated, an 30-story C e n te rre Plaza. This glass tow er and adjacent audible signal alerts the operator and th e nature, low-rise office annex offer 900,000 square feet of office location and tim e of the activation appear on the space, making it one of th e largest buildings in console m onitor (CRT) in color coding. According to a Missouri. pre-d eterm in ed procedure that can be changed as the After an extensive review of proposals, C e n te rre situation dictates, th e operator will verify the alarm selected M osler to design and install electronic and physical security and drive-in banking eq uipm ent. C ontributing heavily to this selection was the availability of the M osler C O M S E C 1'1 proprietary security system. W Modular Feature Appreciated According to John R. H aw ken, C e n te rre ’s security officer, “The C O M SE C system is one of th e most advanced security system s in th e world. It m et our com prehensive specifications m ore closely than any other proposed system , and it is m odular, a feature of which w e’ve taken advantage. In th e security-operations cen ter, d eep in th e h eart of the tow er, a single console o perator is able to m onitor all security-related activity th ro u g h o u t the building — from C e n te rre Bank s seven-lane drive-in facility to the safe-deposit vault. A netw ork of electronic sensors, known as rem ote term inal units (RTUs) and an extensive CCTV system , w hich is connected to the C O M SE C control panel, also are an integral part of the security system . The C e n te rre system has 20 RTUs installed, each w ith a capability of m onitoring 496 points. Camera Views Can Be Locked In Sixty CCTV cam eras supplied by M osler cover teller stations, elevator consoles, interiors of vaults, the parking garage, loading docks and som e elevator cars. The security operato r can lock in any cam era’s view to the large-screen m onitor and record th e scene on tape at will. If an alarm is activated — by a teller, for example — th e cam era focused on th at te lle r’s station autom atically is sw itched to a large CRT and its signal is recorded. T hree 35mm hold-up cam eras in th e banking hall are activated by tellers’ hold-up alarm system s, which, in turn, are connected to th e C O M S E C console. MID-CONTINENT BANKER for December, 1985 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Security guard operates Mosler COMSEC '1 proprietary security system that monitors Centerre Bank and Centerre Bancorp offices in 30-story Centerre Plaza, St. Louis. and, if required, call law -enforcem ent agencies and bank personnel. T heir nam es and telephone num bers autom atically are displayed on the console CRT. For p erm anent records, a hard-copy p rin te r records each alarm and the response m ade to it. The C O M SEC console m onitors only bank prem ises in the C en terre Plaza Building. The bank is studying the feasibility of m onitoring o th er C en terre Bancorp, banking facilities throughout M issouri from this one central location. T he C O M SE C system ’s m odular design will accom m odate th e additional security load. Since the initial installation, C en terre branches in F rontenac and Ladue — two high-incom e St. Louis suburbs — have jo in ed the C O M SE C security network. Alarms and o th er security breaches are review ed by Al P ruett, assistant security officer/investigator. His investigations assist in preparing recom m endations on 27 how such incidents may be p rev en ted in the future. The C O M SE C prin t-o u t of entrances and exits makes it easier to determ ine m eans of p rev en tin g secu rity foul-ups. A large 8,000-square-foot vault from M osler secures (with appropriate p a r titioning) safe-deposit boxes, custom e r’s bulk valuables, financial securities and currency. T hree electric 25-inchth ic k v a u lt doors secu re v au lt e n trances. Bulk currency is h andled at the com m ercial facility at th e rear of the b u ild ing. A rm ored trucks move in and out of loading docks p ro tected by two in te r locking sets of overhead doors also con trolled by the C O M SE C console o p er Security Notebook Card Access System Designed • An hour-long video tape outlining a hostage/robberv incident at C entral Bank, W est Allis, W is., is b ein g pro d u ced by Financial M arket ing C orp., Prairie du C hien, Wis. It’s titled “ Do Exactly as You Are T old,” and it features interview s w ith C entral Bank Executive Vice P resident Richard W oodcock, his wife, his d aughter and Vice P resident E dw ard L entz, all of w hom w ere involved in the incident, which occurred last S ep tem b er 2. The video contains p rocedures that should be followed during a hostage and/or robbery incident. The tape is designed for view ing by all bank em ployees and th eir families. It will be available in January. F o r inform ation, call 608/326-4444. * * * • A new standardized process for protection of sophisticated data security for electronic transfer of funds is available through the ABA. It was developed by X9, th e accredited-standards com m ittee on financial services operating u n d e r th e p rocedures of th e A m erican National Standards In stitu te. It provides a uniform process for the protection and exchange of cryptographic keys for th e authentication and encryption of sensitive inform ation. Cost p e r copy is $40. O rd er publication num ber 091000 from the ABA’s O rd e r Processing D ep artm en t, 202/467-4118. * * * • Bank of America is offering for sale to financial institutions a 15m inute em ployee-training video tape designed to help banks comply w ith th e repo rtin g req u irem en ts of th e Bank Secrecy Act. The Act is designed to crack dow n on organized crim e and drug trafficking by m onitoring bank deposits of m ore than $10,000 by individuals and non-exem pt businesses. T he video explains th e following: valid id en ti fication, w hat to do if a transaction involves m any different types of foreign currency, how to handle transactions involving many different checks, who is exem pt from rep o rtin g transactions, how to handle forms retu rn e d by the 1RS and w hat to do if a custom er makes deposits of less than $10,000 into m ultiple accounts. The video is available at $400 per copy from th e BofA M edia Services, 180 M ontgom ery #3630, San Francisco, CA 94104. * * * • Visa USA reports th at counterfeit losses rep o rted on Visa cards declined m ore than 12% in th e year e n d ed April 30, to $34.4 million from $39.3 million for th e sam e p eriod a year earlier. It s the first such decline since counterfeiting becam e a problem in 1982. High losses prom p ted Visa to, am ong o th er things, form a professional secuiity departm en t, integrate anticounterfeiting p ro p erties into a new card design, develop a com puterized system of identifying m erchants who subm it a disproportionate am ount of fraudulent transactions and pro m ote new federal laws. * ^ * • The United Security Professionals Association (USPA) has been organized to provide b e tte r security training and com m unication foi financial institution and law -enforcem ent personnel. USPA sponsois training sem inars and workshops; a resource library; and a crim e h ot line” devoted to financial crim es. USPA’s phone nu m b er is 608/8310003. 28FRASER Digitized for https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ator. In side in d iv id u al docks, bulk cash is unloaded and passed into the bank by using package and cart pass throughs. As a result, bank m essen gers have room to p ark th e ir cars securely w ithin this facility. They com plete th eir transactions in individual rooms equipped w ith M osler bulletresistive service windows. G uard Supervisor Tom C alvert is re sponsible for ensuring that p roper p ro cedures are followed so that the sys tem ’s degree of security is not com prom ised. In addition, M osler designed a cardaccess system to fit in to C e n te rre B ank’s system to re stric t access to h ig h -se c u rity areas on a “ n e e d -to e n te r” basis. The security access co ordinator, Ken M ueller, issues plastic cards to authorized personnel along w ith a personal identification n u m b er (PIN) which the em ployee m em orizes. A m agnetic stripe on the card is e n coded w ith an identifying n u m b er plus a code that will unlock certain doors. To pass through a restricted doorway, the cardholder m ust insert his card in a read er and e n te r his PIN n u m b er on a keypad. C ards are encoded by a co m p u t erized control unit in the security op erations center. This unit perm its in stant cancellation of a card’s priorities (in case a card is lost or stolen, for example) and can record, if need ed , a hard-copy record of card usage. C en terre uses 64 card readers lo cated at entrances to m antraps, vault areas, cash-handling rooms and on the p erim eter of “security envelopes’ on each executive floor. Echoing the view of m any security officers around the nation, Mr. Hawken feels that security training is as im portant as physical security at the bank. For instance, Security T rainer Dave Battle provides security training for each teller four tim es a year, cover ing aspects of security from robbery procedures to bunco schem es. Training films produced by th e M os le r A nti-C rim e B ureau are used as teaching aids in this program . “W e’ve had good success w ith the system ,” Mr. H aw ken says, “and since th e initial installation, we have added our w arehouse (which houses bank supplies and records) and a safe d e posit affiliated com pany to th e system w ith the same degree of dependable service w e’ve com e to expect from M osler. As the C en terre netw ork con tinues to expand, our security needs will grow accordingly. O u r security system is in a position to grow w ith these needs. • • MID-CONTINENT BANKER for December, 1985 Marine Banks’ Survey Finds: Manufacturers Optim istic About 1986 in W iscon sin are looking to 1986 w ith optim ism . According to M arine Ranks’ sem i annual business-conditions survey of m anufacturers, th e W isconsin econ omy will continue to expand in 1986 at a slightly h igher rate than in 1985. M arine Rank asked m anufacturers to p red ict th e ir com panies’ results for 1986 in 14 econom ic areas. a n u fa ctu rers M Wisconsin Transitions • W isconsin’s regional in te r state banking bill, AR596, has been passed by the assem bly and aw aits a c tio n by th e S e n a te , probably in late January. T he bill w ould allow reciprocal in terstate banking w ith Illinois, Iowa, In d i ana, M ichigan, M innesota, M is souri and Ohio. • Valley Bancorp., A ppleton, has an nounced th a t it will ac quire Spring G reen Bancshares, Inc., and Bank of Spring G reen. W ith th e recen t announcem ents of acquisitions of F irst National, M inocqua and W oodruff; C om m ercial Bank, Chilton; Peshtigo State; and F irst National, B eaver Dam, this affiliation will bring Valley B ancorp.’s total assets to about $2 billion. • Rudolph P. Hanamann has been nam ed p resid en t/C E O of Valley Bank, Casco. H e succeeds W illiam D. B ushner, who was nam ed p resid en t at Valley Bank, O regon. • Barry James has b een p ro m oted to senior vice p resid en t/ lending and personal banking. • Jam es C. H a zza rd has joined F&M Bank, M enom onee Falls, as senior vice p resid en t, p e rs o n a l b a n k in g . H e w as form erly senior vice p resid en t/ com m unity banks division and vice p re sid e n t, H e rita g e W is consin Corp. • The majority, 68% of th e 752 re sponding m anufacturers, plan to in c rease th e ir e m p lo y m e n t levels in 1986, w ith an average grow th rate of 2.6% expected. This com pares with the 1.7% grow th rate p red icted in the survey done in May, 1985. • Sales revenues are expected to in crease by an average of 7.5%. • Capital ex p enditures are antici p ated to increase, w ith 67% of the m a n u fa c tu rers p ro je c tin g increases over 1985 spending levels. • Profits are pred icted to increase an average of 4.7% in 1986. The grow th rate p red icted for each indicator is up slightly from w hat was p ro je c te d last spring by th e sam e m anufacturers. • R espondents expect the prim e in te re st rate to rem ain near the 10% level d u ring 1986. Specifically, the rate is expected to be 10.2% at yearend 1985, and 10.9% on June 30, 1986. T hese predictions are a slight increase over the cu rren t 9.5% rate. H ow ever, these are the lowest in terest-rate p re dictions in the six years of th e survey, according to M arine Banks. • Inflation and price increases of m anufactured goods will rem ain low in 1986 w ith a projected inflation rate of 4.3% and a projected price increase of 1.9%. These low expectations for inflation translate into low predictions for em ployee-com pensation increases, with w ages e x p e c te d to rise 3.7% an d fringe-benefits costs expected to in crease 2.3% in 1986. In addition to the econonic-outlook questions, two additional questions w ere asked relatin g to W isconsin’s business environm ent. The W isconsin state legislature re cently passed a bill that will allow util ity com panies to diversify by form ing holding com panies. A m ajority of the m anufacturers favor allowing utilities to form holding com panies. Finally, the survey asked w hat in heritance and gift-tax policy changes the state should adopt. O f those re sponding to this question, 98.4% felt that inheritance and gift taxes to lineal d e s c e n d a n ts (sons an d d a u g h te rs ) should e ith e r b e re d u c e d or elim i nated. • • 157 YEARS OF BANKING AND CONSULTING EXPERIENCE AT YOUR SERVICE Douglas Austin & Associates oilers the experience and expertise needed to solve any banking problem. Our professional staff consists of former bank presidents ; correspondent bankers and financial consultants to hundreds of banks large and small. Call us to discuss your problems or opportunities. (312) 6G4-594G DOUGLAS AUSTIN AND ASSOCIATES, INC. Suite 702, 40 East Delaware Place • Chicago, Illinois 60611 • Lansing • Toledo MID-CONTINENT BANKER for December, 1985 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 29 Regional Banking Com es W ith Price LLIN O IS bankers got th e ir regional interstate banking law last m onth, b u t with a few com prom ises. The law includes som ething for consum ers and som ething for in d e p e n d e n t banks that desire to stay th at way. The law, scheduled to take effect July 1, 1986, allows in terstate banking w ith the contiguous states of W iscon sin, M ichigan, In d ia n a , K entucky, M issouri and Iowa. M ichigan is across Lake M ichigan from Illinois. R e c ip ro c ity is re q u ir e d . O f th e states nam ed in th e Illinois law, In d i ana and K entucky have passed region al banking laws that include Illinois in th eir regions. E ven w ith th e am endm ents to the Illinois law, “we re d elighted w ith it, said G. Thomas A ndes, p resid en t of the Illinois Bankers Association (IBA) and of F irst National, Belleville. Illi nois bankers paid a reasonable price to get w hat they w anted, he added. The Illinois law req u ires out-of-state or in-state banks to have a 7% total capital-to-assets ratio to buy an Illinois I bank. In d e p en d en t banks had the re q u irem en t added to slow down the big banks, b u t it probably will have little effect, according to a spokesm an for G overnor James Thom pson. “It was aim ed at the big banks, b ut they probably can get around it,” said E ric B r e n n e r , a s s is ta n t to G ov. Thom pson. Mr. Andes, IBA p resid en t, agrees. “I don’t think it will p resen t any major problem s to Illinois banks. Seven p e r cen t is a reasonable figure to have in th e re ,” he said. “The only problem w ith it is that it m uddies the w ater as far as reciproc ity .” The law also includes an opt-out p ro vision similar to one in Indiana s law. Banks that invoke the provision may not acquire or be acquired by another bank for a period of two years. O nce again, Mr. Andes sees little im pact from this am endm ent. 1 11 be surprised if any bank opts out, he said. If a board w ithdraw s its bank from the acquisition m arket and another bank Illinois Banks Will Have Time To Deal With “Onerous” Amendments i i ^ T h E R E is a lot of trash in that bill th at we will ad m in ister,” I Illinois state banking com m issioner W illiam H arris told bank ers re c e n tly w h e n discussing th e sta te ’s new regional in te rs ta te banking law. H ow ever, “th e re will be an opportunity to deal w ith the onerous aspects before im p lem entation, he added. T he law takes effect July 1, 1986. It includes sections th at m andate free lifeline checking for senior citizens, m axim um check-hold periods and a m inim um capital ratio to participate in in terstate banking. Mr. H arris spoke at th e annual co rresp o n d en t bankers conference of C en terre Bank, St. Louis, last m onth. C om m unity banks, d espite th e ir opposition to in teistate banking, will have one m ajor advantage in com peting against th e larger banks, Mr. H arris said. T hat is th e ir capacity for direct, personal service. “C om m unity banks can flourish in this rem aikable flux situation existing today if th ey co ncentrate like crazy on profitability, he added. M ost com m unity banks today are overstaffed, he said. Bank boards m ust do all they can to m ake th e ir banks profitable, w hich may m ean trim m ing staffs. , D irectors should ask them selves w hat th eir institution s mission is, Mr. H arris said. T he board should set a specific course th at concentrates on w hat th e bank does best, h e said. 30 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis com es alo n g la te r th a t d e s ire s to purchase it b u t is stym ied, the first bank’s board may expose itself to ac tion from shareh o ld ers, M r. A ndes added. The Illinois law also contains several c o n s u m e r - r e la te d a m e n d m e n ts . “T here is trem endous pressure from consum er groups in Springfield,” Mr. Andes said. Basic banking for people age 65 and o v e r is m a n d a te d , re q u ir in g fre e checking w ith no m inim um balance and 10 free checks p er m onth. This am endm ent includes savings and loans and credit unions. “ Surveys by the IBA have shown that the m ajority of banks by far are already providing some type of basic b a n k in g for s e n io r c itiz e n s ,’ M r. Andes said. In addition, checks holds are lim ited by the law to one day for governm ent checks, four days for in-state checks and seven days for out-of-state checks. Once again, “surveys by the IBA have shown that Illinois banks should have no problem w ith th at, Mr. Andes said. The law also sets rules for disclosure of interest rates on checking and sav ings accounts, w hich also will not be any great b u rd en for banks, Mr. Andes reported. The law includes com m u nity reinvestm ent rules, which simply puts in state law w hat is already in federal law, he added. The law elim inates the five banking regions in Illinois. Previously, bank holding com panies w ere lim ited in th eir acquisitions to banks in th eir own and one contiguous region. Mr. Andes sees a m idw estern bank ing region shaping up by th e end of n ex t y e a r. In d ia n a a n d K e n tu c k y already have passed regional banking laws. W isconsin and M ichigan are g et ting close. Regional banks in M issouri hope to have a law early in 1986, Mr. Andes said. Iowa will be delayed lor a while w ith its agricultural problem , he added. Ohio passed a regional-banking law earlier this year that nam es a liberal region of 13 states, including Illinois. How ever, the Illinois law does not in clude Ohio. • • MID-CONTINENT BANKER for Decem ber, 19 8 5 Indiana/lllinois Transitions • CNB Bancshares, Evansville, Ind., has reached an agreem ent to acquire Peoples F irst Ban corp, M adisonville. • Old National Bancorp, E vans ville, has received F ed approval to a c q u ire G re e n c a stle (Ind.) Bancorp, p aren t of F irst C itizens Bank, G reencastle. Illinois joined a growing Midwestern regional-banking compact late last month when Gov. James Thompson signed SB525, permitting reciprocal interstate banking with contiguous states as of July 1, 1986. At r. is G. Thomas Andes, pres., Illinois Bankers Association, and pres., First National, Belleville; standing are state representatives. Signing ceremony took place at correspondent banking conference sponsored by First Nat'l, Chicago. Arkansas Commissioner: Interstate Banking No Threat to Independent Community Banks ARLIN D. JACKSON, Arkansas Those of you who are in small banks b a n k in g c o m m is s io n e r, has and w orry about your careers, you some advice for com m unity bankers have nothing to w orry about. A cquir who are afraid that th e spread of re ing banks w ant to buy the custom er list gional in terstate banking will be the m ore than anything and you are the tie end of life as they know it: D o n ’t be. to those custom ers. The b e tte r m an “If I am convinced of anything at all ager you are the b e tte r prem ium you . . . if pigs like slop, if bank com m is will com m and. I have seen acquiring sioners like beautiful w om en, if bank banks com e in and retain incom petent ers like high profits . . . th e re is a place m anagem ent simply to retain that tie among th e m ulti-bank holding com to custom ers. panies for the in d e p e n d e n t com m u “I am convinced th e re has never nity b an k ,” he said. been a b e tte r tim e for the com m unity Mr. Jackson spoke recently at the bank to rem ain in d ep en d en t, or affili annual m eeting of Region 5 of th e Illi ate w ith another bank, or affiliate w ith nois Rankers Association, giving a talk an out-of-state bank, or som ething in laced w ith his folksy hum or. betw een. • • Illinois Gov. Jam es T hom pson had signed the state’s regional in terstate First National, Lincolnshire banking law th e w eek of th e m eeting. Refunds Credit-Card Interest “ T h e w e ll-m a n a g e d c o m m u n ity bank has th e best of all worlds. You F irst National, Lincolnshire (111.) is have all th e o p tio n s,” Mr. Jackson told giving its Visa cardholders a holiday th e group of m ore than 400 m ostly gift of a refund of 6.67% of th e in terest com m unity bankers. paid on th eir bank-card accounts. You can rem ain in d e p e n d e n t and The bank claims one of the lowest make great earnings th at w ould m ake credit-card in terest rates in the coun th e m oney barons of W all S treet green try and charges no fee on its Idea Visa w ith envy. You can buy o th er small card. banks, if you are w ell-m anaged, and Public response to the bank’s Visa enjoy econom ies of scale. You can be program since it was in tro d u ced in acquired; th e value of w ell-run com J a n u a ry , 1985, has e x c e e d e d th e m unity banks has gone up 50% in re bank’s predictions, w ith cards being cent tim e s,” Mr. Jackson said. issued across the U. S. C o m m u n ity b an k ers w ho do not “This is our way of saying thank you own a piece of th e ir banks also should to our custom ers for making our p ro have little w orry of losing th e ir jobs, grams extrem ely successful in 1985,” Mr. Jackson told th e group. said Saul H inder, bank president. M MID-CONTINENT BANKER for December, 1985 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • Indiana National, Indianapo lis, has purchased non-classified and n o n -d e lin q u e n t loans and assum ed deposits of th e failed Allen C ounty Bank, Leo. The m ain office and th re e b ran ch locations of the failed bank w ere reopened as branches of Indiana N ational. In addition, Indiana N a tio n a l has a n n o u n c e d th e form ation of In d ian a N ational Brokerage Services, a subsidiary offering discount-brokerage ser vices. • K enneth J. R oeh has b e e n elected senior vice president/executive tru st officer of M ercan tile National, H am m ond, Ind. • Jerry J. R oberts has b e e n elected executive vice presid en t at Am erican F letch er National, Indianapolis. • F ir st C olon ial B an csh a res Corp., Chicago, has reached an agreem ent to acquire all assets of Colonial G roup, including All A m erican Bank, Chicago, and N o rth w e s t C o m m e rc e B ank, R o sem o n t. All A m erican and N orthw est previously o perated as affiliated m em b ers of F irst Colonial. As w holly-ow ned su b sidiaries, they will bring F irst Colonial’s assets to $596 million. • Am ericorp Financial, Rock fo rd , has a c q u ire d Illin o is N a tio n a l, R o ck fo rd , an d has m erged it w ith Am erican N ation al, Rockford. The bank has been nam ed Amcore Bank. E v en tu al ly all banks ow ned by A m ericorp F in a n c ia l w ill b e r e n a m e d Amcore banks. • First M idwest Bancorp, Jo lie t, has c o n s o lid a te d U n io n N a tio n a l an d N a tio n a l B ank, both of Joliet, into a single bank, c a lle d F ir s t M id w e st B an k / Joliet. 31 Ohio, Michigan Banks Acquire Firm s LINE OF CREDIT stock and brokerage activities into the R eiter firm, w hich will retain its nam e. The com bined firm will em ploy 15 re g is te re d b ro k e rs and offer a full range of stock and bond products, in cluding options, m argin accounts, selfd ire c te d IRAs and tax-free in v e st m ents. T he b an k ’s re latio n sh ip w ith th e brokerage has extended over 60 years. In Michigan, F irst of A m erica Bank C orp., Kalamazoo, has announced the purchase of Securities C ounsel, Inc., Jackson, an investm ent-advisory firm. Securities C ounsel provides invest m ent advisory services to individuals and institutions and m anages $200 m il lion in assets. The acquisition is in ten d ed to com plem ent F irst of A m erica’s tru st divi sion, which has assets of m ore than $2 billion. F irst of A m erica has total assets of m ore than $5 billion. • • for the acquisition of Mich./Ohio Transitions ANKS in Ohio and M ichigan plan to acquire firms offering services non-traditional to banking. Fifth T hird Bank, C incinnati, has B announced an ag reem ent to acquire C. H. R eiter & C o., Inc., a C incinnati brokerage. Fifth T hird will consolidate its own TRUMARK, INC. (LANSING, MI) has obtained an $ 8 ,5 0 0 ,0 0 0 Guthrie, Inc. and Uptilt, Inc. & affiliates from BarclaysAmerican/Business Credit A subsidiary of PJ- BARCLAYS Barclays Bank Ki BarclaysAmerican/Business Credit, Inc. 200 West Madison S t Chicago, IL 60606 (312) 346-8370 32 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Offices located nationwide. Dial 1-800-BARCLAY • BancOhio National, C olum bus, has elected as vice presidents Richard L. H eston and W illiam O. W ick Jr. in corporate banking and Steven C. Veno in retail services. • Toledo Trustcorp, Inc. has com p leted acquisition of Society National of N orthw est Ohio and Society N ation al, M id-Ohio. W ith these acquisitions and the pending acquisition of Sylvania Bank, Toledo T rustcorp assets are expected to reach $3 billion. • C o m erica , I n c ., D e tr o it, has a p p o in te d In a G. F e r n a n d e z and Jam es E. Rohan vice presid en ts/au diting; Prodyodth K. C h atterjee, vice p r e s id e n t, C o m e ric a A c c e p ta n c e C o rp .; and G erald P. Piontkow ski, vice p re sid e n t/c e n tral bookkeeping, Com erica Bank, D etroit. • National Bank of D etroit has ap p o in ted as senior vice p resid en ts R obert A. D eA lexandris, w estern m e t ropolitan regional banking division; Philips S. Jones, credit-adm inistration division; D onald M. Nowicki, M ichi gan banking division; Noel L. P e te r son, financial-services division; and Kevin F. W alsh, m ortgage division. MID-CONTINENT BANKER for December, 1985 Insurance for Directors. . . bank board letter T h e in s u ra n c e e v e ry b a n k c a n a ffo rd , an d no b a n k c a n a ffo rd to be w ith o u t Bank directors today are subject to risks unheard of a generation ago. Regulators impose penalties. Disgruntled shareholders sue. Consumer activists turn up the heat. Just look at the cost of your D&O insur ance . . . if you can get it. No wonder attract ing and holding quality directors has be come a challenge to CEOs. Serving as a bank director is no longer the quiet, comfortable position it once was. The demands are formidable. Directors today must be knowledgeable about operations, interstate banking, marketing, deposit de regulation, strategic planning and more . . . while the industry continues to change. Today’s banking environment demands that your directors take an active, informed role, working with management in guiding their institution. Opinions, facts and ideas deluge your directors from many sources. But only one publication brings together all the news that directors need to know. The Bank Board Letter presents the big picture in easily read able newsletter form, direct, to-the-point, ideal for your busy directors. Think of it as your best value in insurance. MID-CONTINENT BANKER for December, 1985 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis An informed director: The best insurance. The BANK BOARD LE T T E R 408 Olive St., St. Louis, M O 63102 Please e n te r my o rd er for ------ subscriptions to BANK BOARD LE T T E R at $45 for the first sub scrip tio n and $15 for ad d itio n al su b scriptions. (Attach list of addresses for additional recipients.) N a m e ________ ___________ _________ Address _____ ________ ____________ _____________ City --------------------- S ta te ________ Z I P __________ 33 Banks Receive MICR Data Over Phone W O M innesota banks are participating in an experim ental M ICR datacapture program p rom oted by th e M inneapolis Fed. Security State, Sebeka, has b een saving from two to four hours of personnel tim e daily w ith th e program . Earl Keskey, p re sid e n t of th e $l5-m illion-asset institution, says the new service announced by th e F ed in S ep tem b er called M ICR D ata C ap tu ie Transm ission” allows th e bank to receive and process its daily cash le tte r and ACH item s over telep h o n e w ires w ithout handling any docum ents manually. Mr. Keskey told M i d - C o n t i n e n t B a n k e r th at th e only expenditure necessary was for a m odem and additional software. Total cost to the bank was about $1,500. r . Financial inform ation from th e F e d is tran sm itted directly fiom M inneapolis to Security S tate’s Texas In stru m en ts m ini-com puter. E n try errors, com m on u n d er th e form er m anual system , have b een reduced, he says. “As far as we know, we re th e first bank to try this new system , M i. Keskey says. “O f course, th e next logical step w ould be for us to transm it our infoi mation directly to th e F e d .” . A second test of the system is underw ay at Janesville State. Joe rin le y , president, says his bank was selected because it uses th e same Texas In stru m en t m ini-com puter. T he system soon will be m ade available to o ther banks in the Jth F ederal R eserve D istrict, according to th e M inneapolis Fed. • • T Iowa Banker Gives Bankruptcy Hints At ABA Ag Bankers’ Conference bank experienced one farm b a n k ru p t cy last year, and was anticipating a total Senior Editor of four or five this year. H e ad vised th a t b an k ers gain as INTS for ag bankers dealing w ith m uch know ledge as they can as quickly farm b an k ru p tcies w ere given as they can about dealing w ith farm by a panel of experts at last m o n thbankruptcies, ’s since th e outlook calls ABA N ational A gricu ltu ral B ankers for m ore. C onference in Dallas. “ Prior to the ag crisis, m ost bankers Iowa banker Paul M. Q uam , senior had a little fat in th e ir accounts,” he vice presiden t/ad m in istrato r, Hayessaid. “W e’ve lost some of th at fat b e ville Savings Bank, m o d e ra te d th e cause of ban k ru p tcies and we can t panel. H e told ag bankers atten d in g afford to lose any m ore of it. ” th e special-in terest session th at his H e advised th at bankers m ake the following provisions to help deal with bankruptcy cases: • Retain good legal counsel. • D on’t attem p t to transfer resp o n sibility for dealing w ith bankruptcies to the bank’s attorneys. • Tell bank counsel w hat th e bank wants to do in each case and listen to counsel’s advice as to th e wisdom of th e course of action. • M aintain an ongoing journal that includes w hat h ap p en ed , who com m unication is w ith and each entry. B ankruptcy cases go on and on, Mr. Paul M. Quam (I.), s.v.p. at Hayesville Sav Q uam said. B ankers should realize ings Bank, chats w ith others on farm th at they have to stay on each case and bankruptcy panel at last month's ABA ag push it along until it it resolved. conference. James G. Lauck, Indianapolis Bankers should realize th at the bank attorney, is 2nd from I.; Dean M. Gandy, doesn’t have the use of th e b an krupt s bankruptcy judge from Dallas, is at r. By Jim Fabian H 34 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Minn.-lowa Transitions • Sophie Bell has been p ro moted to vice president by First Bank Saint Paul. She joined the bank in 1983. • Patricia Goodwin has been promoted to vice president/corporate communications by First Bank Minneapolis. • Andrew R. Guzman has been named vice pre sid e n t/m a rke ting director by Marquette Bank Min n e a p o lis. He d ire cts m a rke ting efforts for all Marquette banks. • N ational Bank, W a te rlo o , la., has acquired Gilbertville (la.) Savings. National Bank has assets exceeding $300 million; Gilbertville Savings has approximately $21 mil lion in assets. • Shirley Poertner, assistant vice president, First Interstate of Iowa, Des Moines, placed first in the 1985 scholarship-award program of the N a tio n a l A sso cia tio n o f Bank Women. assets during a bankruptcy situation. For that reason, it may be wise to make a negotiated settlem ent. T here is no room for vengeance in a bankruptcy situation; acting w ith an ger is not acting prudently. Not All Bad Having one d eb to r in bankruptcy may not be all that bad, Mr. Quam said. It m ight be a good thing because a bankruptcy can rep resen t an im proved situation w hen it involves a client who hasn’t been conform ing to bank rules. At least in a case of bankruptcy, he added, you have help w ith the situa tion! Additional inform ation was supplied by D ean M. Gandy, an attorney and b a n k ru p tc y ju d g e from th e D allas area. R eferrin g to M r. Q u am ’s reco m m endation about keeping a journal of events associated w ith a bankruptcy case, Judge G andy said such diaries are subject to discovery, hence bank ers should be careful about w hat they record in them ! • • • Dick Holthaus has joined the staff of th e Iowa B ankers A ssociation as m arketing director. H e form erly was w ith M e rc h a n ts N a tio n a l, C e d a r Rapids. MID-CONTINENT BANKER for December, 1985 ABA Ponders Agri-Future Consultants hired to assess, possibly remedy, pickle ag banks find them selves in C om m unity and Rural D evelopm ent Frank W. Naylor Jr. m ade things quite plain: C om m ercial bankers should not expect to be treated equally w ith the FCS because banks can make use of th e Farm ers H om e A dm inistration as a tool. H e term ed the Fm H A the only By Jim Fabian m ajor tool available to banks for the Senior Editor 1986 lending season. But, all is not lost. If the ABA ag T ’S DEBATABLE if all w en t w ell for division has its way, ag bankers will ag bankers at last m o n th ’s National have anoth er tool to help them extract A g ric u ltu ra l B a n k e rs C o n fe re n c e , them selves from th e pickle th ey ’re in. sponsored by th e ABA in Dallas. It took alm ost a year to arrive at a con Ag bankers have long b een adam ant sensus in the association’s head q u ar in th eir view th at any go vernm ent bail ters, b u t p ersisten t plugging by Alan out for the tro u b led Farm C red it Sys R. Tubbs, who recently retired as ag tem (FCS) must be nondiscrim inatory division chairm an, and others on the — that is, it m ust also b enefit com division roster, th e ABA has agreed to m e rc ia l ag b a n k e rs . B u t re m a rk s tu rn the ag crisis situation over to a slipped out ra th e r regularly during the group of consultants charged to come conference th at such w ould not be the up w ith a rem edy. case. The catch is that th e rem edy w on’t T h e F a r m e r C r e d it A sso ciatio n be ready for quite a w hile — som etim e (FCA) d oesn’t think m uch of th e idea of next year, which m eans an o th er “crop” assisting ag bankers as p art of a federal of ag banks could be “harvested along re h a b ilita tio n o f th e F C S . M arvin w ith th e corn and milo next year. D uncan, senior d ep u ty governor of th e Mr. Tubbs, who is p resid en t, F irst FCA, said FCS banks are being hit C entral State, D eW itt, la., should be hard er than com m ercial banks, a re cannonized for the tim e and effort he m ark that m ade th e m ajority of his has devoted to the ag situation over the listeners wince. years. H e was justly recognized during If that w asn’t enough, U. S. U n d e r th e c o n feren ce by ABA P re sid e n tse c re ta ry o f A g ric u ltu re for Sm all E lect M ark W. Olson, who p resen ted I ABA Pres.-Elect Mark W. Olson (c.), pres., Security State, Fergus Falls, M in n ., is flanked at Ag Conference by Michael E. Fitch (I.), ag-div. ch., and v.p., Wells Fargo, San Francisco; and Jack Harmon (r.) of ABA staff. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis M r. T u b b s w ith th e A BA ’s E ag le A w ard for d istin g u ish ed service to banking. Mr. Tubbs explained the develop m ents leading up to the engagem ent of Texas-based consultants H opkins & Associates to em bark on a m ajor re search study on the future of the agricultural-banking industry. A good portion of one general ses sion was devoted to an explanation of th e fu tu re p ro sp ects of a g ric u ltu re according to scenarios developed by th e Hopkins firm based on differing versions of the forthcom ing farm bill as envisioned by both C ongress and P res id en t Reagan. N eith er scenario bodes w ell for ag ric u ltu re or ag bankers, according to the consulting firm. Bankers in attendance w ere asked to fill out a com prehensive questionnaire that will enable the H opkins firm to assess existing and future tren d s in agriculture and agricultural finance. Speaking to the issue of reh ab ilitat in g th e F a rm C re d it S y stem , th e ABA s Mr. Olson, who is p resident, Security State, Fergus Falls, M inn., reiterated the ABA’s policy pertaining to the FCS. I t’s a given, he said, that th e FCS m ust not be p erm itted to go u n d e r. Too m any banks h old FC S bonds and the FCS holds too m uch of th e real estate underlying com m ercial Frank W. Naylor Jr. (I.), representing U. S. Agriculture Dept., appeared at "Restruc turing Agriculture" session during ABA National Ag Bankers Conference. With Mr. Naylor are Alan R. Tubbs (c.), pres., First Central State, DeWitt, la., and Michael D. Boehlje, ag consultant from University of Minn., St. Paul. bank loans for such an event to b e p e r m itted. “W e support the survival of th e FCS b u t strongly believe th at w hatever ac tions are taken to shore th e system up m ust be taken w ith th re e fundam ental principles in m in d ,” he said. • “Policymakers m ust consider the future role of th e FCS in agricultural finance. Long-term solutions m ust not be obscured by short-term dem ands. Propping up th e FCS now should not be taken as a sign of g reater reliance on governm ental and quasi governm ental agricultural lenders in th e future. The ABA believes th e fu tu re needs of the agricultural econom y can be m et only w ith a g reater reliance on private le n d ers. • “Assistance to th e FCS should be offered only if a d e q u a te reg u lato ry safeguards are p u t in place. T he FCS needs desperately to p u t its own m an agem ent house in order. It m ust be subject to in d e p e n d e n t audits, careful ly defined capital req u irem en ts and p ru d en t and standard internal prac tices to assure soundness. T he system would benefit from a strong in d e p e n d en t regulatory agency such as th e FD IC . • “T here m ust be quality of tre a t m e n t o f a g r ic u ltu r a l b o r r o w e r s . Com m ercial-bank borrow ers m ust not be discrim inated against.” This last point is th e keystone of th e ABA’s support of aid to th e FCS. Mr. Olson called for “rural A m er ican com m on sense” to solve th e ag crisis. H e also called for a balanced budget and retaining th e loan-loss re serve in the tax bill. The FCA ’s Mr. D uncan called for “som ething to be d o n e” to m ake the adjustm ent going on in agriculture less painful. 36 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis year, it will be a long tim e — Spring at H is ag ency favors th e follow ing least — before a new attem p t is m ade proposals for the FCS in addition to to pass legislation. H e term ed 1986 the any m onetary aid: m ost difficult credit lending year of th e • E n hanced enforcem ent capabili last several years. ties for th e FCA, including in term ed i S peaking to th e FCS legislation, ate enforcem ent pow ers such as ceaseMr. Naylor said th ere is m uch dis and -d esist o rd ers, au th o rity to sus agreem ent as to the type of assistance p en d d irectors, etc. H e also favors that should be granted. F ed eral in re s u m p tio n of d ire c t exam in atio n s te rv en tio n is seen as in ad eq u ate to at FCS affiliates to ensure safety and h e lp th e fin a n c ia l-stress situ atio n . soundness. • The FCS should make full use of Also, it’s difficult to make an accurate assessm ent of the problem . The FCS is its own resources through the Farm disorganized and its records are not C red it Capital Corp. through a $5 bil consistent. It can’t get its arms around lion revolving line of credit that comes th e problem , he added. available only after th e FCS has u ti H e said the FCS needs the authority lized its own reserves. This provision to use its own surpluses. T he system will ensure that th e FCS deals w ith its problem s before going to th e govern has capital and assets that are higher than those m ost banks have, he added. m ent for aid. H e said access to financial m arkets is H e said com m ercial bankers have a m o re im p o rta n t th a n g o v e rn m e n t stake in th e survival of the FCS since they are the largest single group of guarantees. But this access is becom ing difficult because of th e gloom y investors in FCS bonds, they provide statem ents about the FCS being m ade lines of credit to FCS affiliates and lend by its own people. to F ed eral Land Banks in structuring T he conference atm osphere was not loan packages. O n e of U n d e rs e c re ta ry N ay lo r’s one of gloom and doom , b u t th ere w ere noticeable differences from p re them es was that the FCS w ould be in vious m eetings: A ttendance was down, m uch b e tte r shape today if it w ere w ith some states being re p resen ted by m anaged m ore prudently. T he Reagan adm inistration favors a policy that re ju st handfuls of th eir bankers; th ere was only one exhibitor, w hereas p re quires th e FCS to m arshal its reserves and use them to deal w ith its p ro b vious co n feren ces fe a tu re d e x h ib it lems. Only th en w ould the adm inistra halls (the ABA expects to have an ex hibit area next year); and consultants/ tion be w illing to consider any bail-out econom ists w ere m ore visible than aid, he said. usual. D uring a workshop on restru ctu rin g C onference C hairm an M ichael E. agriculture, Mr. Naylor said a veto of F itch , vice p re sid e n t, W ells Fargo any farm bill is likely and a veto may be B ank, San F ra n c isc o , m an ag ed to th e only way Congress can deal w ith appear optim istic about th e future of the im passe it is in. E veryone w ants to ag banking. “W e have survived diffi avoid a veto, b u t C ongress d o esn ’t cult tim es and we will solve our cu r have th e ability to satisfy everyone re n t problem s and grow stronger as a right now, he said. result, he said. • • If a farm bill doesn’t m ake it this MID-CONTINENT BANKER for December, 1985 Dealing W ith Exam iners Bankers learn how regula tors regulate and how legislators legislate at ABA sessions am ount to be raised over a period of tim e. It takes innovative thinking to raise capital u n d er today’s conditions, b u t this route generally is favored over th e altern ativ e, w hich is to red u ce assets. • Review the adequacy of the bank’s loan-loss reserve and bring it up to a By Jim Fabian Senior Editor level th a t’s acceptable to regulators. Bankers also should review th eir loan portfolios w ith a critical eye and make sure actions are docum ented. NSIG H TS for bankers into th e reg • Review credit lines to directors. ulation and legislative arenas w ere provided bankers atten d in g two of the T ho se w ith loans th a t ex c e e d th e b ank’s legal loan lim it will find these many con cu rren t sessions conducted loans being classified and the directors during th e ABA N ational A gricultural B ankers C o n fe re n c e in D allas last m o n th . O n e c o v e re d d e a lin g w ith bank exam iners, th e o th er focused on th e congressional staff p erspective re garding c u rren t political issues in agri Panelists at dealingculture. with-examiners ses T he bank-exam iner panel featured sion at ABA ag con John Ryan, form er directo r of banking ference were, from supervision for th e F ed eral R eserve I., John Ryan, repre senting the Fed's System, and D ave M eadows, F D IC v ie w p o in t, and associate d irector responsible for bank Dave Meadows from su p erv isio n and failing banks. T he the FDIC. At r. is Ron panel was m o derated by Ron R. Poor, R. Poor, pres., City president, City Bank, M oberly, Mo. Bank, Moberly, Mo., Mr. Ryan, w ho now is a bank/finanpanel moderator. cial consultant, spoke to th e issue of bankers facing en forcem ent actions by regulators. H e listed th e th re e types of actions taken by exam iners in th eir efforts to get banks to shape up, n am e ly m em os of u n derstanding, w hich can asked to resign as well as ante up the be issued on e ith e r an inform al or for funds to pay th e bank back. O ne way to mal basis since th ey have no statutory avoid such situations w ould be to move support; letters of agreem ent, w hich such loans to another bank. c o v e r m o re s e rio u s o ffe n se s; a n d • Banks w ith high volum es of classi cease-and-desist orders, w hich cover fied loans m ust reduce them or devise th e m ost u rg en t infractions. All th re e a plan to deal w ith each m ajor classified differ little in th e ir in ten t; b u t th e loan. p re s s u re for b a n k e rs to com p ly is If m anagem ent is inadequate to take greatest u n d e r cease and desist. p ro p e r action, reg u lato rs could re R egulators issue such actions b e qu ire th e institution to hire a replace cause they w ant banks to do one or m en t for th e C E O , Mr. Ryan said. m ore of th e following, Mr. Ryan said: H e advised bankers to deal w ith • E ith e r p r o h ib it d iv id e n d p a y issu es o f th is n a tu re b efo re b e in g m ents or red u ce them to a figure based fo rc e d to b y re g u la to r s . H e also on an earnings formula. R educing th e advised bankers to negotiate the term s dividend usually is the b est course to o f re g u la to ry actio n s ag ain st th e ir take. banks. • D evelo p a cap ital-im p ro v em en t “Avoid signing an ag reem ent you plan. Agencies will state th e m inim um can’t fulfill,’’ he said. “In m ost cases, I MID-CONTINENT BANKER for December, 1985 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis regulators will be realistic and will lis ten to w ell-thought-out arg u m e n ts.’’ R egulators’ first concern is for safe and sound banks, th e F D IC ’s Mr. Meadows said. H e advised bankers to be know ledgeable about th eir borrow ers. Exam iners look for evidence of this in the form of loan docum entation. Bankers can make exam inations go sm oother by providing exam iners w ith adequate space th a t’s away from public view and out of em ployee earshot, he said. The bank also should provide ex am iners w ith a list of key personnel they may need to contact during the examination. Exam iners m ust explain th eir com m ents and/or criticisms, Mr. Meadows said. But it’s up to bankers to make sure they u n d erstand exam iners’ re marks. And it’s up to bankers to take w hatever actions are necessary to cor rect deficiencies during an exam ina tion. “D on’t wait for the report to arrive b efo re taking rem ed ial a c tio n ,’’ he advised. “W aiting is a big mistake. The bank’s m anager should make it a point to find out w hat criticism s exam iners have before th e next board m eeting. ’’ Q uestions from th e floor dealt w ith th e following topics: • G etting rid of undesirable d irec tors. The F D IC does not get involved in such m a tte rs, acco rd in g to Mr. Meadows, unless th ere are grounds for 37 rem oval u n d e r F D IC statutes. The b o a rd sh o u ld hav e a u th o rity as to which directors continue to serve. The F D IC is in terested in w hat develops. Mr. Ryan advised th e adoption of a general policy covering d irector b e havior so th at directors not observing the policy can be asked to resign. Such a policy should be in th e bank s bylaws, he added. • P r o c e d u r e fo r te r m in a tio n o f F D IC insurance. W hen such a drastic step is im m inent, banks generally are given from 20 to 120 days to restore them selves to a safe and sound condi tion, Mr. M eadows said. The re q u ire m ent usually involves raising a ddition al capital. C om pliance is assessed by an exam ination and, if th e F D IC is not satisfied w ith th e results, it calls for a hearing before an adm inistrative law judge. After th e ju d g e makes a deci sion, the F D IC board decides w h eth er to proceed w ith th e action. Should d e posit in su ran ce b e te rm in a te d , th e affected bank is re q u ire d to tell its d e positors that new deposits w on’t be in sured. In m ost cases, th e bank eith er m erges w ith another bank, fails or re capitalizes before insurance term in a tion takes place. • The possibility of negotiating a m em o of u n d erstan d in g or a ceaseand-desist order. In m ost cases, these actions are negotiated, Mr. M eadows said. T he F D IC o p erates from th e prem ise that th e action should be one that both th e bank and th e agency can live with. But th e re is room for nego tiation, w hich often is u n d ertak en b e fore a docum ent is signed. B ankers w e re c a u tio n e d to have w e ll-d o c u m e n te d a rg u m e n ts w h en they negotiate. T hey should not hold the attitu d e that th ey w on’t receive a fair audience w ith th e agency; thus, they n e e d n ’t make the effort to d e velo p w e ll-th o u g h t-o u t a rg u m en ts. T hey never should tell regulators they can’t live w ith the term s of an action w ithout being able to explain why, Mr. Ryan said. • P rocedure for closing a branch. N either the F D IC nor the F ed reg ulates branch closings, b u t the agen cies w ant to be inform ed w hen such action occurs. It w ould b e well for m anagem ent to b e m indful of th e p ro visions of the C om m unity R einvest m e n t A ct (CRA) w h en co n sid erin g closing a branch, Mr. Ryan said, esp e cially if the branch is in an area in w hich th e re w ould be no banking ser vices w ithout th e branch. U n d er the CRA, individuals could m ake it diffi cult for the bank to open a branch som ew here else if they felt th e branch closing resulted in a hardship to those who had patronized the branch. B oth p an elists ag reed th a t th e re may be a need to com bine the F D IC a n d th e F S L IC d e p o s it-in s u ra n c e funds at some point in th e future, b u t th at th e re is little pressure to do so at this tim e. M oderator Poor gave credit to reg ulatory agencies for making banking such a desirable business th at all sorts of o th er businesses w ant to becom e banks. Banking has a unique in g re d ien t going for it, he added: T he in d e p e n d e n t system of regulators that p ro vides confidence to its custom ers. Political-Issues Session T h e political-issues session d ealt w ith the procedure for getting legisla tion through Congress. Panelists in cluded G regg F razier from th e staff of Legislative staffers Alan Ott (I.) and Gregg Frazier (3rd from I.) flank Harold Stones, e v p Kansas Bankers Assn., at reception given by KBA at ABA ag conference. At r. is James Darrah, ch./pres./CEO, Chapman (Kan.) State, who is KBA's ag task-force ch. Messrs. Ott and Frazier spoke at congressional staff-perspective session during confer ence. ~o https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Rep. Dan Glickman (D .,K an.), Allan O tt from the staff of Sen. Nancy Kassebaum (R. ,Kan.) and Jim W ebster, for m er chief clerk of the Senate com m it tee on agriculture. Mr. F razier told of the difficulty he has had in correcting the problem s of th e 1981 farm bill in new legislation for this year. W ork was started in 1982, b u t progress has been slow due to the peculiar position facing Kansas legisla tors because of the seriousness of the farm crisis in that state, strong political pressures supporting various interests in a g ric u ltu re , lim itin g b u d g e t r e straints and the difficulty of satisfying various groups of constituents. Mr. O tt rep o rted that it’s difficult for S en . K a sse b a u m to g e t a n y th in g accom plished in the ag area because sh e’s not on the agriculture com m it tee. She has to be content to try to influence key co m m ittee m em bers, b u t can’t do m uch until a bill gets out of com m ittee and onto the Senate floor, at w hich tim e am en d m en ts can be m ade. Kansas ag interests are d em an d ing am endm ents, some of w hich th e senator doesn’t support, he said. Mr. W eb ster said th e 1985 Farm Bill should be called the Ag Econo m is ts ’ F u ll-E m p lo y m e n t Bill! H e added that the realities of politics play ed a role in the issue: The adm inistra tion took itself out of th e picture by subm itting an unacceptable proposal that C ongress was forced to reject b e cause it was considered deadly to the ten u re of congressm en. H e said the social and econom ic aspects of the ag situation m ust be separated before any progress can be made. M oderator Floyd Stones, ABA leg isla tiv e r e p r e s e n ta tiv e , r e m in d e d bankers that many issues in the ag sec tor are beyond the control of congres sional com m ittees and that congress m en not on the ag com m ittee have little influence in the creation of an ag bill. T heir only recourse is to vote “no if a bill doesn’t reflect the wishes of th e ir constituency. A nother im portant point: U rban congressm en are not b e ho ld en to agricultural interests and they now are in the m ajority in C on gress. Still another obstacle: the farm situ atio n ecom passes an area th a t’s larger than that over w hich the ag com m ittees hold jurisdiction. T he m indset for th e last 50 years was “W hat’s good for the family farm is good for farm ing in general. This no longer is the case, Mr. S toner said. Fam ily farms are no longer viable in m ost cases, b u t legislators and th e adm inistration haven’t yet recognized this fact. T heir efforts to preserve the family farm are not necessarily benefi cial for agriculture as a whole. • • MID-CONTINENT BANKER for December, 1985 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. https://fraser.stlouisfed.org 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. ---------------------------------------------------------------------------------------! FirstLease! AND EQUIPMENT CONSULTING CORP 9100 Shelbyville Road • Suite 340 Louisville, KY 40222 Please have one of your leasing experts contact me. Name Position Company Name State Phone MCB i Essentials of BANK CONSUMER LEASING was a relatively easy decision for the dealers re p resen t the first custom er co n tact and banks had strong rela bank to purchase lease assets w ithout recourse to the dealer so long as the tionships w ith dealers, indirect leasing — w herein th e dealer leases the vehi bank controlled credit approval, p ro gram specifications and program ad cle and th en sells lease contracts to the m inistration. bank in re tu rn for his sales price — was a natural progression. Banks Slow to Move. A lthough Banks offering direct leasing soon some banks have developed aggressive recognized th e advantages of indirect and creative leasing program s, most leasing. M ost im portant, they realized have not pursued consum er leasing, th a t volum e p o ten tial could be e n ev en in th e ir e sta b lish e d m arkets. hanced greatly. A lthough th ere was By Ronald S. Loshin Com m ercial banks traditionally have less gross profit in individual transac and R andall R. M c C a th re n supported the grow th of leasing by ex tions since the bank had to share profit Bank Lease Consultants, Inc. tending lines of credit to dealers and w ith th e dealer, g reater volum e and in d e p e n d e n t leasing com panies e n low er p e r-u n it a d m in istrativ e costs gaged in retail leasing operations. The produced m uch larger overall leasing great increase in leasing tax benefits H E N th e first bank leasing p ro profits. Since th e bank bore th e lessor beginning in 1981 and th e decline in gram s b e g a n in 1964, d ire c t risks u n d er a direct-leasing program , it th e m arket im portance of in d ep en d en t leasing was the only type offered. leasing com panies has led m any banks In d irect leasing, th e bank offers to prefer th eir own leasing program s vehicle leasing directly to its custom over lease line financing. ers and obtains th e d esired vehicle at Bank in terest in consum er leasing fleet cost from a dealer, th ereb y ea rn has b een stim u lated largely by th e ing th e v e h ic le p r ic e m a rk u p . favorable tax benefits of leasing. The Although each lease could be highly Econom ic Recovery Tax Act of 1981 p ro fita b le , v o lu m e was difficu lt to (ERTA) tripled the effective tax b e n build because dealers had advantages efits of leasing for banks. Institutions in soliciting leasin g cu sto m ers. To w ith tax liability could earn greater address this problem , indirect leasing y ield s from co n su m er leasing than through autom otive dealers was d e from almost any o th er alternative in velop ed . Banks h ad tw o im p o rta n t v e stm en t. O th e r banks w ith active advantages over dealers engaged in dealer-finance program s have m oved direct leasing: low er cost of funds and into leasing to protect th e ir dealer rela ex p ertise in a d m in iste rin g p erio d ic tionships. W ith th eir natural m arket consum er-loan paym ents efficiently. advantage as full-service financial in These assets could be capitalized on stitutions, banks have gained signifi in the consum er-leasing m arket, p ar cant m arket penetration and extensive ticularly by banks that could convince profits from consum er lease financing. new car dealers of th e m utual advan For banks w ith tax liability, gross tages of indirect leasing. A great deal of yields are extrem ely attractive. The tax com m ercial cred it for vehicle flooring benefits of leasing typically contrib was provided by banks to dealerships ute 1,000 basis points to pretax taxin their area; and finance acceptance book yield and m ore than 500 basis program s w ere com m on. Since th e MID-CONTINENT BANKER for December, 1985 Digitized for 40 FRASER Consum er leasing is a growing, lucrative market for banks. A new book tells why your bank should be involved and how to get started. W https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis PITFALLS TO AVOID IN STARTING A LEASING PROGRAM HE AUTHORS recommend conducting a feasi program components are tested. . . . A sustainable, bility study to determine whether the bank should consistent high quality of service should be the limit get involved in leasing based on market potential and ing factor for program growth. A bank program management commitment to the project. Once a should control its expansion rate rather than having it study of the competition and the market scope is determined by demand. concluded, a tentative leasing program should be outlined that will serve as the bank’s blueprint for Do not select staff hastily. A lease-program subsequent financial analysis and projections. manager must have many skills which extend beyond conventional banking. In a direct program, A feasibility study is most important when a bank is the ability to sell and to manage a sales effort is considering a large-scale consumer-leasing pro necessary. gram; i.e., large in terms of its absolute size or its size In an indirect program, familiarity with the retail relative to total assets or to the lending program. If automobile industry in addition to sales experience, the bank plans for the program to capture a signifi knowledge of banking practices, the ability to work cant market share or provide a primary income within banking policies without comprising innova source, a full feasibility study is needed. The purpose tion, the ability to make and implement decisions of the study is to determine whether the intended quickly and the capability to work with senior bank resource commitment and resultant revenue return is management on special policies and technical mat realistic in light of market realities. ters for the leasing program also are required. .. . If a bank is primarily interested in offering consum Recruiting a top-notch business manager who er leasing as a necessary adjunct to its existing deal understands how to run the retail leasing division as er-finance products or to generate modest tax ben a profit center can be the single most important step efits without seeking a prominent position in the leas senior bank management can make in establishing ing market, an exhaustive and expensive feasibility the bank’s program. study may be unnecessary. The bank should limit the Do not promise permanently low lease rates. A feasibility study to the analysis needed to show that a bank may wish to launch a program with low, attrac profitable program can be initiated or that it cannot. If tive lease rates. However, since a bank cannot fore it can, the bank can then proceed to the implementa tion tasks. cast its long-term rate structure, it should not promise permanently low lease rates. According to Messrs. Loshin and McCathren, the period between the decision to initiate a new con Do not rush into buying a lease-accounting sumer leasing program and the commencement is system. Selection of a lease-accounting system or devoted to hectic planning, usually with a large dose service bureau should be done in a relaxed, deliber of trepidation. . . . While no set of planning formulae ate manner. A mainframe system should not be ensure success, some general principles and selected without careful review of new mini-computer caveats deserve discussion.” Among their recom and micro-computer alternatives. Selection of a datamended pitfalls to avoid: processing system should follow program design, not precede it. Do not undercut credit standards. Lease financ ing does not have a margin for credit errors. They Do not copy lease documentation verbatim. simply are too expensive. No one likes to turn away While the lease documentation of other programs is business; however, for a very good reason, the a good guide and can provide suitable language in established leasing firms have evolved firm credit some instances, it never should be copied exactly. standards. . . . At program inception, high standards First, different state legal requirements will mandate with few exceptions should be the policy. different responses, particularly if program policies vary. Second, the documentation contains a balanc Do not set higher residual values. Here again, ing of risks and benefits idiosyncratic to the institution adherence to industry convention is a good starting based on its program policies. . . . Expert counsel point for setting residual values. This conservative should review all forms, particularly the lease agree approach will be reinforced by residual-value insur ment, before any documentation adapted from ance programs if full coverage is sought. The current another institution is used. downward trend in used-car prices due to low newcar inflation and greater foreign competition requires Do not let tax counsel dictate uncompetitive greater caution for programs without full coverage terms without an outside review. Leasing is a suffi residual insurance. ciently specialized legal field and bank tax counsel may be inclined toward conservative approaches if Do not begin with large volume. A new leasing not familiar with the history and practices of bank program will tax management and staff to the fullest leasing. Counsel’s views should not be accepted to — even experienced staff recruited from another force a program to include uncompetitive elements or program. Every program has a “shake-down” period policies until an outside review by expert counsel has in which the design, use and integration of the major been obtained. T MID-CONTINENT BANKER for December, 1985 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 41 Although the Consumer Bankers Association 1984 Survey convered only a limited number of banks engaged in leasing, it is indicative of the concentration of leasing on the West and East coasts. N A T IO N A L D IS T R IB U T IO N OF B A N K C O N S U M E R L E A S IN G (1 9 8 4 ) Region Western Rocky Mountain Midwest Mideast Eastern Number of Banks 12 TOTAL 2 3 15 27 Percent of Total Leases Average Lease Balance (MM) Percent of Total Lease Assets 11752 3540 2057 3914 52.8% 2.7% 2.3% 22 .0 % 20 .2 % 100 . 0 % 166.8 36.2 29.0 40.5 30.9 55.6% 2 .0 % 2.4% 16.9% 23.2% 100 .0 % 2001 4526* 59 ‘ Weighted Average Source: Consumer Bankers Association, 61.1* . 1 9 8 4 S u r v e y o f B a n k A u to m o b ile L e a s in g . p o in ts to th e p re ta x fin a n c e -b o o k yield. Leasing also usually includes a non-interest-bearing security deposit, an acquisition fee and a purchase or disposition fee, w hich fu rth er increase the yield. The following are typical gross p re tax yields for a bank w ith a 46% tax rate showing th e increm ental increase as each lease yield com ponent is added. Lease Component Base Yield Yield w. Acquisition Fee Yield w. Disposition Fee Yield w. Security Deposit Yield w. ITC Yield w. ACRS T h e A c c e le ra te d C o st-R e c o v e ry System (ACRS) tax benefits are w orth m uch m ore for leases beginning the end of the tax year, so com petitive base rates often drop at th e end of the year. Emergence of dealer tax-benefit leasing. P io n e e re d by B ancO ne of Ohio, a new form of lim ited-recourse leasing is beginning to em erge across the country. Known by a variety of nam es, “dealer-tax leasing” seem s an appropriate title for this new type of hybrid financing w hich has character istics of b oth nonrecourse leasing and lease-line financing. T he dealer in iti ates the lease and th e bank services it; how ever, th e d ealer rem ains th e lessor for legal purposes and retains sufficient credit and residual risks to be th e vehi cle ow ner for tax purposes, entitling him to th e In v e s tm e n t Tax C re d it (ITC) and ACRS deductions. This gives th e d ealer th e central benefits of lease-line financing w ithout the main disadvantages since th e bank: (1) advances th e w h o le cap italized costs, (2) accepts th e prim ary credit risk; and (3) p erfo rm s all servicing functions. As this type of pro d u ct is standardized and becom es available around th e country, dealers and in d e p en d en t leasing com panies across the 42 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Ave. Number of Leases country may begin to shift a portion of th e ir leasing to dealer-tax leasing since they get the leasing-tax benefits w ith out th e negative cash flow, credit risk and adm inistrative b u rd e n of lease line financing. Other attractions of consumer leasing: In addition to the tax b e n efits, banks are attracted to leasing because m ore installm ent credit Tax Book Yield Finance Book Yield 11.39% 11.84% 12.02% 12.57% 17.69% 23.12% 11.39% 11.84% 12.02% 12.36% 16.11% 18.05% ten d ed on a lease transaction than on a new car loan. A lease com bines a larger initial funding outlay w ith a balloonpaym ent transaction resulting in a low er repaym ent or am ortization rate than offered on a loan. In essence, the bank makes two in vestm ents: a term investm ent for the residual value of the vehicle (repaid by the retu rn of th e vehicle or a balloon paym ent repurchase) and a sim ple-in te re st declining-balance in v estm en t for the expected depreciation of the vehicle. The lower down paym ent and reduced m onthly paym ent result in a higher average balance. Also, leased vehicles, as a group, are higher priced than purchased vehicles, which fur th e r raises th e average outstanding balance. Since a lease allows a bank to extend m ore cred it p e r transaction, m o re in co m e is g e n e ra te d . M any banks find that the average lease bal ance p er transaction is twice the aver age loan balance over the course of the transaction. Leasing can be conducted in states o u tsid e th e b a n k ’s s ta te of o rig in th ro u g h v a rio u s b a n k s tr u c tu r e s . M oreover, banks have found that they can effectively m anage an out-of-state leasing operation. The lim ited n um ber of banks c u rre n tly en g aged in this activity invite experienced banks to attem p t to gain a foothold in new geo graphic m arkets. • • Tax Reforms Going Way of Compromise, Say Leasing Experts Loshin, McCathren to the point that th e two products are U RREN T tax-reform efforts may indistinguishable, according to Mr. succeed in dim inishing the ITC Loshin. Both products em body those benefits that make leasing operations characteristics that consum ers find so so attractive to banks, b u t n eith e r Ron attractive, he says: low m onthly pay L o sh in n o r h is p a r t n e r R a n d a ll m ents, 100% financing and a provision M cC athren foresee m uch likelihood to retu rn the vehicle. Mr. Loshin even that those tax benefits w ould be re proposes a generic term to cover any duced to the point that banks w ould financing product w ith those charac abandon the leasing m arket. teristics: leveraged finance. All proposed tax reform s seem to be Mr. M cC athren says, how ever, that going th e way of com prom ise, says Mr. balloon-loan financing w ith a buy-back Loshin, and h e expects th e deb ate provision has some conceptual pro b over ITCs to go the same route. In the lem s from the bank’s perspective that end, he says, tax benefits will be suffi has caused some institutions to rethink cient to m aintain leasing as a profitable th e ir approach to th e product. The product. buy-back provision makes th e product W hat may happen is that th e differ m uch m ore difficult to adm inister and ences in the tax tre a tm e n t of lease could create num erous headaches for financing and balloon-loan financing the bank. w ith a buy-back provision could erode C MID-CONTINENT BANKER for December, 1985 U nder th e buy-baek provision, the consum er ow ner can re tu rn th e v ehi cle to th e bank, w hich is obligated to rep u rch a se it. Serious conflicts can arise over w hat th e residual value of th e vehicle is w hen th e custom er tries to retu rn it. T he bank and th e in su r ance com pany th a t g u a ra n te e d th e loan could, like m ost b uyers of au to mobiles, see m ore deficiencies than the seller d o e s.” If th e bank values the custom er relationship enough to give th e custom er m ore for th e vehicle than th e in s u ra n c e c o m p a n y th in k s its w orth, it could get into a legal w rangle w ith the insurance com pany. “ T h e c o n v e n tio n a l b allo o n loan makes m ore sense for banks, ” says Mr. Loshin. Both m en expect lease financing to grow. Mr. M cC athren points out that tax-reform efforts could create tax in centives for consum ers to lease rath er than buy. For exam ple, if tax-sim pli fication efforts cause few er taxpayers to ite m iz e , in te re s t d e d u c tio n s no longer have any value for consum ers who take that route. In a lease-versusfinance analysis, says Mr. M cC athren, m any consum ers will notice that, ab sent in terest deductions, financing is less attractive than leasing. N or does Mr. M cC athren expect that the psychological benefits of ow n ership will continue to d e te r som e con sum ers from leasing. O lder consum ers may still cling to th e psychological benefits of ow nership, b u t younger consum ers consider th e purchase of an autom obile an investm ent. T hey real ize that automobiles generally depreci ate in value w hile real estate appreci ates, he says. Given a choice betw een investing in real estate or an autom obile, most of them can see that they are b e tte r off owning real estate and leasing their cars. • • Balloon-Loan Financing as Alternative to Leasing A L L O O N -loan financing is an attractive adjunct or alternative product to consum er leasing program s for banks. F or institutions th at cannot use the tax benefits of leasing, balloon-loan financing may offer hig h er yields than leasing. If a tax-reform consensus is reached to elim inate th e ITC and re duce ACRS benefits, th e attractiv e ness of balloon-loan financing to finan cial institutions w ould be greatly in c re a se d . B allo o n -lo an fin a n c in g is attractive to m any custom ers because it com bines m any of th e desired leas ing and p u rch asin g a ttrib u te s. O ne m ajo r C alifo rn ia b a n k has h eav ily a d v e rtise d th e b alloon loan as th e lease-alike lo an ” and has achieved great success. W hile having th e re d u c e d dow n paym ent and low er m onthly paym ent benefit of leasing, balloon-loan financ ing retains th e econom ic and psycho logical benefits of ow nership w anted by many business and consum er cus tom ers. As th e tax ow ner, the custom e r can d educt the finance portion of the m onthly paym ent as in terest expense. If the custom er uses the vehicle p ri marily for business, he also can claim the ITC and ACRS (for his p ercentage of business use). Because of th ese custom er benefits, a b a llo o n -lo a n -fin a n c in g p ro g ra m usually can sustain a hig h er in terest rate than a conventional loan program , usually 1-2% higher. W ith th e hig h er in terest rate and larger average loan balance than conventional financing, balloon financing can be a popular and profitable pro d u ct in any part of the country for any size bank. B ecause b allo o n fin an cin g riskslarger losses on default than conven tional lending, hig h er cred it standards are req u ired that are m ore equivalent to leasing. A balloon-loan program does not involve m ost of th e com plex ities of leasing, w hich can be intim idat ing for sm aller institutions. Thus, bal loon financing can be a com fortable product for any size institution to initi ate and adm inister. Among o th er ob vious benefits, no special accounting system is required. A balloon-loan program can be m ar k eted in conjunction w ith consum er leasin g o r ev en as a lead p ro d u c t am ong an array of auto-finance op tions. In conjunction w ith leasing, the balloon loan is an attractive alternative to some custom ers, particularly if the MID-CONTINENT BANKER for December, 1985 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis dow n-paym ent req u irem en t is not too high or the custom er has a trade-in vehicle to offset the paym ent. A finance-versus-lease com parison could be m ade available to the custom er so th e full im pact of his decision on the acquisition financing can be presen ted to him. This can be done in eith er a direct or indirect program . This custom er-oriented approach to financing should be a strong plus for any bank wishing to establish a rep u ta tion for helpfulness and com petence w ith its direct banking custom ers. • • 43 Sound Collateral/Residual Strategies these costs can be can save m uch grief OR MANY YEARS, th e e q u ip a later date. This applies to th e cost Improved collateral identi at m ent-leasing industry has had to of repossession as m uch as it does to deal w ith th e risk of eq u ip m en t valuesfication for commercial th e cost of receiving a leased asset at as a natural phen o m en o n of pricing the loans helps determine term ination. eq uipm en t lease. T he c u rre n t tren d D istance also is an issue, perhaps lending risk for all banks to e n te r th e e q u ip m e n t not in the sense that th e eq u ip m en t is leasing industry and th e training for in im m ediate proxim ity to your o p er eq uipm en t issues has su p p o rted an im ation; b u t from a b u sin ess-clim ate provem ent in collateral identification By Terry J. Winders standpoint. E ven though lease agree for com m ercial loans and helps d e te r m ents call for retu rn of the eq uipm ent m ine th e risk in lending. to the lessor at the lessee’s expense (or G uidebooks, vendors and m anufac in the case of a repossession, at the m arketers of eq u ip m en t and, g eneral turers generally do an excellent job of bank’s expense), you may not be in the ly speaking, did not consider selling establishing th e price for a new piece cost w hen establishing its assum ed col right m arket area to allow its resale in a of equipm ent. H ow ever, w hen a cus tim ely m anner. D istance creates costs; lateral or residual value. tom er requests a lease or a loan, th e in c re a se d p h o n e costs, ad v e rtisin g S e llin g costs th a t com e to b e a r bank has to deal w ith d eterm in in g th e cost, storage, insurance and w hat not; should the lessee re tu rn the eq u ip value of th e asset in question over th e as well as the logistical problem s of m en t or should the eq u ip m en t be re period that th e obligation is in force. p o ssessed include in surance, tra n s re s tric te d sellin g cap acity an d r e Too often, banks yield to guidebooks stricted selling effort. You should not portation, preparation, storage costs, and guessing to d eterm in e th e actual discover at lease term ination or repos advertising, technical costs and any value of th e asset and, in som e rare session that this particular custom er is com m issions that m ust be paid to re cases, do not even look at th at value the only one who has use for the e q u ip m arket th e equipm ent; not to m ention w hen trying to d eterm in e th e risk fac m ent in a 1,000-mile radius. You m ust th e tim e it takes you or your staff to tor in extending th e cred it request. d eterm in e before the fact w here the effectively organize the e q u ip m e n t’s Asset/collateral m anagem ent is a key e q u ip m e n t’s p ro sp e c tiv e m ark et is disposal. factor if losses are to be kep t at a m ini and, if it is different from your location, At lease term ination or on reposses m um and th e tru e risk of extending th e cost m ust be assessed and collateral sion, th e custom er’s responsibility to credit is assessed. value or residual assum ption reduced in s u re th e e q u ip m e n t e x p ire s. In M ost lessors and banks eq uate re accordingly. o rd er to p rev en t loss due to theft, van sid u a l a s s u m p tio n s in e q u ip m e n t Preparation costs, although general dalism, p ro perty dam age or personal leases at projected fair-m arket value ly to be avoided, som etim es are neces injury, it is necessary to provide your (FMV) and typically express them as a sary in o rder to make the eq u ip m en t own coverage in the p ro p er am ounts percentage of th e e q u ip m e n t’s original m ore attractive to prospective buyers. cost. In reality, th e residual assum p on possession of the equipm ent. Storage costs are d eterm in ed by the In an equipm ent-lease contract, the tion is a nu m b er refined from w hat one tvpe of eq uipm ent to be stored. The language in m ost cases requires that expects the e q u ip m e n t’s fu tu re value cost for storage facilities can be as th e lessee re tu rn th e eq u ip m en t to th e to be, taking into account th e selling m uch as $10 p e r day. costs th at will affect actual value re lessor. H ow ever, instances can arise A dvertising cost m ust be closely ex ceived. It is im m aterial as to w h eth er a req u irin g that it be tran sp o rted from am ined because, d ep en d in g on the one place to another. M any contract leased asset or a collateral repossession type of publication used, it can run into haulers are in business to provide this forces the bank into a m ode of having the thousands of dollars. service and they are paid handsom ely to rem arket th e equipm ent. Technical costs and com m issions are for th eir tim e. A quick check into w hat Banks historically have b een poor those costs that m ust be paid to dispose of unfamiliar or highly unusual eq u ip m ent. In these cases, it som etim es is best to d eterm in e at the outset that an outside organization should be used for e q u ip m e n t disposal in o rd e r to maximize retu rn . Tim e is req u ired to com plete the m a rk e tin g e x e rc is e . A llo w an ces should be m ade in advance to account for the tim e you are req u ired to spend to dispose of used equipm en t. D ispos al tim es for nontechnical eq uipm ent such as a forklift or a dum p truck can be F 44 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis MID-CONTINENT BANKER for December, 1985 30-60 days. H ow ever, unusual or high ly te c h n ic a l e q u ip m e n t su c h as a m achine cen ter or a scanning electron m icroscope can req u ire six m onths or m ore. T hese disposal tim es m ust be realistically assessed, th eir tim e value d eterm in ed and th e residual assum p tion an d /o r th e collateral value r e duced accordingly. Utilizing Selling-Costs Analysis You will find that the largest im pact on selling costs stem s from w hat kind of eq u ip m en t is involved and how long it will take to dispose of th at e q u ip m ent after repossession or lease te r m ination. To illustrate, let us exam ine th e forklift and th e electro n m icro scope w hich, over an identical term , have sim ilar p ro je c te d fa ir-m a rk e t values, b u t radically different residual a ssu m p tio n s . T his ex a m p le , w h ile dem onstrating th e exercise a leasing com pany m ust go through to d e te r m ine residual values, has a great deal of im portance in a com m ercial-loan situation. S e llin g co st m ay b e d iffic u lt to assess, b u t it is easy to realize th at you will have less trouble disposing of m u l tiple-use eq u ip m en t in a large com m unity than special-use eq u ip m en t in a small com m unity. Let us say that your custom er has e le c te d to e ith e r le a se o r b o rro w m oney and, after a close investigation, it has b een d eterm in ed that at th e end of the loan or lease th e eq u ip m en t will still m aintain 25% of its original value. In a c o m m e rc ia l lo an , th is w o u ld appear to be a safe risk. In an e q u ip m ent lease, it w ould appear th at a 25% r e s id u a l a s s u m p tio n w o u ld b e in order. After closer review , how ever, it is d eterm in ed th at the forklift has in fact a residual assum ption of 20.5% and th e m icroscope an assum ed value of only 12.5%. L et us exam ine th e reasons for the difference in th e re co m m en d ed re sidual assum ptions. In the case of th e forklift, research indicates that th e secondary m arket is strong. The eq u ip m en t is durable; it suffers little from technical m aturity; vendor contacts are good; and in the w orst case, 60 days w ould be req u ired to dispose of it. T herefore, we have a lim ited exposure to selling cost. T he m icroscope, on th e o th e r hand, has a lim ited secondary value: tech n o l ogy has ad v an ced rap id ly over th e years; likely by lease-end or on rep o s session th e only in te re s te d p a rtie s w ould be small colleges, hospitals or perhaps a w holesaler specializing in used lab equipm ent. This eq u ip m en t w ould re q u ire six m o n th s’ disposal tim e, so your exposure to selling cost is greatly magnified. That is to say, the cost for insurance, storage, advertis ing, tim e involved, com m issions and so on is less for two m onths than for six m onths. You can see that in o rder to project selling costs, factors m ust be con v e rte d from p e rc e n ta g e s to actual num bers. Both one-tim e and recu r ring costs are involved. These m ust be totaled, subtracted from the then fairm arket value and reconverted to ex pressed percentages of original cost to be used as a residual assum ption or collateral value. You also can see from the chart how different types of eq u ip m en t (i.e., the forklift in one case and the m icroscope in the other) have brought different selling costs to bear. T rue enough, I have m anufactured these two exam ples for th e sake of this article; how ev Forklift Cost Analysis $ Amount % of Total Estimated Disposal Time (2 Mos) O riginal Cost Projected Fair-M arket Value Cost Factors: Insurance (60 days) Transportation Preparation Storage (60 days @ $ 4 .2 0 per day) Advertising (60 days) Commission ($ 1 5 ,0 0 0 @ 1 0 % ) 6 0 ,0 0 0 .0 0 1 5 ,0 0 0 .0 0 100 25 148.00 100.00 2 5 0 .0 0 2 5 2 .0 0 4 5 0 .0 0 1 ,5 0 0 .0 0 .25 .17 .42 .42 .75 2 .5 0 2 ,7 0 0 .0 0 4.51 Projected Fair-M arket Value Projected Selling Cost 1 5 ,0 0 0 .0 0 2 ,7 0 0 .0 0 25 -4 .5 1 Rec. Assumption for Pricing: 2 0 .5 % 1 2 ,3 0 0 .0 0 2 0 .4 9 Microscope Selling-Cost Analysis Estimated Disposal Time: (6 Mos) O rig in a l Cost 1 0 0 ,0 0 0 .0 0 Projected Fair-M arket Value 2 5 ,0 0 0 .0 0 Cost Factors: Insurance (6 Months) 1 ,2 0 0 .0 0 Transportation (Special C rating) 9 0 0 .0 0 Preparation (Clean & Recalibrate) 2 ,4 0 0 .0 0 Storage (180 Days @ $ 5 .5 0 per day) 9 9 0 .0 0 Phone (6 Mos. LD Vendor Contact) 4 5 0 .0 0 Advertising (Technical Pubs) 3 ,0 0 0 .0 0 Technical Costs (Consultants) 1 ,1 0 0 .0 0 Commission ($ 2 5 ,0 0 0 @ 1 0 % ) 2 ,5 0 0 .0 0 100 25 1.2 .9 2.4 .99 .45 3 .0 1.1 2.5 1 2 ,5 4 0 .0 0 12.54 Projected Fair-M arket Value Projected Selling Cost 2 5 ,0 0 0 .0 0 1 2 ,5 4 0 .0 0 25 12.54 Rec. Assumption for Pricing: 1 2.5 % 1 2 ,4 6 0 .0 0 12.46 MID-CONTINENT BANKER for December, 1985 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis er, the costs illu strated have com e from experience in dealing w ith differ en t types of eq u ip m en t at lease te r m ination and th e se costs are real. These exercises also help to dem o n strate the wisdom of taking little or no assum ptions on transactions of $25,000 or less, because any proceeds that one m ight hope to gain from the sale of eq u ip m en t at lease-end can rapidly be eaten up in selling cost. It also puts in perspective the tru e collateral value on a loan. The chart indicates the cost as it ap plies to both the forklift and the m icro scope. E ven though the assum ed value of the eq u ip m en t at lease term ination or at the end of the loan term was 25%, by the tim e we subtract the assum ed selling cost in an e q u ip m e n t-le a se transaction, a residual for the forklift would be in the neighborhood of 20%; b u t the residual for the m icroscope 45 ket the equipm ent. W e therefore can offer th e lessee a substantial savings by allowing him to purchase th e eq u ip m en t at 12.5%. This cannot be consid e re d a nom inal purchase option, in th at the n et of all expenses, 12.5%, is w hat we w ould have realized from th e fair-m arket selling price of 25%. If th e lessee wishes to renew , th e re n e w a l o p tio n raises som e issues un iq u e unto itself. L et s assum e that th e original lease called for 60 pay m ents w ith a paym ent factor of 2.10 and a yield re q u irem en t of 18%. And again, le t’s use th e eq u ip m en t d e p a rt m e n t’s 12.5% residual recom m enda tion. If th e custom er renew s, w e can not divide 12.5% evenly by 2.1. The Additional Considerations 12.5% n u m b er is good only if it is re ceived as the 61st paym ent. It does not In an eq u ip m en t lease, even though th e c h a rt in d ic a te s re sp o n sib le re account for the tim e value of m oney for siduals th at should be taken, additional th e renew al term ; so, we m ust view it considerations are im portant to d e te r in th e sense that th e lessee is borrow m ine w hat residual assum ption should ing our 12.5% for the req u ested re be placed on the books for both pricing new al-term length. A m ore ap p ro p ri and negotiation w ith th e custom er at ate assum ption w ould include a ren ew al residual easily divisible by th e pay lease term ination. To illustrate, le t’s use the m icro m ent, including both th e 18% original scope transaction on w hich a 25% p ro yield re q u irem en t and th e tim e period jected fair-m arket value has b een d e req u ested . In this case, le t’s assum e that six term in ed and th e eq u ip m en t d e p a rt m en t has established a 12.5% recom m onths is a logical renew al term . Six m e n d e d re s id u a l a s s u m p tio n . W e tim es 2.1 (the paym ent factor) gives us know that, even though we expect its 12.6, w hich is close to the eq u ip m en t fair-m arket value to be 25% if not sold d e p a rtm e n t’s recom m ended assum p to the lessee, we w ould have to begin tion. W e th en discount the 12.6 by the th e m arketing exercise and n e t all cost 18% yield req u irem en t for six m onths, we actually w ould receive at 12.5% w hich gives us 11.52. If we book 11.52 as our residual rath er than 25%. If we first look at the sale option, we can see th at we have a assum ption, we can offer th e lessee a great m otivation, in th at we have d e m renew al at the same paym ent factor as onstrated th at it w ould take roughly th e original term and be com fortable in half our expected proceeds to re m a r th e assum ption that we have received w ould be m ore apt to fall in th e 10% area. A close study of th ese costs should lead a com m ercial le n d e r to question th e collateral value of th e two assets over th e term of a loan. Also, w hile it may seem a paradox, the hig h er the value of th e loan, generally speaking, if the collateral value also is high, selling costs as a percentage are reduced. The most difficult collateral or asset value is a transaction th a t is small to begin w ith, w h e re th e actu al p ro fit from making th e loan or th e lease does not w arrant th e exercise of m aking th e col lection calls or selling th e repossessed equipm ent. ONE COMPANY STANDS ABOVE THE REST... TRANSAMERICA FINANCIAL SYSTEMS AND CONCEPTS. A m erica's leader in C ollateral P rotection. Call u s for: • A C om plete R ange of In su ra n ce Tracking P ro g ram s • C red it Life P ro d u cts • C o o p erativ e In su ra n c e M arketing P ro g ram s th e actual residual value we n eed ed to get out whole. Residual assum ptions are an im por tan t p art of alm ost every lease transac tion. The im portance lies in the cor rectness of the assum ptions m ade. If you scrutinize eq u ip m en t issues p ro p erly, you will find a few deals will be lost because some o th er individual was willing to take a higher residual. I suggest that if you practice the p ro cedures o utlined in this article and m ake sound inform ed decisions, you will find y o u rself a h ero five years down the road. • • Business-Investment Gain To Duplicate ’85 Figure The aggregate gain in business in vestm ent in 1986 should be similar to the 3% advance projected for 1985 d e spite conflicting trends in various in v estm en t categories, says an econo m ist at C ontinental Bank, Chicago. “Because this gain is in line w ith the econom y’s tren d rate of expansion, the im pact of business in v estm en t next year should b e indiscernible — n ei th e r pulling up nor dragging down the overall rate of econom ic advance,” said Joan D. Schneider, a C ontinental vice president. “This investm ent pace should keep productive capital growing in line w ith o u tp u t, cau sin g o v erall u tiliz a tio n rates to rem ain near cu rren t levels, she added. “C onsequently, investm ent should b e sufficient to g e n e ra te som e ad vances in em ploym ent and incom es, helping to keep th e econom ic expan sion u n d er way, yet not so strong as to prom pt production bottlenecks or in tensify inflationary p re s s u re s ,” Ms. Schneider said. She p red icted m odest advance in eq uipm ent investm ent and said nearterm investm ent gains will be lim ited by re la tiv e ly low u tiliz a tio n rates, weak profit grow th and anticipation of m oderate econom ic activity next year. “Real spending for com m ercial and industrial building in 1986 will be flat at best, reflecting diverse trends in the sector,” she noted. For details, call: 1-800-426-1221. O r w rite: T ransam erica Financial System s a n d C oncepts 2045 O ra n g e w o o d A venue, O range, CA 92668 Transamerica Financial Systems and Concepts Expertise backed by Transamerica. 46 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • The F ed has approved th e ap plication of F o u rth Financial C orp., W ichita, K an., to acquire F irst N ation al, Topeka, Kan. F o u rth Financial has d e p o sits of $ 1 .5 b illio n an d F irs t National, Topeka, has $320 million in deposits. MID-CONTINENT BANKER for December, 1985 ‘W e Contem plate No Changes’ — II In the final installment o f his two-part article on post-merger management changes, Dr. Austin offers practical advice to the acquiring board and management. Some boards attem p t to gloss over this reality by accepting statem ents from th e acquiring bank like “we contem plate no changes in p erso n n el” and passing them along to em ployees at face value. O th er boards insist By Dr. Douglas Austin that such statem ents be incorporated into the m erger Chairman/Professor, Department of Finance, agreem ent, b u t go no fu rth er in protecting em ployees. University of Toledo A n u m ber of states have construed that statem ents similar to “we contem plate no changes in perso n n el” S W E SAID in th e first in stallm ent of this article, m ean that em ployees have lifetim e tenures and thus financial institutions have un d erg o n e th e m ost such statem ents should not be used in m erger expansive and volatile p eriod in th e ir history during the contracts. O f course, individual em ployees can be past 20 years, a perio d characterized by an escalation of protected w ith em ploym ent contracts. m ergers, consolidations and acquisitions. The Board’s Responsibility These actions have b ro u g h t substantial benefits to the industry, b u t have a negative by-product — the In any bank m erger, the reality is that some elim ination of th e staff w hose functions are red u n d an t em ployees will be term inated, others will be dem oted once institutions m erge. I t’s n ev er easy for th e board of and some may be prom oted. The board cannot entirely the acquiring bank to perform this role, b u t it is avoid some personnel changes; how ever, it has a necessary. A nother im portant function the board m ust responsibility to pro tect em ployees it feels should be perform is ensuring th at th e co m p eten t and necessary retained. In fact, em ployee reten tio n should be an staff of th e acquired in stitution d o esn ’t leave. im portant part of th e reorganization negotiations. M ost often, th e failure to p ro tect th e targ et bank’s W e’re not speaking only about th e C E O and senior em ployees is th e fault of th e acquired bank’s board of m anagem ent. O th er dedicated, long-term , loyal directors at th e tim e of specific agreem ent. F lippant em ployees who may be m ore vulnerable to em ploym ent though it m ay sound, bank boards often don’t make risk than senior m anagem ent also are the board’s provisions for th eir valued em ployees in negotiating a responsibility. m erger. A fter 20 years of experence in this field, I ’ve Nor are we concerned w ith “golden parach u tes.” W e come to th at conclusion. are talking about em ploym ent contracts at cu rren t The board generally is co ncerned m ore about the wages for definite tim e periods for em ployees who have price to be paid, th e form at of th e price and oth er factors involved in consum m ating th e deal than in w orked w ith considerable m erit for the bank over many em ployee reten tio n . I d o n ’t m ean this to be an years. Some of these em ployees may not be officers, indictm ent of bank boards. O f necessity, they m ust b u t they have dem onstrated loyalty, m eritoriousness protect shareholder in v estm en t and, in som e cases, that and expertise and often are close to retirem ent. m eans em ployees’ in terests take a back seat. Younger em ployees could replace them at a lower A Employees of a target bank may view new management with alarm. They may feel that the acquiring bank plans wholesale personnel changes once the merger has been completed. Employ ment contracts can alleviate some of the fear and confusion. MID-CONTINENT BANKER for December, 1985 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 47 wage, b u t th e new com ers w ould not have similar dep th of experience. In a recen t m erger negotiation in which I was involved, four em ployees w ere protected by em ploym ent con tracts, only one of w hom was an officer. The others w ere em ployees w ith over 25 years of experience who w ere seven to 10 years from re tire m e n t. T hese em ployees w ere p ro tected by sim ple em ploym ent agreem ents w ith th e ac quiring organization th at guaranteed continued em ploym ent at a salary at least equal to th eir c u rre n t salaries and in functional areas — d eterm in ed by m utual ag reem en t of th e parties — som ew here in th e acquiring organiza tion’s system. These w ere not golden parachutes, b u t rath er a continuation of sim ilar em p lo y m e n t. T h is k in d o f c o n tr a c t doesn’t m ean th at th e em ployees could not be fired if they w ere found to have jeopardized th e safety and soundness of th e ban k . R ath er, th e co n tracts sim p ly g u a ra n te e d th e e m p lo y e e s w ould have jobs until re tire m e n t as long as they continued to fulfill th e new em p lo y er’s reasonable expecta tio n s. T h e a c q u irin g o rg a n iz a tio n m ight consider such contracts a point of negotiation, b u t they are not p ro h ib ite d by any law, re g u la tio n an d /o r banking-industry practice. The bank board’s responsibility is to protect valued employees financial difficulty and the em ployees may — deservedly or not — be consid ered som ething of a liability. In my experience, m ost bank m ergers do not occur for this reason. U sually, th e board of the acquired bank simply feels th at selling to another bank is a b e tte r alternative than trying to rem ain com p etitiv e in today’s highly tu rb u le n t b anking clim ate. R egardless of th e reason for the m erger, every acquired b an k has h id d e n assets in its e m ployees and th e ir w orth should be evaluated before they are term inated. bank faster in future m erger negotia tions than a reputation for insensitivity in handling post-m erger term inations. Assistance in job placem ent will be g re a tly a p p re c ia te d by em p lo y ees whose services no longer are need ed and will help m aintain m orale of re tained em ployees. Giving em ployees th ree to six m onths to find new em ploym ent will be another sign to re tained em ployees and to the com m u nity at large that th e bank values and respects people. Since banking is a people business, th at’s not a bad reputation to have. • • Win Through Negotiation Topic of ABA Videoclass I n c r e a s e d c o m p e titio n , from changes in g o v ern m en t regulations and the econom ic environm ent, has m ade the ability to negotiate an in te gral part of a banker’s success, th e ABA says. “W in-W in N egotiations” is the title of an ABA Banctraining video tape that Employment Contracts shows bankers how to use the pow er of A lthough m an ag em en t of th e ac n e g o tia tio n by id e n tify in g issu e s, quiring institution often is willing to separating needs from solutions, com agree to p ro tect certain people at the m unicating acceptance of th e o th er s acquired bank, it may be reluctant to n eed , g en eratin g m ultiple solutions extend em ploym ent contracts, esp e and choosing the best alternative. cially if none of its own people are p ro “The strength of any bank depends tected by contracts. “W hy them and to a large extent on the ability of its not our p eople?” is a reasonable q u es bankers to negotiate internally and ex The Acquirer’s Perspective tion, and my response w ould be, W hy te rn a lly ,” says T. C h arles B ru e re , It may surprise you to know th at in not your people as w ell?” p re sid e n t, F irst State, St. C harles, Indeed, the acquiring bank can ex the past 10 years I have n ev er en co u n M o., and newly appointed ABA C om tered a situation in w hich th e acquiring pect a groundsw ell of in terest in em m unity Bankers Council chairm an. in stitu tio n was unw illing to p ro tect p lo y m e n t co n tracts w ith in its own N egotiation tips em phasized in the certain key em ployees of th e selling organization if it extends em ploym ent videoclass include focus on the future, organization. The acquiring organiza contracts to perso n n el at th e target p u t the past b ehind you; speak only for tion realizes th at once th e acquisition bank. T hat’s not necessarily a bad d e yourself; separate evaluation from idea is fin a l, c h a n g e s — s o m e tim e s v e lo p m e n t, h o w ev er. E m p lo y m en t generation; encourage the o ther p e r wholesale changes — will be neces contracts are one way of alleviating son to generate ideas; ask questions, sary. On th e o th er hand, m anagem ent some of the fear and confusion created d o n ’t m ake p ro n o u n cem en ts; inyite of the acquiring bank recognizes that by any m erger. T hey help lock in good o th e r’s reactions; and u n d er pressure, th ere are expert, efficient and qual and useful personnel and can shorten reem p h asize a d esire to m eet both ified em ployees w ithin th e targ et in th e consolidation phase of th e m erger. needs. stitution who m ust be retain ed for the They p resen t concrete evidence of the The video tape includes a discus new m anagem ent’s intentions and are organization to function. sion-leader’s guide th at contains in m ore likely to be believed than a vague Personnel of th e acquired bank are form ation to enhance learning re te n “no changes” policy statem ent. p art of th e assets th at give value to the tion, an overview of the tape, discus institution. Good bank em ployees are sion topics, pre- and post-tests and re What About the Rest? producible participant w orksheets. scarce, so th e m anagem ent and board O nce th e m erg er has b e e n com Inform ation on purchasing or p re of the acquiring in stitution usually are view ing th e tape is available by calling willing to listen to a reasonable argu pleted , the reorganization set in m o th e ABA at 1-800-247-0010. In Iowa m en t for th e reten tio n of particular tion and em ployees evaluated, new em ployees. In fact, since th e m anage m anagem ent will have the never-easy call 1-800-622-0022. task of le ttin g som e em ployees go. m en t and board of th e targ et bank • Kathleen M. McShare has been T here may be a natural tendency to get th eo retically know th e ir em ployees nam ed director of m arketing for M as b e tte r than anyone, they are in an ex this phase of the m erg er over as quick te rC a rd ’s corporate card. She form erly ly as possible, b u t th e w orst possible cellent position to recom m end which was a vice p re sid e n t/m a rk e tin g for approach is to term in ate em ployees in em ployees m ight have a role to play in C iticorp D iners C lub, Chicago. Prior wholesale lots w ithout regard for th eir th e revam ped organization. to that, she was w ith A m erican E x — or th e new organization’s — future. O f course, some banks becom e ac press. N othing will com e back to h au n t a quisition targets because they are in MID-CONTINENT BANKER for December, 1985 48 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis PC Holdouts, Your Days Are Num bered Number of PCs in banking and finance to triple in next five years, study says By John L. Cleveland Editor/Associate Publisher RE you am o n g th e c o m p u te r phobes at your bank who still do not have a personal com p u ter (PC) in your office? A new ly released study indicates your days as a holdout in th e c o m p u te r re v o lu tio n m ay b e n u m bered. The study, Vertical Markets: Bank ing and Finance, conducted by F u tu re C om puting, Inc., a D allas-based m ar ket-research firm specializing in in form ation on m icro-com puters, shows that, over th e next five years, th e in stalled base of personal com puters in th e banking/finance in dustry will in Study showed that word processing led other work categories in uses for PC in crease th re e fo ld . A ccording to th e banking and finance. There were considerable differences in how PC was used c o m p a n y ’s r e s e a r c h , th e r e w e re when individual job classifications were considered, however. Bank managers 640,000 m icro-com puters in th e b ank put a high priority on financial analysis, accounting and mathematics/statistics. ing/finance field in 1984. By 1990, th ere will b e 1.9 million units in place. Banking and finance professionals The study indicates that w hile the an o th e r m ethod banks are using to are discovering in grow ing num bers c o m p u te r revolution has crested in lim it potential use of the system by that by reducing tim e sp en t on m anual som e industries, th ere rem ains room unauthorized personnel. calculations, they can spend m ore tim e for considerable grow th in banking and “O ne of the biggest challenges fac selling products and servicing custom finance. In the future, says Ms. W in d ing banks is how they can p erm it p e r e r s n e e d s , F u t u r e C o m p u tin g ’s ham , individuals in dep artm en ts and s o n n e l to c o m m u n ic a te w ith o n e Senior A nalyst F au rie W indam told offices w h ere m icro-com puters c u r another and larger system s w hile con M i d - C o n t i n e n t B a n k e r . C o m p e ti ren tly have to be shared by a nu m b er trolling potential ab u ses,” she says. tion is forcing bankers to use m icro of people will have com puters of th eir Sm aller banks will not be im m une to c o m p u te rs. As in m ost in d u s trie s , own on th e ir desks. O f course, those these problem s, she adds. A lthough w o rd p ro c e s s in g a c c o u n ts for th e new PC users will w ant the capability larger banks w ere first to experim ent m ajority of p erso n al c o m p u te r use, of exchanging data w ith others in th eir w ith PCs and the first to experience says Ms. W indham , b u t th e num bers bank and local-area netw orks will b e th e related security and com patibility d iffe r d e p e n d in g on w h ic h b a n k com e increasingly common. problem s, sm aller banks, S&Ls and occupation one hap p en s to be con In th e recen t F u tu re C om puting r e credit unions will be am ong the next sidering. port, 43% of banking/finance PC users group to ju m p on th e m icro-com puter It shouldn t com e as any surprise to su rv e y e d had stan d -alo n e PC s and bandwagon. find, for exam ple, th at th e m ajority of 43% had PCs connected to m ainfram e T he F u tu re C om puting study also bank financial analysts use th e ir PCs c o m p u te rs . T h irte e n p e r c e n t said dem onstrated th e dom inant position prim arily for financial analysis or that th e ir PC was co n n ected to a m in i IBM products play in th e banking/fi d a ta-p ro c essin g p e rs o n n e l c o n sid er co m p u ter and 18% said th eir com puter nance industry. Forty-seven p ercen t program m ing to b e th e prim ary use for was a node in a local area netw ork. of th e banking/finance resp o n d e n ts th eir PCs. M ost bank business m an PCs tied into larger system s in the said th eir PCs w ere IBM s com pared to agers also use th e ir PCs for financial bank are posing a trem endous security only 32% of respondents in the in su r analysis (57%), b u t accounting (40%) problem , says Ms. W indham . In an ance industry who gave that answ er. and m athem atics/statistics (39%) w ere effort to control access to sensitive Although Apple has 22% of th e total th e second and th ird m ost com m only data, m any banks are installing soft PC m arket, only 10% of respondents in cited uses for this occupation group, w are w ith built-in security features. banking/finance said they had A pple according to Ms. W indham . L o c k a b le d isk d riv e s on P C s a re m icro-com puters, says Ms. W indham . MID-CONTINENT BANKER for December, 1985 49 A https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis U. S. League of Saving: S&Ls Wrestle With Problem Of Anemic Insurance Fund: W ho S hould Pay? By Joe Lawler Assistant Editor In his inaugural speech, Mr. Levy announced that th e league w ould form a task force to develop solutions to the insurance fund problem . have practiced p ru d e n t m anagem ent, and w ould push many ailing S&Ls over th e edge into insolvency. “I com e from a conservative area, ” said one atten d ee from Kentucky. “O ur capital is above 10%. W hy should we pay the bills for th e high fliers?” Risk-based prem ium s in general are opposed by th e league. “It’s very hard to identify front-end w hat th e risks a re ,” Mr. Levy said. “By th e tim e you identify th e risks, it’s too difficult to raise the p rem iu m s,” he added. A b e tte r solution is to increase in su r ance prem ium s on S&Ls that e n te r non-traditional activities, such as realestate developm ent, he said. “If you think you’re right, p u t up th e m oney,” Mr. Levy added. F or long-term solutions to the in su r ance-fund problem , th e U. S. League supports FH LB B efforts to curb direct in v e s tm e n t; tig h te n n e t-w o rth r e q uirem ents and lim it growth; restrict th e use of b rokered deposits; req u ire tig h ter accounting on acquisition, d e velopm ent and construction loans; and lim it the use of subordinated d eb t to m eet net-w orth m inim um s. L. W illiam S e id m a n , n e w ly -in s ta lle d c h a irm a n o f th e F D I C , announced his opposition to a m erger of the F D IC and FSL IC . “Frankly, we a lre a d y h a v e p le n ty to do at th e F D IC ,” he told attendees. “The F D IC is stru ctu red to u n d e r w rite diverse com m ercial-banking ac tivities. Savings institutions th at have decided to avoid asset specialization can apply for F D IC insurance. If the thrift industry continues as a different kind of financial institution, it should have its own fund if this is financially possible,” Mr. Seidm an said. H e urged the S&L industry to use its own resources to b ring its insurance fund back to health. “The potential for regular special assessm ents is a real, b u t painful, altern ativ e.’ • • H E thrift industry m et in Dallas last m onth for th e annual conven tion of the U. S. L eague of Savings The U. S. League opposes th e ob vious short-term solutions to the in su r Institutions w ith talk of a good year, ance fund’s woes: b u t w ith d is a g r e e m e n t o v e r w ho • An appropriation from C ongress should pay to boost th e F S L IC ’s ailing is seen as out of the question in this deposit-insurance fund. FH LB B C hairm an E dw in J. Gray has p u t th e F S L IC ’s unobligated re serves at $3.2 billion. Mr. Gray has repeatedly characterized th e situation as a crisis. Som e r e lie f has co m e from th e FH L B B ’s M anagem ent C onsignm ent Program , Mr. Gray said. U n d er this a rr a n g e m e n t, m a n a g e rs fro m th e healthy thrifts are run n in g 17 failed thrifts. “This puts them in a holding pattern u n d e r sound m anagem ent u n til u ltim a te r e s o lu tio n can b e achieved,” Mr. Gray says. This has re lieved some of th e p ressu re on the F S L IC ’s reserves. In addition, th e new F ed eral Asset Disposition Association is expected to liquidate some of th e $2.5 billion in Gerald J. Levy, chairman/ d is tre s s e d a sse ts a c q u ire d b y th e president, Guaranty Savings & FSLIC from failed thrifts. Loan Association, Milwaukee, was installed as chairman of the N evertheless, M r. G ray has called U. S. League of Savings Institu th e state of th e deposit insurance fund tions at the league’s annual con his top priority, and th e subject also vention in Dallas last month. was the top concern of S&L executives Guaranty Savings has $210 mil in Dallas last m onth. lion in assets and nine offices in O ne possibility recently floated by southeast Wisconsin. Mr. Levy Mr. Gray — a one-tim e assessm ent of has been managing officer of 1% of assets h eld by S&Ls — was Guaranty for 12 years. He joined quickly shot down by loud opposition the industry in 1959. from the thrift industry. Mr. Gray called on th e thrift in d u s try to work w ith th e FH L B B in d e p eriod of concern over the ballooning federal debt. veloping legislative solutions to th e • A m erger of the F D IC and FSL IC problem s of th e thrift industry and the insurance fund. “T he ball is in your is opposed on the grounds that it would c o u rt,” Mr. Gray told th e assem bled b e th e beginning of th e end of th e thrift in dustry as a distinct industry. thrift executives. • The one-tim e 1% assessm ent was G erald J. Levy, incom ing chairm an fought on the grounds th at it w ould be of the U. S. League, quickly h anded unfair to m any healthy S&Ls which th e “ball” to a com m ittee. MID-CONTINENT BANKER for December, 1985 50FRASER Digitized for T https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Institutions Annual Convention Industry Enjoys Advantages Of Rate-Sensitive Assets T h rifts C eleb rate G ood Y ear Income to set record, but turnaround could take “six or seven years” By Joe Lawler Assistant Editor to th e u. s. L eague’s annual convention had som ething to celeb rate this year — healthy profits. The league is projecting n e t incom e of $5 billion for this year, w hich w ould top the record $3.9 billion of 1978. The leag u e p ro je c ts after-tax r e tu rn on average assets at about 0.5% for 1985. Low er in terest rates and g reater use of interest-rate-sensitive assets, e sp e cially adjustable-rate m ortgages, have aided th e industry. N evertheless, a re c e n t study by the G eneral A ccounting Office rep o rted that 42%, or 1,343 savings institutions, w ere in trouble at the end of 1984 and th a t m ost of th ese still w ere losing m oney this year. The GAO estim ates th e cost of liq uidating th e tro u b led institutions at betw een $15 billion and $20 billion. Officials of th e F S L IC have estim ated th e cost at $30 billion to $50 billion. The FSL IC has unobligated reserves of $3.2 billion. U. S. L eague C hairm an G erald J. Levy adm itted th at th e S&L industry has n o t c o m p le te d a tu r n a r o u n d . W e re going to have an extraordinary change in th e capital position of this in d u stry ,” Mr. Levy said at a press conference in Dallas. ‘But we can’t do it in th ree years. W e re going to need six or sev en .’’ T he thrift in dustry will continue to look at c o n s u m e r an d c o m m e rc ia l lending as a p e rm a n e n t p a rt of a d iv er sified portfolio w hile rem aining com m itted to th e hom e m ortgage m arket, said Mr. Levy. elegates D H o w e v e r, th e s e n e w p o w e rs g ranted by the G arn-St G erm ain Act of 1982 are no longer being used to tu rn around failing thrifts, Mr. Levy added. I think the industry is beyond that kind of th in k in g ,” he said. O n th e o ther hand, FH L B B C hair m an E dw in J. Gray faulted some S&Ls for ignoring the in ten t of th e G arn-St G erm ain Act. “The p ream ble (to the Act) says that this is ‘an Act to revitalize the housing in dustry by strengthening th e financial stability of hom e-m ortgage lending in PORTFOLIO YI ELD VS. COST OF FUNDS Thrifts now are enjoying a 2% spread, thanks to lower interest rates and the use of adjustable-rate mortgages and other interest-rate-sensitive assets. MID-CONTINENT BANKER for December, 1985 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis stitutions and ensuring the availability of hom e-m ortgage-loans,” ’ M r. Gray said. The G arn-St G erm ain Act was not fashioned to make thrifts th e functional equivalents of com m ercial ban k s,” he said. The asset-related provisions of the Act w ere in ten d ed to provide thrifts a way to work out of th eir portfolio p ro b lems over tim e ,” Mr. Gray said. Thrifts currently have 4% of th eir assets in consum er loans and 1.5% in com m ercial loans. • • Marketing Employee-Benefit Services Rewards are waiting for the trust division that develops a plan and goes after employee-benefit business By Steven L. Finerty Vice President, Trust Marketing Boatmen’s National Bank, St. Louis A XIOM One: N ever assume anyone understands em ployee benefits and related tru st products. Axiom Two: N ever assume any one rem em bers anything about em ployee benefits and related tru st products ju s t because you have explained them o n ce. These axioms reflect both th e frustrations and opportunities in h e re n t in m arketing em ployee-benefit tru st services. On th e one hand, prospects are easily confused about em ployee-benefit products and, as a result, th e products can be difficult to m arket. On th e o th er hand, prospects generally recognize the im portance of offering a quality em ployee-benefit package to em ployees and th at they m ust rely on professionals, such as tru st officers, to keep up-to-date. As a trust-m arketing officer, I enjoy soliciting em ployee-benefit business. Not only is th e re a virtually endless supply of prospects, th e rew ards to th e trust division can be considerable. E m ployee-benefit accounts generally increase in value each year, m ultiplying trust-division revenues and enhancing prestige. They also help cem en t th e bank’s relationship w ith the custom er. L e t’s consider th re e areas of im portance to any trust division seeking to m arket em ployee-benefit services. These topics are developing a m arketing plan, developing prospects and m otivating prospects. The ideas p resen ted u n d e r each topic should prove as Digitized for52 FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis effective for a one-officer tru st division as for divisions managing billions of dollars. Developing a Marketing-Action Plan T here are no prescribed formulas to follow w hen preparing a m arketing-action plan. A few general rules, though, are im portant. First, don’t apply one basic plan to all prospects. Instead, p rep are w hat m any w riters term a m ulti-level approach w ith th e action plan dividing various prospects into two or m ore m arket tiers. My experience is that only two tiers are necessary. T ier O ne includes organizations w ith a n eed for m aster or prototype retirem en t plans and corporations and partnerships with plan m arket values of u n d er $1 million. T ier Two includes everyone else, specifically, plans w ith m ore than $1 million in plan assets or new plans with exceptionally large annual contributions. Second, recognize that an action plan m ust address both the m arketing and sales aspects of th e job. They are not the same. M arketing involves advertising services and products, w hile sales m eans establishing personal contact w ith com panies. F or exam ple, m arketing will focus on th e use of m edia, direct mail, panel-program participation and brochure purchase or preparation. Sales will focus on: • How to specifically identify prospects. • F requency and m anner of contacting prospects. • F requency of call reports to superiors. • Target nu m b er of calls to both existing prospects and previously unsolicited prospects. Third, define in w riting who is a good tru st prospect for your tru st division. This definition will vary, of course, w ith the size of your tru st division. D efining good prospects is im portant as it forces the trust-m arketing officer to decide w hat is to be his/her target m arket. M ore im portant, a good definition will contain specific exam ples of prospects th at can be distributed to o th er bank officers. Since we expect other MID-CONTINENT BANKER for December, 1985 WHAT EVERY BANK DIRECTOR NEEDS IN TODAY’S HIGH-RISK BANKING CLIMATE. The Bank Board Letter Book Series by Dr. Lewis E. Davids: Board Reports for the Bank Director______ Planning the Board Meeting A 200-page manual is designed to help your board determine types of reports needed to improve the quality of your decisions. A 64-page how-to manual provides some workable agenda, suggestions for advance planning and also lists types of reports directors need to make strong decisions. $26 for single copies, $23 each for 2-5 copies, $22 each for 6-10 copies, $21 each for more than 10 copies. The Bank Board and Loan Policy (Fourth Edition) _______________________ ____________ $16 for single copies, $8 each for 2-5 copies, $7.50 for 6-10 copies. Board Policy on Risk Management_________ Stay a step ahead of bank regulators with this manual on loan documentation procedures that bank directors should know. Your board needs to know all of the factors that go into determining risk and how to manage those factors. This 160-page manual provides muchneeded answers. $16 for single copies, $13 each for 2-5 copies, $12.50 each for 6-10 copies. $20.50 for single copies, $17.50 each for 2-5 copies, $16.50 each for 6-10 copies. The Effective Board Audit_____________ This 184-page manual provides a comprehensive guide to the audit function. It describes the degree of board participation, how to select an audit ~ committee and the magnitude of the audit. $22 for single copies, $19 each for 2-5 copies, $18 each for 6-10 copies. Return order form to: THE BANK BOARD LETTER 408 Olive St. St. Louis, MO 63102 Please send: # KNOW YOUR RESPONSIBILITIES AS A DIRECTOR! Responsibilities of Bank Directors This popular text by Raymond Van Houte, president of Topkins Trust, Ithaca, New York, describes your responsibilities as a director of a bank. $11 for single copies, $9 each for 2-5 copies, $8 for 6-10 copies, $7.50 for more than 10 copies. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis copies, Board Reports $ copies, Board Audit $ copies, Board Meeting $ copies, Risk Management $ copies, Responsibilities $ Name & Title______ ____________________ Bank______________ Street___________ _____________________ City_________________ State________ Zip (Please send check with order. In Missouri, add 4.6% for sales tax.) bank officers to refer quality prospects, we m ust accept th e responsibility for educating them as to how we define our target m arket. F o u rth , include specific n u m eric goals on w hat is expected to be accom plished. Project: • Number of accounts to be opened. • Total dollar volum e of both new m anaged accounts and new d irected or custodial accounts. • Total first year’s fees to be g e n e r ated. Set realistic goals. T hey should be ch allen g in g , b u t n o t im p o ssib le to attain. Developing Prospects Prospects m ust be found; rarely will they com e to you. T h ere are m any sources w hich can b e used to identify prospects. The b est place to start is w ith existing em ployee benefit, e n dow m ent and p ersonal-trust custom - Existing customers should provide your trust division with as much of their busi ness as possible. ers. Look to existing custom ers to p ro vide your tru st division w ith as m uch of th eir business as possible. Relationship Development In a d d itio n , c o m m e rc ia l-le n d in g officers can be helpful in developing bank re la tio n s h ip s in to tru st re la tionship s. To im p ro v e co m m u n ica tions b etw een tru st and lending offic ers, schedule periodic m eetings to dis cuss tru st in vestm ent and adm inistra tive services. Also, review com m er cial-lending accounts and ask about com panies you feel are tru st prospects. N um erous publications can be used in identifying prospects, including: • Business sections of local new s papers. • D irectories listing virtually all taxqualified re tire m e n t plans in any geo graphic region. • D irectories of national unions. • D un & B radstreet reports. O ne m ore suggestion: K eep fellow tru st officers inform ed of em ployeebenefit services and profitability. My experience is th at m ost tru st officers concentrate alm ost totally on personal tru st accounts and often know little about th e em ployee-benefit side of th e business. Digitized for54 FRASER https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Motivating Prospects O nce a prospect has b een identified, trust-m arketing officers m ust m otivate them to action. How this is done d e pends a great deal on the use of com m unication and tim ing skills. C om m unication m eans understanding cus tom er needs and translating them into needs th e tru st division can satisfy. Tim ing may involve: • Selling m aster or prototype plans sub seq u en t to law changes. • Selling inv estm en t perform ance w hen your portfolio retu rn s are supe rior. • Calling on prospects w hen new p r o d u c ts su ch as S e c tio n 401 (k) appear. • Calling on prospects w hen th ere has been a change in p ersonnel to see if th e new em ployee wants to place his/ h e r ow n stam p on th e em p lo y e e benefit program . C om m u nication and tim in g skills should be com bined w ith a thoughtful and professional approach: • H ave w ell-thought-out responses to objections to perform ance results, fees or a d m in is tra tiv e lim ita tio n s. N ever give the appearance of agreeing w ith a p ro sp e c t’s sta te m e n t casting tru st services in a bad light. • N ever forget to ask for the bu si ness. If it is not forthcom ing, casually ask, “why not?” • If a prospect is satisfied w ith a re latio n sh ip w ith a n o th e r in stitu tio n , consider selling the concept of dual in v e stm e n t m anagers. Suggest th at th e hiring of another investm ent m an a g e r n e e d n o t u p s e t ex istin g re la tionships, and that they may wish to consider placing ju st new annual plan contributions w ith your tru st division. H irin g tw o in v e stm e n t m anagers can be very appealing to com panies. C om petition is view ed as healthy, and in addition, prospects may find it b e n eficial to have m ore than one bank rela tionship w hen the need arises for m ore typical com m ercial needs. • Sell the benefits of using a bank as tru stee. Too often we fail to tout th e advantages appropriately: — Low cost, generally w ithout accept ance fees or term ination penalties. — Flexibility in plan design. — Local adm inistration. — In vestm en t flexibility and good performance. prom ptly forward any w ritten m ate rials that w ere prom ised. Follow up w ith a le tte r that rem inds th e prospect of how his com pany will benefit from your services. • Be im patient. “Call reluctance is th e b ig g e s t d ra g on a p r o s p e c t’s m om entum . The Ten Commandments T h ere are certain rules to follow w hich I believe can help make anyone a m ore effective salesperson of em ployee-benefit services. T hese are my T en C om m andm ents: 1. Avoid overselling. Be realistic in speaking about fees and investm ent perform ance. 2. N ever talk down another in stitu tion. Instead, talk up your tru st divi sion. 3. N ever assum e the person you are sp eak in g to u n d e rsta n d s em p lo y ee benefits and investm ent lingo. Avoid loss leaders and marginal accounts. To day’s unprofitable busi ness rarely becomes prof itable later. 4. M ake certain you are speaking w ith the decision-m aker. 5. Know your com petition. A com p e tito r’s p erform ance, services and fees can be used as a guide for m arket ing your own services. R em em ber, few good ideas are original. 6. Avoid loss leaders and m arginal accounts. C u rren tly unprofitable b u si ness rarely becom es profitable later. 7. D on’t be all things to all people. Recognize your strengths and exploit them . 8. Always seek to im prove products and services. No institution can suc ceed in the long run w ithout regularly im proving internal operations, solicit ing new business and developing new products. 9. Follow up after each sale. Make certain that a new cu sto m er’s first im pressions are good. 10. N ever forget to cross-sell bank services. Opportunities Are There The tim e is ripe for tru st divisions of • Do y our hom ew ork. S tudy the notes from p rio r conversations. R e all sizes to reevaluate th e ir em ployeem em b er th e type and size of th e pros benefit services, products and m arket ing efforts. By carefully planning and p e c t’s em ployee-benefit plans. Also, b e familiar w ith existing bank and tru st im plem enting a strategy to increase m arket share, your tru st division can relationships. • Be on tim e for appointm ents and reap the benefits. • • MID-CONTINENT BANKER for December, 1985 Is the W ork Ethic Dead? Before managers can motivate employees, they must learn what makes them tick psychic kicks and leisure w ere m ost im portant. From this, readers would have p red icted that the work ethic soon would be dead. But in 1985, D aniel Yankelovich w rites that w hat he once called the new b reed will work hard if it sees a payoff. By V. R. Buzzotta, New-values w orkers will produce — if they feel they will Chairman be rew arded. Psychological Associates, The work ethic has not died; it has changed from outerSt. Louis directed to inner-directed. O ld-values w orkers take their S m ore and m ore banks v e n tu re into u n tried activi cues from outside sources. T he com pany’s definition of a ties, executives are realizing th at today’s bank em good day’s work becom es the w orker’s definition. ployee m ust be resourceful and innovative, sales-oriented The new-values w orker defines a good day’s work him as well as service-oriented. self — w hat’s interesting, challenging, fulfilling, w orth M any banks have tu rn e d to professional training to give while. New-values w orkers (who can be of any age) work em ployees the new skills th ey n eed to work productively hard for personal satisfaction. Each w orker determ ines for w ith bank custom ers and fellow em ployees. him self w hat’s satisfying. All b u t th e m ost hid eb o u n d ban k er will acknowledge For M idw estern banks, this is both good news and bad that training can im prove em ployees’ skills. But many news. The good news is that th e work ethic isn’t dead; hard bankers w o n d er if an y th in g can m otivate today’s em work isn t obsolete. The bad news is that m otivating people ployees to strive for corporate goals. W hy spend m oney to work hard may be m ore difficult than ever before. W ork teaching skills to people who ju st w ant to get by as effort ers m ust be convinced that the rew ard, which includes lessly as they can? W hy spend tim e on training w hen the personal satisfaction, is w orth it. work ethic seem s m oribund? To m otivate the new b re e d of banker, which is fast Is the w ork ethic in A m erica dying? The b est evidence becom ing the dom inant breed , bank m anagers m ust show com es from Y ankelovich, Skelly & W h ite, a surveyem ployees the link betw een hard effort and personal satis research firm th at has b een tracking th e work ethic for faction. That isn’t easy. years. Still, as m any banks are proving, it can be done. In fact, The firm w rote in 1980 th at it had uncovered two groups they are training th eir m anagers to do it. C en terre Bank, of workers: old-values w orkers, for w hom “th e job ” was St. Louis; F irst National, Chicago; and National Bank of m ost im p o rtan t, and “new -values” w orkers, for whom D etroit all have conducted sem inars that teach m anagers how to m otivate new -breed em ployees. C en terre, for exam ple, has been using a program called D im ensional M anagem ent Training for its m anagers and supervisors. T he program teaches individuals how to understand and m anage th e behavior of others. H e re ’s how it works. The program consists of a w eek-long sem inar w ith 25 m anagers or less. T he sem inar relies on role-playing ses sions. B eginning w ith the first day, students are divided into groups and spend the rest of the w eek testing w hat they have learned through situations that sim ulate on-thejob problem s. They are first taught a shorthand guide for in terp retin g behavior — a lesson in the fundam ental ways a boss and subordinate usually deal w ith each other. F or example, how m any tim es have you enco u n tered an em ployee who flares up and argues at every criticism , who blam es his failings on everything from his colleagues to the w eather? O r the em ployee who gets q u iet and crawls into a shell at every negative com m ent? O r the em ployee who laughs and jokes and agrees to anything — b u t w on’t really tell you w hat’s on his m ind? None of these behaviors are conducive to com m itm ent. They are evasions. MID-CONTINENT BANKER for December, 1985 A https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 55 Until the supervisor and employee address th eir real feelings about th e job, and th en explore how th e bank can react to them , productivity always will be less than it could be. It’s th e boss’s job to change evasive behavior, w h e th e r it’s th e su b o rd i nate’s or his own. That is a big p art of w hat’s taught next in th e sem inar. T h e re are five e sse n tia l p e o p le skills. T hese are: • Sizing-up skills. M anagers learn to figure out subordinates, particularly w hat each em ployee w ants from the job, how each defines personal satis faction. The sem inar teaches m anagers how to d eterm in e if a subordinate is seeking recognition, security, accept ance, personal grow th, or w hatever. • Com m unicating skills. M anagers learn to talk w ith subordinates rath er than past them . M anagers learn how to ask questions, how to listen openly and attentively, and how to convey th eir own ideas clearly and convincingly. • Coaching skills. M anagers learn to dem onstrate the connection b etw een w ith subordinates, m anagers role-play the subordinate’s personal goals and the boss and subordinate in sim ulated th e bank’s business goals. coaching sessions, using the skills to • M otivating skills. M anagers learn coach and m otivate the subordinate. te ch n iq u es for establishing a d irect This is crucial; practice transform s the link b etw een personal goals and the skills from som ething m anagers u n d e r bank’s business goals. • S trateg y -p lan n in g skills. M ana stand to som ething they can use. P ractice is followed by feedback. gers learn to u n d erstan d each sub M anagers who play the boss in each ordinate as the unique individual he or mock session get a rep o rt on how it she is. H ow else can th e m anager w ent and how it m ight have gone b e t prove to the subordinate that doing the job well will pay off in personal satisfac ter. Finally the sem inar covers ways to tion if th e m anager does not have this apply the skills back at th e bank. M an u n d e r s ta n d in g ? O b v io u s ly , o n e strategy will not w ork w ith all em agers m ust use these skills on the job c o n tin u o u sly or th e y are likely to ployees. T h at’s w hy m anagers m ust forget them . learn to develop strategies th at fit each By using these skills, m anagers can individual. show em ployees how helping the bank The sem inar leader explains w hat to attain its external, objective goals m otivation is and how m otivating skills will help them attain th eir own in te r can be used to enlist the com m itm ent nal, subjective goals. T he message is: of subordinates. The skills th en are d e W hat’s good for the bank, as the bank m onstrated. V ideotapes show how to defines good, is good for you, as you use the skills, giving exam ples to em u define good. • • late. N ext th e m an ag ers p ra c tic e th e skills. Using real problem s th at exist Com m unications: A Tw o-W ay Street Effective communications with employees is key to reaching the bank’s goals By Gloria A. Hagler Comptroller, Eufaula (Ala.) Bank & Trust Co. O M M U N IC A TIO N S in banks have com e a long way over the years. No longer are decisions m ade in th e front office and shared w ith only a few officers. In-house new sletters now range from color magazines com plete w ith photos to one-page “poop” sheets; m em os freq u en tly are seen floating across em ployees’ desks. But are bank com m unications really w hat they ought to be? Do em ployees feel they really know th e ir organizations? I think not — we still have a long way to go. L et’s first d eterm in e why in-house com m unications are necessary. The goals are em ployee team w ork, motivation, education and, m ost im portant, custom er service. Knowledge enables em ployees to cross-sell services. All em ployees should know th e in terest rates the bank pays on deposits and th e rates charged on loans. C ustom ers ask em ployees th ese questions outside the bank. Com m unications should be tim ely and effective in order to stren g th en team w ork in th e organization, to m aintain em ployee m orale, to enable em ployees to cross-sell services and in general to develop a superior operation. Next, le t’s d eterm in e how to develop an effective com m unications process. This process may consist of the six steps covered in th e book “M anagem ent: The Art of W orking W ith and T hrough P eo p le,” by D onald C 56 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis C. Mosley and Paul H. Pietri Jr. The first step is to establish a pro p er clim ate for com m unicating, a clim ate of m utual trust. Subordinates are m ore willing to talk frankly about job problem s and are m ore willing to express th eir ideas w hen they trust th eir superiors. Supervisors can build this tru st by representing em ployees’ interests to top m anagem ent and by respecting the abilities of em ployees. The second step is to d eterm in e th e objectives of our com m unications. F or exam ple, suppose you are talking to an em ployee who will be en terin g a training program . The objective w ould be to gain the em ployee’s acceptance of, and enthusiasm for, the program. The next four steps relate to planning. N um ber three is to engage in two-way com m unications. This allows us to understand the receiver, his reaction to w hat we are saying and his point of view. The fourth step is to relate our m essage to the receiver’s self-interest. Show how th e m essage will add to the receiver s developm ent, how it will benefit him. This increases th e probability that the message will be accepted. The fifth step is to be sensitive to th e language we use. W e should say w hat we w ant to say, use understandable w ords or phrases and as few words as possible. R epetition will reduce the risk of incorrect assum ptions and reinforce th e message. The sixth step is to gather feedback, w hich aids understanding. W e n eed to ask for questions, opinions, suggestions and feelings tow ard th e subject. By planning our com m unications and using these six steps, we can becom e b e tte r com m unicators. Effective in-house com m unications is a key to a successful organization. • • MID-CONTINENT BANKER for December, 1985 ¡J 1} i rm cf'ài M giêi Help for Security Conscious New security-related products come to market to make job of security officials easier. • The advanced-access-control system has the capability of operating off-line w ith a M osler Century® 22 alarm control; on-line w ith a M osler COMSEC™ proprietary system; and can be used w ith a com puter for m anagem ent reporting and activity-record retention. A security feature of the system is its H E im portance of financial-institution security distributed-processing architecture, w hich keeps the nev er wanes, a fact a ttested to in p art by the system in operation should com m unication w ith the m u ltitude of new security-related products and services central console be lost, assuring that no aspects of coming on th e m arket in a continuous stream . security are lost. PIN pads and/or intercom s can be Following is a sam pling of new products that have added and high-security encoding also is available to becom e available in recen t m onths. prevent unauthorized duplication of cards. For inform ation on these security products, write: New Security Products M osler, M arketing C om m unications D ep t., 1561 G rand Marketed by Mosier Blvd., H am ilton, O H 45012. T M osler is m arketing th re e new security-related products: a closed-circuit TV system that m onitors facilities, assets, custom ers and personnel; data safes; and an access-control system . • The CCTV provides continuous m onitoring of check-cashing and o th er potentially fraud-prone operations, parking lots, building entrances, ATMs, etc. It also can be used for live-action view ing of eq u ip m ent operation or em ployee activity. IBM PC Security System Offered by Enigma Logic SafeW ord PC-Safe is a security system for the IBM PC and com patible personal com puters th a t’s m anufactured by E nigm a Logic, supplier of the SafeWord™ family of com puter-system security products. Using the SafeW ord ID verification technique, authorized PC users are issued a calculator-like SafeW ord decoder and key set that acts as a PassW ord dispenser. U sers requesting access are asked for a changing SafeW ord PassW ord that can be generated only by the decoder and key. W hen the identity of the PC user is confirm ed, the unit secures all disk drives so they cannot read or w rite unencrypted data. SafeW ord PC-Safe includes a second SafeW ord key kept by supervisory personnel that controls supervised im porting or exporting of data to or from the encrypted environm ent. This key enables adm inistrators to specify autom atic D ES encryption, autom atic Enigm a Logic DAS encryption or plaintext operation for each disk Mosler CCTV system monitors bank facilities, assets, customers and personnel. System s are tailored to m onitoring req u irem en ts and can interface w ith netw orks like M osler s COMSEC™ security-com m unications system . • D ata safes for p rotection of inform ation processing and com puter m edia have b een added to the M osler line of record and m oney safes. The data safes are rated to p ro tect floppy discs and have passed the G erm an B raunschw eig fire-and-im pact test, which sim ulates fire conditions. The safes com e in four sizes and a line of in terio r arrangem ents is available. MID-CONTINENT BANKER for December, 1985 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Enigma Logic decoder and key set acts as "PassWord" dispenser. 57 drive. Audit trails of every configuration change and each u ser’s daily ID verification is autom atically m aintained. For inform ation, w rite: J-C. S pender, vice president, m arketing, E nigm a Logic, Inc., 2151 Salvio, Suite 301, Concord, CA 94520. maintains the m em ory of the pow er-line problem for later reading should a pow er failure occur. The m onitor’s “sm art lights” enable personnel to pinpoint specific pow er problem s as th e cause of lost or scram bled data. For inform ation, w rite: Lakonteck, Inc., 2385 S. Clinton Ave., South Plainfield, NJ 07080. Currency Device Foils Robbers Devices Offer Privacy For Confidential Viewing Trap Pack II™ is a stack of real currency that houses tear gas, smoke, dye and digital electronics equipment. Placed in a teller drawer and given to a robber along with other currency, the device ignites after the robber leaves the bank, thereby disrupting escape and assisting in funds recovery. For information, write: Protection Products Corp., PO Box 13948, New Orleans, LA 70185. Security-Product Family Introduced by Tandem Tandem C om puter, Inc., has announced a new SAFE™ system security-product family, an in tegrated set of security tools for users of T andem systems. Initial p roduct offerings include SAFEGUARD™ software and SAFE-T-NET™ data-encryption subsystem that gives users increased control in securing access to information th at m ight be d istrib u ted across devices, files and system s on a T andem netw ork. SAFEG U A RD software provides users of distrib uted networks w ith authentication, authorization and auditing services. I t’s designed to w ork w ith T an d em ’s GUARDIAN 90™ operating system to control access to shared resources, including term inals, processors, printers, encryption devices, tape drives and com m unication lines. SA FE-T-N ET is a channel-attached perip h eral that provides for encryption, m essage authentication and an online m aster key change m echanism . For inform ation, w rite: T andem C om puters, Inc., 19333 Vallco Parkway, C upertino, CA 95014. Power-Line Monitor Detects Computer Problems The Lakontek Office Pow er M onitor now is available to classify and display various pow er-line problem s that occur in bank-autom ation systems. The m onitor displays lights th at indicate problem s such as line sags, surges and im pulses. O ne set of color-coded L E D lam ps indicates th e p resence and m agnitude of voltage sags and surges. A nother set indicates the p resen ce and m agnitude of voltage spikes. The m onitor has an internal rechargeable b attery that 58 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Privacy for financial institutions is provided by Micro Design m odels 855 and 865 readers that have direct projection system s to shield screen images from passersby. Both m achines serve a variety of % com puter-output microfilm or source docum ent needs w ith dual-lens option. The 855 unit magnifies from 18x to 66x and the 865 offers 24x to 58x for microform viewing. The units are energy-efficient to cut operation cost and a fanless system utilizes convection cooling to m aintain film -plane tem p eratu res below industry standards. For inform ation, w rite: Sue Stern, M icro D esign, 857 W. State St., H artford, W I 53027. New Catalog Offered By Anti-Crime Bureau A new catalog describing M osler A nti-C rim e Bureau (MACB) security-training m aterials and program s now is available. It features descriptions of 10 16mm films (also available in video) produced by MACB for use in security-training program s. The catalog provides particulars about o th er MACB materials and services, including books, pam phlets and stuffers, packaged training kits and slide presentations. MACB is celebrating its 25th year. In addition to the training m aterials and program s described above, MACB offers two-day security-training sem inars open to security professionals and held in m ajor cities, an annual w eek-long security-officers-training school and an annual week-long advanced security-officers-training school. For inform ation, w rite: M osler A nti-C rim e Bureau, 1561 G rand Blvd., H am ilton, O H 45012. Training Manual Cuts Effect of ‘Paper Thieves’ A new training m anual is available that shows how to prevent losses from bad paper. The m anual gives examples of bona-fide and counterfeit checks, credit cards, identification cards and travelers checks. Sections are devoted to spotting false credit applications, cashiers checks and counterfeit currency. E ditorial com m ents inform readers about tricks of the trade used by individuals who p resen t false ID s and make purchases w ith counterfeit docum ents. The manuals are useful for instruction at sem inars conducted by banks for retailers whose em ployees m ust be able to d etect “p aper th iev es.” For inform ation, w rite: Publishers Services, 6318 V esper Ave., Van Nuys, CA 91411. MID-CONTINENT BANKER for December, 1985 Understand Customer Base, Pricing For ‘Q’-Less Society, Says Consultant ARG E banks have d e c id e d to throw out a lot of new products to co n su m e rs w h ile sm a lle r o nes leaning tow ard selectiv e p ricin g of products w hen Reg Q bites th e dust next M arch 31, says a Chicago-based consultant. L a rg e r b a n k s a re a lr e a d y te s t m arketing new products, said G. M. M oebs, p resid en t of a firm bearing his nam e, at a recen t m eetin g of th e St. Louis chap ter of th e Bank A dm inistra tion Institute. H e w arned bankers th at th ey w on’t be able to price products intelligently unless they have ad eq u ate inform ation about th e ir custom er bases and p ro d ucts. No longer is it feasible to look at p ric e s th e c o m p e titio n acro ss th e street is charging; chances are those prices are based on prices charged by another com petitor fu rth e r down th e street! H e chided com m ercial-loan d e p a rt m ents for not building profits by re quiring com pensating balances m ore often. T he giv e-it-aw ay -fo r-n o th in g a ttitu d e still is p r e v a le n t in som e banks. S&Ls are taking c u sto m ers from banks sim ply by p ro v id in g account analyses, w hich m ost banks d o n ’t p ro vide at all. Bankers can solidify cus to m er relatio n sh ip s by asking com m ercial custom ers how th ey w ant the bank to invest th e ir excess balances. M ost custom ers will be grateful, he said, and less likely to take th e ir b u si ness to anoth er institution. H e p red icted th at th e re will not be m u ch m o v e m e n t in m in im u m s for m oney m arket dem and accounts com e April 1, 1986. M ost large banks already have low ered th e ir m inim um s and, in terestingly, m ost small S&Ls have too. H e advised th at th e best way for com m unity banks to sell services is by direct mail or phone. H e told of a bank in Indiana th at calls every one of its custom ers by phone during th e IRA season. F o r one m o n th em p lo y ees p h o n e c u s to m e r s d u r in g e v e n in g hours as followups to a letter. C ustom ers are rem in d ed th at “this is th e last chance to get an IRA this y e a r.” The bank has 15 IRA products and it has only $90 million in assets. Banks should strive to establish total relationships w ith custom ers because th a t’s the m ost profitable type of rela tionship. Banks will d iscount som e ser vices to get such relationships, b u t they still can profit. Mr. M oebs advised against tiering of L rates w ithin a single product. H e said som e banks are again issuing pass are books because custom ers w ant them and they are willing to take less in terest on th eir savings in o rder to have them . “ G ive th e cu sto m e r w hat h e/she wants, Mr. M oebs said, “b u t price Retail Banking Revolution Brings Challenges and Choices to Bankers ^ ^ ^ ^ A N A G I N G c h a n g e ” is a I V I good d e fin itio n of retail banking today, according to Jack Shipm an, executive vice p resid en t, L ib er ty National, Louisville. M r. S h ip m a n w as th e k e y n o te speaker at the K entucky Bankers Asso ciation Retail C red it C onference held recently. T he new financial products being offered to consum ers today have dras tically changed retail services, he said. Such p ro d u cts include self-directed IRAs, d isc o u n t-b ro k e ra g e services, ATM services and revolving personal c re d it lin es se c u re d by re a l-e sta te equity, am ong others. Banks m ust develop a sales culture in o rd er to sell these new services, Mr. Shipm an said. Using th e sales-team approach at L iberty N ational as an ex am ple, he talked of th e im portance of a w ell-planned and im p lem ented sales m anagem ent, training and incentive program . Retail bankers face stiff com petition in th e days ahead, Mr. Shipm an said, particularly from new nonbank com petitors such as Sears. Bankers m ust strongly su p p o rt new p ro d u cts and E F T systems in o rd er to retain and expand th eir m arkets, he added. MID-CONTINENT BANKER for December, 1985 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis the product higher because th ere is a dem and for it.” H e advised against offering variablerate auto loans because they not only are less profitable, they are not in d e mand. In p rep aratio n for April 1, 1986, bankers should start trying to b e tte r understand th eir institutions’ custom er bases so they can offer the products custom ers w ant and parlay custom er desires for services into profits for the institution. • • Bankers also should be wary of the po ten tial im pact of pen d in g legisla tion, including two bills recently in tro duced in the U. S. H ouse that would lim it the am ount of in terest that may be charged on credit-card balances, Mr. Shipm an said. W hile recen t ABA testim ony before the H ouse Banking C om m ittee was received favorably and th e ABA G overnm ent Relations C oun cil does not expect these bills to d e velop into major issues this year, the topic rem ains hotly deb ated and bank ers should be vigilant, he added. H e also recom m ended th at bankers keep a watchful eye on the issue of life-line banking, as well as a probable re g u la to ry re v ie w o f b a n k s ’ co m pliance w ith the C om m unity R einvest m ent Act. Retail banking is a highly complex business, evolving in an environm ent of deregulation, new technology and stiff com petition. Success depends on a c o n s ta n t a w a re n e s s o f m a rk e t changes and careful selection of a dis tribution system , Mr. Shipm an said. Most of all, it requires everyone at th e bank, from top m anagem ent on down, to re-orient them selves tow ard sales and develop a retail-banking sales c u ltu re ,” he said. • • Bullet-Resistant Buildings Offered A new line of prefabricated threat-resistant structures and components is available from Henges Manufacturing, Inc. It offers bullet-resistant window assemblies, doors, walls, panels and steel or aluminum pre-assembled buildings that can resist penetration up to and including high-powered military rifles. For information, write: Henges Manufacturing, Inc., 12100 Prichard Farm Rd., Maryland Heights, MO 63043. 59 F a rm -C ris is L o s s e s P re d ic te d T o C o s t B a n k s $ 2 0 -$ 2 5 B illio n tion could take another th ree to four H E FARM crisis could lead to losses totaling $20 billion to $25 years, even if farm com m odity and billion by financial institutions in th eland prices w ere to im prove. H e p red icted th at about 15% of the next few years, according to a recen t farm land in Iow a will n ot p ro d u ce W harto n E co n o m etrics study. And en o u g h incom e u n d e r any c ircu m that could lead to: stances, w hich m eans tough decisions • An increase in in terest rates of 75 for len d ers w ho m ust decide which to 125 basis points for all types of loans. farm ers they will continue to support. • T he loss of 175,000 to 275,000 jobs, not ju st in th e farm sector b u t Friction Predicted throughout the U. S. econom y. Bankers are going to have to tell • A $30-billion to $50-billion re d u c m ore farm ers to e ith er pay off th eir tion in GNP. • A $14 billion to $21 billion in debts or get rid of some assets, he said, crease in the federal d e b t because of and that m eans m ore friction betw een lower tax incom e and hig h er d e b t se r farm ers and lenders. vice costs resu ltin g from h ig h er in terest rates. This bleak picture was p re se n te d by The impact of the farm cri M ich ael B o e h lje , fo rm e r a ssista n t sis is important to the pub dean of th e College of A griculture at lic, not because of food Iowa State U niversity during th e re cent annual convention of th e Iowa prices, but of what it will do B an k e rs A sso ciatio n . H e re c e n tly to the financial markets. joined th e U niversity of M innesota in a similar capacity. T Figures Significant “Some people find it h ard to believe that th e farm crisis w ould spin through the econom y to th at extent, he said. “But even if you halve th e figures, it’s still significant.” H e a d d ed th a t m any p e o p le are arguing th at it w ould cost less for the governm ent to act to ease the problem rath er than w aiting to deal w ith w id en ing problem s later. “From th e govern m en t’s and public’s perspective, you pay now or pay la te r,’ he said. H e te r m e d to d a y ’s f a r m - s e c to r problem s structural rath er than cycli cal and added th at th e painful transi- POSITIONS AVAILABLE Senior Operations — $150MM + bank Loan Review — $200MM + bank V. P. Loans — $45MM community bk. Comml Loan — $200MM suburban bk. Comml/R.E. — $50MM community bk. Instl. Loan — $100MM suburban bk. AgriLoan — $30MM rural bank $50K $48K $35K $40K $30K $25K $28K All Inquiries Confidential. Résumé requested. TOM HAGAN & ASSOCIATES Of KANSAS CITY p.O. Box 12346/2024 Swift North Kansas City, MO 64116 816/ 474-6874 SERVING THE BANKING INDUSTRY SINCE 1970 60 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Three Midwestern State PCAs Merged into Single Unit F a rm e r-sto c k h o ld e rs th ro u g h o u t Arkansas, Illinois and M issouri have voted overw helm ingly to m erge th eir 32 P ro d u c tio n C re d it A ssociations (PCAs) into a single PCA that will b e gin serving custom ers on January 1. The district-w ide PCA will be h ead q u artered in St. Louis, b u t farm ers will continue to receive credit services from local offices in 19 new F arm C red it Services territories in th e th ree states. In voting to im plem ent th e m ergers, stockholders approved grassroots re structuring proposals adopted by th eir locally elected directors over the past several m onths. The vote was term ed “significant” by the chairm an of the Sixth D istrict Farm C redit Banks board. D a v id s (C ontinued fr o m page 62) “I see m ore and m ore an unw illing and it provides m ost services com m er cial banks provide. U ntil recently it ness on the part of the farm com m unity to cooperate w ith the lending com was a tax-sheltered organization that paid no federal incom e tax. m u n ity ,” he said. “T hat disturbs me. I T he D O D -p ro p o sed cen tral bank think we need to be concerned and w o u ld , it is b e lie v e d , p e r m it th e aw are th at in this en v iro n m en t we issuance of a special cred it/d eb it card. have th e potential for a very divisive U ntil now, low er-grade enlisted p e r situation w here th e concept of p a rt sonnel have not had access to major ners is no longer th e re .” credit cards, as a rule. R eferring to th e farm crisis, D r. W hile th ere w ould be regulations Boehlje said it can’t be contained or and restrictions lim iting garnishm ent lim ite d to ju s t financially stre sse d of m ilitary salaries in the event of d e farm ers. “You can’t p u t a wall around linquencies, it should be recognized it.” th a t th e re is a strong psychological H e added that financially stressed pressure in th e m ilitary to see that in farm ers w ho have been h it by the “first w ave” of structural changes in agricul dividuals do not abuse the system. M aybe history will repeat itself. To tu re are suffering the m ost at present. illustrate: The introduction of social B ut a “second w ave” is affecting security insurance in the 1930s was financially strong farm ers w hose assets are being eroded by declining farm opposed by th e insurance industry. The same industry later was am azed to land and m achinery values. A th ird fin d th a t social s e c u rity coverage, w a v e ” has h it local c o m m u n itie s , rath er than dim inishing the public s w h ere retail sales have declined and d e s ire fo r in s u ra n c e , a c tu a lly in farm -related businesses and banks are suffering from unpaid bills and d elin creased it. People who never before bought insurance becam e in terested q u e n t loans. Still a “fourth w ave” will hit the e n in broadening th eir coverage through the private sector because of th eir ex tire nation “w hen financial institutions p e rie n c e w ith social-security in su r — b anks, in su ra n c e firm s and th e F a rm C r e d it S y stem — s ta r t e n ance. W ould it be sanguine to anticipate countering p ro b lem s,” he added. “The th a t th e D O D ’s pro p o sal could be im pact is im portant to the A m erican structured to be m utually beneficial public, not because of food prices, b u t because of w hat it will do to th e finan and profitable to federal em ployees as well as the private banking sector? • • cial m arkets. • • MID-CONTINENT BANKER for December, 1985 Index of Advertisers in This Issue Austin & Associates, Inc., D ou g las................. Bank Board Letter ...................................... 33, Banking Consultants of America ..................... Barclays American/Business Credit ............... Boatmens National Bank, St. Louis ............... 29 53 22 32 64 Central Bank of the South, Birmingham, Ala. 29B Commerce Bank, Kansas C it y .......................... 5 Commerce Publishing Co.................................. 25 Dimensional D a ta ............................................. 14 Hagan & Associates, Tom .............................. 60 Illinois Code Co.................................................. 23 Liberty National Bank, Oklahoma City ........... 2 MPA S yste m s................................................. 35A Mercantile Bancorp., St. Louis ..................... 31B Money M a ke r..................................................... 31 North Central Life Insurance Co....................... 2 Page-Ruane, Inc................................................ 43 FIC Banking Consultants .............................. 33B First Lease & Equipment Consulting ............. 39 Foothill Capital Corp........................................... 63 Sales Training S ystem s.................................... 10 Stucky & Associates, W illia m .......................... 17 Swords Associates, Inc........................................ 12 Getzler & Co., A, E............................................. 9 Globe Life & Accident Insurance Co.............. 33A Transamerica Financial Systems ................... 46 Whitney National Bank, New Orleans ........... 33 C om ing Events Jan. 26-29: Bank Administration Institute Con ference on Productivity, Bal H arbour, Fla. Jan. 28-31: ABA National Insurance and Protec tion Conference, N ew O rleans, H yatt Regency. Jan. 29-31: Dealer Bank Association Sales Man agers’ Seminar, Palm Springs, Calif., A m ericana C anyon H otel. Feb. 2-5: A B A National Trust Conference, O rlando, F la., H yatt R egency G rand Cypress. Feb. 2-3: Robert Morris Associates Loan Review Seminar, St. Louis, Chase H otel. Feb. 9-11: Consumer Bankers Association In novations in Retail Banking Confer ence, Atlanta, Ram ada Renaissance. Feb. 9-12: ABA National Telecommunications & Financial Networks/Video Banking III Conference, O rlando, F la ., H yatt R egency G rand C ypress. Feb. 9-21: ABA National School of Retail Bank ing, N o rm an , O k la., U n iv ersity of O klahom a. Feb. 16-19: ABA National Assembly of Commu nity Bankers, San D iego, H otel In te r C ontinental. Feb. 19-21: AB A Construction Lending Work shop, D enver, F airm ont H otel. Feb. 23-26: National Council of Savings Institutions Operations Conference and Ex hibit, W ashington, D. C ., Sheraton W ashington H otel. MID-CONTINENT BANKER for November, 1985 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Feb. 26-29: ABA Bank Investments Conference, N ew O rleans, H yatt Regency. Mar. 2-5: Bank Marketing Association Elec tronic Banking Product Strategies Conference, San Francisco, Fairm ont H otel. Mar. 9-11: A B A National Corporate Banking Conference, San Francisco, St. F ra n cis Hotel. Mar. 9-12: Bank Marketing Association Com munity Bank C EO Seminar, Palm S prings, C alif., A m ericana C anyon H otel. Mar. 9-13: Independent Bankers Association of America National Convention, Las Vegas, Las Vegas Hilton. Mar. 9-15: ABA National Compliance School, U niversity of Oklahoma, Norman. Mar. 11-14: Tillinghast, Nelson & Warren Inter national Captive Insurance and Rein surance Forum, H am ilton Princess H otel, Berm uda. Mar. 16-19: ABA National Fiduciary & Securities Operations Conference, M a rrio tt M arquis, Atlanta. Mar. 18-21: Bank Administration Institute Check Processing Conference, Las Vegas. Mar. 19-20: Robert Morris Associates Loan Par ticipations and Purchases Workshop, H o te l In te r-C o n tin e n ta l, N ew O r leans. Mar. 23-26: Bank Marketing Association Business Development Training Conference, W yndham Franklin Plaza H otel, Phil adelphia. 61 W orldwide-Banking Proposal for com m ercial banks. A federal regulator explains this phenom enon by com paring the sense of unity displayed by thrifts to the sense of disunity displayed by banks. A unified front makes legislators m ore willing to consider industry issues than they w ould be if th eir constituency is divided and can’t get its act together. By Dr. Lewis E. Davids Professor Emeritus/Finance F u rth er, S&Ls w ere astute in phrasing th eir requests Southern Illinois University for broader pow ers in term s of benefitting the general Carbondale public. Low er capital req u irem en ts w ould m ean thrifts could make m ore hom e loans, an argum ent sure to please congressm en and wom en. H E D ep a rtm e n t of D efense (D O D ), th e U. S. Air H ow ever, it’s my opinion that low er capital Force and som e m ajor banks are supporting th e idea of establishing a central bank to serve governm ent requirem ents for S&Ls may have encouraged m ore aggressive m ortgage lending b u t proved to be an em ployees on a w orldw ide scope. im p ru d en t regulatory step th at has resulted in higher The In d e p e n d e n t Bankers Association of A m erica is proportions of problem S&Ls. They also are tilting the opposed to th e idea. The trad e association for banks level playing field of com petition betw een the various with facilities on m ilitary bases has mixed views on the types of financial institutions. subject. The only way to get com m ercial banks to A dilem m a th at confronts m ost regulators is that, in support th e concept w ould be to grandfather th eir existing facilities and let th ese banks benefit from having a federal central bank. If cut out of th e action, they would oppose th e proposal. M ost m anagers of th e nation’s 15,000 banks could care less about th e issue as a practical m atter. This is P ro p o n e n ts of th e fe d e ra lbecause only a small n u m b er of banks are com peting for accounts from m ilitary personnel. H ow ever, taking a em ployee central bank view philosophical view point, m any banks see the concept as opposing bankers as knee-jerk contrary to th e free-en terp rise system and, thus, oppose reactionaries adverse to any it. ch a ng e th a t m ig h t re s u lt in Proponents of th e federal-em ployee central bank view heightened competition. opposing bankers as knee-jerk reactionaries adverse to any change th at m ight resu lt in h eig h ten ed com petition. O ne of the m ore in terestin g facets of m uch of the myopia on the p art of com m ercial bankers is that they tend to look at th e sh ort-run banking environm ent rather than at th e long-term — and m uch b ro ad er — many areas, they don’t know the correct action to take. picture. They can only estim ate w hat is correct. Som etim es they To illustrate: Since th e 1930s, bankers, especially are correct in th e short run b u t incorrect in th e long unit-com m unity bankers, for th e m ost p art espoused run. Regulation “Q ” is a classic exam ple of this restrictions on branching and m ulti-bank H Cs, although situation. they supported th e chain-banking concept. O ften th ere is a question that, if th e U. S. doesn t or But th eir com petitors, including savings and loans, can’t take certain actions it will lose business, m arket with few exceptions, su p p o rted both in te r and intrastate share, etc., to foreign com petitors that are less operations, as well as expansion of services they are regulated. If it is good business, we w ould like to have perm itted to offer. it; if it is bad business, naturally we are glad to not have From the 1930s through th e 1970s, statistical data it. H ow ever, it is not initially obvious w h eth er some show that S&Ls had a m uch hig h er grow th rate than business is good or bad. In this context, some comm ercial banks and th at m uch of this grow th was at questionable third-w orld loans w ere encouraged by the expense of th e latter. U. S. governm ent agencies. The disinterm ediation of th e early 1980s suspended Will the D O D ’s sponsorship of a w orldw ide netw ork this tren d for a period. H ow ever, such factors as lower of facilities w ith a central bank for governm ent capital req u irem en ts for S&Ls and th e m ore p roponent em ployees fly? and accom m odating attitu d e on th e part of thrift I don’t know. But I do know th ere is a large credit regulators vis-a-vis to u g h er req u irem en ts m ade on union of Navy em ployees that already operates on a banks by bank regulators, suggests th at bank w orldw ide basis. It’s a billion dollar-plus organization com petitors will continue to be, over a period of tim e, (C ontinued on page 60) in a position to grow at a faster rate than th at predicted Are the fears of the banking industry valid concerning establishm ent of a worldwide central bank for federal em ployees? T 62 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis MID-CONTINENT BANKER for December, 1985 If y o u w a n t q u ic k fin a n c in g , th e last th in g you n e e d is re d ta p e ♦ oothill, America’s capital source, cuts through the re? creative financing. As the largest, independent commercial finance company in the nation, w e’ve built our reputation on responding immediately with fast, personal service and innovative solutions even when funds are not readily available from other sources. F At Foothill, we treat each borrower as an individual. Whether you’re a newly organized or established company, we have the flexibility to meet your specific needs on a timely basis—regardless of how complex the transaction may be. Let Foothill help you cut through the red tape with one of our many lending programs: ■ Participating Lender Program offers you, the participating institution, an opportunity to expand your loan base without incurring added overhead required to service the loan. For our mutual customer, this not only means an increased source for subsequent funds, but also access to the lending capacity of two institutions and Foothill’s efficient loan servicing systems. H Receivable and Inventory Financing can provide the working capital needed. By using accounts receivable and inventory as collateral, we can advance up to 80 percent against invoices on a revolving line of credit. ■ Long-term Financing is tailored to fit a particular business. We will arrange financing from $500,000 for one to ten years, using existing equipment and/or real property as collateral. I Bankruptcy Reorganization Financing can mean a new beginning for a company. Foothill has the financial expertise to help a business restructure and emerge from Chapter XI. I Acquisition Loans can mean more than financing at Foothill. We can assist in professionally analyzing the company to be acquired and then promptly create the financing package needed—for a merger, acquisition or leveraged-buyout. For more information on how Foothill can cut red tape, please call Robert L. Horvath, Vice President, at (312) 635-6570, or write Foothill Capital, 2700 River Road, Suite 300, Des Plaines, IL 60018 Foothill. AMERICA’S CAPITAL SOURCE Chicago Dallas Denver Los Angeles Miami New York Orange Phoenix San Francisco St. Louis https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis
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