View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

MID-CONTINENT BANKER


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

JANUARY, 1985

NORTHERN EDITION

(ISSN 0Q26-296X}

IM

I

P
Ov'eVA
■

te d

S a te *

B IB IM

» !» !» “ —

1

n-sOp 7
Fage, ^ i l H P

’

Page

84

------- r ' ä . n W n S ? o i e C - - - g a 1 P 1 i ■ —

C tO s

Growth
Wodest £cono^ Ma| | | g { | H H M I I illaBialB
» g
T sT u t Before Congress__ « • »
¡« ■ ■ w

h u m

h b iib iB

H EI

Compare For Yourself.
How Does Your Current
Credit Insurance Company
Measure Up lb
North Central Life?
What
What Your
North Central Company
Life Offers
Offers

What
What Your
North Central Company
Life Offers
Offers

B in

Fast, Computerized Claim
Settlements

Home Office Customer Service
Department

bid

Insurance Plans That Fit Virtually
Every Loan Situation

Simple, Automated Premium
Reporting System

Bln

Special Programs for the Large
Borrower

Computer-based Measurement and
Control System to Help You Manage
Your Business

0 n

Nation-wide Toll-free WATS Service

Personalized Training For Your
Support Personnel

Instant, Over-the-phone Rate
Calculations For Difficult Loans

Simplified Procedures Manuals For
Administrative People

Instant, Over-the-phone
Underwriting approval for over-limit
coverages

Complimentary Sales Aids,
Brochures and Point-Of-Purchase
Materials

Sales and Insurance Training
Programs Designed for Bankers

Free Analysis of Your Current
Insurance Operations

Bin

Incentive Plans to Help Increase
your Productivity

“Captive Company” Capability

Bln

Professional, Experienced Account
Field Representatives

Bin
Bin
Bin

No Company, Anywhere in The United S tates, Can Give
Your Bank As Much Help in Running A Smooth, Profitab le
Credit Insurance Operation As North C entral Life


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

America’s #1 Credit Insurance Service Organization

Protection all ways

North Central Life Insurance Company
NORTH CENTRAL LIFE TOWER, 445 MINNESOTA STREET BOX 64139, ST PAUL, MN 55164

In Minnesota call 800-792-1030
All other states 800-328-9117

What do you do
when your best
corporate customer
wantstoleasea...
Whatchamacallit?
If yo u ’re saying no, AFI can help you say yes
with our BankLease Program. AFI offers:
• Complete turnkey leasing services
• No start up costs for your bank
• Complete preparation of lease
documents
• Closing of lease transactions on
your behalf
• Remarketing used equipment at
lease term ination
If your big city com petitors are
offering lease financing to your
customers, contact AFI today!

Ifyoucannam eit,
you can lease it!
FINANCIAL CORPORATION
Affiliated Financial Institutions

N A T L 1-800-321-3010
O H IO 1-800-362-0434
MID-CONTINENT BANKER for January, 1985


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

Hanna Building, Cleveland, OH 44115

3

CONVENTION
CALENDAR
Jan. 27-30: ABA National Trust
C on feren ce, New York City,
New York Hilton.
Jan. 29-Feb. 1: ABA National Insurance/Protection Conference,
Bal Harbour, Fla., Sheraton Bal
Harbour.
F eb . 3-6: ABA Telecom m unications/Financial Networks Work­
shop, New Orleans, Hyatt Re­
gency New Orleans.
Feb. 10-13: ABA National Assem­
bly for Com m unity Bankers,
Orlando, F la., Hyatt Regency
Grand Cypress.
Feb. 10-22: ABA National School of
Retail Banking, Norman, Okla.,
University of Oklahoma.
Feb. 12-15: ABA National Bank In­
vestm ents C o n feren ce, Los
Angeles, Westin Bonaventure.
Feb. 14-17: Assemblies for Bank
Directors Assembly 60, Honolu­
lu, Hawaii, H yatt R eg ency
Waikiki.
Feb. 24-27: Bank Administration
Institute Security Conference/
Exposition, H ouston, Adams
Mark Hotel.
F eb . 27-M arch 1: D ealer Bank
Association Annual Conference,
Scottsd ale, A riz., Cam elback
Inn.
March 3-6: ABA Trust Operations/
A utom ation W orkshop, New
Orleans, Hyatt Regency New
Orleans.
March 6-9: Independent Bankers
Association of America National
Convention, San Antonio, Tex.
March 10-14: ABA Executive D e­
velopment Program, Minneapo­
lis, Amfac Hotel.
March 10-15: ABA National Com­
pliance School, Norman, Okla.,
University of Oklahoma.
March 17-19: ABA National Corpo­
rate Banking Conference, Dallas,
Hyatt Regency Dallas.
March 20-21: First Lease Equip­
ment Corp. Seminar, Chicago,
Hyatt Regency.
March 26-29: Bank Administration
Institute Check Processing Con­
ference, Dearborn, Mich.
March 26-30: Louisiana Bankers
Association Annual Convention,
New Orleans, New Orleans Hil­
ton.
March 28-31: Assembly for Bank
Directors Assembly 61, White
Sulphur Springs, W. V a., The
Greenbrier.

4


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

MID-CONTINENT RANKER
(Incorporating M ID-WESTERN BANKER)

IN THIS ISSUE
Volume 81, No. 1______________________________ January, 1985
7 BANKS MORE SALES ORIENTED IN ’85
Says survey o f ban ks in 18 states

10 CEO-FORECAST FOR 1985
W hat they see f o r coming year

22 ECONOMY TO GROW THROUGH 1980s
But at relatively m odest pace

26 STATE NEWS SECTION
Prom otions, retirem ents, deaths in news

33 CONGRESS’ PLAN FOR BANKING
W hat will it b e in ’85?

36 STATE LEGISLATIVE ISSUES FOR ’85
In terstate banking, ban k structure on tap

43 LONG-RANGE AGRI SOLUTION?
A m essage to C ongress fr o m agri-ban kers

45 PORTFOLIO APPROACH TO A/L MANAGEMENT
It can actually be rath er sim ple

54 THE BANKING SCENE
D eregulating F ed margin requirem ents

Mid-Continent Banker Staff

Editorial/Advertising Offices
408 Olive St., St. Louis, Mo. 63102. Tel. 314/
421-5445.

Ralph B. Cox
Publisher

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

Lawrence W. Colbert
Vice President, Advertising

POSTMASTER: Send address changes to MID­
CONTINENT BANKER at 408 Olive S t., St.
Louis, MO 63102.

Rosemary McKelvey
Editor

Printed by The Ovid Bell Press, Inc., Fulton,
Mo. Second-class postage paid at St. Louis,
Mo., and at additional mailing offices.

Jim Fabian
Senior Editor

Subscription rates: Three years $2 7 ; two years
$2 0 ; one year $1 2 . Single copies, $ 2 .5 0
each. Foreign subscriptions, 50% additional.

John L. Cleveland
Assistant to the Publisher
Marge Bottiaux
Advertising Production Manager
Nancy Gilbreath
Staff Assistant
Shelia Humphrey
Subscriptions

Commerce Publications: American Agent &
Broker, Club Management, Decor, Life Insur­
ance Selling, Mid-Continent Banker and The
Bank Board Letter.
Officers: Donald H. Clark, chairman emeritus,
Wesley H. Clark, president and chief executive
officer; James T. Poor, executive vice president
and secretary; Ralph B. Cox, first vice president
and treasurer; Bernard A. Beggan, David A.
Baetz, Lawrence W. Colbert and W illiam M.
Humberg, vice presidents.

MID-CONTINENT BANKER for January, 1 9 8 5

Introducing Micro-BRMS
An Asset/Liability M anagem ent tool that is

COMPREHENSIVE
POWERFUL
FLEXIBLE

and now, Micro-Based
Until now, we have been providing sophisticated
asset/liability support on a mainframe. Now we are
providing it for your micro.
Micro-BRMS was built by bankers for bankers. It
provides meaningful analyses, not just output. Our
Strategy Sim ulator allows you to customize analyti­
cal techniques that enable you to understand the
impact of changing environments and alternative
strategies on your institution. Our Strategy Analyzer
enables you to interactively develop risk/return
profiles of alternative gap positions.

With micro-BRMS, you can
• integrate with Lotus 1-2-3
• use Chase Econometrics’ rate forecasts or your
own
• centralize or distribute your asset/liability manage­
ment function
• interconnect with other micros or mainframes
• use our 24 hour data back-up facilities
• rely upon a customer support group staffed by
both bankers and computer professionals

A free dém onstration disk is available to introduce you to microBRMS. To get your
demo disk or to learn more about microBRMS, cali Mei Strauss at 212/306-6808 or
write to him at 22 Cortlandt Street, New York, New York 10007.

MID-CONTINENT BANKER for January, 1985


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

5

“ N ow that you’ve reviewed our operation,
what have you learned about our earnings?”

Bob: ‘ ‘We’ve learned a lot. About what
you’re doing right... about what you
could be doing better.’ ’
Ed: ‘ ‘Oh, well, any banking operation is
going to have it s.. .”
Bob: ‘ ‘Sure it is. We’ve been there too, you
know. Our people come from banks and
S & L ’s all over the country. And I can
tell you that infloat management,
operations, retail, and mortgage
lending, your earnings can be better.’ ’
E d : ‘ ‘Like how much better ? ’ ’
Bob: ‘ ‘In your case, it looks like it could be
over a million dollars.’ ’
Ed: “ A million dollars! Are you sure ? ’ ’
Bob: “ I ’m sure. Maybe more. We do this all
the time. It’s like money in the bank.’ ’
Ed: ‘ ‘That’s what I ’m banking on.”

Call for an appointment and ask about
the full range of financial services available through
BEI Holdings, Ltd. —including Bank Earnings International,
Bank Earnings Systems, BEI Software, Electronic Banking, Inc.,
and BEI Investments, Inc.

Earning our place in the financial community
AtlantalDallas!San Diego
3420 Norman Berry Drive, Suite623, Atlanta, Georgia30354, (404)768-5689

6


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

MID-CONTINENT BANKER for January, 1 9 8 5

MCB SURVEYS BANKS IN 18 STATES

In 1985
Banks W ill Be M ore Sales O riented
78% will offer at least one new product or service;

40 % will establish or expand sales-training programs

penses and also to review or imple­
RE BANKERS to become salesment new or better loan-monitoring
i men? Results from a year-end
survey by this publication would indi­systems.
Here, too, the signals were clear:
cate a trend — a small but growing
Bankers recognize the need for new
trend in that direction.
Perhaps bankers are responding to products and services in order to retain
mounting com petition or threat of or increase share of market. Fu r­
thermore, they recognize the need to
competition from such giants as Sears,
become “lean and mean” as industry
J. C. Penney, Citicorp and others.
has done in the past several years. And
Perhaps it is their own determination
further, they desperately see the need
that, as they introduce new products
and services (and 78% said they would to halt the massive loan losses (if possi­
introduce new products or services in ble) that have plagued the industry
during the past 12-36 months.
1985), they must be prepared to SE L L
Those answers could have been an­
those products.
In any event, bankers a re preparing ticipated. But salesmanship? It is true
to upgrade their sales tactics and pro­ that a good many bank conventions
this past year have initiated the subject
grams in 1985. Some — we expect
from the tone of their response — will through expert speakers, round-table
be starting from scratch, but the sig­ discussions and question-and-answer
sessions; but salesmanship, catching
nals are clear: B ankers in the
Mid-Continent area are gearing up to on?
Here’s what bankers had to say:
become better salesmen. As one bank­
• Forty percent said they would
er noted: “Now, we re just order tak­
establish or expand present bank­
ers. We must learn how to sell if we are
training programs. Some 38% indi­
to stay in this business.”
While such positive answers to our cated they already had such programs
underway.
questions about salesmanship were
• Thirty-tw o p erce n t said they
somewhat surprising, answers to other
major areas of our question­
naire could have been antici­
pated. For example:
• Seventy-eight percent
of the 252 bankers respond­
ing to our survey said they
would introduce new prod­
ucts or services in 1985.
• One hundred percent
(w ell, alm ost) said they
would do their utmost to
control n o n -in terest ex­

A

MID-CONTINENT BANKER for January, 1985

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

would establish s a les tra in in g for
point-of-contact people. Programs
already in effect: some 40%.
• Thirty percent said they would
hold sales contests. This wasn t new
since 40% had sponsored sales contests
in the past.
• Twenty-two percent said they
would establish incentive compensa­
tion (commissions) for opening new
accounts. A small percentage indi­
cated they would be apprehensive
about offering compensation for loans.
Their reasoning: Judgment might be
swayed (by compensation) to open a
questionable loan. By way of compari­
son, 16% stated they already had newaccount incentives.
• Twenty-four percent said they
would launch officer-call programs for
the first time! Another 53% said this
was commonplace with their banks.
• Sixteen percent said they were
changing their “hiring policies” in
order to hire sales-oriented people in
the future. We found that 15% of those
responding now are doing this.
• T h irtee n p erce n t will create
direct-sales programs. Some 11% have
been doing this.
• Nine percent will start
premium campaigns for new
accounts, up from the 7%
who have been holding such
campaigns.
• Seven percent will cre­
ate the new position of sales
manager! That bears repeat­
ing: Seven percen t will c re­
ate the new position o f sales
m anager. We were equally

7

astounded to learn that 9% of those
responding already had the titled p osi­
tion o f sales m an ager in their banks.
Not so clear, even after several tele­
phone follow-ups to this survey, was
whether the bank sales manager would
have the same type of authority and
resp on sibility industry generally
associates with that position.
New Services — 78%

As already mentioned in preceding
paragraphs, 78% of the 252 bankers
responding to our survey indicated
their banks would be launching at least
one product or service in 1985. H ere’s
how those new services ranked:
• Twenty-three percent will launch
an up-scale-customer service, and this
percentage is exactly the same as those
who will initiate financial counseling.
The same percentage (27%) already
offer both services.
• Tw enty-tw o p ercen t will join
ATM networks . . . 34% already have.
• Fifteen percent are looking for
places to put ATMs in shopping malls,
department stores, etc. Some 17%
already have staked out such locations.
And while a whopping 58% have at
least one ATM in service, approx­
imately 11% will offer customers ATM
service for the first time in 1985.
• Fifteen percent will offer mort­
gage servicing for the first time. Some
32% already are involved.
• Fourteen percent expect to offer
property/casualty insurance through
owned or leased services. This would
increase from 12% already offering the
service.
• Thirteen percent will offer dis­
count brokerage . . . 51% already do.
• Eleven percent will offer life in­
surance . . . 23% already do.
• Eleven percent will have manned
(or should we say staffed) facilities in
shopping centers or other desirable
locations. Surprisingly, 14% already
do.
• Ten percent will offer POS ter­
minals (point of sale). This is more than
a 300% increase over the 3% now offer­
ing such service.
Lower-Ranked Services

Other services to be introduced, but
not highly ranked, in the survey are
senior-citizen programs, 7%; fullinvestm ent counseling, 5%; home
banking, 4%; service for handicapped,
3%; and commodity-futures brokerage
sales, 3%.
While only 7% of those responding
will initiate senior-citizen programs, it
should be noted that 61% already have
comprehensive programs for seniors.
One banker even admitted he was cur­
tailing part of his program. His com-

8

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

ments: When these senior citizens
started asking for money-market rates,
we questioned how many free services
we should give away! (But as most
bankers know, that’s where some of
the big bucks are — in the seniorcitizen checking accounts! Anyone for
joining that banker?)
New Services: How,
What and Where

Bankers look longingly at up-scalecustomer and financial-counseling ser­
vices, but clearly have not fully sorted
out their thoughts on these services.
One banker states: “We do a lot of
informal counseling now, but do not
offer a formal service.” His bank, he
says, has an advisory director who is an
agent for life, property and casualty
insurance companies and, through
him (they hope), they might offer some
financial counseling.
The trust department appears to be
the logical avenue for counseling of all
types. Further, there appears to be a
dilemma on how to charge: Several
would charge for financial counseling.
Others would not charge for full invest­
m ent counseling.
One banker who appears to have
concrete plans would offer up-scale
service with preferential rates on
check-credit loans, discounts on safe
deposit boxes, “distinction” checks
and free travel insurance. Another
banker writes: We will offer a creditdriven package of “prestige” items.
Still another w rites: “Revolving
lines of credit up to $100,000 for

affluent customers. Home equity re­
volving lines of credit for healthy mid­
dle-m arket custom ers. Asset-man­
agement account for up-scale custom­
ers.”
And for agricultural customers, one
banker states: W e’ll offer tax planning
and seminars (with expert speakers) on
all topics we feel our customers need.
Also for farm accounts, one banker
writes: We ll offer a micro-computerbased program that will analyze profit/
loss, cash flow, budget (with weekly
update), cost projection and break­
even on crop production. Charge? An
initial fee, plus m onthly service
charge.
Another bank will offer programs to
attract younger, professional people.
Included will be a self-directed IRA
plan.
Among other types of services bank­
ers hope to offer in 1985 are the follow­
ing: simplified profit sharing and HR10 plans; tax preparation; real estate
brokerage; travel services; remittance
processing for u tilitie s; hom eimprovement loans; a national debitcard program ; agricu ltu ral-typ e
leasing; IRA-completion insurance;
and a point-of-sale bank card.
Mortgage servicing and insurance
products were mentioned repeatedly
by bankers. Most bankers looked long­
ingly for legislative approval for insur­
ance products (both life and property/
casualty), but many are looking for
agencies to buy and operate “on the
side. ” Leasing of desk space to insur­
ance agents was not a popular choice.

MID-CONTINENT BANKER for January, 1 9 8 5

Mortgage servicing, on the other
hand, appears to be “off and running”
with Mid-Continent-area bankers. All
sizes: $2 million and up, with those
already servicing mortgages indicating
a willingness to expand through mort­
gage companies they own or through
normal acquisitions and sales in the
secondary market. (Editor’s note —
Readers might have noticed that the
nation’s No. 2 m ortgage-servicing
bank is in the Mid-Continent area —
Union National, Little Rock — with
$1.2 billion of loans! No. 1 servicing
bank is Bank of America, San Francis­
co, with $2.2 billion of loans.)
Expansion of ATM system s —
through networks and local place­
ments — also appears high on bankers’
plans. Repeatedly, bankers told us
they were looking for “ideal” locations
in shopping cen ters and grocery
stores. One bank was looking at a col­
lege campus.
Controlling Expenses

Budgeting, tight controls, increased
productivity were the terms bankers
used as they expressed desires to con­
trol non-interest expenses in 1985.
One banker would “appoint a cost
czar. ” Another would watch postage —
mail fewer statements to local resi­
dents and instead hand them out on
request. Another would buy supplies
in larger quantities. Still another
would look closely at advertising “give­
aways.”

But the major cost-cutting approach
expressed repeatedly by bankers was
their determined effort to reduce the
number of employees and curtail em­
ployee benefits, but, at the same time,
increase employee productivity. Use
of part-time employees (presumably
clerical) was listed frequently as a
means of achieving this goal. Bankers
also would allow “attrition” to solve
some of their presumed over-staffing.
One bank already has reduced its
level of employees from 77 to 72 dur­
ing 1984 and expects to receive the full
impact of savings in 1985. But there s
more coming at that bank: a reduction
in size of the board. (Look out, direc­
tors!)
Another bank also will “hand out”
statements rather than mailing them in
1985. “Postage is going up again this
year,” the banker writes. Also, this
bank will limit magazine subscriptions
“only to those essential publications!”
(Question: Is M i d - C o n t in e n t B a n k e r
essential?)
Target for this bank in ’85: “Reduce
non-interest expense by 29%.
A holding company officer reports:
“Our banks work in clusters. Each
CEO has specific guidelines for 1985
on non-interest expenses.”
One bank will be open fewer hours,
close branches on Saturday.
Product profitability was mentioned
frequently. Conclusion: Bankers will
eliminate the unprofitable ones. The
problem will be similar to the one

faced by Wrigley (the chewing gum
king), who was asked: “Mr. Wrigley,
don’t you waste a lot of money on your
advertising?” His reported reply: “I
suspect I waste 50%. If I just knew
which 50%, I d cut it out! ).
Health-insurance coverage is a ma­
jor concern, and bankers are looking
for ways to control these costs.
One banker hopes to solve his pro­
ductivity” problem with an employeeincentive plan. The plan was not di­
vulged.
Numerous bankers are looking for
H ELP from financial-consulting firms.
One banker currently has an outside
consultant” performing a procedures
audit on various departments of the
bank, and he hopes to receive recom­
mendations on cost savings as well as
revenue increases.
In each his own way, the MidContinent-area banker has indicated
his basic philosophy: Trim; cut; slash
away at non-interest expenses in 1985!
Lending Controls

Will Offer
in '85

Already
Offer

Upscale customer service

23%

27%

Financial counseling

23%

27%

ATM networks
ATM placements in shopping centers

22%

34%

15%
14%

17%

Two words were found in almost ev­
ery response from bankers on the sub­
ject of lending practices: “Tighter con­
trols!’
There were few refinements of those
two words, except that bankers would
say: “We will stress quality . . . we’ll
be less aggressive . . . we ll price more
realistically . . . we’ll review more
often . . . we’re going back to basics
. . . we ll get better financial informa­
tion . . . we’ll look for better security. ”
And so it went.
Since a good many responses came
from agri-based banks, we found rep­
etition in statements such as: “We re
cutting back on ag loans . . . we’re hir­
ing a new ag man . . . we re looking
more at cash flow than at assets. ” Plus a
new factor that has surfaced recently in
agricultural lending: We 11 ask bor­
rowers to hedge more often” (hopeful­
ly, plugging in a profit).
But the message is clear: The banker
is going to put back his “glass eye in
1985.

NEW SERVICES OFFERED BY BANKS IN '85

Property/casualty insurance

12%

Discount brokerage

13%

51%

ATMs

11%

58%

Mergers/Acquisitions

Mortgage servicing

15%

32%

Life insurance
Facilities (m anned) shopping m alls

11%

23%

11%

14%

No one admitted his bank would
merge with another in 1985. (Even
with a promise of anonymity, we really
didn’t expect a positive answer to that
question.)
But with 37% of responses coming
from a number of bank HCs and affili­
ates of HCs, 24% of those responding
stated: We plan to acquire one or more
banks in 1985.
Plans are afoot by 8% to start multi­
bank HCs. Another 8% plan to pur­
chase an insurance agency, and 2%
(Continued on page 44)

POS (point of sale)
Senior-citizen programs

10%

3%

7%

61%

Leasing of all types
Full investment counseling

6%

23%

5%
3%

12%

Service for handicapped
Commodity-futures-brokerage sales
Home banking

MID-CONTINENT BANKER for January, 1985

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

17%

3%

2%

4%

6%

9

Forecast

What These Bankers
Are Saying . . .
"I . . . feel New York
City banks should not lob­
by for n atio n al branch
banking in states here in
the M id d le W est u n til
they clean up their own
acts." — R. Crosby Kem­
per

For 1985

"We w ill have to de­
pend more on our skills as
m anagers than ever be­
fore. We must im prove
productivity, identify new
opportunities in the m ar­
k e t p la c e / ' — C a rl R.
Pohlad
"We tend to be gener­
ally optimistic about the
economy in 1985 despite
the slowdown, recogniz­
ing, however, that there
w ill continue to be pock­
ets of d istre ss d u rin g
1985. . . . " — Donald N.
Brandin
"W hile rate of growth
in em p lo y m en t should
slow in 1985 as the recov­
ery matures, we still ex­
pect employment growth
in Texas to exceed U. S.
averages." — Robert H.
Stew art III
". . . Advances in tech­
nology are reshaping the
economics of the banking
in d u stry a n d c re a tin g
greater size economies;
i.e., certain kinds of bank­
ing fu n ctio n s a re p er­
formed most efficien tly
by la rg e b a n k s ra th e r
than by numerous sm all
banks." — G eorge R. Sla­
ter
"Much has been made
of having a 'level playing
field.' . . . However, it's
even more important to
be able to put on a uni­
form and be allowed to
play on the field at all."
— John W. Woods


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

By R. Crosby Kemper

By George R. Slater

HE 1985 economy will be a mixed
ANKERS today are facing difficult
bag — good for some and serious
changes in their environment
problems for others. Good or bad,
due to 1) deregulation, 2) international
there will be a lot of changes for us in com petition and 3) tech nological
the banking business. Deregulation changes. This article deals with one of
will sponsor all the thrust we bankers these pressing issues, geograp hic de­
in the Middle West will have to con­ regulation.
tend with and that will take all of our
Many experts believe Congress will
time in the coming year.
authorize nationwide geographic de­
I think New York City bankers,
regulation in the banking industry by
principally Citicorp, have had a great
1990 based on three factors.
influence with the Reagan Administra­
F irst, advances in technology are
tion and have convinced that adminis­ reshaping the economics of the bank­
tration that deregulated, free-for-all,
ing industry and creating greater size
national branch banking will be good economies; i.e., certain kinds of bank­
for the country. I feel nothing could be ing functions are performed most effi­
further from the truth. Most of the ciently by large banks rather than by
regulations we used to have were initi­ numerous small banks.
ated by problems we had in the bank­
Second, new and greater competi­
ing business in the 1920s and ’30s.
tive forces, both domestic and interna­
These regulations were accomplished
tional, require development of big
to protect the public from an over­ U. S. banks if we are to compete
accelerating financial environment.
worldwide for multinational business.
The current conventional wisdom
T h ird , geographic deregulation
among money-center bankers is that
potentially can provide enormous ben­
the cause of the debacle at Continental
efits to consumers and businesses.
Bank, Chicago, was reliance on shortCongress recently took the first step
(C ontinued on page 16)
(Continued on page 12)

T

B

R. Crosby Kemper is chairmanICEO, United
Missouri Bank, Kansas City.

George R. Slater is chairmanICEO¡president,
i he Marine Corp., Milwaukee.

MID-CONTINENT BANKER for January, 198 5

CEOs of Mid-Continent-Area
, HCs
Tell What They Foresee in Coming Year

By Robert H. Stewart III

By Donald N. Brandin

By Carl R. Pohlad

N 1985, the U. S. and Texas econo­
mies will enter the third year of the
recovery that began in November,
1982.
Based on total employment statis­
tics, growth in the Texas economy is
outpacing growth in the national econ­
omy; over the last year, total employ­
ment has grown in Texas by 7% and by
3.3% in the U. S., excluding Texas.
While rate of growth in employment
should slow in 1985 as the recovery
matures, we still expect employment
growth in Texas to exceed U. S. aver­
ages. This growth will lead to expan­
sion of markets in which InterFirst’s 68
affiliate banks operate.
Growth in employment has been in
1984, and will continue to be in 1985,
well diversified by economic region
and by industry. There are six major
economic regions in Texas: the plains,
metroplex, east Texas, border, central
corridor and Gulf Coast. Employment
growth in the large metropolitan areas
of these economic regions over the last
(C ontinued on page 18)

o r e c a s t i n g the economy at
any time is a hazardous enterprise.
It is doubly hazardous this year be­
cause of questions about the strength
of the recovery and uncertainty about
the ability of the Administration and
Congress to jointly cope with the ma­
jo r econom ic issues that must be
addressed in the wake of the Novem­
ber elections. The timing and manner
in which we resolve such issues as def­
icit spending, trade imbalance and tax
reform will have a major impact on the
economy going forward.
The present recovery is moving into
a mature phase, and statistics in the
last half of the year have indicated a
significant slowing in rate of growth.
We tend to be generally optimistic
about the economy in 1985 despite the
slowdown, recognizing, however, that
there will continue to be pockets of
distress during 1985, particularly in
the agricultural areas of our trade terri­
tory. For those banks that have signifi­
cant exposure in those areas, further
problem situations can be expected to
(C ontinued on page 16)

F

has spawned a
competitive environment that
demands a level of management exper­
tise never needed in the past. Regula­
tory reform and technological innova­
tion have fostered dramatic changes in
just a few short years.
For 50 years, commercial banking
was a consistently stable and profitable
enterprise. Banking s reliable bottom
line created a complacency and resis­
tance to change that still persist. Cop­
ing with our new environment has left
some bankers disoriented; there have
been closures and liquidations in our
industry, and more casualties will fol­
low. The phenomenon that finds losers
acquired by winners is likely to con­
tinue for an indefinite period.
We will have to depend more on our
skills as managers than ever before.
We must improve productivity, iden­
tify new opportunities in the market­
place and create profitable new prod­
ucts. W e cannot accomplish these
o b jectiv es w ithout capable, welltrained people.
In the highly competitive environ-

Donald N. Brandin is chairman/CEO, Boat­
men’s Bancshares, Inc., St. Louis.

Carl R. Pohlad is president/CEO, FirM Mar­
quette National, Minneapolis.

I

Robert H . Stewart III is chairman/CEO, InterFirst Corp., and InterFirst Bank, both in Dal­
las.

MID-CONTINENT BANKER for January, 1985

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

D

e r e g u l a t io n

11

Forecast for 1985
ment of the future, the successful bank
will pay more attention to manage­
ment functions. Those who manage
well will be survivors. Those who don’t

manage their human resources effec­
tively will be losers in the eyes of stock­
holders and could cease to exist as
commercial-banking institutions. • •

Let's Join to Remove Inequities
Curbing Banking's Potential
By John W. Woods

T IS D IF F IC U L T today to pick up a
newspaper or magazine without
Iseeing
at least one article on interest
rates or some financial product. In fact,
most magazines directed to the work­
ing-woman audience seem to be full of
advice or suggestions about which
financial products to select and from
whom they should be purchased.
There are more financial services
available to the consumer today than
many of us who have spent some time
in the banking industry would have
dreamed possible 20 years ago.
The recent era of extremely high in­
terest rates attracted the attention of a
vast new audience. Realistic pricing of
services and introduction of new in­
vestm ent opportunities have given
consumers more reason than ever be­
fore to shop carefully. Consequently,
we are dealing with a customer base
that is far more sophisticated about
financial-product selection than in the
past.
Growth of this large market has
attracted nonbanking companies, most
of them well known, whose activities
have served to expand the market even
further. Many of these companies have
spent decades sharpening their skills
in attracting customer allegiance and
in packaging their products to fulfill
consumer needs. Because of their size,
nationwide operations and lack of reg­
ulatory restraint, they have enormous
potential for offering a wide variety of
financial products tailored to the spe­
cific desires of a consumer at a particu­
lar point in his or her life and adopting
these products to future needs as cus­
tomer requirements change. All these
developments have been healthy for
the American economy.
Unfortunately, however, the con­
sumer still remains shortchanged beJohn W. Woods is chairman/CEO, AmSouth
Bank and AmSouth Bancorp, Birmingham, Ala.

12

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

cause of regulatory and artificial re­
straints established by laws that have
outlived their usefulness. Banks are
not allowed to offer the full range of
services our customers desire. The
magnitude of that restraint can be seen
in the change in market share of finan­
cial assets held by commercial banks
over the past 30 years. In 1950, com­
mercial banks held more than 50% of
those assets. Today, that percentage
has decreased to about 35%.
There also is no question that com­
petition is more severe today for com­
mercial banks, but we should not over­
look the many achievements of the
banking industry. We offer, despite
the heavy hand of government regula­
tion and an archaic legal framework,
many innovative products and services
to our customers. Banks have been
quick to change over the years and
respond to new challenges. Indeed,
profitability for banks has been re­
markably consistent, and they have
been able to serve many of the econ­
omy’s needs in an important fashion.
That is the past, however, and we
need to redefine the debate about non­
bank competition in terms that present
the issues in their proper light. First of
all, it simply is unfair to American con­
sumers to deny them the benefits of
bank competition in appropriate finan­
cial-service markets. Additionally, it is
harmful to the American economy to
impose inefficiencies in delivery of ser­
vice based on laws designed for prob­
lems that no longer exist. Let us not be
bashful about pointing out it is the con­
sumer who ultimately bears the cost of
inefficiencies in our economy.
W hile we as bankers have done
much to overcome these challenges,
there are limits on what we can do. We
need product and geographic dereg­
ulation. W e have superb reta ildelivery systems already in place.
There is minimal incremental cost to
adding appropriate services to that de­

livery system. We should be able to
follow our customers and service their
demands in our highly mobile society.
The nationwide nonbank giants should
not have a monopoly on providing cer­
tain financial services to the American
consumer.
What can we do? Divisions within
our industry are a major problem for
us.
First, a concerted effort should be
made to persuade our trade associa­
tions to bury parochial differences and
present a unified front to Congress and
state legislatures.
Second, we should focus on keeping
the issue clearly defined for what it is
— serving the American consumer
better.
Third, we should not abrogate to our
competition fulfillment of certain con­
sumer-financial needs in this new era.
Much has been made of having a
“level playing field. ” I, too, wish we
could have a lev el playing field.
However, it’s even more important to
be able to put on a uniform and be
allowed to play on the field at all. The
challenge to the banking industry
affects all of us, no matter what our
size. Now is the time for small and
large banks to join in a united effort to
remove the inequities that keep us
from achieving our full potential. • •

Slater
(Continued fr o m page 10)
toward geographic deregulation when
the Senate approved a bill last fall that
clarified the states’ right to form inter­
state-banking regions. The House de­
clined to act on the bill, but it still
represented an important step in clar­
ifying the authority of states to form
regional-banking compacts.
Many experts also agree that be­
tween now and 1990, regional com­
pacts will and should serve as a transi­
tion, and only a transition, to full-scale
nationwide geographic deregulation.
Were full nationwide interstate bank­
ing permitted im m ediately, it’s prob­
able that few Midwest bank holding
com panies would survive the on­
slaught of the large multinational in­
stitutions on the East and West coasts.
Midwest bank holding companies of
any consequential size would be early

MID-CONTINENT BANKER for January, 1 9 8 5

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

afcyo ^?S-^entBanker ©Commerce Bank
MEMBER FDIC

No one knows the value of
time better than Commerce.
MID-CONTINENT BANKER for January, 1985

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

®

Kansas City

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

13

Forecast for 1985
targets of these giant banks. One con­
sequence would be ownership of most
large banks by holding companies out­
side of the Midwest region; i.e., by
institutions which might or might not
continue a m idw estern business
orientation.
Im m ediate nationwide deregula­
tion, therefore, would thwart growth
of major regional-banking institutions,
creating an undesirable concentration
of banking assets among huge financial
institutions located in a few of Amer­
ica’s largest cities. Regional geograph­
ic deregulation provides the opportu­
nity for existing Midwest holding com­
panies to combine into perhaps 10 to
20 powerful Midwest holding com­
panies big enough to survive and com­
pete in 1990. Regional-banking in­
stitutions headquartered in the Mid­
west have as their primary focus the
economic health of this region.
Many community banks also will
survive and prosper in this environ­
ment as regional banks will develop
broader capabilities for serving these
independent banks.
Regional deregulation may or may
not be economically sound for the
Midwest, depending on how the leg­
islation is designed. Three pitfalls
should be avoided as regional dereg­
ulation legislation is shaped:
1. In action , because doing nothing
is no longer an option and it would
greatly penalize this area when nation­
wide geographic deregulation evolves.
2. State-by-state g eog rap h ic d ereg ­
ulation because that approach only ac­
centuates the economic advantages of
large banks and powerful states over
smaller banking institutions and less
powerful states;
3. Selecting the w rong states, which
would result in a grouping of states
with dissimilar economic characteris­
tics and dissimilar banking needs.
There are numerous benefits of
well-conceived regional deregulation,
including 1. Greater economic de­
velopment and growth of Midwest
business; 2. A banking system head­
quartered here and responsive to the
Midwest; 3. Ranks large enough to
serve Midwest business; 4. Banks
large enough to prosper and compete
with large multinational banks; 5. A
stronger, more viable Midwest econ­
omy.
Selecting the region for deregula­
14

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

tion must be based on econom ic
criteria: 1. The region must be large
enough to be recognized as important
relative to the national and world econ­
omies of which it is a part. 2. The re­
gion should be homogeneous in order
to capture maximum economic ben­
efit, and it should enhance existing
economic strengths. 3. The region

Dots indicate manufacturing centers; squares indicate agri­
cultural production; stars indicate consumer durables.

should not create needless barriers to
natural growth.
Using these criteria, the Midwest
region should include the eight states
of Illinois, Indiana, Iowa, Michigan,
Minnesota, Missouri, Ohio and Wis­
consin.
This eight-state area represents only
12.7% of the total land area in the
United States.1 However, its popula­
tion represents 22.8% of the U. S.
population, which is the highest per­
centage of all regions in the country.2
Personal income is 23.5% of the total
U. S. figure and, again, the highest of
any region.3
The Midwest’s manufacturing value
added is 32.7% of the U. S. total and
also the highest of all regions.4 Agri­
cultural production represents 30.8%
of the U. S. total, highest in the
nation.0 Both manufacturing and agri­
cultural exports6, ' in the Midwest are
the highest of all regions, representing
34.7% of the U. S. total, respectively.
Comparing the various natural re­
gions in the U. S. with other countries
of the world, the Midwest ranks fifth in
the world in terms of gross domestic
product and is surpassed only by the
U .S.S .R ., Japan, West Germany and
France.8
Not only is the Midwest important

for its size, but the area is set apart
from the rest of the United States by
the homogeneity of its industrial base
across all eight states. Dominant in­
dustries include food processing,
manufacturing of automotive, con­
struction and farm equipment and pro­
duction of consumer durable goods
such as appliances and electronics.9
The heart of the region is dominated
by the Milwaukee-Chicago megalopo­
lis. The 12-county area comprised of
southeastern Wisconsin and north­
eastern Illinois, while representing
only 1.3% of the Midwest land area,
accounts for 16.4% of its population,
17.8% of manufacturing output and
19.1% of the region’s personal income. io
W isconsin pu blic policym akers
should attempt to strengthen existing
economic ties between Milwaukee and
Chicago. Commerce should not be in­
hibited by an artificial, political bound­
ary separating Wisconsin and Illinois.
W isconsin should avoid laws that
would pull Milwaukee and Chicago
apart or put them in different interstate-banking regions.
Based on econom ic criteria and
Midwest regional characteristics, the
broad outline for Wisconsin legislation
is set forth below.
Wisconsin should enact a law that
perm its, on a regional, reciprocal
basis, acquisition and merger of Wis­
consin banks and bank HCs by banks
and bank HCs headquartered in the
other seven states of the Midwest re­
gion; namely, Illinois, Indiana, Iowa,
Michigan, Minnesota, Missouri and
Ohio.
The law should stipulate that only
banks and bank HCs headquartered
within this eight-state region be per­
mitted to acquire and merge with
banks and bank HCs headquartered
within the region.
Because of the economic dominance
and in terd ep en d en ce of the Milwaukee-Chicago megalopolis, W is­
consin’s law must preserve and en­
hance the free movement of banking
resources within the vital 12-county
area of southeastern Wisconsin and
northeastern Illinois. That is, any bank
HC in this entire 12-county area must
have free and equal access to acquire
and merge with banks and bank HCs
throughout this 12-county megalopo­
lis.
A ccordingly, W isco n sin ’s law
should become effective when any
three of the other seven states, includ­
ing Illinois, enact substantially com­
patible laws.
Clearly, regional deregulation must
be designed prudently if it is to en­
hance the econom ic grow th and

MID-CONTINENT BANKER for January, 1 9 8 5

Would you love to generate three times the profit of a com­
mercial loan? Would you love to institute a program
that’s predicted to be 60% of the Capital Goods Market by
the 1990’s? Are you within arm’s reach of a telephone?
If the answers to all three of the above questions is “yes,”
then pick up the phone and call (502) 423-7730 . . . but
be prepared to fall in love. Because First Lease has a story
you’re going to love to hear.
First Lease is one of America’s largest equipment leasing
consultants. We help independent banks across the coun­
try set up profitable, in-house leasing departments without
a major investment in start-up and maintenance.
And First Lease works on a fee basis, so that leasing prof­
its stay where they belong . . . with our clients.

Fall in love in only two days
The best way to find out how your bank can start reaping
high equipment-leasing profits is to attend a First Lease
Two-Day Seminar.
In only two days, you’ll get a clear understanding of the pro­
cedures and huge benefits of equipment leasing. Plus,
you’ll discover what it takes to get started and how to
negotiate, document and fund an equipment lease
transaction.
But hurry, First Lease seminar space is limited and fills up
fast. To make your reservation or to find out more, call
(502) 423-7730 or fill out and mail the attached
coupon.
Then attend a First Lease seminar, whe
you’ll sit back, listen and "all in love.

I-------------------------------------------------Name

F ir s t L e a s e

AND EQUIPMENT CONSULTING CORP.

You’ll love leasing!
420 Hurstbourne Lane • Suite 202
Louisville, KY 40222

(502) 423-7730

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

Company Name
Position/Title
Address
State
Phone

MCQ1

Forecast for 1985
prosperity of the states involved. The
Midwest region, as defined, provides a
prudent region and with enactment of
regional-banking deregulation, as de­
scribed, will enhance the economies of
all participating states. • •
1. Land Area. Statistical Abstract o f the
United States 1984, U. S. Department of
C o m m erce: Bureau of the C en sus,
Washington, D. C ., December, 1983, page

202 .
2. Population, 1983. 1984 Survey of Buying

Power, Sales & Marketing Management,
July 23, 1984 (Vol. 133, No. 2), page B-3.
3. Total Personal Income, 1981 (in 1981 dol­
lars). Statistical Abstract o f the United
States 1983, U. S. Department of Com­
merce: Bureau of the Census, Washington,
D. C ., December, 1982, page 426.
4. Manufacturing Value Added, 1977. Statis­

tical Abstract of the United States 1984,

5.

6.

7.

8.

9.

10.

U. S. Department of Commerce: Bureau of
the Census, Washington, D. C ., Decem­
ber, 1983, page 767.
Agricultural Production. “Cash Receipts
From Farm Marketing, 1982,” 1984 Fact
Book of U. S. Agriculture, U. S. Depart­
ment of Agriculture, Washington, D. C .,
November, 1983, pages 23-24.
Manufacturing Exports, 1977. “Value of
shipments, export related 1977,” State and
Metropolitan Data Book 1982, U. S. D e­
partment of Commerce: Bureau of the Cen­
sus, W ashington, D. C ., August, 1982,
page 538.
Agricultural Exports 1982. Wisconsin Econ­
omy Scan, by Federal Reserve Bank of Chi ­
cago, 1984, page 88. (Original source was
U. S. Department of Agriculture.)
World Rankings By National Income 1981.
“Gross Domestic Product in U. S. Dollars
— 1981,” 1984 Reader’s Digest Almanac,
pages 476-479. Compiled from United Na­
tion’s publication, Statistical Yearbook, and
other U. N. sources. U. S. regional income
based on each region’s percent of total per­
sonal income X national GDP.
Industry Mix. Compiled from Places Rated
Almanac, Richard B oyer & David
Savageau, Rand McNally & Co.: Chicago,
1981, pages 338-360.
Megalopolis Relative to Region: Land area
(square miles); 1981 total personal income;
1977 manufacturing value added. All from:
County and City Plata Book, 1983, U. S.
Department of Commerce: Bureau of the
Census, U. S. Government Printing Office,
Washington, D. C., November, 1983. 1983
population: 1984 Survey of Buying Power,
pages C62-C68, C209-C212.

Brandin
(C ontinued fr o m page 11)
develop in addition to those already
identified.
Fortunately, Boatm en’s does not
have any significant loan problems in
16


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

those areas or in any other segment of
its portfolio. For that reason, we do not
anticipate any change in loan policy
although we are emphasizing through­
out the organization the necessity of
following proved disciplines in exten­
sion as well as servicing of loans of all
types.
Establishment of nonbank banks is
just one more assault on banks’ tradi­
tional business, highlighting once
again the inequity of current banking
law and regulation. How many of these
units actually will be established and
how effective they will be against
established banks is questionable.
Pressure will continue to be put on
federal and state legislators to permit
expanded authority in such related
lines as securities, insurance and real
estate. Interest in this type of ex­
panded authority varies widely in the
industry. For regional bank holding
companies like Boatmen’s, the pri­
mary interest and thrust will be for
interstate expansion. While it is un­
likely that any federal legislation will
be passed in 1985, it is likely that many
states will pass legislation to permit
regional compacts or contiguous state
expansion with reciprocity.
For Boatmen’s, following acquisi­
tion of CharterCorp of Kansas City, we
will become the largest banking orga­
nization in Missouri and the Missouri
trade territory, with assets of over $6
billion. As such, we will be well posi­
tioned to take advantage of any oppor­
tunities as they develop. • •

Kemper
(C ontinued fr o m page 10)
term foreign deposits, which were
controlled by fickle Asians and Arabs,
and that if Continental had had a more
stable deposit base from Mid-America,
its problems wouldn’t have occurred
— thus the need for branch banking.
That line of reasoning or wisdom is
pure bunk. The reason Continental
failed was extremely poor loan judg­
ment! If the bank had the opportunity
to reach out for more domestic de­
posits, it probably would have made
even more bad loans.
To do something well, you have to
be trained and experienced, and many

people getting into the traditional
banking business today have neither
the training nor the experience. Con­
sequently, many have failed and many
will fail. Many entrepreneurs and
speculators who have gotten into the
banking business, because they felt
that was where the honey was, already
have failed or are having many prob­
lems keeping their banking interests
alive and well. Other big companies
have gotten into the business in our
areas on a shoestring and are not play­
ing cricket with the public. One big
New York company has a subsidiary in
Kansas that is taking deposits, and of
the $1 million in initial capital, has lost
half of it in one year. Its deposits are
not insured by the FD IC , but by an
insurance company I have never heard
of before. On the face of it, it is one of
the weakest institutions in the state.
I, for one, feel New York City banks
should not lobby for national branch
banking in states here in the Middle
West until they clean up their own
acts. The very ones that are lobbying
the hardest have enormous problems
in their own backyards. The ones that
have far more foreign loans that are in
trouble than they have capital and
more domestic loans in trouble should
be taking half their before-tax profit
and putting it into a reserve until they
get such loans down to 50% of face
value. Instead, they are taking some of
this money that should be going into
reserves and pushing across the coun­
try, spending millions of dollars in lob­
bying to try to get into the deposit and
loan business in the Middle West.
These companies continue to pay div­
idends that take a potential buildup of
capital out of the bank; i.e., Continen­
tal Bank paid a dividend in April and
was, in essence, closed a short time
later.
These banks don’t care what it costs
or what they lose. All they care about is
market share. Unfortunately, most
money-center banks are being run by
men who are principally marketing
men and not loan men. In the old days,
men who ran the banks were principal­
ly loan men, but today, market-share,
regardless of the consequences, seems
to be the only criterion for leadership.
In my own opinion, lending still is
the guts of banking. It doesn’t do any
good to quadruple your market share if
you go broke doing it. My father al­
ways said, “It doesn’t do a bit of good to
say, ‘The other banks were doing it,
too’ if your bank is just as broke as
theirs are.’’
Unfortunately, these money-center
banks will do things in our areas in the
coming year that will tempt us to want

MID-CONTINENT BANKER for January, 19 8 5

Energy
lems

MEMBER F.D.I.C

First National Correspondent Consulting Services offers
educational and training opportunities that deal with the
vital issues and problems you face today.
Each “ hands-on” course features experienced in­
structors from First National Bank of Louisville—the
region’s largest and strongest bank. In a very short time,
you’ll gain information and refine skills that can
help you make your bank stronger and more
profitable.
All eight courses—three are new for 1985—
earn Continuing Education Units (CEU ’s) from
the University of Louisville.
In addition to the courses and seminars,

!7 0 M
First
National
offers other
programs: Retail Sales Incentive Program, Officer Call
Program, IRA Seminar. Each is custom-tailored for your
bank and your customers.
For a presentation of these programs or in­
formation on any of our services, contact First
National. And let us put the power of Financial
Energy to work for you.
Call Correspondent Consulting Services: Direct
(502) 581-7741; Kentucky WATS (800) 292-2272; In
other states (800) 821-5789.

Put it to work for you.
MID-CONTINENT BANKER for January, 1985


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

17

Forecast for 1985
to compete, but if we do, it will cause
us to lose money and weaken ourselves
just as they will lose money and further
weaken themselves. We must not be
tempted that way, and we must use
our influence with Congress and state
legislatures to keep their false banking
practices and shallow thinking out of
our area for the good of the public and
the econom y. I f they ev en tu ally
absorb the good regional banks, there
will be few good, well-run banks left,
and the whole business could much
more easily be nationalized. Right
now, the trend is for many corporate
treasurers, who are thinking soundly,
to place their banking business with
the solid, well-run regional banks in a
move to better protect their com­
panies. I have read several articles
about this trend recently.
So, in sum m ation, I think our
greatest challenge in the year to come
is to get the money-center banks to
clean up their own acts before they
attempt to come across the country
and pervert the good banking practices
of many of the fine regional banks. • •

Stewart
(C ontinued fr o m page 11)
six months and over the last year are
displayed below:
A nnualized
G row th Rate
Last
Last
Six M onths Y ear
Region
9.1%
8.8%
The Plains
8.7
10.6
Metroplex
6.8
5.2
East Texas
10.9
7.7
Border
14.7
Central Corridor
12.8
6.8
4.2
Gulf Coast
Not only has growth in the metroplex and central corridor been at a dou­
ble-digit pace over the last year, the
border and central corridor regions re­
main at double-digit-growth rates in
the latest six-month period. While
growth in most areas has slowed some,
growth in the border and Gulf Coast
areas has accelerated.
The border region was hit particu­
larly hard by peso devaluations in
1982, but the economic health of Mex­
ico has improved dramatically in 1984.

18


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

Increased certainty about the value of
the peso has contributed to a return to
more normal trade patterns; as a re­
sult, employment growth in the bor­
der area should be a positive for Texas
in 1985.
The energy industry affects primari­
ly three areas that have rebounded in
1984: The plains, east Texas and Gulf
Coast regions. While the current soft­
ness in oil prices has dampened the
typical year-end surge in drilling activ­
ity, it’s likely that December, 1983’s,
level of rig activity will be equaled in
1984. The oil industry is cyclical, but
because the U. S. economy still is in
expansion and several foreign nations’
energy use should be up in 1985, we
expect the energy industry to be a
modest plus for Texas in 1985.
Among other factors affecting our
growth in 1985, relocation of busi­
nesses to the state has and will con­
tinue to provide a dynamic synergism
to economic life in Texas. The metroplex and central corridor regions par­
ticularly have benefited from corpo­
rate relocations. Infrastructure needs,
both public and private, generated by
our population growth, will continue
to stimulate real-estate activity in
1985. And, finally, economic activity
among defense contractors should pro­
vide a boost to Texas in 1985. Defense
contractors in Texas obtain the thirdhighest percentage of defense con­
tracts in the U. S., and defense back­
logs today are about double their level
in 1980.
In conclusion, the Texas market is

very strong and should remain so in
1985. While growth in our major met­
ropolitan areas often is in the double­
digit area, total employment outside
those areas is 5% above last year’s
level. M anufacturing em ploym ent
outside of Texas has stalled over the
last three months, while manufactur­
ing employment in Texas continues to
grow at nearly a 4% annual rate over
the same period. Indeed, the Texas
economy is fortunate to begin 1985
with considerable potential. • •

Roberts Leaves St. Louis Fed
To Take Over Chicago Thrift
Theodore H. Roberts resigned as
president, St. Louis Fed, last month to
becom e p resident/C EO , Talm an
Home Federal Savings & Loan, Chica­
go.

Talman is said to be the largest sav­
ings institution in Illinois with $7 bil­
lion in assets and 60 branches.
Mr. Roberts’ appointment is part of
an attempt to revitalize the ailing thrift
with new top management. The S&L
is under the control of the Federal Sav­
ings and Loan Insurance Corp.
Mr. Roberts was chief financial offi­
cer at Harris Rank, Chicago, prior to
assuming the St. Louis Fed presidency
in January, 1983. He had been with
Harris since 1953.

Banks Gain in IRA-Keogh Money
ANKS and credit unions increased their shares of IRA and Keogh
assets during the first half of 1984, according to the Employee
Benefit Research Institute (EBRI). Banks showed the largest per­
centage increase.
Banks posted a 3.6 percentage-point increase during the period,
giving them a 33.4% share of the $120.2-billion market. Market share
for S&Ls dropped 1.7%, to 26.4%. Also losing ground are mutual
savings banks (down .8%, to 7.8%), mutual funds (down .5%, to 16%),
and life-insurance firms (down 1.9%, to 10.1%).
Total assets in IRA and Keogh accounts increased 19% during the
six-month period, according to EBR I. Asset growth during 1983 was
60%. In terms of absolute dollar amounts, assets have grown fairly
steadily since 1981 — with an average increase of $30 billion each year
— but the increase in total asset amounts causes the annual percentage
increase to get smaller. This suggests a leveling off of participation rates
among those eligible to open each of the accounts.

B

MID-CONTINENT BANKER for January, 1 9 8 5

G oss Sell Manager
Builds Business Fivewavs.
Sell More Services
•Per Customer.

5

Enhance Personnel
•And Product
Management.

1

Color-based
"show & tell" soft­
ware helps your
platform staff
present services effec­
tively, cross sell related
services easily and
answer complex
customer "what if"
questions
responsively.

Valuable activity
information is
available at a key­
stroke to assist you in
making accurate and
timely management
decisions about per­
sonnel, products and
promotional
questions.

2

Build Long-Term Customer
•Relationships.

Cross Sell Manager. All The Right
Answers. Just In Time.

Customers will appreciate your
Cross Sell Manager is a selling tool, a
personal and professional financial
training course and a management system
counseling and will return for additional
in one. So you can manage effectively,
services as their relationship with your
rather than playing the odds.
institution grows.
Take a moment and find out more.

Promote An Effective And
•Motivated Staff.

Toll free 1-800-4-BERM AN (1-800-423-7626).' In Virginia,
1-804-971-5989. Or write Berman Technologies, Dept. MCB 185
1222 Harris Street, Charlottesville, Virginia 22901.

Comprehensive and exciting video
based training teaches your staff the fine
art of consultative selling. The dynamic
IBM®-PC software helps them gain
product knowledge quickly.

4

Optimize Your Advertising
•Dollars.

Vital information about your customers'
source of interest and key service interests
help you target promotional dollars to
achieve the best product and media mix.

® Copyright, 1984, Berman Technologies Corp. All rights reserved. Subject to license agreement.
C ross Sell M anager'“is a trademark of Berman Technologies Corporation.


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

IBM is a registered trademark of International Business M achines C orporation.

Financing Service-Oriented Sector
To Be Focus of Late '80s Lenders
This, in some cases, will require addi­
tional provisions. Our industry must
take a proactive position in estab­
HE FIRST HALF of the 1980s was lishing adequate tools for properly
spent trying to deal with inflation,
establishing our reserves. If we do not,
recession and unemployment. Wethe regulatory authorities will have no
hope most of this is behind us for the alternative but to establish methodolo­
second half of the 80s. The prospect gies we must use. While we continue
for 1985 appears to be one of growth to experience an expanding economy,
and prosperity. Financial institutions it is appropriate to reserve for tomor­
should benefit from new loan growth row’s losses. No one plans on having
and proper management risk in their charge-offs, but some loans always will
current portfolios.
turn bad. Rather than wait, we need to
Commercial lending in the latter be reserving for those loans now when
part of the 1980s also will require addi­ the economy is strong and loans being
tional skills to finance an economy that negotiated are of a higher quality.
is increasingly service-oriented. The When we undergo a downturn, we
already will have reserved for them.
The year 1985 is one of the years we
should take definite steps to increase
reserves.
Patrick L. Flinn is
Increased geographic expansion also
pres., Robert Mor­
will take place during 1985. This will
ris Associates, and
come from many sources, including,
e .v .p ., Citizens &
but not limited to, regional interstate
Southern Nat’l, At­
pacts and nonbank banks. All these ex­
lanta.

By Patrick L. Flinn

T

five Cs of credit will still predominate,
but makeup of cash flows, income
statements and balance sheets will be
different. W e’ve already seen some in­
creased lending activity in this sector.
What we have seen is only a small frag­
ment of what we can expect to see in
1985 and future years. How we deal
with this opportunity will influence
our organizations.
We will continue to finance our
manufacturing and production sectors,
but they will becom e a relatively
smaller segment of our commercial
and industrial loans in 1985 and the
future. Distribution and service sec­
tors will challenge our industry’s abil­
ity to adjust to change. Increased tech­
nology will require better-educated,
more sophisticated lending staffs.
In addition to a changing economic
environment, our organizations will
need to continue to emphasize quality
control. This is best illustrated by the
large number of bank failures during
1984. A back-to-the-basics approach
will be necessary for our organizations
to participate in real growth.
Continued emphasis by regulatory
authorities on reserves for loan-loss
adequacy will cause most institutions
to increase their analyses in establish­
ment of their provisions and reserves.

20

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

pansions will tax the capacities of our
current staffs. An increased number of
lending and credit personnel will be
necessary. Back-office support staffs
also may need to be expanded.
The strength to access and train
these additional personnel will be in
the hands of the best performing finan­
cial institutions. They’re the ones that
have recognized the need for hiring
and training quality people. They are
committed to continued training at all
levels. They have the flexibility to
move staff geographically in order to
transfer their corporate philosophies.
The movement of staff is not creating a
void, but provides an opportunity for
someone’s growth.
In summary, 1985 will be a year that
requires us to lend an ever-increasing
amount of dollars to the distribution
and service industries. Our reserve for
loan losses will be the result of a more
sophisticated analysis and generally
will increase in an expanding econ­
omy. Finally, financial institutions
committed to continued education and
training will hire and train an increas­
ing number of personnel. This in­
creased number will be used to staff
opportunities created by geographic
expansion. • •

A/L Mgt., Acquisitions, Nonbanks
Are Concerns of Big-Bank CEOs
ORE THAN HALF the chief ex­
sponded to the survey, termed by
ecutive officers of the nation’s
Egon Zehnder as an unprecedented
largest banks expect their institutions
response rate among so large and so
to acquire nonbanking businesses in
senior a group.
the next five years. Their favorite
The survey found that desp ite
targets: insurance companies (72%)
C EO s’ acquisition plans, acquisition
and real-estate/mortgage-related firms
efforts will not slow within their own
(35%).
industry. Almost 70% of them expect
The C EO s’ five most critical con­
to buy other banks, according to the
cerns are led by asset/liability manage­
survey, and another 25% think their
ment, followed in order by loan losses/
institutions will be a cq u ired within
risk exposure, competitive environ­
five years.
ment, business development and deC ritical C on cern s. Egon Zehnder
regulation/reregulation/strategic plan­
points out that with poorly managed
ning.
banks continuing to falter at 1983’s
Sears, Roebuck will pose the major
high levels, it’s not surprising that the
competitive threat in C EO s’ markets
most frequently cited critical concerns
in 1990.
mirror CEO choices of last year. Sig­
These are some of the key findings
nificantly, loan losses/risk exposu re
from a November survey of the 2,235
jumped to second place from eighth in
CEOs of all U. S. commercial banks
1983, and deregulation dropped from
with assets of more than $100 million.
second to fifth.
This third annual survey was con­
In other noteworthy shifts, inter­
ducted by the U. S. offices of Egon
state banking (which tied with em­
Zehnder International, a worldwide
ployee relations as No. 14 in a list of 23
m anagem ent-consulting firm spe­
critical concerns) was cited by twice as
cializing in executive search. CEOs
many CEOs as in 1983, and the cita­
surveyed control 83% of all U. S. com­
tions increased dramatically as bank
mercial-bank assets. Over 33% re(Continued on page 44)

M

MID-CONTINENT BANKER for January, 1 9 8 5

Nothing Reaches Your Financial Market
Like United States Banker

Every banking institution with assets o f
$ 5 0 ,0 0 0 ,0 0 0 or more is covered. T h a t’s
9 0 % o f the market.

-----------------------------------------------------------------------------------1

Senior officers in commercial banks, sav­
ings & loan associations, savings banks,
insurance companies, credit unions, invest­
m ent and finance firms all read United
States Banker. The in-depth analysis o f
current financial issues makes U.S. Banker
essential reading for these leading ex­
ecutives.

Name _____________________________________________

For a complete media file, or for a per­
sonal subscription, return the coupon or
call Peggie Heidel at (203) 661-5000.

MID-CONTINENT BANKER for January, 1985


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

I I Please send a media file and current issue.
I I Enter my subscription—One Year $24 (20% saving).

Title.
Company.
Address _
City_____

_State.

.Zip.

Telephone ________________________________________
Return coupon to:

United States Banker
One River Road, Cos Cob, CT 06807
L _______________________ ___________ - ________________ J

21

Economy to Grow Through 1980s,
But at Relatively Modest Pace
The significance of this prediction for banks and their customers,
from a business standpoint, is that; from year to year, changes
in business conditions are not likely to be great. This means that
conditions are much more within the control of bank managements
than outside their control.

By Roy E. Moor
F I were to give a title to this pre­ we entered into a long-term horizontal
sentation, it essentially would be trading range for every fixed-income
“More of the Same”; that is, we will see market that will prevail throughout at
more of the same experiences we have least the rest of the decade and will
had over the last six to nine to 12 provide relative stability in every
months, more of the same in almost financial market. I think that is what
every market in which we are involved we saw in 1983; I think it is what we
have seen in 1984, with rates going up
through 1985.
If you want to make a forecast for in the early part of 1984, then coming
your own operations, a general one ap­ back down to about the same levels
plicable to most markets in which you they started at when last year began.
My specific forecast for 1985 is that
individually deal for 1985, it’s likely to
be similar to the last three to five rates will be rising, but modestly. B e­
months of experience (as of the date of tween now and D ecem b er, 1985,
short-term rates will increase (in about
the First Chicago conference).
Last year, I discussed three general every short market) 100 basis points —
characteristics of the overall business about 1% above today’s levels. That is
environment as I foresaw it, not only an extraordinarily modest change in
the third year of a business-cycle re­
for 1984, but for the rest of the decade.
I want to repeat those three character­ covery.
Within the bank, my department
istics before going into 1985 specifics.
One, I saw relatively little fluctua­ has been asked what the up-side risk in
tion in any financial markets during the those markets is because the faster
those rates increase in those markets,
rest of the decade. My view was that,
the worse it is for our earnings. The
some time in the second half of 1982,

I

Pictured at First Nat'l of Chicago's 38th annual conference of bank correspon­
dents last November are (I. to r.): Nicholas J. De Leonardis, v.p./ch., money
committee, municipal finance division; W alterC. Bean, v.p., domestic equity
division, First Chicago Investment Advisors; Edward M. Roob, s.v.p./v. ch.,
asset/liability management committee; Roy E. Moor, s.v.p., chief economist,
economics department; and Jam es K. Suhr, s.v.p./head, U. S. financial in­
stitutions group. All appeared on program.

22

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

maximum up-side risk I think has any
likelihood of occurring in 1985 is 150
basis points — H/2% in any short-term,
fixed-income market. One characteris­
tic, therefore, of the overall environ­
ment is the relatively modest changes
either upward or downward, essential­
ly relative stability, in all fixed-income
markets.
A second condition I mentioned last
year essentially was the same charac­
teristic with respect to the U. S. econ­
omy. I see the economy generally
growing throughout the balance of the
decade. However, rate of growth is
likely to be, now that the recession and
recession recoupm ent in the early
stages of recovery are behind us, rel­
atively slow — slow by comparison to
the hyper-inflationary period of the
1970s and, indeed, to some of the rapid
growth rates we have experienced in
prior decades.
But the key nature of the forecast is
that the swing in business conditions
from peak to trough to peak is relative­
ly small. The amplitude of the swing is
blunted, or held down. The signifi­
cance of that from a business stand­
point, for you and your bank customers
as well as for us, is that from year to
year, changes in business conditions
are not likely to be great. What we
have seen is what we are likely to see in
an ensuing year with only minor
changes. What that, in turn, means for
managements of banks is that condi­
tions are much more within our control
than outside our control.
The business environment remains
relatively similar from year to year. In
Roy E . Moor is s .v .p ./chief economist, eco­
nomics dept., First Natl, Chicago. This
article is an edited transcript o f a report
presented in November by D r. Moor at the
bank’s 38th annual conference o f bank cor­
respondents .

MID-CONTINENT BANKER for January, 198 5

1985, I see the econom y growing
throughout the entire year, but rel­
atively modestly, just as it has in the
last three to five months.
The third condition I mentioned a
year ago was a continued low inflation
rate. This has a lot of significance, both
in the way we manage our own affairs
and the way in which businesses gen­
erally manage their affairs. Price in­
creases are not likely to be occurring in
any dramatic form in any market we
know of in 1985. The inflation environ­
ment for all of 1985 is similar to what
we have experienced in 1984, and the
differences are so modest that an econ­
omist should not worry about trying to
forecast them . W hat this m eans,
therefore, is a much heavier emphasis
on cost control/cost management than
any of us experienced in the 1970s or in
prior periods.
These three conditions are expected
to continue not only in 1985, but for
the rest of this decade, as I see it.
Specifics o f 1985. 1 expect businessloan demands to be rising about 15% in
terms of external credit requirements
in 1985 compared to 1984. That is a
strong number. It was driven much
more in the past not so much by a need
for working capital as by a need for
expansion, for modernization, for up­
grading of capital equipment in par­
ticular.
There are some qualifications to this
forecast, and I would like to stress
them.
First, the growth is largely in smalland medium-sized companies — the
so-called middle-market area— rather
than in large companies. This is similar
again to conditions in 1984, when the
greatest growth occurred in that par­
ticular market area.
Second, while I am comfortable
with the forecast — and the ones I have
given in the past generally have ma­
terialized with respect to overall busi­
ness-borrowing requirements — I am
not as comfortable in terms of fore­
casting distribution or mix of those
borrow ing req u irem en ts betw een
types of markets. As we know, those
markets have becom e vastly more
competitive than in the past; there­
fore, there might be an increased shift
again in 1985, as in 1984, relatively
toward the commercial-paper market.
There might be — and I cannot assess
this — some shift relatively toward
financing in longer-term markets as
contrasted with the heavy orientation
in 1984 to the shorter end, even
though I continue to see a positive
yield curve prevailing between short
and long markets, not only in 1985, but
throughout the rest of the decade.

Third, foreign sources of funds have
become vastly more significant poten­
tial competitors for essentially all types
of businesses. Not only the largest cor­
porations in the U. S., but all types of
businesses in this country are likely to
be drawing in creasin gly on such
sources.
I already have mentioned the need
for cost containment among our busi­
ness clients. Some of the same factors I
stressed last year, such as continued
high level of interest rates, competi­
tion from other banks and other finan­

How Will Bond Markets
Fare in Coming Year?
HE BOND-M ARKET OUTLOOK was discussed in November at
First National of Chicago’s annual conference of bank correspon­
dents by Nicholas J. De Leonardis, vice president/chairman, money
management committee. Here is how he sees it:
First, it should be recognized that the Fed has a great deal invested in
its fight against inflation, and while it’s desirous of seeing the current
recovery continue, it will not abandon its anti-inflation posture.
Second, until the post-election government, President and Congress
are prepared to come to grips with the deficit, the federal government
will continue to exert pressure on the marketplace through its huge
deficits, which are projected to exceed $200 billion.
Third, credit needs of our states and political subdivisions are pro­
jected to remain moderate. This has been a result of increased taxes and
improved fiscal positions resulting from the current recovery.
Fourth, credit demands of the private sector are expected to remain
strong during the forthcoming year, and their requirements will be felt
particularly in the banking system and commercial-paper market. Bal­
ance sheets of nonfinancial corporations could come under pressure as
liquidity diminishes and short-term- to long-term-debt ratios reflect
greater reliance on short-term debt.
Fifth, long-term interest rates during the current recovery have not
responded as in previous upturns in that they have trended higher in the
early stages of the economic advance, as opposed to the downward bias
demonstrated in past recoveries.
Sixth, despite the higher level of long-term yields, current spread
relationships between short- and long-term rates seem to be tracking, as
in the past, and suggest that, as we enter the third year of the recovery,
we can expect a further flattening in the yield curve. As corporations
increase their dependency on short-term debt, there’s also a remote
possibility we could see an inversion in the yield curve.
Seventh, interest rates during the next year will remain under pres­
sure, and the trend should be for higher levels; although, in Mr. De
Leonardis’ judgment, highs in interest rates for this cycle already oc­
curred last June. Further, the higher than trough levels of interest rates
during the first two years of this recovery already have slowed down
certain interest-rate-sensitive sectors of the economy; whereas, in pre­
vious cycles, this phenomenon did not occur until the third year of a
recovery. This overall slowing in mid-cycle will have the effect of
tempering the extent of further increases in bond rates. Finally, if the
post-election government does demonstrate a willingness to come to
terms with the deficit, we possibly could see long-term rates peaking
from current levels between mid-year and the third quarter of 1985.
Therefore, Mr. De Leonardis expects five-year treasuries to peak at
123/8%-12%%; long-term governments, 121/4%-121/2%; “A” Moody’s,
14V4%-14V2%; and the Bond Buyer’s Index of tax-exempts, 10V4%10y2%, all of which are well below June, 1984, levels.

T

MID-CONTINENT BANKER for January, 1985

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

cial interm ediaries, are all there.
There’s one additional factor that prob­
ably is becoming more dominant in
many business markets than ever be­
fore, and that is the toughness of for­
eign competitors, not just in the bank­
ing area, but in every aspect of busi­
ness. The reason for stressing this for
1985 is that the competition is deter­
mined largely by the value of the dollar
in the preceding year. Regrettably, I
see increased foreign competition in
every financial and real market I know
of in 1985 compared to 1984. Even if

23

the dollar declined somewhat in value
— further in value relative to its peak a
few months ago — and I do expect
some modest decline as we go further
into 1985, it will be little relief or ben­
efit to any businesses as we go through
this year.
Agricultural P ictu re. As I look at the
agricultural picture, it is almost unre­
mittingly bleak. Production is up for
most crops, suggesting continued
price weakness. I don’t foresee any
government programs that will benefit
agriculture this year. Foreign demand
for agricultural products generally is
increasing, but not for agricultural
products from the U. S. We consis­
tently are losing market share in world
agricultural markets and in world agri­
business markets as a result of the
strength of the dollar in 1984. We will
continue to lose market share through­
out all of 1985.
A year ago, I talked about the transi­
tion from fixed- to variable-rate mort­
gages. As I see it today, that transition
is complete. Basically, the mortgage
market for residences now is essential­
ly 100% variable-rate market and will
not change in the foreseeable future.
In 1985, I expect there will be some­
what less new-home construction in
virtually every locality than there was
in the early months of 1984. We no
longer have as much of a backlog of
new-home demand, and the specula­
tive fervor that existed in early 1984 as
a potential for rising home values has

largely dissipated.
Moreover, with cost cutting so uni­
versal among companies, there are
likely to be fewer employee transfers
and, therefore, less turnover of ex­
isting homes this year. I expect that in
1985 th ere will be no p articu lar
changes in home values relative to
1984. There will be about a million and
a half new-home starts nationwide and
somewhat reduced demands for new
mortgages compared particularly to
the early months of 1984.
Aside from mortgages, consumerrelated loan demand should grow
throughout 1985. This growth, howev­
er, will not be as vigorous as we saw in
the first six months of 1984. A year ago,
I had forecast that installment-credit
consum er-loan dem and generally
would be rising about 9% year over
year; that turned out to be fairly accu­
rate. For 1985, by comparison, I ex­
pect an increase of about 5%. There
are some positive aspects to this.
First, the consumer is becoming
more liquid, is increasing his financial
assets, a major source of new deposits
for most of us in banking. Moreover,
household balance sheets are becom­
ing stronger, and credit-worthiness in
the consumer sector is increasing from
already reasonably healthy levels. A
year ago, I said general stability finally
had arrived in deposit markets after
the substantial adjustments brought
about by deregulation. Through 1984,
as I said a year ago, depositors were

Policy Frameworks Outlined
For Capital-Ratio Policy
OMPONENTS for an effective capital-ratio policy were outlined at
First National of Chicago’s conference of bank correspondents in
November by William J. McDonough, executive vice president/chief
financial officer, asset/liability management committee. According to
Mr. McDonough, they essentially amount to a checklist for creation of
proper balancing of risk and return throughout a bank’s operations.
These components are:
• A policy framework for interest-rate risk management that explicit­
ly measures risk inherent in mismatching and relates it to both the profit
potential of mismatching and risk capacity of the organization.
• A policy framework for liquidity management that accurately mea­
sures a bank’s funding capacity and identifies ways to improve that
capacity.
• A policy framework for credit risk management that seeks to con­
strain aggregate credit risk through careful analysis, proper pricing,
diversification and aggressive credit risk management.
• A policy framework for strategic planning of growth that properly
identifies risk and return trade-offs in both new and existing business
opportunities and explicitly incorporates appropriate aggregate risk
constraints.
• A policy framework for capital management that continually en­
courages access to new sources of capital.

C

24

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

likely to change their holdings in a
more balanced way under a betterunderstood set of conditions. Repeat
the same thing for 1985. What you
have seen by way of deposit changes in
all the various forms of deposits is like­
ly to be repeated, at least in 1985.
The consumer remains extremely
interest sensitive, and so we are get­
ting increasing com petition from
alternative types of short-term liquid
instruments. I expect that competition
to intensify in 1985, but the consumer,
at the same time, is more liquid, and
there’s a greater pool of funds from
which to draw deposits from the
household sector as we go through this
year.
These deposit forecasts by them ­
selves point to a further pinching of
interest-rate spreads within the bank­
ing industry in 1985, and that, there­
fore, re-emphasizes the need for cost
containment and cost controls in every
area in our own operations as we go
through the year.
One major cost continues to be
labor. I had forecast a year ago that
average hourly earnings for bank em­
ployees would rise only about 4Vfe% in
1984. Lo and behold, that turns out to
have been a more accurate forecast
than I really believed when I made it a
year ago, and it continues to be my
forecast for 1985 over 1984.
Essentially, our interest-rate fore­
casts, however, are not based on Fed
policy. I think the Fed will remain a
neutral factor in most financial markets
during 1985.
Our major expectation for rising in­
terest rates is based on business-credit
demands reasserting themselves as we
go through 1985. One negative factor
pushing up interest rates is a signifi­
cant slowdown in business cash flow
and in business financial conditions,
forcing them increasingly to external
markets.
By now, we can reasonably trace the
economic consequences to our indus­
try of this challenging new world in
which we now operate.
• One of those consequences is that
at least some portion of the industry
must continue to tighten its belt.
• A second is that we must scruti­
nize credit quality of our customers
and their potential for survivability as
never before.
• The third is that we must all look
to new products, new services and new
markets to complement our opera­
tions.
• Finally, to strengthen our market
positions, all of us must expand our
own interrelationships and the ways in
which we do business together. • •

MID-CONTINENT BANKER for January, 1 9 8 5

Attention Bank CEO s:

How Does Y ou r Bank
“ Introduce” the New D irector
To His New Job ?
H E N E W L Y E L E C T E D bank d irecto r probably seem s
overw helm ed with the responsibilities of his new jo b and the
com plexities o f th e banking system . So, you’ll want to acquaint
him with his “new ch air” as quickly and as “gen tly” as possible.
Your bank undoubtedly has a portfolio of m aterial to hand to
the new d irector. O ur instructional folder, en titled “B r ie fin g th e
N ew B a n k D ir e c t o r ,” can b e a useful addition to your introduc­
tory m aterial. It is w ritten by D r. Lew is E . Davids, editor of T h e
BAN K B O A R D L etter.
“B r ie fin g th e N ew B a n k D ir e c t o r ” provides the recip ien t with
an overview of the d irecto r’s jo b and responsibilities and also
offers suggestions on “hom ew ork” and “reading” assignm ents
that will bring him quickly up-to-date in his jo b .
This 8-page folder concludes with what the author has term ed
the “20 C om m andm ents for Bank D irecto rs” starting with “Thou
shalt not attem pt to usurp prerogatives o f m an agem en t,” and
ending with “Thou shalt subm it thy resignation gracefully and
with dignity when no longer making a positive contribution to the
b an k .”
F o r a F R E E copy of this folder, fill in the coupon below . You’ll
receive this plus oth er inform ation con cern in g the bank d irecto r’s
jo b that can b e useful to him and, of course, to the bank.

T

r------------------------------------------------------------ 1

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

Please send me a F R E E copy of “Briefing the New Bank Director
along with other information about The BANK BOARD Letter.

|
|

N am e_________________________T itle ________________________
Bank _____________________________________________________ _
I

Address ___________________________________________________ _

I

City __________________ S ta te ______________Z ip ______________

MID-CONTINENT BANKER for January, 1985

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

I

25

About B anks
ILLINOIS
Service Aids Corporations
Selling Autos to Employees
C ole-T aylor F in an cial Group,
Northbrook, has a new program to aid
corporations in transferring ownership
of com pany-owned autos to em ­
ployees.
The program is believed to be the
first of its kind and provides an alterna­
tive to firms affected by recent changes
in federal tax law that limit their ability
to take full advantage of investmenttax credits/depreciation on companyowned vehicles used by employees.
The program enables firms to sell
autos to employees in a single transac­
tion. All employee buyers receive
100% uniform Cole-Taylor purchase
financing at preferred corporate sim­
ple-interest rates.
New federal tax regulations force
firms to maintain extensive records on
auto usage. They can take tax credits
and depreciation only to the extent an
employee drives a car for actual busi­
ness-related purposes. Transferring
ownership enables firms to deduct
reim bursem ents to em ployees for
driving costs as a business expense.

Nine of the current 14 non-employee
directors of Continental Bank, Chica­
go, will not stand for re-election at the
annual stockholders’ meeting in April.
The action is part of a board restructur­
ing announced last July by the FD IC
as a requirement in connection with
FD IC assistance to the bank. In addi­
tion to the nine, two other directors
left the bank prior to the end of 1984.
They are Vernon R. Loucks Jr., president/CEO, Baxter Travenol Labo­
ratories, and Weston R. Christopherson, former chairman/CEO, Jew el
Companies. Mr. Christopherson has
been named chairman/CEO, North­
ern Trust Corp. The nine directors not
standing for re -e le c tio n include
Raymond C. Baumhart, president,
Loyola University; James F. Beré,

26

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

Bankers

chairman/CEO, Borg-Warner Corp.;
William B. Johnson, chairman/CEO,
IC Industries; Jewel S. LaFontant,
senior partner, Vedder, Price, Kauf­
man & Kammholz; Robert H. Malott,
chairman/CEO, FM C Corp.; Marvin
G. Mitchell, retired chairman/CEO,
C BI Industries; Paul J. Rizzo, vice
chairman, IBM Corp.; Thomas H.
Roberts Jr ., chairman/CEO/president, D E K A L B A gResearch; and
Blaine J. Yarrington, retired executive
vice president, Standard Oil of Indi­
ana. The nine are expected to remain
on the board until the shareholders’
meeting.

Cole-Taylor Financial Group, Inc.,
Northbrook, has named J. Houstoun
(Howie) M. Clinch Jr. senior vice president/administration and consulting
and Paula L. Barnett training/development manager. Mr. Clinch moved
from Peat, Marwick, Mitchell & Co.,
Chicago, and Ms. Barnett went to
C ole-Taylor from Bankers Life &
Casualty Co., Chicago.
James E . Welch has been elected
president/C EO , Corn B elt Bank,
Bloomington. He formerly was presi­
dent, First National, Champaign. Mr.
Welch succeeded Harry M. Petrie,
who retired after serving as president
for 13 years.
Weston R. Christopherson has been
nam ed
chairm an/C EO /director,
Northern Trust Corp. and Northern
Trust Bank, Chicago. He succeeds
Philip W. K. Sweet Jr., who will serve
as a consultant for an 18-month period.
Mr. Christopherson is a retired chair­
man/CEO, Jew el Com panies, and
formerly was a director of Continental

Accreditation Bestowed
The Office of the Commissioner of
Banks and Trust Companies of the
State of Illinois has become the first
state banking department in the
U. S. to receive full accreditation in
the Conference of State Bank Super­
visors (CSBS) accreditation pro­
gram.
The program was designed by
CSBS to provide state banking de­
partments with an independent ex­
ternal evaluation of their operations
and personnel. A similar program
was recently recommended by the
Task Group on Financial Services
chaired by Vice President George
Bush.
The evaluation leading up to
accreditation was conducted during
the past year and included on-site
reviews of the department’s opera­
tions and personnel.
William C. Harris, Illinois com­
missioner of banks and trust com­
panies, said the accreditation “paves
the way for a decreased federal reg­
ulator p resen ce in the statechartered banks in Illinois.”

Illinois National. No other top-man­
agement changes were announced.
Mr. Sweet announced his intention to
retire last April, subject to selection of
his replacement. In other action, the
HC has agreed to acquire a minority
interest in Stotler & Co., Chicagobased futures-commission merchant.
The agreement is subject to regulator
approval and provides for Stotler &
Co. to clear all futures transactions for
N orthern Futures C orp., futurescommission-merchant subsidiary of
the HC.
Elmhurst National has named Robert
G. Girolamo Sr. and Walter R. John­
ston vice presidents/corporate bank­
ing. Both will be expanding the bank’s
overall com m ercial-loan portfolio
through loan origination and newbusiness development. Mr. Girolamo
formerly was with Bank of Elmhurst;
Mr. Johnston formerly was with First
Chicago Credit Corp. In other action,

MID-CONTINENT BANKER for January, 1 9 8 5

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

The
Effective
Board Audit

is demanding more disclosure from all
businesses, including banking. Thus,
bankers literally are forced to re-exam­
ine policies on types of information
that can be disclosed publicly. The
board's disclosure policy can be a major
factor in the public's judgment of a
bank. The fact that a bank is willing to
discuss . . . or make public . . . any of
its actions will encourage high stan­
dards of conduct by the bank staff.
This manual (over 200 pages) will help
directors probe "grey” areas of business
conduct so that directors can establish
written codes for their own bank.

QUAN TITY PRICES

2 - 5 copies — $23.00 ea.
6 - 1 0 copies — $21.50 ea.
BOARD PO LICY ON RISK MANAGE­
MENT. $20.00. This 160-page manual
provides the vital information a board
needs to formulate a system to recog­
nize insurable and uninsurable risks
and evaluate and provide for them. In­
cluded are an insurance guideline and
checklists to identify and protect direc­
tors against various risks. Bonus fea­
ture: A model board policy of risk
management adaptable to the unique
situations at any bank. Every member
of your bank's board should have a
copy!

/w iXrK*o amJ Officer! •/ Firn

CORPORATE
ETHICS

^
RISK
MANAGEMENT
BANK BOARD

$22

LOAN POLICY

Zl

$20.50

B

THE BANK BOARD AND LOAN
PO LICY. $16.00. (Fourth Edition)
Recently off the press! This revised and
expanded manual enables directors to
be a step ahead of bank regulators by
providing current loan and credit poli­
cies of numerous well-managed banks.
These policies, adaptable to any bank
situation, can aid your bank in estab­
lishing broad guidelines for lending
officers. Bonus feature: Loan policy of
one of the nation's major banks, loaded
with ideas for your bank! Remember:
A written loan policy can protect direc­
tors from lawsuits arising from failure
to establish sound lending policies!
Order enough copies for all your direc­
tors!

QUAN TITY PRICES

2 - 5 copies — $17.50 ea.
6 - 1 0 copies — $16.50 ea.
THE

What Every Director
Should Know About

Conflicts of Interest

$16

CO N FLICTS OF INTEREST.$16.00.
(Third Edition) Conflicts of Interests
presents everything directors and offi­
cers should know about the problem
of "conflicts." Itgives examiners'views
of directors' business relationships with
the bank, examines ethical pitfalls in­
volving conflicts and details positive
actions for reducing the potential for
conflicts. Also included is the Comp­
troller's ruling on statements of busi­
ness interests and sample conflict-ofinterest policies in use by other banks
which can be adapted by your board.

QUAN TITY PRICES

QUAN TITY PRICES

2 - 5 copies — $13.00 ea.
6 - 1 0 copies — $12.50 ea.

2 - 5 copies — $13.00 ea.
6 - 1 0 copies — $11.50 ea.

E F F E C T IV E BOARD AUDIT.

$22.00. This 184-page manual provides
comprehensive information about the
directors' audit function. It outlines
board participation, selection of an
audit committee and the magnitude of
the audit. It provides guidelines for an
audit committee, deals with social re­
sponsibility and gives insights on en­
gaging an outside auditor. It includes
checklists for social responsibilities
audits, audit engagement letters and
bank audits. No director can afford to
be without a copy!

T H E BAN K B O A R D L E T T E R
408 Olive St., St. Louis, MO 63102
$
$
$

..........copies, Conflict of Interest
..........copies, Corporate Ethics
Total Enclosed

$
$
$

N a m e ................................................................................................. Title
Bank............................................................................................................
Street ..........................................................................................................
City, State, Z ip .........................................................................................

QUAN TITY PRICES

2 - 5 copies — $19.00 ea.
6 - 1 0 copies — $18.00 ea.
MID-CONTINENT BANKER for January, 1985

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

..........copies. Board Policy on Risk Management
..........copies, The Effective Board Audit
..........copies, Bank Board & Loan Policy

(Please send check with order. In Missouri, add 4.6% tax.)

27

the bank has promoted Craig W. Tow­
er to assistant vice president/consumer
loans. He joined the bank in 1979.
Robert T. Stevenson J r ., has been
electe d p resid en t, C om m ercial
National, Peoria, succeeding David E.
Connor, who has been named chairman/CEO. Mr. Stevenson formerly
was executive vice president and has
been succeeded in that post by Bruce
F. (Skip) Snyder, formerly senior vice
president and trust division head.
The Illinois D epartm ent of Com­
m erce & Community Affairs will
sponsor a workshop to assist bankers
and economic-development officials
determine which firms present good
credit risks. It will be held January
21-25 at the Springfield Hilton. The
National Development Council will
conduct the workshop that is geared to
bankers, loan officers, city-planning
officials, mayors and econom icde velop m en t/com m uni ty -a c tio n program officers. Registration is $250
and can be made through Tony Scillia
at 217/785-6355.
Larry
moted
officer
joined

L. Essenpreis has been pro­
to senior vice president/trust
at Eagle Bank, Highland. He
the bank in 1969.

Richard A. Kwiecien has been named
assistant vice president, Skokie Trust.
He formerly was a commercial loan
officer, Bank of Lincolnwood.
Cheryl L. Giacobbe has been pro­
moted from loan interviewer to per­
sonal loan officer, Elmhurst National,
which she joined in 1978.
Acquisition of W heeling Trust has
b een com pleted by C ole-T ay lor
F in an cial G roup, In c ., C hicago.
Wheeling Trust has been merged into
Main Bank and now is doing business
as Main Bank — W heeling Office.
Cole-Taylor also announced that the
headquarters of Main Bank is being
moved from 1965 Milwaukee Avenue,
Chicago, to 350 East Dundee Road,
site of the former Wheeling Trust. The
bank also operates a drive-up facility at
314 West Dundee. The Chicago office
will continue to operate as a fullservice-banking facility.

28

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

INDIANA
Kevin J. H im m elhaver has been
promoted to controller at Lincoln
National, Fort Wayne. He joined the
bank in 1979.
1st Source Bank, South Bend, has
moved the regional headquarters of its
bank-card-services business to the
downtown Mishawaka Main Office.
The move permits expansion of the
business and involved 26 employees.
Old National Bancorp, Evansville,
and Merchants Republic Corp., Terre
H aute, have announced plans to
merge when Indiana law permits mul­
ti-bank HCs. At that time, Old Nation­
al Bancorp will become the state’s
fourth largest bank HC, with assets
approaching $1 billion. Following the
merger, Old National Bank, Evans­
ville, and Merchants National, Terre
Haute, will become subsidiaries of the
expanded Old National Bancorp.
Commerce America Banking Co., Jef­
fersonville, is the new name of the for­
mer Citizens Bank and Clark County
State, both of Jeffersonville. The two
banks merged recently, consummat­
ing plans announced a year ago. The
new bank has assets of $275 million.
CB Bancshares, Inc., is the parent
organization. It’s headed by George N.
Lane, chairman; B. David Boone, vice
chairman; Ronald R. Carroll, pres­
ident; and Gilmer G. Hensley, execu­
tive vice p resid en t. T h e bank is
headed by Mr. Carroll as chairman,
Mr. Hensley as president and David
C. Esarey as executive vice president.

IOWA
Merger of Two Iowa HCs
Canceled by Participants
The proposed merger of Hawkeye
Bancorp., Inc., and United Central
Bancshares, Inc., — the state’s firstand third-largest HCs — has been can­
celed by mutual agreement of the two
HCs. Both firms are headquartered in
Des Moines and have experienced in­
creased loan losses and earnings diffi­
culties in the past year.
At the time the deal was announced,
total value of the transaction was about
$78 million in cash and stock.
Managements of both firms decided

it was in the best interest of each to
remain independent and devote full
attention to the problems in their mar­
kets.
Steve Jones in Hawkeye’s marketing
department confirmed to M i d - C o n ­
t in e n t B a n k e r that the $ 1.9-billionasset Hawkeye had a loss of $1.9 mil­
lion in the 1984 third quarter, com­
pared with net income of $3.7 million
during third quarter 1983. Hawkeye’s
earnings for the first nine months of
1984 were down 66% from year-earlier
figures.
The loss was attributed to the “se­
riousness of the plight of the Iowa
farmer,” by Hawkeye’s President Paul
Dunlop.
United Central posted a 79% de­
cline in net income for the third quar­
ter, 1984, to $277,000 from $1.3 mil­
lion in the same period of 1983, accord­
ing to Kenneth M. Myers, president/
CEO. The $l-billion-asset HC attrib­
uted the decrease to higher loan losses
resulting from bad weather, depressed
farm margins and falling farmland
values.
United Central is negotiating an
agreement with First Interstate Ban­
corp, Inc., Los Angeles, to join that
firm’s franchise program. Mr. Myers
told M i d -C o n t in e n t B a n k e r the can­
cellation with Hawkeye will not affect
the franchise plans, except to delay im­
plementation from the first of this year
to mid-year.
The merger plan was announced in
July, 1984. Agreement terms called for
Hawkeye to exchange $10 million in
cash and four million shares of com­
mon stock for the outstanding shares of
United Central.
Merchants National, Cedar Rapids,
has elected two vice presidents — W il­
liam M. O’Hara and Pierre J. Herszdorfer. Mr. O’Hara also was named
manager, corporate banking depart­
ment. Mr. Herszdorfer, who is in the
bank’s international banking depart­
ment, formerly operated his own in­
ternational-trade-consulting firm and
has managed the international banking
department of a Des Moines bank.
Merchants National’s international
banking departm ent is headed by
Gretchen Sealls. In other action, M er­
chants National has appointed Douglas
Keiper assistant vice president/commercial loan officer and Steve Boes
corporate banking officer. Mr. Boes
formerly was business development
representative, Banks of Iowa Com­
puter Services, Cedar Rapids.
A commercial-lending school will be
held February 24-March 2 at Iowa

MID-CONTINENT BANKER for January, 19 8 5

FOR YOUR DIRECTORS — TO HELP THEM HELP YOU
No. 51 BUDGETING, FO RECASTIN G
and PLANNING

Every bank must know W H ERE it is
going and HOW to get there! Manage­
ment should “ map the course,” but
directors should play a role in estab­
lishing goals.
Th is manual supplies directors
with tools they need to steer bank
policy in the best direction. Chapters
help directors establish “ m issions”
statements, trace stages of a plan­
ning process. Details HOW to per­
form financial planning, how to plan for
new services . . . how to “forecast.”
Techniques used by su ccessfu l
banks are included, along with sour­
ces of information and a bibliography
of references.

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

No. 101 DIRECTO RS . . . Selection
Qualifications, Evaluation
and Retirement.

This 42- page manual answers key
questions concerning director selec­
tion, retention and retirement. Special
section: the prospective director and
how he should be expected to contri­
bute to the bank’s success. Includes
a rating chart.
Manual also contains a section
posing questions that a prospective
director should ask himself before he
accepts a bank board post.
Another section deals with the sen­
sitive nature of director retirement.
Age can be a guide but not an over­
riding factor in this decision.

CONSUM ER
Lending Policy
A Manual for Directors,
Management and

No. 220 — AN INVESTMENT GUIDE
For the Bank Director

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

Price — $10.00

Price — $26.00

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

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

No. 210 MAXIMIZING
CO RRESPO N D EN T BANK
RELATIONSHIPS

Directors aren’t “ born correspon­
dent experts, but you can help them
catch up in a hurry, and it’s profitable
for you to do so. This 100-page manual
covers all facets of correspondent
banking. Clearings and float analysis
. . . loan participations . . . lines of
credit . . . foreign exchange, etc. This
manual also helps directors APPRAISE
correspondent services — to make
certain you receive maximum service
at a competitive price.
The manual also d iscusses several
federal regulations, including the con­
straints imposed on “ insider” bank
lending by FIRA. A MUST for every
bank director.

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


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

No. 230 — CONTRACTS WITH BANK
EXECU TIVES

In many banks, salaries, bonuses
and fringe benefits of top manage­
ment are covered by contracts. Since
many contracts extend for periods of
five years they call for careful con­
sideration.
This 48-page manual discusses the
role of the board’s Compensation

Committee in determining the nature
of such co n tra cts. The author
suggests that “ performance” can
and should be the key in rewarding
the executive. Charts and worksheets
are included to help the committee
arrive at “ fair and equitable” pre­
requisites as motivating factors for
the bank executive.
An aid to writing a NEW contract or
in REVIEW ING existing contracts.

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

No. 240 — CONSUMER LENDING
POLICY

Bank directors don’t get involved in
lending, but they do help formulate con­
sumer-lending policy. Therefore, they
must be familiar with the dramatic in­
creases in personal bankruptcies and
new policies called for.
This 208-page manual includes an
array of consumer loan policies in force at
various-sized banks; provides checklists
of topics on installment-credit policy, pro­
cedures and policy components; model
application forms; Federal Reserve reg­
ulations; cost analysis of consumer op­
erations, plus a bibliography of reference
materials.

P le a se S e n d T h e s e M a n a g e m e n t A id s:

copies
copies
. copies
. copies
. copies
. copies

$
$
$
$
$
$

(In Missouri add 4.6% tax)

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

The BANK BOARD LETTER
408 Olive Street
St. Louis, MO 63102

Name
Bank
Address

T a x $ _________

City ___

TOTAL $ _________

State ___

Zip.

State University, Ames, by the Iowa
Bankers Association. Information is
available from Judi Carber at the IB A,
430 Liberty Building, Des Moines, IA
50308.
Diane K upferschm idt, personnel
director, Waterloo Savings, has been
elected chairman of the North Central
Iowa Group, National Association of
Bank Women. New vice chairman is
Ruth Ann Uetz, assistant vice presi­
dent, First Security Bank, Charles
City; secretary is JoAnn Merfeld, agri­
cultural loan officer, Citizens National,
Charles City; and treasurer is Delores
McLaughlin, vice president, United
Central Bank, Mason City.

First of America Bank-Detroit has
named Harold A. Cunningham and
Larry J. Zahra vice presidents and Lee
E. Freeland, Connie A. Richardson
and Janet L. Robinette assistant vice
presidents
Died: Mark B. Putney, retired chair­
man, First National of Michigan, Kala­
mazoo, at age 79. He joined the bank
— now F irst of A m erica BankMichigan — in 1922 and served as
president from 1953 to 1969.

MINNESOTA

Eloise Pearson, vice president/secretary, City State Bank, Madison, re­
tired recently following 44 years’ ser­
vice. She continues as a director.

Norwest Franchises
Eight Wyoming Banks
In Alliance Program

Marie Wilson, director of education/
human resources, Iowa Bankers Asso­
ciation, has been named executive
director, Ms. Foundation for Women,
New York City. She had been with the
IB A for three years.

Eight Wyoming banks have joined
the bank-franchising program of Nor­
west Corp., Minneapolis. The banks
are the first participants in Norwest’s
Alliance Banking program.
The eight banks are subsidiaries of
Affiliated Bank Corp., of Wyoming,
C asper. They include W yom ing
National banks in Kemmerer, Gillette,
West Casper, East Casper and Casper;
F irst National of Wyoming, Chey­
enne; Wyoming State, Cheyenne, and
First National, Wheatland.
Banks participating in Norwest’s
program may adopt the N orw est
identity and have access to many of the
programs and resources used by Nor­
west affiliate banks. However, fran­
chisees retain their ownership and
management.
Norwest entered the franchising
business to distribute certain of its
products and services to an expanded
customer base.
“ Bank franchising enables us to
establish a mutually beneficial rela­
tionship with independent banks and
to generate income through fees, ” said
Darin Narayana, senior vice president
and head of the financial institutions
group at Norwest. “It also gives us the
opportunity to share the cost of re­
search and development with major
regional financial institutions and
H Cs.”
Alliance banks have access to certain
Norwest products, services and exper­
tise available to Norwest affiliate
banks. They join with Norwest in
advertising and promoting consumer
products and have the opportunity to
participate in Norwest’s ATM and deb­
it-card network and be part of its
check-cashing program. Input into re­
search and development efforts also is
available.

MICHIGAN
Comerica Bank-Detroit has appointed
Neil F. Endres vice president/consumer loans; David C. Muzzall vice
president/trust new business; Vincent
F. Panzera III vice president/corporate financial services; and Gregory W.
Q uick assistant vice p resid en t.
Raymond R. Melani was named vice
president, Comerica Mortgage Corp.
Manufacturers National, Detroit, has
named Robert R. Schoonbeck senior
vice president/senior trust officer. Also
promoted in the trust departm ent
were Stephen G. Hawkins to vice
president/senior trust officer; Clinton
P. Schloop to vice president/senior in­
vestm ent officer; and Charles W.
Brown to vice president/investment
officer. Donald K. Tyler Jr. was named
vice president/trust officer; Carol A.
Marola, Thomas E. M cGahey and
H arriet S. Stephens were named
second vice presidents/trust officers;
Stephen J. Seymour second vice presi­
dent/investment officer; and Lois C.
Billings and Michael J. Madison in­
vestment officers. Thomas H. Cobb
was promoted to second vice presi­
dent/trust officer in the personal trust
division. Shari S. Cohen was named
vice president/marketing and Sharon
R. McMurray was named marketing
officer. Brenda L. Sch n eider was
promoted to vice president/government and community relations.

30

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

Alliance banks display Norwest
signs and use N orw est product
brochures, but statements at bank en­
trances and on stationery notify cus­
tomers that Norwest Corp. is not the
banks’ owner.
Mr. Narayana said Norwest is “in
various stages of negotiations with
several other institutions” about fran­
chising.

New Investment Program
Introduced by F&M Marquette
A program designed to offer clients
investment advice in mutual funds has
been introduced by F&M Marquette
National, Minneapolis.
The bank has rights to market and
manage the Mutual Funds Investment
Program (MFIP) in the Twin Cities
and eastern Minnesota from M FIP
creator/coordinator Michael Hirsch.
Mr. Hirsch introduced and explained
the program at an F&M Marquette
M FIP seminar recently.
Through M F IP , more than 700
mutual funds are evaluated on an
ongoing basis to select the 75 or 80 best
performers. Marquette Capital Man­
agement Corp., the bank’s investment
advisory subsidiary, then selects 30 to
40 of the mutual funds best suited for
its M FIP clients.
The program is available through
the trust department to individual in­
vestors, corporate pension and profitsharing plans, endowments and foun­
dations.
Norwest Bank Minneapolis has ap­
pointed nine vice presidents, includ­
ing A. William Charleton, Luis Ernes­
to Fernandez Moreno, Michael Sadak,
Judith A. Owen, Robert A. Amund­
son, David J. Peterson, Thomas D.
W right, John Matyi and Jeannine
M cC orm ick. N orw est Corp. has
named Stephen L. Byrnes vice presid en t/ m ark etin g -serv ices-d i vision
head.
James H. Hearon III has been named
chairman/CEO, National City Bank,
Minneapolis. Walter E. Meadley Jr.
was named president/chief operating
officer, succeeding Mr. Hearon.

OHIO
AmeriTrust, Cleveland, has named
John P. Ringenbach executive vice
president in charge of retail banking,
David M. Zarnoch senior vice presi­
dent and head of the new corporate
finance division and J. G erard
Sheehan head of the new area develop-

MID-CONTINENT BANKER for January, 1 9 8 5

This Four-Volume

MARKETING LIBRARY
ban k*

ADQÌversar'e8’

Formal Openings,

Open Houses *

^ \y( \ ic ^ \

Regular Price

NOW

$ 60.00

0NLY

$42.50

How to Plan, Organize and Conduct an Incentive Campaign

- Ä Buem
:-n

aiulSS' it \niUOsOeO

. . . Mid-Continent Banker's newest how-to-do-it manual; a
complete guide to procedure in evolving an effective in­
centive campaign to sell bank services and/or increase bank
deposits; 96 pages, 16 illustrations; starts by telling you
premium terms and the history of incentives, roams
through such topics as trade area studies, tying in with cur­
rent events, getting new business from old customers, moti­
vating staff members and concluding with a series of six
case histories of actual bank promotions that obtained ex­
ceptional results.

ORGANIZE

Regular Price: $ 1 5 .0 0

COHDUCT
an

Profit-Building Ideas fo r Bank Christmas Promotions. This

iM C i u r w t

CAfnPA*^^
^ n - B u a o iH C io it ó
{fi*

BANK CHRISTMAS
prom otions

is NOT a Christmas Club book, although ON E chapter is
devoted to Christmas savings promotion plans. Other chap­
ters: selling various bank services during the Holidays: using
lobby decorations most effectively; helping children at
Christmas; remembering employees in Christmas planning;
using the "good will season" to build bank good will; get­
ting the most benefits from Holiday publicity; planning for
the Holidays from mid-summer to New Year's. In 80 pages
are packed tested Holiday ideas used by banks, big and
small, from coast to coast.
Regular Price: $ 1 1 .0 0

How to Plan, Organize & Conduct Bank Anniversaries. . .
The complete guide to procedure when holding a formal
opening, an open house, any kind of bank celebration; 166
pages, many illustrations; 12 chapters starting with "First
Things First," ranging through "Add a Little Pizazz and
Oom-pah," concluding with " Expect the Unexpected";
eight appendices containing actual plans, budgets, programs
used by banks in actual celebrations; a completely factual,
step-by-step how-to-do-it book now in its second printing.
Regular Price*. $ 2 4 .0 0

M O N E Y B A C K G U A R A N T E E — If not c o m p le t e ly satisfied, return
w it h in 10 da ys for full ref und .

H v ilD -C O N T IN EN T B A N K E R
408 Olive, St. Louis, Mo. 63102

|
.

Please send us books checked:
copies, Bank Celebration Book (a

$24.00 ea.

copies, Bank Publicity Book (« $10.00 ea.
copies, Planning an Incentive Campaign (u

$15.00 ea.

copies, Profit-Building Ideas for Xmas (ft $11.00 ea.

$42.50

How to Write Bank Publicity and Get It Published. . .T h e

SEN D A L L FO U R BOOKS A T T H E LOW P R IC E O F

complete guide to procedure in writing publicity releases
and how to prepare them so that newspaper and magazine
editors will use them; 61 pages; 12 chapters with titles such
as " Constructing the News Story," "Placing the News
Story," "Handling 'Sticky' Situations," "Dealing with News

[ ] Check enclo sed .................................................................................

Media"; another completely factual, step-by-step how-todo-it manual.

Name.................................................... T i t l e ..................................................
B a n k .................................................................................................................
Street.................................................................................................................
City, State, Z i p ..............................................................................................
( C h e c k s hou ld a c c o m p a n y order. We pay postage and
Mis sou ri b a n k s please in clu de 4 . 6 % sales tax.)

handling.

Regular Price: $ 1 0 .0 0

MID-CONTINENT BANKER for January, 1985

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

31

ment department. Messrs. Ringenbach and Zarnock both joined the bank
in 1973. Mr. Sheehan formerly was
with the Cleveland Area Development
Corp.

AmeriTrust, Cleveland,
Acquires Colorado HC
AmeriTrust Corp., Cleveland, has
completed the acquisition of 87.9%
economic interest in Central Ban­
corp., Inc., Colorado-based bank HC.
Through its subsidiary, AT Western
Corp., AmeriTrust has invested in a
92.4% nonvoting limited-partnership
interest in New Central Colorado C o.,
a limited partnership that owns 95% of
Central Bancorp. Cost of the interest
was approximately $157 million.
The investment represents a major
step in the HC s long-term plans,
according to Jerry V. Jarrett, HC
CEO.
Zuheir Sofia has been named presi­
dent, Huntington Bancshares, Inc.,
Columbus, but remains vice chairman/
director, Huntington National, Co­
lum bus. T. C arl Alderm an and
J. Virgil Early Jr. were made vice
chairmen, Huntington National, and
executive vice presidents of the HC.
Both also are directors of the bank’s
Columbus board. Lloyd D. Peele has
been named president, Central Ohio
Region, and a Columbus board mem­
ber of the bank. Robert W. Van Auken
has been named president of Huntington’s Northeast Region and a member
of the Cleveland board of Huntington
National. Frank Wobst continues as
chairman/CEO, Huntington Baneshares, and president/CEO of the
bank. In other action at Huntington
National, Columbus, W. Grant Alvord and Bruce L. Barefoot were
named senior vice presidents. Mr.
Alvord has charge of the credit policy
group/credit administration division.
Mr. Barefoot is in charge of the finan­
cial institutions/international divi­
sions.

WISCONSIN
Roger L. Fitzsimonds, executive vice
president, First Wisconsin National,
Milwaukee, has been named head of a
newly formed commercial financial
group, with responsibility for the com­
mercial banking division, First W is­
consin Financial Corp., First Wiscon­
sin Leasing and real estate finance and
corporate finance divisions. Senior
32

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

Vice President Michael J. Schmitz
heads a new consumer financial group,
which includes Mr. Fitzsimonds’ for­
mer retail responsibilities. This group
consists of the branch office and con­
sumer credit divisions, First Wiscon­
sin Investment Services and First In­
surance Management. In his new post,
Mr. Schmitz continues to be responsi­
ble for the marketing/personnel divi­
sions. E x ecu tiv e V ice P resid en t
Richard S. B ib le r, who form erly
headed the commercial banking divi­
sion, now reports to Chairman Hal C.
Kuehl and works on special assign­
ments for that office.

Export-Mgt. Services
To Be Performed
By Bank HC Subsidiary
M ILW A U K EE — Marine Corp.
says it is the first bank HC in Wiscon­
sin to announce establishment of a
management firm, Marine Financial
Services Corp., which will offer ser­
vices to businesses taking advantage of
a new federal-tax incentive to stimu­
late exports.
The Tax Reform Act, passed by Con­
gress last year, allows companies to
form foreign sales corporations (FSCs)
in the U. S. Virgin Islands and several
other offshore locations beginning
January 1, 1985. W hen firms use
FSCs, their exports are provided par­
tial exemption from U. S. income tax.
Marine Financial Services Corp. will
have an office and personnel in the
U. S. Virgin Islands to carry out func­
tions and requirements of the law for
companies that want to avoid the ex­
pense of estab lish in g th e ir own
offshore offices.
Marine Financial Services Corp.
also will provide services for com­
panies with more than $5 million in
export sales that must meet additional
FSC managerial/economic-process re­
quirements.
Marine Financial Services Corp.
also will help companies in meeting
economic requirem ents, which in­
clude participating in one of three sales
activities: solicitation, negotiation or
contracting for sales.
Marine Corp. has made filings re­
quired by the Fed to permit it to oper­
ate Marine Financial Services Corp.
W illiam B. W oodward has been
named executive vice president in
charge of the firm. He has had 38 years’
experience in all phases of export
marketing, having been vice presi­
dent, export operations, Eaton/Cutler
Hammer, and export manager, Trane
Co.

Catherine Drager has been named
assistant controller/operations officer,
Capital One Corp./Brown Deer Bank.
She joined the bank as a secretary in
1976 and previously held several posts
in the accounting department.
Linda K. Evenson has been promoted
to assistant vice president/personal
banking manager, Firstar Bank Appleton, which she joined in October,
1983. She formerly was with First Wis­
consin National, Madison, and Kellogg
Bank, Green Bay.
Ronald L. Buzzell has joined Com­
munity Bank, Middleton, as vice president/loan-review officer. He formerly
was with the office of the commissioner
of banking, Madison.

Motor Club Prexy Gets Tour
Of City Joked About in Ads
The president of the AAA Chicago
Motor Club knows it’s not nice to fool
with Mishawaka, Ind.
The president, his wife and five AAA
Chicago Motor Club officials were
taken to the northern Indiana city by
1st Source Bank and the city admin­
istration in response to a Motor Club
ad that facetiously asked, “Why settle
for Mishawaka?”
Using the theme “Why settle for
anything less than Mishawaka?,’’ bank
officials and the city’s mayor invited
the motor club people to Mishawaka,
where the president was made an hon­
orary citizen.
The group took a tour that included
stops at Mishawaka landmarks as well
as several “off-the-beaten-path” attrac­
tions. During the tour, the group was
met by Indiana Governor Robert Orr
and other civic officials. A tour of 1st
Source Bank’s new headquarters in
South Bend was included.

Joel Roth (r.), 1st Source Bank, M ishawaka,
Ind., presents packet of gifts from local
merchants to AA A Chicago Motor Club
Pres. Nels Pierson during Mr. Pierson's tour
of Mishawaka.

MID-CONTINENT BANKER for January, 19 8 5

The 99th Congress:
W h at D oes It Plan for Banking?
Emphasis probably will be on interstate banking
and definition of bank both emotionally charged issues.
However, myriad of other bills likely to be addressed,
including deregulation of insurance activities for banks,
deposit-insurance changes brokered deposits,
lifeline banking branch closings
and payment of interest on demand deposits.

,

,
,

ITH the opening of the 99th
Congress this month, bankers
will be kept busy trying to keep up
with the many banking issues that may
be introduced, either individually or
as part of larger — omnibus — bills.
Emphasis probably will be placed on
two emotionally charged issues — in­
terstate banking and definition of a
bank (the so-called nonbank loophole).
The new Congress also is likely to
address deregulation of insurance ac­
tivities for the banking industry, bank
competition in securities/real estate,
simplified HC-formation procedures,
deposit-insurance changes, brokered
deposits, payment of interest on de­
mand deposits, basic, or lifeline, bank­
ing, failing-institutions provisions and
branch closings.
In ter s ta te B a n k in g . W hile many
federal laws and regulations have in­
directly addressed this issue, only
th ree have done so d irectly : the
McFadden Act of 1927, the Banking
Act of 1933 and the Douglas Amend­
ment to the Bank Holding Company
Act of 1956.
In the 98th Congress, the validity of
interstate statutes was directly ad­
dressed by Title X of the Garn Bill
(S. 2851), which passed the Senate by
a vote of 89-5. Title X explicitly author­
ized states to enact laws to allow inter­
state-banking lim itations based on
geography, reciprocity or other qual­
ifications. Title X contained “sunset”
language so that the provision would
expire in 1989. No merger or acquisi­
tion entered into during this five-year

W

period would have been affected by
the sunset language.
As the ABA points out, absent fur­
ther specific federal legislation, the
issue of where a bank can do business
continues to be shaped by a hodge­
podge of court cases, regulatory deci­
sions and, indirectly, by some federal
legislation. The Garn/St Germain Act
of 1982, for example gives the FD IC
and Federal Savings & Loan Insurance
Corp. (FSLIC ) greater flexibility in
dealing with troubled thrift institu­
tions and closed commercial banks, in­
cluding the authority to permit inter­
state purchases.
From a regu latory standpoint,
there’s the Comptroller’s recent deci­
sion to resume processing applications
for nonbank charters (see page 50)
The ABA believes this issue likely
will be included, at least in part, in
banking legislation to be re-introduced
in the new Congress.
N onbank L o o p h o le . The Bank Hold­
ing Company Act (BHCA) defines a
bank as any institution that accepts de­
mand deposits and makes commercial
loans. If either of the functional tests in
the BHCA does not apply, the institu­
tion is not a “bank” under the BHCA,
and, therefore, is not subject to its
limitations. However, these limitedpurpose banks or “nonbanks” have
bank charters and are subject to the
regulation of the appropriate bankregulatory agency. As pointed out by
the ABA, because of this anomaly in
the definition of a bank under the
BHCA, many companies engaged in a

M ID-CONTINENT B A N K ER fo r Jan u ary , 1 9 8 5


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

wide variety of activities have been
able to acquire or apply for charters of
state or national banks with the intent
of eliminating one of the functions and
thus operating a “nonbank.” Because
the BHCA doesn’t apply, interstate
restrictions of the Douglas Amend­
ment are not applicable.
In the last Congress, four bills were
introduced that addressed many issues
facing banking, including redefinition
of a bank (H.R. 5916, S. 1609, S. 2134
andS. 2181). However, legislation that
would have addressed this issue ex­
pired in the House when the 98th Con­
gress adjourned.
As indicated by end-of-session state­
ments, according to the ABA, both
Senator Jake Garn and Representative
Fernand St Germain will introduce
legislation early in the 99th Congress
that will redefine a bank as well as
address other issues facing the banking
industry. A hearing schedule has not
been set, but the ABA believes one to
be available by the middle of January.
Insurance A ctivities. Legislation (S.
1609 and S. 2181) was introduced dur­
ing the 98th Congress to allow bank
HCs to sell or underwrite insurance.
This legislation would have repealed
Title VI of the 1982 Garn/St Germain
Act, which significantly limited bankinsurance activities.
Legislation that would have sharply
curtailed the ability of some statechartered banks to offer certain insur­
ance products/services died as the 98th
Congress adjourned. Similar legisla­
tion to Section 104(d) of the Senate33

passed Financial Services Competitive
Equity Act (S. 2851) was approved by
the House Banking Committee, but
was not considered by the full House.
The Fed published a proposed rule
making in the March 12, 1984, F ed eral
Register to define permissible insur­
ance activities under the Garn/St Ger­
main Depository Institutions Act of
1982. These would be amendments to
Regulation Y. In addition, the Fed has
a proposed rule making published in
the November 25, 1983, F ed era l R eg­
ister to eliminate the rate-reduction
requirem ent from credit-life/creditaccident/health-insurance underwrit­
ing. Final rule makings were antici­
pated by the new year, says the ABA.
The FD IC issued an advance notice
of proposed rule m aking in the
September 12, 1983, F ed era l Register
req u estin g com m ent on w h eth er
there’s any need to regulate involve­
ment of insured banks in insurance. In
November, 1984, the FD IC proposed
placing certain insurance activities in
separate subsidiaries.
In a December 2, 1983, letter rul­
ing, the Com ptroller said national
banks have authority to rent lobby
space to insurance agents.
The ABA believes a proposal for de­
regulation of income-producing insur­

New from
SEM . . .
paper
shredders

ance activities should be re-introduced
in the 99th Congress. House and Sen­
ate Banking committees will review
the proposals. The Fed, according to
the ABA, most likely will expand Reg Y
insurance activities in its final rule
making.
FIC Form ations. The Treasury D e­
partment submitted a legislative pro­
posal (S. 1609, H .R. 3537), which
would have permitted bank HCs to
engage in certain insurance/realestate/securities activities beyond
those currently permitted. The ABA
points out that to alleviate concerns
that these new activities would in­
crease risk to a bank, the Treasury
proposal required that the activities be
conducted through a separate subsidi­
ary of the bank HC. For those banks
not already organized as an HC, this
requirement would have posed a prob­
lem. Recognizing this, the Treasury
proposed an expedited procedure to
allow banks to reorganize into HCs.
The ABA says the proposal could
streamline and simplify bank-HC pro­
cedures and make it easier for BHCs to
engage in other activities closely re­
lated to banking or of a financial nature
as permitted by regulation or order
under section 4(c)(8) of the BHCA.
W e've added the n ew
ULTRA SHRED™ series of
paper shredders to our
respected line of
disintegrators. SEM no w
offers you a choice. From our
small office model to a large
capacity volume-size
shredder, or for ultimate
security choose one of our
disintegrator models. For your
best solution to document
destruction call SEM TO LL
FREE at (800) 225-9293
or mail reader service
card for literature.

UUftH SHRED
5 Walkup Drive, Westboro, Massachusetts 01581 (617) 366-1488/TELEX: 951648

34

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

Simplified HC procedures likely
will be included in any re-introduction
of S. 2181 in the 99th Congress. The
Senate/House Banking committees
have jurisdiction over the matter.
D e p o s it-In s u r a n c e C h a n g e s . In
April, 1983, the F D IC and FSL IC
both submitted reports to Congress, as
required by the Garn/St Germain D e­
pository Institutions Act of 1982, de­
tailing changes they would like to see
en acted into law in the depositinsurance system. The FD IC , early in
1984, submitted proposed legislation
designed to accomplish the major
amendments to its statutory authority
the FD IC sought in the 1983 report.
M ajor changes proposed by the
F D IC are: 1. Enactment of a riskrelated deposit-insurance-premium
system that would allow the FD IC to
vary the amount of deposit-insurancepremium rebate an insured commer­
cial bank received, based on amount of
risk in the bank’s asset/liability port­
folios. 2. Increased enforcement au­
thority that would authorize the FD IC
to take enforcement actions against all
insured banks when they are placed on
the F D IC ’s problem list. 3. Limitation
on deposit insurance that would pro­
vide that deposits of government agen­
cies and financial institutions not be
insured. 4. Allowing the F D IC to
assess additional fees for examinations
it must do of problem institutions.
A Treasury Department task force is
studying various alternatives for de­
posit-insurance reform. Two alterna­
tives are being examined closely. On
the one hand, they would provide for
100% deposit insurance for all banks,
with 10% of the insurance being pro­
vided by private insurance companies,
and, on the other hand, for a system of
variable-rate-deposit-insurance pre­
miums that would attempt to impose
market-related deposit-insurance pre­
miums on all depository institutions.
During 1984, Senator William Proxmire proposed a legislative amend­
ment, which would impose, for the
first time, the ABA says, depositinsurance premiums on those deposits
of U. S. commercial banks held in their
overseas offices. The Proxmire propos­
al would reduce deposit-insurance
premiums for all banks by an amount
comparable to the additional revenues
that would be raised from assessing
deposit-insurance premiums on for­
eign deposits.
The ABA believes the House Bank­
ing Com m ittee will make depositinsurance reform one of its major early
items of business in the 99th Congress.
Also, the Senate Banking Committee
has agreed to hold hearings on the
Continental Illinois of Chicago rescue

M ID-CONTINENT BA N K ER for Jan u ary , 1 9 8 5

effort, and the ABA foresees these
hearings involving the subject of de­
posit-insurance reform.
B ro k ered D eposits. Both the FD IC
and Federal Home Loan Bank Board
(FH LBB), says the ABA, announced a
proposal to restrict deposit insurance
to $100,000 per broker per institution
on brokered funds placed after Octo­
ber 1, 1984. Final rules were issued
last March 26. Although these rules
are in litigation, neither agency has
withdrawn its ru le, although the
FH LBB moved the effective date of its
rule to February 1, 1985.
Both the Senate (S. 2851) and House
(H.R. 5913) had bills in the last Con­
gress to limit the amount of short-term
insured brokered funds any one in­
stitution can hold to 15% of deposits or
200% of unimpaired capital and sur­
plus, whichever is less. The House bill
also required brokers to report to the
insuring agencies, denies deposit in­
surance to any U. S. agency or deposi­
tory institution and limits benefits pay­
able to any one person through any one
broker to $100,000 in any four-year
period. The Senate passed S. 2851
containing the brokered-deposit pro­
vision; the House did not act.
The ABA believes the issue prob­
ably will be included as a part of a
larger consideration of deposit-in­

surance reform in the first session of
the 99th Congress.
I n t e r e s t on D em a n d D e p o s it s .
There were several proposals during
the 98th Congress that would have
allowed payment of interest on de­
mand deposits, and the issue likely will
come up again in the new session.
The ABA has suggested that the fol­
lowing statutory changes are needed
before payment of interest on demand
deposits can be con sid ered : 1.
Broadening products/services that can
be offered by commercial banks. 2.
E lim ination of unrealistically low
state-usury ceilings. 3. Payment of in­
terest on reserve balances held by the
Fed. 4. Reform of the Bankruptcy Act
(accomplished last July).
Lifeline Banking. As bankers know,
deregulation increased substantially
the cost of serving bank customers so
that they had to raise service fees to
meet these costs. As the ABA points
out, in many cases, banks are charging
customers for services previously pro­
vided free of charge.
That has caused some consumer
groups, legislators and regulators to
charge that rising fees and minimumbalance requirements threaten to ex­
clude a growing number of low- and
moderate-income Americans from ac­
cess to the banking system. As a result,

says the ABA, several states have de­
veloped, or are considering, various
forms of legislation to require financial
institutions to provide basic- or “lifeline’ -banking accounts. For instance,
Massachusetts adopted legislation that
prohibits banks from charging fees on
savings/checking accounts of custom­
ers under 18 and over 65.
During the 98th Congress, Repre­
sentative Cardiss Collins of Illinois in­
troduced a bill to require banks, S&Ls
and credit unions to disclose fee poli­
cies and require federal regulators to
study the feasibility and costs associ­
ated with establishing a lifeline-bank
account for financial institutions. The
ABA believes this bill will be re ­
introduced in the 99th Congress and
that other legislation can be expected
to be introduced in that Congress and
in some state legislatures, notably
New York and California.
F ailing Institutions. The Garn/St
Germ ain Act of 1982 granted the
FD IC and FSL IC greater flexibility in
dealing with troubled thrift institu­
tions and closed commercial banks.
The “emergency” provisions that were
granted will expire next October 15,
and the ABA says the issue will be
addressed in Congress this year. —
Rosemary McKelvey, editor.

Designed for the busy executive — The nation’s newest and most com­
prehensive Financial Institutions Directory is now available. McFadden’s
new Savings Directory when combined with its American Bank Directory
becomes a handy 3-volume directory of American Financial Institutions.
Each listing contains: city, population, mailing address, memberships,
phone numbers, top officers/titles, financial data and much more!
CO M PLETE DIRECTORY — American Financial Institutions — Yes, I want
all the nation’s top financial institutions in one complete directory:
□ Send m e _________ copies of the current AFI @ $180 ea.
□ Enter standing order for each Spring AFI @ $145 ea.
□ Enter standing order for each Spring AFI @ $130 ea. andstand­
ing order for Fall American Bank Directory @ $75 ea. (plus
shipping and handling)
SAVINGS DIRECTORY — American Savings Directory — Yes, I want to
add this volume to my library to include savings and loans, mutual sav­
ings banks, major credit unions and money market funds.
□ Send m e _________ copies of the current ASD @ $75 ea.
□ Enter standing order for each Winter ASD @ $60 ea.
□ Enter standing order for each Winter ASD @ $60 ea. andstand­
ing order for Fall American Bank Directory @ $95 ea. (plus
shipping and handling)
□ SEND ME MORE INFORMATION
PLA CE YOUR ORDER TODAY! Mail to: McFadden Business Publications,
6195 Crooked Creek Rd., Norcross, GA 30092.

COMPANY
NAME
ADD RESS

M ID-CONTINENT BA N K ER fo r Jan u ary , 1 9 8 5


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

STATE

ZIP

35

Interstate Banking and Bank Structure
To Be Aired by State Legislatures in '85
O N T IG U O U S-S T A T E in ter­
state banking and bank structure
are the most prevalent topics expected
to be aired in state legislative cham­
bers during 1985, according to a poll of
M id-C ontinent-area state bankers
associations.
A few states already permit con­
tiguous-state interstate banking, pro­
vided the privilege is reciprocal in na­
ture. When and if the majority of states
have such agreements in place, bank­
ing will spill over state lines in a lim­
ited way — limited to adjacent states,
that is. This situation is expected to
constitute the initial phase of interstate
banking — one that will give bankers
time to adjust to the practice before
more ambitious regional-banking au­
thority is enacted into law.
Some states, such as Illinois, will be
dealing with intrastate-banking priv­
ileges this year. Other states will be
playing “catch up” by considering
structure items such as multi-bank
HCs, a topic most states dealt with
long ago.
A trend that is noticeable this year is
the increasing practice of state bankers
associations to discard their neutral
attitudes regarding legislative matters
affecting their members. This is seen
by some as a reversal for independent
banks, whose influence in state asso­
ciations seems to be declining. Region­
al and money-center banks appear to
be gaining in flu en ce in onceindependent-banker-dominated state
associations.
Following is a rundown of expected
legislative activities affecting banking
in most of the Mid-Continent-area
states.
A la b a m a . The Alabama Bankers
Association has no plans at present to
introduce legislation affecting bank­
ing. H ow ever, bills dealing with
ATMs, interstate banking and oil-andgas lease money may be introduced.
Illinois. Statewide-banking author­
ity will be the major thrust of the Illi­
nois Bankers Association’s legislative
program this year (see adjoining arti­
cle).
An attempt may be made to close
the “nonbank” loophole by amending
36

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

the definition of “bank” under the Illi­
nois Bank Holding Company Act. The
present definition parallels the one in
the Federal Bank Holding Company
Act, which defines a bank as an institu­
tion that accepts demand deposits and
makes commercial loans. Illinois bank­
ers want to see the term “bank’’ de­
fined simply as an institution holding a

national or state bank charter, a defini­
tion that would make any national or
state bank subject to restrictions of the
Illinois Bank Holding Company Act.
Other items expected to be sought
by Illinois bankers include the follow­
ing:
• Authority to sell insurance with or
without a subsidiary.
• Exemption of GNMA and FNMA
interest for income-tax purposes, re­
versing a recent court decision.
• A call for a constitutional conven­
tion to mandate a balanced budget.
• Legislation to deregulate or in­
crease fees relating to consumer cred­
it.
• Authority to permit lenders to
offer true variable-rate loans.
• Legislation to include debit-card
fraud within the parameters of the
Credit Card Crime Act and to increase
penalties for counterfeiting debit and
credit cards.
• Legislation to amend the Revolv­
ing Credit Act to provide for a delin­
quency charge and a charge when pay­
ment is made by an N SF check.
In d ia n a . The cornerstone of the
1985 legislative program for the Indi­
ana Bankers Association will be a com­
prehensive banking-structure-reform
bill. Other proposals will be technical

amendments to the Troubled Bank Act
of 1983 and some reforms to the cur­
rent schedule of exemptions currently
allowed in the state’s bankruptcy stat­
ute.
The structure-reform bill is ex­
pected to deal with the following
topics:
• Statewide multi-bank HCs would
be authorized, limited to controlling
no more than 10% of the state’s total
deposits from September 1 (the enact­
ment date) through D ecem ber 31,
1985. A bank must be in existence for
five years before it is eligible to be
acquired or merged into an HC.
• Branching. Banks $200 million
and under in assets would be permit­
ted to add one branch de novo or by
merger/acquisition annually for five
years. Banks with $200-$400 million in
assets would be permitted a total of
three branches de novo or by merger/
acquisition — one allowed each twoyear period for the first four years and
one in the fifth year. Banks over $400
million in assets would be able to
establish two total branches de novo
or by m erger/acquisition — one
each 2V2-year period. Bran chin g
would be governed by natural market
boundaries — contiguous counties
with a minimum of five counties. After
five years, branching would be un­
limited in contiguous counties.
• Reciprocity. Banks desiring to
operate in Indiana under the proposal
would be governed by the same re­
strictions that apply to Indiana banks
with regard to HC/branching activi­
ties. Banks must be home-based or
domiciled in a state contiguous to Indi­
ana.
Issues expected to be introduced
that will not be favored by bankers
include limits on service charges and
delayed-funds availability and a roll­
back of the state’s usury ceiling from
21% to 19%.
Io w a . The Iowa Bankers Association
plans to take the following positions
regarding state legislative issues in
1985:
• No increases or changes should be
made to the present franchise-tax
structure in view of the refunds denied

M ID-CONTINENT BA N K E R fo r Ja n u a ry , 1 9 8 5

to the banking industry when the pres­
ent tax structure was established in
lieu of the deduction concept prior to
1979.
• Endorsement of the pledging con­
cept regarding pledging vs. sinking
funds. Efforts will be sought to make
pledging less cumbersome and costly
for banks, which could make legisla­
tive action a moot issue.
• The IBA proposes to maintain the
present language in the ag-lien bill
through the first production year and
oppose any changes to the existing bill.
• The IBA opposes any action at the
state or federal level to change the
present UCC provisions protecting
banks in securing proceeds of the sale
of farm produce and opposes any lienwaiver-bill provisions.
• The association favors authoriza­
tion for an emergency bank acquisition
not applying to the deposit limitation
of a bank HC or office provisions. This
authorization applies only if there are
no other in-state bidders and the failed
bank is a forced sale by a bank regula­
tor.
• The IBA supports a proposal rec­
ommending the reorganization of a
bank affiliate by amending the Iowa
Banking Act to allow a bank to merge
with a bank that has been an affiliate for
five years or more. The affiliate bank
that is merged into the resulting bank
would not be allowed any additional
bank offices in the merged bank’s local
area.
• The association will take no posi­
tion on regional banking with reciproc­
ity until a consensus is reached among
members.
• The IBA supports an increase in
the maximum time a bank can hold real
estate from one to three years.
• An increase in overdraft protec­
tion to 19.8% will be supported for
open-end credit transactions to bring
the rate into conformity with that for
credit-card and retail sales.
Other legislative issues expected to
be supported by the IBA concern
changing credit-card-fraud regulations
to bring them into conformity with
federal regulations; authority for banks
to invest in interest-rate futures; allow­
ing banks to charge customers for the
cost of title insurance purchased out of
state; real estate and insurance activ­
ities for banks; permission for banks to
make name changes without obtaining
signatures of debtors and bringing
state banks into parity with banks gov­
erned by the Fed and FD IC with re­
spect to transactions between bank
affiliates.

Illinois Bankers Association Seeks
Statewide and Interstate Banking
LLIN O IS bankers plan to scuttle
the elaborate system established
by statute three years ago to keep Chi­
cago’s big banks from saturating the
state with facilities.
At its annual meeting in St. Louis
late in November, the board of direc­
tors of the Illinois Bankers Association
voted almost unanimously (24-4) to
recommend legislation that would let
HCs own banks throughout the state
and authorize HCs in reciprocating
contiguous states to own Illinois banks.
In addition, the association will seek
Outgoing IBA Pres. Charles C. Wilson (I.),
legislation authorizing five, rather
ch./CEO, First Nat'l of Quad Cities, Rock
Island, prepares to pin president's pin on
than three, facilities for banks.
incoming IBA Pres. Jam es Forster, ch., De
Present law, effective January 1,
Kalb Bank, during IBA annual meeting.
1982, permits Illinois HCs to acquire
banks only in two of five regions in the
state — the region of domicile and an President, Charles C. Wilson, chairadjacent region. The statute effective­ man/CEO, First National of the Quad
ly limited Chicago HCs to regions 1 Cities, Rock Island. The recommenda­
and 2, which occupy the northeastern tions were presented to the IBA board
portion of the state.
after expiration of a two-year morato­
The IBA would like to see these re­ rium on bank-structure-change rec­
ommendations, which was established
gions eliminated by January 1, 1986,
and it hopes to have authority for re­ when the Association for Modern
ciprocal contiguous interstate banking Banking in Illin o is and the IBA
in place by the same date. Illinois is merged early in 1983 to form what is
contiguous to six states: Missouri,
called the “new’’ IBA. Donald R.
Iowa, Wisconsin, Indiana, Kentucky
Lovett, past IBA president, and presiand Michigan. Although none of these dent/CEO, Dixon National, chaired
states currently sanctions reciprocal the task force.
banking privileges, several are ex­
At a press conference following
pected to consider such authorization announcement of the board’s approval
this year.
of the task-force recommendations,
The two-additional-facilities author­ Mr. Wilson said the IBA was not con­
ity desired by the IBA would permit cerned about an apparent lack of in­
terest on the part of most IBA member
banks to establish facilities anywhere
in their county of domicile or within 10 banks concerning the recommenda­
miles of the bank in an adjoining coun­ tions. He explained that many of the
association’s banks are quite small and
ty. Facilities could be full-service.
Currently, banks are limited to three
are too busy with the business of bank­
ing to take time out for state-wide
facilities, with geographic restrictions.
Home-office protection for the addi­ issues. They depend on the IBA to
tional facilities would provide that, if a advise them, Mr. Wilson said.
During the IBA annual meeting,
facility is established within 3,500
yards of the main office of the estab­ which was held in conjunction with the
lishing bank, it should not be closer association’s bank management con­
than 600 feet to an existing main office ference, IBA officers for 1985 were in­
troduced. They are: P resident —
of a competing bank.
If a new facility is established more James Forster, chairman, De Kalb
than 3,500 yards from the main office Bank; vice p resid en t — Thom as
of the establishing bank, it should not Andes, president, F irst National,
be closer than one mile from any ex­ Belleville; secretary — Harlan Yates,
president, Cisne State; and treasurer
isting main office of another bank.
The new legislative recommenda­ — John L u ttrell, president, F irst
tions were formulated by a special IBA National, Decatur. — Jim Fabian,
task force appointed by last year’s IBA senior editor.

I

(C ontinued on p age 38)
M ID-CONTINENT BA N K E R for Jan u ary , 1 9 8 5


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

37

Kansas. The Kansas Bankers Asso­
ciation is on record supporting author­
ity for establishing multi-bank HCs in
the state. The topic has received sup­
port from Governor John Carlin and
the Kansas Chamber of Commerce
and Industry.
The KBA is considering support for
a bill to increase the number of de­
tached facilities for Kansas banks from
three to four and to permit one of the
additional facilities to be placed in an
area outside the city or township of
domicile.
A two-year extension of the current
rate ceiling of 21% on consumer loans
is expected to be supported by creditor
groups, including the KBA.
The association will take a neutral
stand on legislation expected to be in­
troduced concerning deposit of local
public funds in S&Ls.
Legislation is expected to be intro­
duced concerning a possible change in
the UCC concerning farm products,
bankruptcy-code changes, attorneys’
fees in litigation involving commercial
loans and several technical amend­
ments to the state banking code.
K en tu cky. The state legislature does
not meet in 1985.
M innesota. The Minnesota Bankers
Association is on record as favoring ex­
pected legislation calling for a regional
interstate-banking bill. The bill is ex­
pected to permit Minnesota banks to
acquire or establish banks in any con­
tiguous state that has a reciprocal pro­
vision and would let banks in those
states acquire or establish banks in
Minnesota. The Independent Bankers
Association opposes the issue. Howev­
er, such legislation is expected to be
successful whether or not it receives
support from the banking industry.
M issou ri. The Missouri Bankers
Association plans to initiate legislation
to permit new services for state banks,
additional facilities and permit region­
al interstate banking in contiguous
states with reciprocal privileges. New
services will include insurance, realestate development and management,
financial advice and tax services,
security-sales authority, travel-agency
services, accounting/bookkeeping ser­
vices and broader leasing powers.
The proposal calls for banks located
anywhere in the St. Louis and Kansas
City metropolitan areas to be allowed
to locate facilities anywhere in those
areas. Banks outside the two metro­
politan areas would be free to locate
facilities anywhere within their home
city or county excep t in another
community already being served by a
38

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

bank or anywhere within five miles of a
main bank. Banks could cross county
lines, provided the community they
want to enter doesn’t already have a
bank.
Other issues likely to be taken up
this year include liens on farm prod­
ucts, a moratorium on farm foreclo­
sures, lifeline-banking services and au­
thority to deposit public funds in all
types of financial institutions.
N ew M ex ico . The New M exico
Bankers Association will introduce leg­
islation dealing with electronic funds
transfer and the definition of “banking
day” this year.
The association is recommending
revision of portions of the state’s Re­
mote Financial Service Unit Act that
pertain to POS terminals, POS net­
works and ATMs because current stat­
utes don’t meet the needs of banks and
citizens. The NMBA wants all own­
ership restrictions for POS devices re­
m oved, recov ery p erm itted of a
reasonable return on invested capital
and a reasonable profit in a POS net­
work, nonexclusivity in identifying
POS systems and mandatory sharing of
POS networks.
The NMBA wants the term “day,”
when found on the face of a bank draft,
to be clarified by changing it to “bank­
ing day” as defined in the UCC.
Legislative issues expected to be in­
troduced this year will deal with S&L
collateral, credit union public-deposit
authority, public-deposit collateral,
state/city/county funds policy, taxes,
banking-departm ent restructuring/
budget increase, establishment of a
bank HC act, funds availability, fiscalagent deposit facility, lifeline services
and geographic expansion of banking
facilities. The NMBA has voted to re­
main neutral on the banking-facilityexpansion issue.
O klahom a. Legislation is expected
to be introduced to expand the num­
ber of potential bidders for a failing
bank by waiving restrictions governing
acquisitions. Present law prohibits
conversion of failing banks to branches
and the acquisition of failing banks by
multi-bank HCs unless the bank being
acquired has been in existence for five
years.
The Oklahoma Bankers Association
is in favor of waiving acquisition re­
strictions for HCs willing to acquire
failed banks. It will not support waiv­
ing the prohibition covering conver­
sion of failing banks to branches be­
cause its membership has not had an
opportunity to express its views on that
topic.

Other issues expected to surface this
year include legislation to address non­
bank problems, several bank/taxation
issues, additional enforcement powers
for the state banking departm ent
(which the OBA is expected to sup­
port) and a number of issues of lesser
importance.
T en n essee. The major issue this year
is interstate banking. Both the Tennes­
see Bankers Association and Governor
Lamar Alexander will attempt to con­
vince the legislature to pass enabling
legislation.
The proposal is expected to permit
banks to establish facilities in the eight
states that are contiguous to Tennes­
see, plus West Virginia, South Caroli­
na, Louisiana, Indiana and Florida.
Each state would need an agreement
of reciprocity to participate.
Governor Alexander favors intra­
state branching, but the TBA doesn’t.
Concern has been expressed by
legislators about the merits of inter­
state contiguous banking for Tennes­
see and the speaker of the house has
urged lawmakers to move slowly on
any banking legislation.
Other legislation expected this year
involving banking will deal with credit
insurance and minor housekeeping
matters.
W isconsin. The Wisconsin Bankers
Association’s task force on interstate
banking has voted in favor of a neutral
stance to be taken by the association
when the issue is introduced in the
legislature this year.
Similar legislation was opposed by
the WBA in 1983 and the attempt re­
sulted in formation of the task force.
It’s expected that, should legislation
be introduced, the WBA will take ac­
tion to make any resulting bill favor­
able to the banking industry.
Other topics expected to come up in
this year’s legislature include authority
for venture capital, closing the non­
bank loophole and broader powers for
banks, including real-estate broker­
age, travel-agency operations and
actuarial services for trust depart­
ments. — Jim Fabian, senior editor.
• Allen R. Jensen and Alicia Williams
have been promoted to assistant vice
presidents at the Chicago Fed. Ms.
Williams continues in the consumer
affairs division of the bank’s supervision/regulation departm ent and as
community affairs officer. Mr. Jensen
has been given responsibility for the
bank’s regional check-processing office
in Indianapolis. He formerly was in the
bank’s Des Moines Office.

M ID-CONTINENT BA N K E R fo r Ja n u a ry , 1 9 8 5

,

Fair, Orderly Safe Transition Needed

Interstate Banking
Should Be A pproached
O n N ational Basis
H IL E pressures for change
seem to be increasing, most of
us probably would agree that the next
Congress is not likely to authorize un­
limited interstate banking. Even con­
gressional approval of regional inter­
state banking is in doubt. Its fate will
depend on the outcome of court chal­
lenges to state regional-banking laws
and on achievement of a compromise
on other provisions of a broader bank­
ing bill.
While we may not have full inter­
state banking in the near future, we
certainly do have an abundance of
banking services provided on an inter­
state basis. Only full retail deposit­
taking powers and the ability to pro­
vide all services through one subsidi­
ary are needed to make interstate
banking a reality. A 1983 study by the
Federal Reserve Bank of Atlanta found
more than 7,800 out-of-state offices of
banking organizations.
In addition to those provided
through these 7,800 offices, many
other services can be provided on an
interstate basis without a physical
presence in the market. Correspon­
dent banking and many business ser­
vices are in this category. Even some
consumer products, such as credit
cards, are now provided interstate
without a banking office being re­
quired. For some services, the tollfree telephone line and the ATM have
become acceptable service-delivery
systems. A lesson was learned here
from success of the money-marketmutual funds.
Now we have the nonbank bank as
the newest method of interstate expan­
sion. As Fed Chairman Paul Volcker’s
letter to Congress makes clear, our de­
cision to approve nonbank-bank ap­
plications was made reluctantly. While
all board members probably would

W

By Martha R. Seger
favor some form of interstate banking,
we are all opposed to allowing change
to come about through this loophole in
existing law.
Although the board is approving
nonbank-bank applications subject to
prohibitions or tandem operations, we
would continue to warn the industry of
the risk of having to divest these sub­
sidiaries. Congress has made its inten­
tions known, and those who assume
the cutoff date for grandfathering will
be changed are taking a major risk.
Since everyone has been warned prior
to establishing their new subsidiaries,
the case for grandfathering is not as
convincing as it was in 1956 and 1970.
M arth a Ro m ayn e
Seg er becam e a
member of the Fed
Board of Governors
last Ju ly , and her
term is to run until
1998. From 198384, she w as profes­
sor of finance, Cen­
tral M ichigan Uni­
versity, Mt. P leas­
ant. Before that, she
w as commissioner of
fin a n c ia l in stitu ­
tions in Michigan, 1981-82. Her career has
included being vice president in charge of
economics/investments, Bank of the Com­
monwealth, Detroit; chief economist, De­
troit Bank; and financial economist, Feder­
al Reserve Board, Washington, D. C. She
has been on the staff of the New Mexico
School of Banking, University of New Mex­
ico, Albuquerque, and lecturer, Prochnow
School of Banking, Madison, W is., and
Northern School of Banking, Marquette,
Mich. She holds three degrees from the
University of Michigan, including an MBA
in finance and a Ph.D. in finance/business
economics.

M ID-CONTINENT BA N K ER fo r Jan u ary , 1 9 8 5


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

While interstate banking should be
considered in the process of closing the
nonbank-bank loophole, that approach
does not seem likely. Therefore, in the
short run, changes in bank geographicexpansion powers will be the result of
state in itiativ es. The 1985 statelegislative sessions probably will result
in several additional states permitting
some form of interstate expansion. I,
m yself, would p refer a national
approach, but it seems clear that the
federal government needed — and
still needs — pressure from the states
to remedy this constraint on banking.
Like NOW accounts, state action on
branching will induce changes that
otherwise would have taken too long to
attain.
As an economist, I welcome removal
of restrictions on entry into new mar­
kets. Entry restrictions often serve
only to perpetuate the existing division
of market shares, regardless of how
well or how poorly the market is being
served. While we all may prefer to
operate without competition or threat
of competition, no better force has yet
been devised to assure good perform­
ance.
Having endorsed freedom of entry
and removal of entry barriers, I want to
mention some problems I see develop­
ing in the regional-interstate-banking
movement.
First, most of the actual and planned
new entry involves mergers between
large banking organizations. The trend
is toward regional consolidation. Rel­
atively large banks, capable of being
lead banks of regional organizations,
have instead become subsidiaries of
even larger banks. Indeed, the merger
of large regional banks appears to be
the goal of the regional-banking move­
ment.
These mergers are defended in a
39

number of ways I do not find complete­
ly convincing. Will the merging banks,
in fact, achieve economies of scale and
scope? There is no empirical evidence
to suggest such economies exist. What
evidence there is suggests economies
of scale are quickly exhausted. Those
who believe there are economies of
scale provide no evidence to support
their claims. Each new or prospective
change in the banking industry brings
new visions of efficiencies that will
benefit the large banks and doom the
small banks to failure. After decades of
hearing these claims, we still have
thousands of profitable small banks.
Thus, I do not see the economic foun­
dation for many of the large-bank
mergers.
The other justification I frequently
hear is that the regional banks must
merge to compete with money-center
banks when full interstate banking
eventually is permitted. Again, there
is no evidence that size is necessary for
survival or that a bank must be all
things to all people in all markets to be
profitable. The argument that size is
necessary to survival would result in a
system composed of only a few large
nationwide banks.
Too often, the argument for region­
al-interstate banking sounds like, “Let
me absorb banks throughout my re­
gion so that I can be an attractive ac­
quisition candidate when nationwide
banking is a llo w ed .” Regionalinterstate banking may reduce the
number of bidders and hence lower
the premium paid to acquired firms by
acquiring firms. Therefore, it may be­
come a boon to large regional acquirors
that are motivated to set themselves
up to be future acquisition candidates
or to become “large enough” to remain
independent. That is to say, regional
banking may be desired, or turn out to
be, a subsidy to the larger regional
banks.
The experience of Maine, the first
state to adopt an out-of-state bankentry law, is illustrative of the value of
maximizing the number of potential
entrants. Rather than limiting entry to
New England banks, many of which
already were competing for business
loans in Maine, the state was opened
on a nationwide basis. Two of the first
entrants were medium -sized bank
holding com panies from Albany,
rather than the expected major Boston
and New York City banks.
While the Supreme Court eventual­
ly will decide the fate of regional recip­
rocal-interstate banking, I hope we
will quickly pass through that stage of
evolution and move to full interstate
banking. Maximizing the number of
40


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

potential bidders for exiting banks and
maximizing the diversity of new en­
trants into markets should result in a
better long-run banking structure.
In this period of transition, we need
to be concerned about the long-run
structure of the banking industry.
While re-examining the old rules, we
must attempt to look well into the fu­
ture and assess the long-run impact of
proposed changes. In this regard, I
would raise two questions.

"I do not foresee any forces
that would suggest problems
for smaller banks. They can ex­
ploit their knowledge of local
market conditions, and while
they may not have the re­
sources to develop new prod­
ucts or operating systems,
there are plenty of vendors to
assist them in delivery of highquality banking services/7

First, do we need to be concerned
about small banks?
Second, do we need to be concerned
about nationwide concentration of
banking resources?
The small-bank question does not
appear to be a serious problem ,
although small banks have the same
fears about regional banking that re­
gional banks have about nationwide
banking. Empirical work on smallbank survival does not suggest major
problems resulting from continued de­
regulation of the banking industry.
The board’s study of 1983 bank profita­
bility, published in the November,
1984, issue of the F ed eral R eserve Bul­
letin, suggests that small banks appear
to have suffered somewhat from de­
posit deregulation. Money-marketdeposit accounts increased their cost of
funds, but large banks substituted
MMDAs for purchased money and
lowered their cost of funds. In addi­
tion, small banks have b een less
aggressive in pricing their services. In
spite of these expected problems,
small banks continued to earn a higher
rate of return on assets than large
banks. Comparative rates of return on
capital were slightly in favor of large
banks, but the difference will narrow
in coming years as large banks increase
their capital to levels closer to those of
small banks.

I do not foresee any forces that
would suggest problems for smaller
banks. They can exploit their knowl­
edge of local market conditions, and
while they may not have the resources
to develop new products or operating
systems, there are plenty of vendors to
assist them in delivery of high-quality
banking services. Competition will be
tougher than in the past, however.
Merely holding a banking charter will
not be a guarantee of profits. But those
willing to adapt to market conditions
and meet the needs of the marketplace
will continue to do well, even in com­
petition with large nationwide firms.
Even though many small banks will
be acquired, most acquisitions will be
by choice and not by necessity. I doubt
that the total number of banking or­
ganizations will decline to the extent
predicted by some forecasters. Major
declines in the bank population will
occur in those states that do not yet
have full intrastate branching. Illinois
and Texas, for example, each still have
more than 1,000 banking organiza­
tions. Nearly 30% of all banking orga­
nizations are in Texas, Illinois, Kansas
or Missouri. One half of all banking
organizations are in only nine states.
Greater intrastate branching will de­
crease the number of banks; whereas,
interstate banking will increase nation­
al deposit concentration.
In estimating the number of banks
likely to exist at some future date, we
should not overlook the fact that newbank formations still continue at rel­
atively high rates. Banking is viewed as
a profitable industry, and as long as
there are markets where entrepre­
neurs perceive the prospect of profits,
new banks will be formed.
While small-bank survival probably
is not a problem, I am more concerned
about the second issue I raised, the
question of aggregate concentration.
Aggregate concentration, or percent­
age of total nationwide deposits held
by the few largest firms, is an issue that
transcends pure economics and goes to
more deeply held traditional American
concerns. Prevention of financial con­
centration is one of the bases of Amer­
ican banking policy. In formulating an
interstate-banking policy, we must de­
cide whether we want to reaffirm this
objective or permit a greater degree of
nationwide concentration of banking
resources.
Some would argue there is no need
to worry about aggregate concentra­
tion. They reason that the number of
firms in the banking industry is so large
there is no reason even to discuss the
issue. Yet I do not think that that atti­
tude is correct. The top 100 banking

M ID-CONTINENT B A N K E R fo r Ja n u a ry , 1 9 8 5

organizations controlled 53 .9 % of
domestic banking assets at the end of
1983, an increase of over five percent­
age points since 1978. If we do not
control interstate mergers between
large banking organizations, deposit
concentration on the national level will
increase ever more rapidly. The over­
whelming proportion of the banking
industry’s assets would be held by a
few extremely large nationwide firms.
There still would be thousands of other
banks, but they collectively would
hold only a small fraction of total de­
posits.
Some observers also argue that
banking concentration would not in­
crease because there are no substantial
economies of scale in banking. This
argument also misses the point. Lack
of sizable economies of scale has not
prevented increased state-deposit
concentration in those states that per­
mit statewide branch banking. Clear­
ly, there are factors other than econo­
mies of scale associated with mergers
and acquisitions that occur after a state
liberalizes its branching laws.
Would the antitrust laws prevent
growth of nationwide banking concen­
tration under a regime of interstate
banking? This seems unlikely because,
at least initially, banks headquartered
in different states would not be con­
sidered competitors in the same local

banking markets. Antitrust laws are
more effective in dealing with mergers
within markets than with mergers be­
tween firms operating in different
geographic markets.
T herefore, if Congress wants to
maintain the historically low degree of
nationwide banking concentration, in­
terstate-banking legislation should be
accompanied by some restrictions on
large interstate-bank mergers and ac­
quisitions. There are many ways inter­
state-banking legislation could in­
corporate concentration limitations.
W e have studied many possible formu­
las, such as prohibiting mergers among
the 100 largest firms. A simple system
based on size of the acquiring firm
would seem best. Nearly all banks not
competing in the same markets would
be free to merge interstate without
limitations. The largest banks, howev­
er, would face increasingly severe size
restrictions on their acquisitions as
their nationwide share of banking
assets increased. It seems clear that
due regard will have to be taken of
increasing com petition banks face
from other depository and nondeposi­
tory financial institutions. Regardless
of the specifics of the plan, I would
hope that some fair and workable sys­
tem for maintaining a deconcentrated
financial system would be developed
by Congress.

As a final topic, I would stress the
need to maintain the safety and sound­
ness of the banking system in the proc­
ess of moving into the in terstate­
banking era. Interstate banking has
the potential to decrease banking risk,
but it also can lead to an increased risk.
Clearly, ability to expand geographi­
cally should allow risk-red u ction
opportunities. To the extent that dif­
ferent regions of the country are sub­
ject to different economic forces, di­
versification of consumer- and busi­
ness-loan portfolios is desirable. On
the other hand, consequences of the
rush to enter the energy-lending busi­
ness should have taught us something
about careful diversification.
The other risk frequently cited in
discussing interstate banking is the
danger that the acquiring firm will, in
its eagerness to acquire an attractive
entry vehicle, pay too high a premium
for the target firm and dilute its equity
position. I think the market is able to
impose its discipline on firms that
overbid for acquisitions. Costs of equi­
ty and debt funds will increase as the
market perceives the added risk and
dilution of stockholders’ equity.
Still another risk that policymakers
must consider involves deposit insur­
ance and related issues. If there is in
fact a cutoff over which banks are too
large to let fail, growth of bank size

W hat Do A P at Gat SPA Rich.Uncle
Have In Com m on?
The fat cat is Kitty Kat,
mascot of Kitty Club, the
popular children’s savings
program. The rich uncle?
He’s Uncle Ira, the individual
retirement account that can
give customers a tax shelter
now—a sizable inheritance
upon retirement. As fran­
chise programs with proven
success in financial institu­
tions across the country,
both Kitty Club and Uncle Ira
can set your institution

above and beyond your
competition.
When purchased together,
Kitty Club and Uncle Ira can
provide you with cross-selling
advantages as well as a spe­
cial discounted package price.
However, either program can
be purchased separately. For
complete information and ref­
erences, call: 919-323-0913,
or write,Kitty Club/Uncle Ira,
Dept. MC-1, P.O. Box 2187,
Fayetteville, NC 28302.

T hey C an Give You The Com petitive Edge!

Kittg^ Stab

TTnftle IR A

Kitty Club & Uncle Ira are subsidiaries of Smith Advertising & Associates.
All rights reserved.

M ID-CONTINENT BA N K ER fo r Jan u ary , 1 9 8 5


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

41

through interstate mergers may in­
crease the number of institutions for
which market discipline is blunted by
public-policy concerns. I am reason­
ably optim istic that policy-makers
have options that can bring the same
types of penalties to the large banks as
to the small banks. But there are prob­
lems and trade-offs, and recent events
have made clear, I think, that this
dimension of banking structure is
ignored at our own risk.
The final risk factor I will mention
also is applicable to the current rush to
establish nonbank banks. There is a
danger that everyone will try to enter
the same attractive banking markets.
For example, 11 banking organizations
have applied to establish nonbank
banks in Phoenix. While Phoenix is
indeed a growing and attractive mar­
ket, how many new banks can the mar­

ket support all at one time? I am not
suggesting that any of the new entrants
will fail, or that the losses incurred by
their parent organizations will cause
their failures. However, I would feel
fairly safe in predicting that not all
these new entrants are going to earn
their target rates of return on their
Phoenix subsidiaries. For that reason,
I would suggest that investments in
new subsidiaries be limited, at least
initially. I also would suggest that
there are plenty of profitable markets
that could use some new competitors;
everyone doesn’t have to go to all the
same places.
To conclude, I would stress my de­
sire for a fair, orderly and safe transi­
tion to nationwide interstate banking.
W e must be concerned with both
short-run equity for the public and pri­
vate interests involved and with the

IF YOU MEET THESE C RITERIA ,
YOU QUALIFY TO TAKE TH E N EXT STEP
TOWARD SENIOR BANK MANAGEMENT
• A baccalaureate degree
• At least three years’ experience in banking
or a closely related industry
• Recommendation from the CEO of your bank, agency or affiliate
Determined to make your mark in
senior bank management? There’s
no better way than with careful
career planning that includes the
Graduate School of Banking
at Colorado.
We’re one of only five advanced
regional banking schools in the
country, with a reputation for the
kind of rigorous program that helps
our graduates get to the top.
W ithin the framework of twoweek summer sessions for three
consecutive years, the Graduate
School of Banking at Colorado
prepares you for accelerated
advancement to senior management
positions. A first-class faculty
comprised of bankers, related
industry professionals and university
professors blends practical
experience with business theory—
while constantly updating subject
matter to keep you current on
industry policy and regulation.
If you meet the criteria listed
above, you’re eligible for application
to this outstanding banking
program.

Find out more by calling
Helen Mickus at (303) 443-1950.
Or complete and mail the coupon to:
A TTN : Helen Mickus
Graduate School of Banking
at Colorado
University of Colorado
Events Center, Campus Box 411
Boulder, C O 80309
It could be the next important
step toward the senior management
position you’re aiming for.
ATTN: Helen Mickus

Mail to: Graduate School of Banking
at Colorado
University of Colorado
Events Center, Campus Box 411
Boulder, C O 80309
□

Yes, I’m interested in taking the next
step toward senior bank management.
Please send me more information about
the advanced curriculum at the Graduate
School of Banking at Colorado.

NAME

ADDRESS

CITY

STATE

ZIP

For Immediate Action,
Call (3 0 3 ) 4 4 3 -1 9 5 0 Today

long-run health and efficiency of the
financial system. What we build in the
next few years will be with us for many
years; so we must design well. • •

Banks, Thrifts Favored
By 8% of Households
As Insurance Providers
More than 8% of all U. S. house­
holds would purchase personal lines of
property/liability insurance from a
bank or thrift, according to a study con­
ducted by Mathematica, a Princeton,
N. J., information-services organiza­
tion.
Findings indicate that this demand
— which represents 6.5 million house­
holds — is primarily from mass-market
segments, rather than from more up­
scale market segments.
The study also projects that the
banking industry could earn $121 mil­
lion annually in commission revenue
from sale of home-owners’ insurance
and $344 million in commission rev­
enue from sale of auto insurance.
Findings are based on Mathematica’s analysis of the recently released
Survey of Consumer Finances spon­
sored by the Fed and the Comptroller
of the Currency. The study consisted
of in-person interviews of a national
sample of nearly 5,000 households and
analyzed responses to survey ques­
tions about interest in purchasing per­
sonal lines of property/liability insur­
ance from financial institutions.
“The findings show that there is
already a basic consumer interest in
buying insurance from banks and
thrifts,” said a Mathematica spokes­
man. “T h ese m arket p ro jectio n s
should be viewed as the floor on which
additional demand could be generated
with effectiv e m arketing/pricing
strategies.”

Joseph Jester Named
President of AIB
Joseph M. Jester, vice president,
BancOhio National, Columbus, has
been elected AIB president, succeed­
ing Roy E. Huddle, executive vice
president, Sunwest Bank, Española,
N. M.
Named AIB p resid en t-elect was
H erbert W. Cummings, executive
vice president, Citizens Bank, Provi­
dence, R. I. The new AIB chairman is
Joseph H. Riley, former chairman/
president, NS&T Bank, Washington,
D. C.

GRADUATE SCHOOL OF BANKING AT COLORADO
42


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

MID-CONTINENT BA N K E R for Jan u ary , 1 9 8 5

A Message to Congress From Agri-Bankers

Long-Range Agri Solution?
URING the recent ABA agri­ teed. This goal appears achievable, the private sector not to be involved in
making these loans. These subsidies
cultural conference in Kansas bankers stated.
City, bankers went through the “con­Commodity reserves. These re­ further encourage unnecessary build­
sensus process,” which has become a serves should be reduced substantial­ up of grain reserves.
Move toward a free market. Bank­
ly, say agri-bankers. Reason: High re­
part of the ABA’s national leadership
serve levels an d their causes have cre­ ers believe that agriculture must begin
meetings. The Kansas City consensus
ated roadblocks to marketing efforts of to move toward a free market and that
addressed the problems of agriculture
and potential long-range solutions to agriculture. Their position was ampli­ restructuring target-price supports
and loan levels is one way to achieve
fied with these remarks:
those problems.
• Reductions should be made over a this. They proposed a target-price
A morning-long session found bank­
ers analyzing and debating a range of period of time so as not to create a program based on a five-year moving
dramatic effect on commodity prices. average, gradually phasing out sup­
proposals the group then would “send
up” to the national leadership confer­
ence for “further massaging” and,
eventually, creation of a policy the
ABA would bring to Congress as pro­
posals for a 1985 farm bill.
Following is a digest of several of the
major items discussed and debated at
Kansas City. (The reader may wish to
add his comments and suggestions by
writing to the ABA agricultural bank­
ers division.)
Direct lending by Farm ers Home
Administration. Bankers advanced the
premise that the relationships b e­
tween direct and guaranteed loans (to
farmers) need to be changed. For ex­
AGRI-BANKERS QUIZZED by press following "consensus" session in Kansas City:
ample:
(from I.) Timothy R. Taylor, pres., First of America, Holland, Mich.; Oliver
Hansen, pres., Liberty Trust, Durant, la.; Mike Fitch, v.p., Wells Fargo, San
• Make it possible for the private
Francisco; and Alan R. Tubbs, pres., First Central, DeWitt, la. Mr. Tubbs w as
sector to handle a larger share of cred­
conference chairman.
its temporarily not bankable on their
own merits.
• Establish procedures that would ports, achieving a free market at the
• Direct loans are more dependent
on government funding than guaran­ result in a gradual decrease in re­ end of the fifth year. Supporting this
recommendation were these thoughts:
teed loans, which are provided by pri­ serves; e.g., production controls, PIK• Price-support policies do help
vate lenders. There is some evidence type programs and reduction in sup­
farmers deal with financial stress, but
that guarantees are fully funded (by port prices to make U. S. agriculture
only in a small and temporary way.
Congress) as if they were direct loans. more competitive in world markets.
• Establish long-range goals for re­
• Price supports do not help those
This assumes 100% loss. There is sup­
farmers most in need. Benefits cannot
port for accounting for losses in a simi­ serves at substantially lower levels for
be targeted effectively on those farms
lar way to banks’ loan-loss reserves. all commodities. Present buildups
with serious financial problems.
Bankers th erefore suggested that prevent proper development of export
• The target-price concept should
guarantees be funded only in that markets. Present high support prices
be more flexible and, if possible, ben­
fashion. They support additional au­ add to these buildups.
• Encourage other countries to
efits should be channeled more to
thorizations for guaranteed loans as
“family farms.”
long as direct government lending is house some of their own reserves.
Present U. S. policies have caused
• Price supports send improper sig­
reduced by a similar amount.
nals to producers, increase production
• A phased-in approach for guaran­ 60% of the world’s grain reserves to be
beyond the capacity to sell in world
tees was recommended: During the housed in this country.
Interest-rate subsidies on storage- markets. There needs to be a balance
first year, 60% d irect and 40%
betw een production and ability to
guaranteed; second year, 50/50; by the facility loans. End these subsidies.
fifth year, 20% direct and 80% guaran­ There is no reason, said bankers, for market.

D

M ID-CONTINENT BA N K ER for Jan u ary , 1 9 8 5


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

43

• Support programs have not raised
prices in world markets. The opposite
has resulted, and increased stocks
have imposed record costs on U. S.
taxpayers.
Bankers seated around some 50
round tables considered the proposals
outlined in the foregoing paragraphs.
Their “table reports’ were monitored,
and results will be considered by the
ABA leadership conference.
A message will be sent to Congress.
Will it hear? Will it listen? Will your
voice be added to those who already
have spoken? — Ralph B. Cox, pub­
lisher.

B a n k in g
C areer
S p e c ia lis ts
Financial Placements is built on a
history of strong relationships
between bankers and Bank
News' publications.
You can benefit from these rela­
tionships — plus the more than
65 years of bank-related experi­
ence of these two men — by
using our specialized employ­
ment service.

Mike Wall
Manager

Tom Cannon
Associate

Call us!
We can help find the
right person or the
right position.

F IN A N C IA L
PLACEM ENTS
a division of BANK NEWS
912 Baltimore
Kansas City, MO 64105

816 421-7941
-

44


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

CEO Concerns
(C ontinued fr o m page 20)
size increased. E m p loy ee relation s,
m a n a g em en t d e v e lo p m e n t, ca p ita l
adequ acy, national econom y and CEO
succession also had higher response
rates than they did last year.
On the other hand, the biggest de­
crease in concern was sp read m anage­
m ent .
The New C om petition . Sears length­
ened its lead over Merrill Lynch as the
most respected nonbank competitor
for the future. Fully 93% of the CEOs
said Sears would be a major competi­
tive threat in their markets in 1990,
compared with 83% for Merrill Lynch
and 77% for American Express. These
percentages, says Egon Zehnder, re­
flect significant gains from the 1983
survey for Sears and American Express
and slippage for M errill Lynch. K
mart, the giant retailer, wasn’t even
mentioned by any CEO in 1983, but
jumped to sixth place (24%) behind
Prudential-Bache (38%) and E. F.
Hutton (27%) in 1984.
C orp orate L ead ersh ip . “Given the
‘acquire or be acquired’ environment
in banking, as well as the general com­
petitive turmoil, we wanted to find out
where these CEOs were turning for
ad v ice,” says Samuel H. Pettway,
Zehnder’s survey coordinator. “Re­
sults indicate coming upheaval in bank
boardrooms and executive suites.’’
For example, when asked to rate
contributions of their boards to their
banks’ strategic success, 28% of the
CEOs described their boards as “pas­
sive” or “largely ceremonial.” Only
27% saw their boards as “critical” or
“very active” contributors. In fact,
only one CEO from the nation’s 55
largest banks — all with assets of more
than $5 billion — viewed the board as a
critical contributor.
“The average bank board of direc­
tors,” warns Mr. Pettway, “may not be
fulfilling the role it’s expected to. In
fact, a majority of the CEOs said they
are altering the makeup of their boards
in response to changes in the industry
or in the markets they serve.”

Copies of the survey described in the
a cco m p a n y ing a rticle may be
obtained by writing the Egon Zehn­
der International offices: 645 Fifth
A ve., New York, NY 10022; One
First National Plaza, Chicago, IL
6 0 6 0 3 ; E ig h t Piedm ont C e n te r,
Atlanta, GA 30305.

The survey also revealed that CEO
succession won’t be a routine matter at
these banks either. Barely four CEOs
in 10 are completely confident their
successors are now on their staffs. Con­
versely, more than one in four ex­
pressed certainty that a successor will
not come from their present manage­
ment teams.
“Clearly,” continues Mr. Pettway,
“changes in the banking industry are
having a ‘trickle-down’ effect, which is
changing requ irem ents for future
senior executives.”
CEOs cited “another officer in the
bank” when asked in the survey to
name th eir most valued business
advisers.
“Ironically,” Mr. Pettway points
out, “the cadres of professional advicegivers — lawyers, accountants and
consultants — fared quite poorly on
this scale. Not one received more than
4% of the responses. In fact, spouses
got as many votes as either accounting
partners or management consultants. ”
CEOs also predicted cities in each
region that will have the most potential
for economic growth in the next dec­
ade. In order of preference, their lead­
ing choices for “Cinderella cities” are:
E a s t — 1. Boston. 2. Harrisburg, Pa.
3. Allentown, Pa. M idw est— 1. Indi­
anapolis. 2. Columbus, O. 3. Min­
neapolis. Southwest — 1. Dallas. 2.
Austin, Tex. 3. Houston. Southeast —
1. Atlanta. 2. Tampa/St. Petersburg,
Fla. 3. Orlando, Fla. W e s t— 1. Den­
ver. 2. San Diego. 3. Seattle. • •

Bank Survey
(Continued fr o m page 9)
plan to buy an investment firm.
And h ere is w here bankin g’s
“house” is divided: F o u r p e r c e n t
adm itted they w ere ready to ch a rter a
n o n b a n k . T h ese are com m ercial
banks, now, in the Mid-Continent area
(not from New York City or the West
Coast) saying they will charter non­
banks! (The bromide must be right: If
you can’t beat ’em, join ’em.)
Perhaps one banker summed it up
best as to what bankers should be
doing or planning for 1985 and the
years ahead. “We need to do what we
do best. The new services will contrib­
ute only in proper markets. They won’t
work for everyone. Tinker Bell (a
magical character in “P eter Pan”)
comes out only in fantasy land.”
Enough said. — Ralph B. Cox, pub­
lisher.

MID-CONTINENT BA N K E R fo r Jan u ary , 1 9 8 5

A Portfolio A pproach
To Asset/Liability M anagem ent
HE first thing many bankers think
By Robert P. Prince
of when they hear the words
“asset/liability management” is a half­
Robert P. Prin ce,
v.p., First Nat'l, Tul­
inch stack of reports. These reports,
sa , m a n a g e s the
through their maze of maturity gaps,
b a n k 's
T reasu ry
periodic gaps and rate-sensitive-asset/
group. His responsi­
ra te -se n sitiv e -lia b ility (RSA/RSL)
bilities include as­
ratios somehow hold the key to manag­ se t/ lia b ility m a n ­
ing the bank’s interest-rate risk.
a g e m e n t,
fu n d s
Gut feeling tells us the bank is liabil­ m a n a g e m e n t and
ity sensitive, but we find it difficult to in v e s t m e n t - p o r t ­
folio managem ent.
confirm or disprove that feelin g
He is a certified pub­
through our analysis of the reports.
lic accountant and
Their complexity often leaves us un­ an adjunct professor
certain or confused. Furthermore, our of finance, University of Tulsa, where he
received a B.S. degree in business adm inis­
uncertainty is heightened by the time
when, based on the negative 90-day tration, with majors in finance/accounting.
gap, we are sure that a drop in interest
rates will help us. Interest rates do, in
fact, fall the following month, but net
In this situation, the bank clearly
yield mysteriously declines. This type was more sensitive to changes in in­
of experience brings about a renewed terest rates within its liability structure
and intensified feeling that we are in­ than its asset structure.
Graph A (page 46) illustrates this
capable of understanding the bank’s
interest-rate risk. The real problem is risk in the form of a maturity mismatch
that despite a bank’s actual exposure to between the asset and liability. Graph
interest rates, bank management often B (page 46) shows the result of this
is so uncertain of its ability to assess mismatch when interest rates rise, and
that risk objectively that it never takes shorter-term liability costs increase
any action to correct it.
while the longer-term asset yields hold
Well, contrary to this picture of par­ constant.
alyzing confusion, asset/liability man­
Managing this problem is what
agement actually can be rather simple.
asset/liability management is all about.
For example, think about a situation The main difference between this sim­
where a bank has one asset and one ple example and real life is that banks
liability each in the amount of $1 mil­ have many assets and liabilities rather
lion (ignore stockholders’ equity for than just one; these assets and liabili­
the moment). Assume the asset earns a ties often pay interest before maturity;
rate of 12% and matures in 180 days; the assets may have amortizing prin­
the liability costs 10% and matures in cipal balances, and the bank uses equi­
90 days. During the first 90 days, the ty and non-interest-bearing deposits as
bank earns net-interest income of 2%,
a source of funds. The trick to asset/
or $5,000. During the first 90 days, liability management is to reduce the
interest rates rise. The liability ma­ balance sheet to a level of direct sim­
tures and rolls over for another 90 days plicity that we see in the previous ex­
at a new rate of 14%. The asset does not ample. At this level of simplicity, any­
re-price and continues to earn 12%.
one can understand interest-rate risk
During the final 90 days, the bank and, more importantly, do something
earns net-interest income of —2%, or about it.
—$5,000. On day 180, the loan pays
A Portfolio A pp roach . Two things
off, and the deposit is closed out, but
make the previous example easy to
because of interest-rate risk, the bank
understand. 1. We clearly can identify
makes no money.
that a specific liability funded a specific

T

M ID-CONTINENT BA N K ER fo r Jan u ary , 1 9 8 5


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

asset. 2. Interest-rate sensitivities of
both the asset and liability are ex­
pressed as a single number, their term
to maturity. To analyze an entire bal­
ance sheet in such simple terms, we
need to accomplish these same things.
The fact that banks have a large
number of individual assets and liabili­
ties, all with different maturities and
cash-flow patterns, keeps bankers
from directly associating individual
assets with corresponding liabilities.
Without an advanced funds-transferpricing system and a central control
point, this type of pairing off would be
impossible even in the most simple
balance sheet.
But when you take in a wider pers­
pective of the balance sheet, you see
that it really does contain distinctly
different types of assets and liabilities.
You see asset groupings called primerate-based loans, money-market in­
vestm en ts, fixed-rate com m ercial
loans, consumer-installment loans and
investment securities. There are liabil­
ity groupings called money-market de­
posits, CDs over $100,000, retail CDs,
NOW and savings and demand de­
posits. And then there is a funding
source called stockholders’ equity.
Each of these groupings represents a
distinct portfolio with its own maturity
and cash-flow profile.
By pairing off asset portfolios against
similar maturity-liability portfolios, we
can show that specific liability port­
folios fund specific asset portfolios.
This process of asset and liability asso­
ciation is the first requirement of a sim­
plified approach to asset/liability man­
agement.
The best way to accomplish portfolio
matching is to organize asset and liabil­
ity portfolios into general categories
according to their initial maturities.
Initial maturity can be estimated by
doubling the average life of the port­
folio. Those assets and liabilities that
generally have an initial maturity
greater than one year, or an average
life of more than six months, fall into
the long-term category, while those
45

GRAPH B

GRAPH A
Rate

Rate

90 Day Deposit

r --------------- ------

14% -----

1 4 % -----

1
1

1

$(5,000)

1
1
180 Day Asset

180 Day Asset

1
$5,000

$5,000

1
|
1
1

10% —

90 Day Deposit

10% —

90 Day Deposit

V
90

with an initial maturity of less than one
year fall into the short-term category.
In essence, you split the balance sheet
into two separate balance sheets — a
long-term balance sheet and a short­
term balance sheet.
Types of assets that go on the short­
term balance sheet are prim e-rate
assets, fed funds sold and bankers
acceptances. These are funded on the
short-term balance sheet by moneymarket deposits, CDs over $100,000
and six-month money-market CDs.
Types of assets that go on the long­
term balance sheet are fixed-rate loans
and investment securities. These are
funded by long-term CDs, NOW and
savings, demand deposits and equity.
Any excess liabilities on the short-term
balance sheet are transferred as a
group to the fixed-rate balance sheet.
On the other hand, any shortage of
short-term funds is covered by trans­
ferring excess fixed-rate liabilities from
the long-term balance sheet to the
short-term balance sheet.
Strategic G ap: A Source o f LongTerm Risk. Failure of these balance
sheets to fund themselves represents a
major source of interest-rate risk we
will call the strategic gap. For exam­
ple, if the long-term balance sheet has
$10 million more assets than liabilities,
then these fixed-rate assets are funded
by $10 million of short-term liabilities.
This represents a $ 10-million strategic
gap. Under this condition, the bank
has a $ 10-million exposure to rising
interest rates.
The first objective in a good asset/
liability management system should
be to minimize the strategic gap.
46

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

90

180

Short-term assets should be funded by
short-term liabilities and long-term
assets by long-term liabilities and
stockholders’ equity. Doing so will
eliminate a great deal of exposure to
sustained interest-rate movements.
This analysis of long-term interestrate risk is a significant departure from
traditional gap analysis. Traditional
gap analysis categorizes assets and
liabilities by their maturities or repric­
ing dates, but pays little or no attention
to individual portfolios in the balance
sheet. The portfolio approach sepa­
rates assets and liabilities by type and
then categorizes these portfolios into
separate balance sheets according to
their initial maturities. Even if you
have a few CDs over $100,000 that
mature in IV2 years, they should be
grouped with all other CD s over
$100,000 and included in the short­
term balance sheet. We are concerned
with portfolios, not individual CDs.
The advantage of this system is that it
more clearly isolates interest-rate risk
and allows us to readily devise
strategies to deal with that risk.
B ala n ce-S h eet M ism atch. Once a
bank minimizes its strategic gap, there
is no guarantee that interest-rate risk is
eliminated. A second source of in­
terest-rate risk still lies within the
separate balance sheets. This exposure
is called a mismatch and is measured
through a technique called duration.
Duration is a single number that
represents the interest-rate sensitivity
of an asset or a portfolio of assets.
Duration analysis has revolutionized
management of fixed-income secu­
rities and is gaining wider use in bank­

180

ing.
An asset’s duration can be defined as
the weighted average time until the
asset’s cash flows occur, where the rel­
ative present values of each payment
are used as the weights. Duration of a
portfolio of assets or liabilities is de­
fined as the weighted average of dura­
tions of its individual assets or liabili­
ties. For a portfolio of CDs that pay
interest at maturity, the portfolio dura­
tion will equal the weighted average
life of that CD portfolio. For now, suf­
fice it to say that duration is a good
index of a portfolio’s interest-rate sen­
sitivity. (For a more detailed discus­
sion of duration, see articles by San­
ford Rose in A m erican B an ker or pub­
lications by Alden L. Toevs of Morgan
Stanley & Co.)
Similar to our first elementary ex­
ample of one 180-day asset and one
90-day liability, we analyze interestrate risk within short-term and long­
term balance sheets by comparing
durations of assets and liabilities. If
duration of assets is longer than dura­
tion of liabilities, the bank is liability
sensitive. If duration of assets is short­
er than duration of liabilities, the bank
is asset sensitive. In either case, there
is an interest-rate mismatch.
To minimize long-term interest rate
risk, a bank should strive to match
durations in its long-term balance
sheet. Once this is accomplished and
there exists no strategic gap, the bank­
er essentially can set aside the long­
term balance sheet and then review it
only periodically.
With the strategic gap minimized
and no duration mismatch in the long-

M ID-CONTINENT B A N K ER fo r Jan u ary , 1 9 8 5

BANK SERVICE:

We can help
your bond portfolio
work in concert
with your
banking objectives

By coordinating your bond
portfolio with your banking
objectives, you can improve your
bank's overall position. Thafs
the concept of BANK SERVICE,®
a service of L. F. Rothschild,
Unterberg, Towbin. We have a
unique approach toward a n a ­
lyzing banking activities, and over
30 years of experience.
We assign a team of experts
to exam ine how your banking
activities and bond portfolio work
together We review your rate sen­
sitive assets and liabilities, your tax
situation, your overall rate struc­
ture—everything that effects per­
form ance. We probe the ways all
these activities are contributing
(orfailing to contribute) to your
bank's overall goals.

Then we com e b ack to
you with an objective, thirdparty recommendation.
It demonstrates steps
that can strike a chord
between your banking o b jec­
tives and bond portfolio.
For exam ple, we might
show you how to reduce your
market exposure without d e­
creasing perform ance. Or how
to gain some tax advantages
through bond exchanges.
We also offer two other inno­
vative products that com plement
your BANK SERVICE® analysis.
Our Portfolio M anagers System
monitors your portfolio, does its
accounting, values all holdings
and more. Then there's a Fixed
Income Computer Service which

will introduce new tech­
niques to help immunize
your portfolio from
rate fluctuations.
BANK SERVICE'S®
total orchestration of
bond portfolios with banking
activities has helped hundreds
of banks around the country
achieve their goals. Perhaps
thafs why the substantial majority
of our business is repeat business.
To learn how we can be instru­
mentai in improving your bank's
position call Stephen H. Kovacs,
Special Limited Partner, BANK
SERVICE® at (212) 425-3300, or
write to 55 Water Street, New York,
NY 10041. Because ifs time your
bond portfolio worked in concert
with your banking activities.

I«
L. F. ROTHSCHILD, UNTERBERG, TOWBIN
BANK SERVICE®
We help orchestrate banking success.

M ID-CONTINENT B A N K ER fo r Jan u ary , 1 9 8 5


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

47

CURRENT BALANCE SHEET

Assets

Balance
(000's)

Cash & Due From
Fed Funds Sold

$ 2,500
2,250

Investment Securities:
Bankers Acceptances
U.S. Governments
Municipals
SUBTOTAL
Loans :
Commercial
Installment

Liabilities

Balance
(000's)

Demand Deposits
NOW & Savings Accts
Money Market Deposit Accts.

$ 7,600
4,250
4,675

Money Market CD's
CD's
$100,000
CD's
$100,000

17,400
4,600
5,300

$18,675

TOTAL DEPOSITS

43,825

$13,500
10,450
$23,950

Other Liabilities

$ 1,050

Equity

$ 4,000

TOTAL LIABILITY &

$48,875

5,125
5,050
8,500

Other Assets

1,500

TOTAL ASSETS

$48,875

STOCKHOLDERS EQUITY
I. Short-Term Balance Sheet

Assets
Prime Based Loans
Fed Funds Sold
Bankers Acceptances

Liabilities
Money Market Deposits
C D ’s over $100,000
Money Market C D ’s

Cap/Spread/Mismatch

(days)
Duration

Current
Balance

Average
Rate

$10,000
2,250
5,125
$17,375

13.00%
8.75
10.30
11.65%

$ 4,675
5,300
17,400
$27,375

8.00%
9.30
9.80
9.40%

1
94
106
86

$(10,000)

2.25%

(39)

30 (a)
1
100
47

(a) The portfolio of liabilities that best matches prime-based assets and
minimizes earnings volatility is 65% 90-day average of 90-day CDs and
35% overnight fed funds. This portfolio has a duration of 30 days. We
allocate this duration to prime-based assets.

II.

Fixed Rate Balance Sheet

Assets
Commercial Loans
Installment Loans
U.S. Government Securities
Municipal Securities

Liabilities
C D ’s under $100,000
NOW and,Savings
Net DDAW , ,
Net Equity C

Gap/Spread/Mismatch

Current
Balance

Average
Rate

$ 5,500
8,450
5,050
8,500
$27,500

12.00%
15.00
10.30
13.00
12.92%

$ 4,600
4,250
5,100
3,550
$17,500

9.50%
5.22

$10,000

(b)

Net DDA = DDA - Cash and due from

(c)

Net Equity = Equity - Non earning assets

(d)

Planning period of :he bank

III.

Long-term Assets
Short-term Liabilities
Gap/Spread/Mismatch

48


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

(days)
Duration

249
370
1,095 (3 years)
1,570 (4.3 years)
850 (2.3 years)

3.76%

363
1,095
1,095
1 ,095
903

x (d)
(3 years) '
(3 years)
(3 years)
(2.5 years)

9.16%

(53)

.2 years)

Strategic Gap

Current
Balance

Average
Rate

$10,000
10,000
-0-

12.92%
9.40
3.52%

(days)
Duration
850 (2.3 years)
86
764 (2.1 years)

term balance sheet, the bank is pretty
well insulated against long-term in­
terest-rate risk. W e now can focus
attention on the short-term balance
sheet, which can be managed daily or
weekly depending on a bank’s informa­
tion capabilities.
The safest place to take interest-rate
risk is in the short-term balance sheet.
Taking risk in the short term allows the
possibility of incrementally higher re­
turns without risking a great deal of
capital on an interest-rate forecast. If
your forecast is incorrect and spreads
narrow due to a wrong asset/liability
mismatch, the worst that can happen is
one quarter of lower earnings. W here­
as a strategic gap or mismatch in the
long-term balance sheet can ruin one
or more years of earnings and signifi­
cantly damage capital formation.
You can measure interest-rate risk
in the short-term balance sheet by
comparing duration of assets to dura­
tion of liabilities. One can manage
these durations through the futures
market or by selective funding or
short-term in vestm en t strategies.
Once again, risk is minimized by
matching duration of assets and liabili­
ties.
Consider the current-balance-sheet
example on this page to see more clear­
ly how portfolio-based asset/liability
management works. In the example,
we start with a representative balance
sheet of a $50-million bank. We break
it into a short-term balance sheet and a
long-term balance sheet. We look at
the long-term interest-rate risk pre­
sented by the strategic gap and the
long-term balance-sheet duration mis­
match. Short-term interest-rate risk is
shown by the duration mismatch in the
short-term balance sheet.
In this example, we can quickly iso­
late the bank’s interest-rate risk.
1. Short-term Mismatch: A 39-day
mismatch in the short-term balance
sheet that exposes the bank to a
near-term decline in interest rates.
The bank should manage this mis­
match according to its interest-rate
forecast.
2. Long-term Mismatch: There exists
no significant duration mismatch in
the long-term balance sheet.
3. Strategic Gap: $10,000 of long-term
assets (850 days) funded by short­
term liabilities. This presents se­
vere long-term interest-rate risk.
The bank should im p lem en t
strategies to eliminate the strategic
gapS u m m a ry . Portfolio-based asset/
liability management requires that we
group portfolios of assets and liabilities
M ID-CONTINENT BA N K E R fo r Ja n u a ry , 1 9 8 5

into a short-term balance sheet and a
long-term balance sheet. To minimize
long-term interest-rate risk, we first
seek to fund short-term assets with
short-term liabilities and long-term
assets with long-term liabilities and
stockholders’ equity, thereby mini­
mizing the strategic gap. W e then
match durations of assets and liabilities
in the long-term balance sheet and set
that balance sheet aside for periodic
review.
We focus our active management of
interest-rate risk on the short-term
balance sheet. There, we can match
durations of assets and liabilities to
minimize short-term interest-rate risk
or strategically mismatch durations to
capture incremental profit from cor­
rectly anticipating changes in interest
rates.
Portfolio-based asset/liability man­
agement is intuitively appealing and
generally easy to understand. Fur­
therm ore, since many analysts feel
duration analysis is a more accurate
measure of interest-rate sensitivity
than traditional gap analysis, this proc­
ess may be more accurate. But the key
advantage to portfolio-based asset/
liability management is that its concise
presentation leads to decisions that
control interest-rate risk. • •

A/L Portfolio-Management Support
Offered by Chase Subsidiary
M IC R O -B A S E D system to can easily understand the interest rate
assist domestic or international and liquidity risks inherent in their
financial institutions manage asset/
portfolios,’’ Mr. Strauss says. “They
liability portfolios has been developed
also will be able to see the impact of
by Interactive Data Corp., a wholly different risk-management strategies
owned information-services subsidiary before any one strategy is acted on.”
of Chase Manhattan Bank, New York
Benefits of microBRMS, according
City.
to Mr. Strauss, include:
To introduce the product, Interac­
• Integration with Lotus 1-2-3™
tive Data is making demonstration
and Symphony™. Reports can be cus­
disks available to prospective users,
tomized for use on either spreadsheet
who include chief financial officers,
package.
asset/liability-management committee
• Function range includes runoff/
members and their staffs.
rollover capabilities, the ability to use
The system is named “ m icro­ target balances, consideration of the
B R M S.’ It’s described as a what-if tax-exempt nature of certain instru­
simulator that projects earnings for any ments, balance adjustments to reflect
volume, pricing or funding scenario a foreign-exchange futures, access to
user wishes to test, according to Mel­
Chase E con om etrics in terest-rate
vin J. Strauss, vice president. The sys­ forecasts, etc.
tem also permits users to evaluate
• In addition to helping the user
th e ir institu tions with resp ect to
with the software itself, the micro­
varying economic conditions, chang­
BRMS team can provide support in the
ing Fed and fiscal policies and antici­
subject of asset/liability management.
pated deregulation.
Personnel are available to discuss
“With microBRMS results, users
broad asset/liability issues, to help

A

BA N K
C O N SU LT IN G
Our approach is solution-oriented from conception through
execution. Improved client profitability is our Hallmark
Asset/Liability Management
Rate Sensitivity
M ism atch Problem s
Balance Sheet
Restructuring
Investm ent Portfolio
C om position
M oney M arket Arbitrage
Loan Pricing and
Funding Balance
Tax Preference A ssets
Bond Trading

Integration of
Financial Functions
Financial Planning
Tax Planning
Capital Planning
Corporate
Planning

Investment Banking Advice
Capital Restructuring
Private Placem ents
O ptim um Leverage Analysis
Appraisals for Mergers
and A cquisitions
"Fair Value" Appraisals
N egotiations for Purchase
or Sale of Assets
N egotiations with
Regulatory Agencies
Expert Testim ony in
D issident A ction Suits

BETTINGER & LEECH, INC.
488 Madison Avenue, New York, N.Y 10022 212-308-2800
Management Consultants and Financial Strategists to the Banking Industry
M ID-CONTINENT BA N K ER fo r Jan u ary , 1 9 8 5


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

49

structure asset/liability com m ittee
agendas, etc.
• Balance sheets and funding/pricing strategies in the system are those
the user defines. No structure is im­
posed on users.
• The system has been field tested
for seven years at Chase Manhattan
and has been used by other banks and
finance companies that range in size
from $40 million to $80 billion.
Mr. Strauss says microBRMS is a
user-friendly system with menus and
extensive help screens. Completely
resident on a micro computer, the sys­
tem is priced at $10,000. A mainframeresident version also is available that is
delivered via conventional timeshar­
ing.
The m icroBB M S dem onstration
disk is available at no charge from the
Banking Products Group, 22 Cortlandt
St., New York, NY 10007. • •

Nonbank Situation Plot Thickens
As Comptroller OKs Applications

to make the road to the establishment
HE PLOT continues to thicken re­
of nonbanks as rocky as possible.
garding the nonbank situation.
Regulatory agencies are at odds over It ruled that nonbanks must main­
tain operations independent of the
the issue that has positioned bankers
parent firm. That means there can be
against their peers and caused officials
no shared check clearing, loan pay­
of bankers associations to wring their
ments, loan-balance inquiries, receipt
hands.
of deposits, trust-administration ser­
But there is one point of agreement:
v ices, advice to trust custom ers,
Congress is the villain for not coming
courier services or check-cashing un­
to grips with the situation during the
moratorium decreed by the Comptrol­ less such check cashing or other cus­
tomer services are provided on the
ler of the Currency last spring. As the
same basis to customers of unaffiliated
congressional session drew to a close
prior to the national elections, the Sen­ depository institutions. Separate op­
erations must be arranged for each
ate and House Banking committees
affiliate.
were at odds — not over the need to
The net effect of this ruling is a sub­
close the nonbank loophole, but over
stantial increase in costs associated
which new services banks should be
with establishing nonbanks. Some HC
permitted to offer.
Bank HCs that had applied for non­ executives said these costs would in­
• Patricia A. Tarbutton has joined the
hibit establishment of many nonbanks.
bank charters were overjoyed when
St. Louis Fed as vice president/diviAt presstime, the Fed was recon­
the Comptroller began processing and
sion administrator, human resources,
sidering its restrictions, at least, as far
approving their applications about
Eighth Federal Reserve District. Most
as they concern banking firms wishing
November 1. But the Fed, which has
recently, she was assistant vice presi­ the last word in the mechanics of the
to establish nonbanks.
dent, personnel, San Francisco Fed.
The threat by key congressmen that
establishment of HC subsidiaries such
as nonbanks, followed up on its threat legislation to close the nonbank
loophole would be the first priority of
the new Congress and that nonbanks
would be legislated out of existence
also gave many bankers pause about
establishing new subsidiaries.
But the Comptroller made light of
this threat, implying that it would be
possible to convince C ongress to
grandfather nonbanks that had already
been established; hence, the impor­
tance of establishing them quickly so
that Congress would be impressed
enough to realize it would be stepping
on a lot of important toes if it failed to
include a grandfather clause in forth­
coming legislation.
Not to be left out of the picture, the
FD IC made some waves of its own by
announcing that the Glass-Steagall Act
doesn’t prohibit state-chartered nonFed-m em ber banks from acquiring
firms that sell and distribute secu­
rities, providing state statutes are
friendly to the move. Most banks re­
ceiving this new go-ahead authority
are not giant institutions and thus are
thought to be less than eager to take
advantage of the new powers.
Another development is being con­
sidered by nonbank parents of non­
banks, namely Sears, Roebuck and
Personnel Agency of Fayetteville, Inc.
other firms that started the nonbank
trend by opening financial centers in
P.O. Box 1570
their stores. These firms are consider­
Rogers, Arkansas 72756
ing banding together to form some sort
(501) 636-8578
(C ontinued on page 53)

T

Locating
Key Management
Personnel
In the
Financial
Industry.
That’s all we do.

Walt Heyne

Dunhill

50


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

M ID-CONTINENT B A N K ER fo r Jan u ary , 1 9 8 5

1984 Tax-Reform Act Provisions
Affect Wide Range of Taxpayers
By J. Alan Harkness and James W. Koeger*
Peat, Marwick, Mitchell & Co., St. Louis

HE TAX REFO RM ACT of 1984
significantly revised many code
sections. In the first part of this twopart article (see October, 1984, issue,
page 40) we discussed revisions pri­
marily affecting banks. In this final part
we will review a number of other revi­
sions that will affect a wide range of
taxpayers, including banks. These re­
visions deal with business use of cars
and other property, interest-free or
below-market loans, depreciation for
real property, debt-financed corporate
stock, industrial-development bonds,
fringe benefits and employee stockownership plans.
A utom obiles. The act closes down
the perceived abuse of obtaining sub­
stantial tax benefits from autos, partic­
ularly luxury cars, used for business by
limiting investment-tax credit (ITC)
and depreciation benefits for cars
placed in service after June 18, 1984.
Under prior law, a taxpayer who
purchased an automobile generally
was entitled to ITC and acceleratedcost-recovery-system (ACRS) deduc­
tions based on the proportionate busi­
ness use of the vehicle and could de­
duct the business-use portion of actual
operating exp enses. A standard
mileage allowance of 20.50 per mile of
business use could be deducted in lieu
of computing ACRS deductions and
actual operating expenses.
The act provides that ACRS deduc­
tions and ITCs are available (subject to
limitations described below) if at least
50% of an automobile’s use in each of
its first two years is for trade or busi­
ness purposes. Otherwise, deprecia­
tion is based on the straight-line
method over a five-year period and no
ITC is allowed.
If an automobile is provided to an
employee (other than a 5% share­
holder or related person) as compensa­
tion, it will be considered trade or
business use to that extent and the
compensation amount will be treated
as wages subject to withholding.
Use of a car provided as compensa* M r. Harkness is partner in charge and
M r. Koeger is a senior manager o f the St.
Louis tax department at Peat Marwick.

tion for services by a 5% shareholder or
related person does not qualify as busi­
ness use and thus would not qualify for
ITC or accelerated-recovery periods.
As under prior law, depreciation
and investment credit only can be
taken for the portion of basis attribut­
able to the automobile’s business use.
The act stipulates that the proportion
used for business never can be consid­
ered greater than that based on actual

The Tax Reform Act of 1984
is an extremely technical act
that revises many code sections
covering a broad range of
area s. Readers should . . .
seek competent advice relating
to their particular situation to
ensure com pliance with the
new rules.

mileage. Commuting to work consti­
tutes personal use.
The act also limits the amount of ITC
and depreciation that may be claimed.
ITC is limited to a maximum of $1,000
per automobile. Depreciation deduc­
tions for the automobile (under either
ACRS or the straight-line method) are
limited to $4,000 in the first year and
$6,000 in all subsequent years. These
limitations are reduced proportionate­
ly for personal use of the automobile.
In the case of leased automobiles,
limitations apply to the lessee.
The act requires a recapture of tax
benefits if the percentage of business
use of the automobile declines in later
years. The reduction is treated as a
partial sale for recapture purposes.
Employee-owned cars are not eligi­
ble for ITC and depreciation deduc­
tions unless use of the automobile is for
the convenience of the employer and
required as a condition of employ­
ment.

M ID-CONTINENT BA N K ER fo r Jan u ary , 1 9 8 5


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

The 50% business-use test also must
be satisfied to claim a business deduc­
tion for rent payments on automobiles
leased by the taxpayer for a period of
more than 30 days. A percentage of
rent payments is deemed equal to the
value of ITC and depreciation that
would have been denied for personal
use had the lessee owned, rather than
leased, the car. Recapture rules simi­
lar to those for purchased automobiles
apply.
These provisions apply with respect
to property placed in service and
leases entered into after June 18, 1984,
unless a binding contact was entered
into on or before such date.
Effective for taxable years beginning
after 1984, the act requires taxpayers
to keep adequate contemporaneous
records (a detailed mileage log) sup­
porting their business use of the prop­
erty. Income-tax preparers are re­
quired to advise taxpayers of these
rules and taxpayers must certify in
writing to the preparer the existence of
adequate records.
O ther Property. For certain other
property used partly in a trade or busi­
ness and partly personal, the act re­
stricts ITC and ACRS deductions.
Property affected by these provisions
includes: passenger cars; property
used in transportation, i.e ., trucks,
boats, airplanes; property used for
purposes of entertainment and com­
puter or peripheral equipment.
If such listed property is not used
more than 50% in a trade or business,
the property does not qualify for ITC
nor for accelerated deductions under
ACRS. The taxpayer must use straightline recovery over a five-, 12- or 40year period for three-, five- and 15year class property, respectively. This
provision is effective for all property
placed in service, or for leases entered
into after June 18, 1984, except when
a binding contract was in eff ect on June
18, 1984.
I n t e r e s t - F r e e o r B e lo w -M a r k e t
L oan s. The tax treatment of interestfree or below -m arket-interest-rate
loans has long been a matter of dispute
between taxpayers and the IRS. Some
courts have held that demand loans of
this nature result in neither a taxable
gift nor taxable income, but conflicting
authority prevails regarding term
loans.
In February, 1984, the U. S. Su­
preme Court put to rest the disagree­
ment concerning the gift-tax conse­
quences of an interest-free demand
loan to a family member. It decided
that the value of such a loan constitutes
a transfer subject to gift tax. The case
did not, however, address the income51

tax treatment of such loans.
The act ends the remaining contro­
versy by specifying that certain belowmarket interest-rate loans will result in
a taxable gift from the lender and tax­
able income from an imputed dividend
or compensation to the recipient. In
addition, the borrower is deemed to
incur interest expense and the lender
to receive interest income.
U nder the act, certain below market interest-rate loans are rechar­
acterized as arm’s length transactions.
The lender is deemed to have made a
loan to the borrower in exchange for a
note requiring payment of interest at a
designated statutory rate. W ith
recharacterization, the borrower is
deemed to have paid interest on the
loan. This interest may be deductible if
the amount is not otherwise limited.
The deemed interest is includable in
the lender’s income. The deemed in­
terest payment also is characterized,
depending on the circumstances of the
loan, as a payment from the lender in
the form of:
• A gift, if the loan is gratuitous;
• A dividend, if the loan is to any
shareholder;
• Wages, if the loan is to an em­
ployee or independent contractor;

For faster
service on
BANK
CREDIT
INSURANCE
CALL THESE SPECIALISTS
Harold E. Ball • Carl W. Buttenschon
John E. King • Milton G. Scarbrough

1 800 527-5511
-

-

Mike Latimer
Missouri General Agent
1- 417 - 881-1192

INDUSTRIAL
LIFE INSURANCE COMPANY
P .0. Box 660274, Dallas, Texas 75266-0274

1

nO(

18c R R

LI U

q 3U

A ™ m b € f company ol

Republic Financial Services. Inc

52

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

• A tax-avoidance transaction, if one
of the principal purposes is avoidance
of any federal tax; or
• Another type of transaction, if, to
the extent provided in regulations,
there is a significant effect on any
federal tax liability of the borrower or
lender.
Loans deemed gifts are subject to
gift tax. Loans in the nature of wages
result in a compensation deduction if
the usual tests concerning reasonable­
ness of compensation are met. In
general, no income or gift-tax conse­
quences occur with respect to a loan if
the aggregate amount outstanding on
all loans between the borrower and
lender is $10,000 or less.
D epreciation f o r R eal P rop erty . The
act increases the ACRS period for real
property, other than low-income hous­
ing, to 18 years from 15 years for prop­
erty placed in service after March 15,
1984.
D eb t-F in a n c ed C o r p o r a te S tock.
Leveraged investments in portfolio
stock will be penalized if a direct trac­
ing is demonstrated between borrow­
ing and investment in dividend-paying
stocks qualifying for the 85% dividendreceived deduction (DRD). The act re­
duces the DRD to the extent of in­
terest expense on the directly trace­
able debt with respect to stock, with a
holding period beginning after date of
enactment.
It is unclear how these rules will be
applied to banks owning dividend­
paying stock. Hopefully, deposits and
related liabilities incurred in the nor­
mal course of a financial institution’s
business will not be presumed to have
been incurred to carry the stock.
Forthcoming regulations may address
this specifically. In any event, the in­
creasingly popular adjustable-rate pre­
ferred-stock offerings are likely to be
less enthusiastically received in the
marketplace under the new provi­
sions, which are effective for stock
withholding periods beginning after
July 18, 1984.
In d u s tr ia l-D e v e lo p in e n t B o n d s .
Despite limitations imposed by recent
tax legislation on the use of tax-exempt
industrial development bonds (IDBs)
to fund private activities, use of IDBs
has continued to grow significantly.
The act makes substantive changes
that will reduce tax benefits available
to most IDB-financed facilities and will
further restrict issuance of ID Bs to fi­
nance private activities. The act also
extends the mortgage-subsidy-bond
provisions first enacted by the Mort­
gage Subsidy Bond Act of 1980 and
revises arbitrage rules for ID Bs and
certain other bonds.

The act imposes an annual volume
limit equal to the greater of $150 ($100
in 1986) per state resident, or $200
million on the amount of most IDBs
and student-loan bonds that may be
issued within each state (including the
District of Columbia) after December
31, 1983.
The act denies tax-exempt treat­
ment to tax-exempt bonds where pay­
ment of principal or interest is the sub­
ject of a federal guarantee. This provi­
sion is a reaction to recent issues of
tax-exempt bonds where proceeds
were deposited in accounts insured by
the FD IC or other similar depositinsurance funds. Numerous excep­
tions are provided, however, includ­
ing FH A -, VA- and FN M A -guar­
anteed bonds.
Fringe B enefits. The act sets forth
new rules taxing fringe benefits. The
intent is to continue the existing prac­
tice with regard to traditionally taxexempt benefits, while taxing any ben­
efit not specifically excluded.
The act sets forth several categories
of benefits which, if granted to an em­
ployee, would be deductible by the
employer and nontaxable to the em­
ployee. Those categories of fringe ben­
efits are:
• No-additional-cost services, i.e.,
services normally offered to customers
can be provided by the employer to
employees at no substantial additional
cost;
• Qualified employee discounts on
purchases of employer products or ser­
vices if the discount does not exceed
the employer’s gross-profit percent­
age;
• Working-condition benefits that
otherwise would be deductible by the
employee as ordinary, necessary and
reasonable business expenses;
• De minimis fringe benefits that
have a value so small that accounting
for them is unreasonable or adminis­
tratively impractical; and
• Athletic facilities.
These fringe benefits are exempt
from employment taxes and incometax withholding. Additionally, they
will not be considered earnings that
could reduce social-security benefits.
These rules generally are effective as of
January 1, 1985, and are subject to
certain an ti-d iscrim in ation rules.
Transition rules allow continuation of
certain existing practices.
E m p loy ee Stock O w nership Plan.
An employee stock ownership plan
(ESOP) is a qualified retirement plan
designed primarily for investment in
employer securities. An employer is
allowed a deduction for contributions
to an ESOP, within limits. Since Janu-

MID-CONTINENT BA N K E R fo r Jan u ary , 1 9 8 5

ary 1, 1983, a tax credit of up to one- legislation last year has resulted in reg­
half of 1% of compensation expenses ulatory agencies taking on the duties of
has been available if an equivalent Congress, critics say. The big question
amount is contributed to a special type is whether Congress will turn its leg­
of ESO P known as a PAYSOP. An islation-creating powers over to these
ESO P can borrow to finance an ac­ agencies without a fight. — Jim F a ­
quisition of employer securities with­ bian, senior editor.
out violating prohibited transaction
provisions generally applicable to • Christmas Club a Corp., Easton,
other qualified plans. Dividends re­ Pa., has appointed Christina Helderle
ceived on stock held in an ESO P can and Gene Barber account executives.
be paid out immediately to plan partic­ They serve the firm in Indianapolis
ipants. The act provides incentives for and Marietta, Ga., respectively.
use of ESOPs, generally effective for
taxable years beginning after the
Temporary Banking Units
enactment date.
Portable
units for lease or sale. Units avail­
The act allows a bank, insurance
company or other commercial lender able throughout the Mid-Continent area — 5' x
8 ' ,8 'x 2 0 ', 12' x 4 0 ', 12 x 6 0 ', 1 4 'x 7 0 'an d 2 8 'x
that makes a loan to enable an u n re­ 70'. MPA Systems, 4120 Rio Bravo, El Paso,
la te d E SO P to purchase employer Texas 79902 915/542-1461.
securities to exclude from taxable in­
come 50% of the interest received on
BANKING OPPORTUNITIES
the loan. This applies to loans made
Sr VP/SrLO, expansion position, $120mm port­
after the enactment date. Apparently,
folio, heavy commercial lending, eastern IA,
the excluded interest will not be sub­ $45-55K.
ject to the 20% scale back of corporate- S r LO , # 2 in $70mm north IL bank, commercial/ag portfolio, $45K.
preference items that affects interest ExVP/CEO,
NE ag bank, solid holding com­
incurred to carry tax-exempt obliga­ pany, $40-55K.
Retail Sales M anager, 40 bank area, consumer
tions.
background, upper Midwest, $30-50K.
Conclusion. The Tax Reform Act of lending
Barbara Ritta, Professional Recruiters, 6818
1984 is an extremely technical act that Grover, Omaha, NE 68106, 402-397-2885.
revises many Code sections covering a
broad range of areas. W e have at­
tempted in these two articles to briefly
BANKING POSITIONS
summarize the major areas that will
AgriLoan — rural branch office
$30K
affect banks. Readers should be aware
Commer. Loan — suburban bank
$30K
that many other areas of the act were
President — small rural bank
$35K
Commer. Loan — metro area
$38K
significantly revised and should seek
Second Officer — community bank $35K
competent advice relating to their par­
Jr. Commer. Loan — suburban
$26K
ticular situation to ensure compliance
R. E. Loan — mortgage co.
$25K
with the new rules. • •
Additional positions available in midwestern
states for experienced bankers.

Nonbanks
(C ontinued fr o m page 50)
of unified front against elimination of
their new ventures by Congress. If the
concept flies, it’s possible that some
banks and nonbanks will be joining
together to protect their turfs.
While most nonbank publicity has
been shining on bank-owned non­
banks, the people at Sears and other
retailers have not been resting on their
laurels. Sears officials envision provid­
ing a fully integrated national financial services-and-banking system that will
include ATMs and credit and proprie­
tary-transaction cards. K mart is plan­
ning to test discount stock brokerage
and real estate sales in its stores later
this year, andJ.C . Penney Co. intends
to test offerings of unsecured loans,
auto loans and leases, mortgages and
real-estate brokerages this year.
Congress’ failure to enact banking

Index to Advertisers

AFI Financial Corp................................................................. 3
Agri Careers, Inc........................................................................ 53
American Bank Directory.................................................... 35
Bank Board Letter . . . . 25, 27, 28A, 28G, 29, 31
Bank Building Corp.................................................................. 55
Bank Earnings International .......................................... 6
Berman Technologies......................................................... 19
Bettinger & Leech, Inc...........................................................49
Boatmen’s National Bank, St. L o u is ............................56
Brock Marketing Services .......................................... 28FH
Centerre Bank, St. Louis ............................................. 28E
Chase Manhattan Bank, New York City .................. 5
Commerce Bank, Kansas City ..................................... 13
Dunhill Personnel Agency ..................................................50
Executive Planning Group, Inc.......................................... 25
Financial P lacem ents............................................................44
First Lease & Equipment Consulting......................... 15
First National Bank of Commerce, New Orleans 28C
First National Bank, Louisville ........................................ 17
Hagan & Associates, Tom ..................................................53
Industrial Life Insurance Co................................................52
Kitty C lu b .................................................................................... 41
Liberty National Bank, Oklahoma City ....................

2

MPA Systems ...........................................................................30
Missouri Encom, Inc................................................................30
North Central Life Insurance Co.....................................

2

Regency Plaza Best Western Hotel .............................. 53
Rothschild, L. F ., Unterberg, Towbin .........................47
Security Engineered Machinery ..................................... 34
Third National Bank, Nashville

......................................29

United Banks of Colorado ..................................................42
United States B a n k e r............................................................21

.eqencv
aza
. . . a m o st g raciou s h otel
in d ow n tow n M inneapolis
20 0 L u xu rio u s guest room s,
su ites & m ini-suites.
• M eeting & Banquet
fa c ilitie s to 30 0.
• Coffee Shop, D ining Room
& Piano B a r Lounge.
•

TOM HAGAN & ASSOCIATES
of KANSAS CITY
P.O. Box 12346 2024 Swift
North Kansas City, MO 64116

816/474-6874
SERVING

BANKING INDUSTRY
SINCE 1970

the

Ag Banking Personnel
(Nationwide)

Let us help you. Call the ag lending personnel specialists
without cost or obligation. Confidential. Employers pay us
to hire the best.

•

H eated Indoor Pool & S auna.

• Lim o u sin e service availab le
to and from A irp o rt.
• S h u ttle to downtown
o ffices, shopping, theaters
and M etrodom e.
• Free p arking.
• S PEC IA L COMMERCIAL
RATES AVAILABLE C A L L FO R D ETA ILS

Regency Plaza Hotel
41 North 10th Street

Minneapolis, Minnestoa 5 5 4 0 3

612-339:9311
For
iR eservations
ÎCall Toll Freel
Jean 515/263-9598 if
no answer, 712/779-3567
Massena, Iowa 50853

M ID-CONTINENT BA N K E R fo r Jan u ary , 1 9 8 5


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

•

Linda
515/394-5827
New Hampton, IA 50659

53

THE BANKING S C E N E

By Dr. LEWIS E. DAVIDS
Professor of Finance
Southern Illinois University, Carbondale

Deregulating Fed Margin Requirements
HE F E D ’S margin requirements
have been on the books so long
they may have escaped the notice
those responsible for deregulating the
banking industry.
The margin requirements (covered
under Fed regulations X(12CFR224),
G (1 2C F R 2 0 7 ), T (1 2 C F R 2 2 0 ) and
U(12CFR221)) tend to be lumped into
what may be called “qualitative credit
controls.”
In the late 1920s, horrendous stories
were told about bootblacks, clerks and
the like, who, in the frenzied stock
market situation, purchased securities
through high borrowing on the various
stock exchanges. When stock prices
fell, many were wiped out because
they couldn’t meet their brokers’ mar­
gin calls.
The nature of the margin calls was
linked in some economists’ minds to a
dysfunctional impact on the stock ex­
change in that the calling of margins
forced sales and the increase in sales
drove down stock prices. Margin re­
quirements were imposed to reduce
leverage and probably to try to protect
neophytes who had entered the stock
market with the expectation of a quick
kill.
The historical chart book of the
Fed’s Roard of Governors shows that
margin requirem ents initially were
imposed at 25% in 1934 and were
raised to more than 50% the following
year. They declined to 50% in 1938,
remained at that level for several years
and moved up to 100% in 1946. After
1946, they periodically moved down
and up, but remained above 50% until
1974. Since 1974, they have stood at
50% of market value.
I question whether a 50% margin
requirement is rational or even neces­
sary.
The governing boards of the New
York Futures Exchange (NYFE) and
the Kansas C ity Roard of Trade
(KCBOT) have adopted reduced mar­
gin requirements for specific inter-

T

54

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

of

". . . the rightful place for
margin requirements should be
individual exchanges, and in­
dividual lending funds should
be left to their customers/7

market (“spread”) trades involving
their stock index futures on the Chica­
go Board of Trade’s (CBOT) new Major
Market Index (MMI) stock index fu­
tures contract.
The initial speculative margin for a
combined position in MMI futures and
NYSE index futures (traded on NYFE)
is $750. Previously, when investors
combined, initial margin would have
totaled $3,850. Combined hedging
margins have been reduced to $750
from $1,850 for inter-market transac­
tions.
For a trade involving one KCBOT
Value Line stock index futures con­
tract and one CBOT/MMI futures con­
tract, the new initial margin will be
$1,400, reduced from $7,400. Hedg­
ing margins were reduced to $1,400
from $3,400.
What the 50% Fed margin require­
ments for stock and convertible bonds
has done is to encourage speculative
elements to move to the NYFE and the
KCBOT as well as the CBOT. In other
words, the typical speculator can get
more action per buck by using such
exchanges. This is clearly demon­
strated by the fact that almost every
week the CBOT issues a news release
showing new trading highs. An ex­
am ination of financial periodicals
shows an exponential growth in the
area of data on the futures market.
There is a basic issue concerned
with the Fed’s margin requirements:
Who should be responsible for them?
The history of qualitative credit con­

trols has not been good. Frankly, it’s
relatively easy for knowledgeable indi­
viduals to bypass margin req u ire­
ments, just as businessmen and banks
developed the Eurodollar market for a
number of reasons, including the im­
pact of Regulation Q and reserve re­
quirements. In other words, sophisti­
cated investors are quite able to bypass
and have been doing so for a consider­
able period of time.
But let’s save and protect the little
guy, the odd-lot buyer, the proverbial
bootblack and file clerk. It appears in­
consistent for a number of states to
authorize legalized gam bling and
vigorously promote lotteries. Just re­
cently, one individual in Chicago won
$40 million in the Illinois lottery.
Thus, in many states, gambling is en­
couraged; whereas, the Fed ’s Board of
Governors is ineffectual in the stock
market because professionals try to
govern it by imposing margin require­
ments, stating that they constitute a
desirable qualitative credit control.
Note the m ention above of the
changing margin requirements by the
NYFE and the KCBOT. These are the
parties that adopted reduced margin
requirements.
By the same token, margin require­
ments are imposed by the NYSE and
lenders, but to a large extent they are
ineffectual as long as the Fed’s margin
requirements exist on stocks and con­
vertible bonds.
The point of this article is that the
rightful place for margin requirements
should be individual exchanges, and
individual lending funds should be left
to their customers. The basic question
is one of business risks involved and
competing elements of other invest­
ments.
Now is the opportune time to de­
termine whether the Fed’s margin re­
quirements should be eliminated and
responsibility placed where it more
properly rests — with the private sec­
tor. •

M ID-CONTINENT B A N K ER fo r Jan u ary , 1 9 8 5

A C o m m u n ity
C om m itm en t
When the officers of Colorado Bank
and Trust, La Junta, Colorado, planned
to rebuild, they were determined to
stay in the downtown area although it
w as starting to deteriorate.

w
a**. ' -^

“We never even considered leaving,”
say s Bob Jones, President. “We had
maintained a strong commitment to
our.community for 76 y e a rs. . .
through good times and bad . . . and
wanted to respond with a facility that
would help revive the town’s spirit
of growth.
“Bank Building Corporation gave us
exactly the facility we needed. . .
architecturally attractive, inviting and
operationally efficient. It enhanced the
downtown area, inspired confidence
and triggered a new feeling of optimism
in the community.

m

mm

“We value our place in La Junta and
the long-term customer loyalty we’ve
enjoyed. Our new building is our
commitment to be h ere. . . at the heart
of our community. . . for another
76 years.”

'J

\ fek

äfii

:'.hL

For help with your facility. . . call Tom
Spalding 1-800-325-9573.
.„ t u * 1

lIIIlllillÄ

s

-

1
The old bank is remembered wit!
a classic column that now
supports the new facility 's sign.

1


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

?i .

*

#
•

J l!
•

■■

JMW
*

<>
Bank Building
4 / Corporation
1130 Hampton Avenue
St. Louis, MO 63139

M eeting the n ee d s
o f the c o m m u n ity
y o u s e r v e . . . b y d e sig n .

Offices: Atlanta. Dallas, Denver,
Hartford, San Francisco, St. Louis

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

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

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

Correspondent Banking Division

THE BOATMEN'S
NATIONAL BANK
OF ST LOUIS
3 1 4 - 4 2 5 -3 6 0 0

Member FDIC