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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? 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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. 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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. 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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