Full text of Mid-Continent Banker : The Financial Magazine of the Mississippi Valley and Southwest : November 1986, Volume 82, No. 11

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MID-CONTINENT

BANKER


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Federal Reserve Bank of St. Louis

FEA TU R ES

Site>Contamination Risk
The D&O Situation
Appraisal-Report Risk
Tax Reform Explained

We Take Care of the Paperw ork...

So You Can Take Care of'fòur Customers.
At North Central, years of experience working with
thousands of banks, have taught us the value of
simplicity. How to elim inate the hassles and
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We call our approach, “A BETTER WAf’. And it
means just that.
It means generating profits—not problems.
It means installing a proven, loan-related insurance
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industry average.


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It means a “BETTER WAf DESK” that puts solutions
to complicated rate calculations and approvals for
overlimit loan applications, just a quick, toll-free phone
call away.
It means training your loan officers and adminis­
trative people to make them more productive and
professional.
And it means that we take care of the paperwork
so that y o u ’re free to take care of your customers.
And that’s what banking’s all about. Right?
We don’t have the answer to headaches caused by
the common cold. But if you’re looking for a remedy
to headaches caused by the common credit insurance
program, call

“America’s #1 Credit Insurance Service Organization.”

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

In Minnesota Call 800-792-1030, all other states 800-328-9117.
Protection all ways

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M ID -A M E R IC A ’S B A N K IN G P U B L IC A T IO N
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N o v e m b e r , 1 986

Late-Breaking News From the World of Banking
CONCERNS VOICED AT ABA CONVENTION.
Care should be taken when details of
closing the nonbank loophole are formulated, said Randall A. Killibrew,
president, First National, Petersburg, 111.
He warned that outside
competitors with a foothold in the industry might be allowed to remain in
business while bankers are prevented from competing with these competitors
in their own markets.
Joseph Pinola, chairman/CEO, First Interstate
Bancorp, Los Angeles, challenged ABA Executive Vice President Donald G.
Ogilvie to do more to bring the ABA, the Independent Bankers Association of
America and the Association of Reserve City Bankers together when
formulating banking legislation.
Mr. Ogilvie responded by stating that
preliminary steps in this direction have been taken.
He claimed the
industry is more united than ever.
INTERSTATE BANKING A MOOT ISSUE? ABA Executive Vice President Donald G.
Ogilvie stated at the ABA convention that greater unity in the banking
industry has resulted from resolution of the interstate-banking question.
He said that rapid change at the state level has made interstate banking a
moot issue. He was referring to the numerous regional banking compacts that
have come into being during the past two years. "We’ve cleared the deck of
some major problems and now we’re ready to move forward," Mr. Ogilvie said.
ABA ELECTS DIRECTORS.
New members of the ABA’s board are Hans H.
Angermueller, vice chairman, Citibank, New York; Charles D. Brummel,
president, Security Bank, Coos Bay, Ore.; Hugh M. Chapman, president, C&S
Corp., Atlanta; Thomas J. Stanton Jr., chairman/CEO, First Jersey National
Corp., Jersey City, N.J.; Robert L. Stevens, president, Bryn Mawr (Pa.)
Trust; and Alan R. Tubbs, president, First Central State, DeWitt, la. In
addition, Richard L. Thomas, president, First National, Chicago, was
appointed to complete the unexpired term of Charles Pistor, chairman/CEO,
RepublicBank, Dallas, who was elected ABA president-elect.
CAIRNS JOINS BOARD OF CONSULTANT. James G. Cairns has joined the board of
Furash & Co., Washington, D. C., financial-institution consulting firm. He
provides management and regulatory
consulting to troubled financial
institutions and develops new consulting activities for Furash. He recently
resigned as chairman/president/CEO, First Interstate, Oklahoma City.
JOE MERMIS TO RETIRE.

J. A. Mermis Jr. plans to retire from Security State,

MID-CONTINENT BANKER S

Reader Inquiry Service
Now you can get a direct response from the advertisers whose products and
services you see advertised in MID-CONTINENT BANKER. Use the Reader Re­
sponse Card at the back of this issue to obtain further information.

Turn to Reader Response Page (following page 48)

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3

Great Bend, Kan. at year-end. He has been CEO since the bank's founding in 1950
and will remain an advisory director.
AN AWARD FOR CONSUMER-CREDIT RESEARCH will be given next fall by the Credit
Research Center located at the Krannert School of Management at Purdue University,
West Lafayette, Ind. Eligibility for the $1,500 award is dependent on a completed
research paper on a consumer-credit or markets topic by next April 1. Appropriate
topics include personal bankruptcy, private contracting, securitization, consumer
behavior with regard to credit use, the relationship between consumer credit and
the economy and related topics. Information is available by calling 317/494-4380.
FIRST COMPLIANCE, COUNSEL AND AUDITORS CONFERENCE ANNOUNCED.
The ABA's first
National Conference for Compliance Managers, Bank Counsel and Auditors will be
held Sept. 23-26, 1987, in Crystal City, Va.
The conference will deal with
concerns about mergers and acquisitions, increases in bank fraud and other changes
resulting from deregulation.
An objective will be to examine how banks can
control losses from potential risks such as insider abuse, which exceeded $800
million last year.
FED BROADENS LIST OF PERMISSIBLE INSURANCE ACTIVITIES.
To act as a general
insurance agent in a town of less than 5,000 population, a bank HC with less than
$50 million in assets need no longer be headquartered in the community, but must
only maintain a lending office there. Such HCs also can engage in any insuranceagency activity except sale of life insurance or annuities.
These changes, as
well as others, became effective Nov. 7.
LOUISIANA'S FIRST STATEWIDE BANK FORMED.
Hibernia Corp., headquartered in New
Orleans, has merged its five affiliate banks in the state into one statewide
institution called Hibernia National Bank.
The bank has combined assets of more
than $4 billion and is said to be the first bank in the state to go statewide
since enabling legislation was passed. Consolidation is expected to be complete
by January 1.
HIRING OF HIGH-LEVEL BANKING EXECUTIVES SURGES IN THIRD QUARTER. The percentage
of national executive hiring in financial services rose from 19% in the third
quarter of 1985 to 27% for the same quarter in 1986, according to Korn/Ferry
International, executive-search firm. Much of the activity is in large commercial
banks making transitions from traditional lending to fee-generating services, a
spokesman said. Commercial banks are recruiting Wall Street professionals in the
trading, corporate-finance, mergers-and-acquisitions and leveraged-buyouts areas.
JOSEPH CRITT MURPHY has joined Central Bank, Lexington, Ky., as vice president/
director of correspondent banking.
He formerly was with Plansmith Corp.,
Palatine, 111., and has been with two Kentucky banks.

Volume 82, No. 11

MID-CONTINENT BANKER
(ISSN 0026-296X)

E ditorial/A d v ertisin g offices: 408 O live St., St.
Louis, MO 63102; 314/421-5445.
M id -C o n t in e n t B a n k e r is p ublished m onthly by

C o m m erce P u b lish in g C o ., 408 O live S t., St.
Louis, MO 63102.
POSTM ASTER: Send address changes to M id C o n t in e n t B a n k e r at 408 Olive St., St. Louis, MO

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November, 1986

63102.
P rinted by The Ovid Bell Press, Inc., F ulton, Mo.
Second-class postage paid at St. Louis, M o., and at
additional mailing offices.
Subscription rates: T hree years $27; two years $20;
one year $12. Single copies, $2.50 each. Foreign
subscriptions, 50% additional.

MID-CONTINENT BANKER for November, 1986

Not everyone tailors
credit insurance to fit a financial
institution’s individual needs.

That’s where Balboa is different.
Tailored Coverage.

Our credit and life insurance pack­
age is designed to fit your exact needs.
Maybe you require higher ages or
increased coverage maximums and dura­
tions. Whatever. Balboa develops the
right products just for you.
And we have the life and credit
products to fit every customer need, a
Credit Life □ Credit Disability a Credit
Property □ Involuntary Unemployment □
Super A & H a Charge Account Protector
□ Mortgage Accidental Death □ Mortgage
Critical Period Life □ Mortgage Involun­
tary Unemployment □ $100,000 Acci­
dental Death d Accidental Death and
Dismemberment □ Family Term Life.
Marketing know-how.

Nobody tailors credit insurance
products and sells them better than
Balboa. We’ve been marketing credit life
insurance for nearly 40 years. We train

your people how to sell more, too.
Our proven marketing techniques
and sales training can substantially
increase your market penetration. More
sales, better sales. All without increasing
your overhead or paperwork.
Higher profits.

Greater sales generate higher profits
for you, too. We offer highly competitive
compensation levels and limits on closed,
open-ended or variable-rated loans,
single premium or monthly outstanding
balances.
Nationwide service.

The most important part of our busi­
ness is service, to you and your customers.
Balboa sales and service offices are
located across the United States, giving
you the convenience of working with a
partner who’s also a neighbor.
We offer a full-service claims
department and a toll-free 800 telephone
number your customers can call to obtain

immediate information relating to their
claims.
Fast processing.

And our computerized claim proc­
essing system provides one of the fastest
claim turnarounds in the business.
Stability and security.

We’re part of the multi-billion dollar
Textron family of companies. Balboa’s
life company, Provident Alliance Life
Insurance, is rated A +/Superior by A.M.
Best. And our property and casualty
companies are rated A/Excellent.
The perfect fit.

So if you feel your present insurance
company is coming up short, find out
more about the one insurance company
that guarantees a perfect, and profitable, fit.
Call Craig Curtner, Director of
Marketing, at (714) 553-0700. Outside
California, call toll-free (800) 854-6115 or
your local representative:
Stu Sammis/Becky Susnig (312) 960-5820

ES BALBOA INSURANCE GROUP
U S. HEADQUARTERS. 3 3 4 9 MICHELSON DRIVE IRVINE, CALIFORNIA. 92715
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M id -C o n tin en t B an ker
S ta ff
W esley H. Clark
P ublisher
John L. Cleveland
Associate P ublisher/E ditor
Lawrence W. Colbert
Vice President/A dvertising
Jim Fabian
Senior E ditor
Joe Lawler
Assistant E ditor
Marge Bottiaux
A dvertising Production M anager
Nancy Gilbreath
Staff Assistant
Linda Brumitt
C irculation M anager

November, 1986/Volume 82, No. 11

In This Issue
FEATURES

11

Asset Securitization: Everybody Wins
Can securitizing bank assets be all that’s said of it?

17 Why a Secondary Market in Ag Loans Is Needed

C om m erce Publishing Co.
O ffic ers

They match two economic interests

20

Donald H. Clark

Site Contamination: Major Risk for Lenders
Banks face costly dilemma when foreclosing on a contaminated site

24 The D&O Situation
Will it ever return to normal?

33

Reducing Appraisal-Report Risk
How to raise the quality of reports

Chairman Emeritus
Wesley H. Clark

Chairman/CEO
James T. Poor

President/Chief Operating Officer
David A. Baetz

Executive Vice President
Bernard A. Beggan

Senior Vice President/Secretary

36 Tax Reform
Are banks bearing brunt of burden?

Lawrence W. Colbert

Vice President/Treasurer
William M. Humberg

40

ABA Convention Report

Vice President

Senterfitt Says Banks Taking ‘Bum Rap’

L arry Albright

Vice President

C o m m erce P u b lic a tio n s
DEPARTMENTS

8

Perspective
Questions of efficiency regarding securitization

43

Agriculture
Ag-bank marketing: a tool to avoid farm-loan problems

45

Legislation/Regulation

American Agent & Broker
Club Management
Decor
Life Insurance Selling
Mid-Continent Banker
The Bank Board Letter
Financial Buyers Guide

E d ito rial/A d vertisin g
O ffices
408 Olive St.
St. Louis, MO 63102
314/421-5445

Knowing your regulators: contrasting views

48

New Products/Services

49

Reader Response Page

MEMBER

V

6


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b p a

MID-CONTINENT BANKER for November, 1986

BOND
SERVICE
VS.

BANK
SERVICE
Chances are, your bank has
been exposed more than once to
“bond service.”
It’s transaction-oriented
service from people who know
bonds, not banks. So the advice
you get too often goes no
further than offerings and oc­
casional bids.
Bond service is not what
L. F. Rothschild, Unterberg,
Towbin provides. Our specialty
is BANK SERVICE.® Over 25
years of service that combines
intimate knowledge of bonds
with in-depth understanding of
banks.
BANK SERVICE views
your portfolio in the same light
as you do: As a crucial com­
ponent of your bank’s overall
position. Not as an independent
entity.

That’s why before we make
a recommendation we conduct a
thorough study of your bank.
Then our BANK SERVICE
committee meets to discuss the
Bank Report we’ve prepared
specifically for you.
The recommendations
from the committee are tailored
to your bank’s present position
and future objectives in a chang­
ing marketplace.
Our PMS system can help
you monitor and manage
your portfolio. We’ll introduce
you to our Fixed Income Com-

MID-CONTINENT BANKER for November, 1986

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Federal Reserve Bank of St. Louis

puter Service, our investment
banking group, our fixed income
research, send you our news­
letter and invite you to appro­
priate seminars that we host in
your area.
All these services are de­
signed for one goal: To help you
achieve your bank’s overall
aims in a way no mere bond
service can.
So, while you may be get­
ting bond service, what you
really need is BANK SERVICE.
Call Mark Rosen, Principal, at
(212) 412-2600.

Id
L F. ROTHSCHILD, UNTERBERG, TO W BIN, IN C .

BANK SERVICE®
Circle 28 on Reader Response Card

7

Questions of Efficiency
Securitizing bank assets will make for more
efficient capital transfers, but since banks
aren’t playing the game on equal footing, will
their position as key financial intermediaries
continue to erode to the point they become
mere loan brokers?

I

I LTIM ATELY, th e re ’s not m uch th at com m ercial
banks do in lending th at can’t be done m ore
efficiently through securities m ark ets,” an investm ent
banker told us recently. “C om m ercial banks need a 200to 250-basis-point spread to m ake a profit while we can
do extrem ely well at 45 basis p o in ts.”
That difference in profit m argin is a reflection of how
efficiently securities m arkets m ove capital from people
who have excess liquidity to those who n eed to borrow,
our friend said. His point was that com m ercial banks pay
a high price for th e inefficiencies in th eir distribution sys­
tem . H e m ight also have added th at com m ercial banks
pay a high price for th e regulation th at p revents them
from underw riting and trading in securities.
A lthough banks are learning to play th e securitization
game, they still find them selves at a severe cost disad­
vantage in relation to th e ir less-regulated b re th re n in the
financial industry. W ith each passing day, th e ir roles as
key financial in term ediaries are ero d ed by nonregulated
com petitors w ith easier access to capital m arkets and w ith­
out th e costs of deposit insurance, reserve requ irem ents,
growing capital requirem ents, branch-system overhead and
so on. Large corporate borrow ers learned how to bypass
the banking in dustry to m eet th eir capital needs years ago
and o th er borrow ers now are taking a m ore direct route
to capital m arkets as well.

ditional lenders and into securitized credits represents a
shift in credit risk from banks and thrifts onto the guarantor
and holder of each issue. Will banks and thrifts continue
to perform th eir roles as watchdogs of credit quality if they
no longer bear the bulk of the credit risk?
Some w ould say banks haven’t perform ed very well as
watchdogs of credit quality anyway and that the task is
b e tte r left to security-rating agencies and investors in the
securities m arkets. So far, the assets that have been se­
cu ritiz e d — hom e m ortgages, stu d en t loans, car and smalltruck loans, com puter leases, SBA loans and credit-card
receivables — are relatively homogenous with known credit
risks and m aturities. U nderpinning those loan pools, how­
ever, is a cadre of good loan officers in banks and/or thrifts
who decide to make the original loans based on the credit
w orthiness of the borrow er.

hat happens w hen those loan officers come to u n ­
derstand that th eir new role is to serve as salesm en
for loans the institution plans to resell later? Regulators
are concerned about such developm ents and, tru e to their
nature, are proposing to tighten the screws at the point
of origin. The Financial A ccounting Standards Board is
promulgating new standards for controling off-balance sheet
activities of financial institutions, for exam ple, the ultim ate
effect of w hich will be to prom ote b e tte r public disclosure
of such activities. The C om ptroller of the C urrency has
tightened banking req u irem en ts for investing in m ort­
gage-backed securities.
A nything that prom otes b e tte r standards of credit m an­
agem ent and protection of investors in d eb t securities
probably is beneficial for the banking industry and the
econom y as a whole. U nfortunately, any plum ber can tell
you w hat will happen w hen you tighten the pressure in
one part of a system and don’t do it elsew here. H igher
yield, low er-risk assets will flow tow ard the less-regulated
players in financial m arkets, leaving com m ercial banks
w ith the less-attractive assets in th eir loan portfolios and
ith 50% of th e nation’s d eb t already securitized and
for use as the base for d eb t securities. If regulators have
the possibility that th e total may increase to 80%
th eir way, banks also will be m ore restricted in partici­
w ithin a decade, traditional lending institutions (banks,
pating freely in the debt-securities game as investors.
thrifts) may find them selves red u ced to the role of brokers
In an ideal w orld, banks hardly could fail to benefit from
(loan originators), Lowell Bryan w rote in an article in the
becom ing m ore active in the securities m arkets, both as
Wall Street Journal last m onth. O th er entities may struc­
issuers and purchasers of d eb t securities. T heir loan p o rt­
ture th e securities, enhance credits, m ake trades and do
folios w ould be m ore liquid and the new instrum ents cre­
most of th e investing, he suggests. Mr. Bryan is a director
ated w ould provide g reater opportunities for portfolio div­
of M cKinsey & Co., N ew York, w hich is working w ith the
ersification. Risk would be spread m ore evenly throughout
American Bankers Association (ABA) and R obert M orris
the banking system and greater stability should result.
Associates (RMA) on a study of various facets of th e bankThis is precisely the logic the ABA has used in calling for
asset-securitization issue.
creation of a m arket in securities backed by ag loans.
The im plications of that shift in econom ic function are
enorm ous, and w hile Mr. Bryan presen ts no firm conclu­
las, the w orld is far from ideal and the playing field
sions, some of th e issues he raises are troubling. The m ove­
on which banks com pete is far from level. Comm ent of assets off th e balance sheets of the nation’s tra­
(Continued on page 42)

W

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MID-CONTINENT BANKER for November, 1986

KBW

The Banking Industry Specialists

MERGER/ACQUISITION TRANSACTIONS
Approximate Market Valuet

Completed

1985

Completed

1986

Pending
Approval

1986

15 Transactions

$2,474,826,760

^Fidelity National Financial Corporation (Baton Rouge, Louisiana)
merged with Hibernia Corporation, New Orleans
*First Connecticut Bancorp, Inc. (Hartford, Connecticut)
acquisition by Fleet Financial Group, Inc., Providence, Rhode Island
*First Indiana Bancorp. (Elkhart, Indiana)
acquisition by AmeriTrust Corporation, Cleveland, Ohio
*Great Western Bank (Phoenix, Arizona)
acquisition by Citicorp, New York, N.Y.
*KYNB Bancshares, Inc. (Lexington, Kentucky)
acquisition by Banc One Corporation, Columbus, Ohio
*Merrill Bankshares Company (Bangor, Maine)
acquisition by Fleet Financial Group, Inc., Providence, Rhode Island
*NBD Bancorp, Inc. (Detroit, Michigan)
acquisition of Midwest Commerce Corporation, Elkhart, Indiana
*NBD Bancorp, Inc. (Detroit, Michigan)
acquisition of Union Bancorp, Inc., Grand Rapids, Michigan
*Pennsylvania National Financial Corp. (Harrisburg, Pennsylvania)
acquisition of Hamburg Savings and Trust Company, Hamburg, PA
*Peoples Bank & Trust Company (Mount Vernon, Indiana)
merged with Old National Bancorp, Evansville, Indiana
*United Jersey Banks (Princeton, New Jersey)
acquisition of Franklin Bancorp, Somerset, New Jersey
*Amoskeag Bank Shares, Inc. (Manchester, New Hampshire)
acquisition of NTC Corp., Nashua, New Hampshire
^American Security Corporation (Washington, D C.)
merging with Maryland National Corporation, Baltimore, Maryland
*Bank of New England Corporation (Boston, Massachusetts)
merging with The Conifer Group Inc., Worcester, Massachusetts
*Cobanco, Inc. (Santa Cruz, California)
merging with Pacific Western Bancshares, San Jose, California
*First Railroad & Banking Company of Georgia (Augusta, Georgia)
acquisition by First Union Corporation, Charlotte, North Carolina
*Keystone Financial, Inc. (State College, Pennsylvania)
acquisition of *Pennsylvania National Financial Corp., Harrisburg, PA
*Pacwest Bancorp (Portland, Oregon)
acquisition by KeyCorp., Albany, New York
*SuriTrust Banks, Inc. (Atlanta, Georgia)
merging with Third National Corporation, Nashville, Tennessee
*United Jersey Banks (Princeton, New Jersey)
merging with Commercial Bancshares Inc., Jersey City, New Jersey

59.400.000
193.000. 000
90.000. 000
N.A.
N.A.
132.000. 000
57.000. 000
104.000. 000
11.856.000
29.000. 000
101.000. 000
50,700,000
440,806,000
656,000,000
35,000,000
779,000,000
112,900,000
76,000,000
755,000,000
285,300,000

Over $9 Billion of Banking Merger/Acquisition Expertise*
*KBW Client

t A f time of announcement.

TSince 1982

For further information contact
Harry V. Keefe, Jr.

Michael C. Connor

CHAIRMAN

SR. VICE PRESIDENT, CORPORATE FINANCE

(212) 349-4321 • (800) 221-3246

KEEFE, BRUYETTE & WOODS, INC.
NEW Y O R K

HARTFORD

SAN FRA NCIS CO

LONDON*

RA c tin g th ro u g h Keefe, C onning A ssociates, Ltd.., a w holly-ow ned subsidiary.

MID-CONTINENT BANKER for November, 1986

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Circle 22 on Reader Response Card

9

10

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Federal Reserve Bank of St. Louis

The New Kids On The Street
Aren’t Kids

Nor Are They New To The Street
They are Alexander Hamilton Life. With over 2
million satisfied customers and over $13 billion of
life insurance in force, and assets of $1.6 billion.
They are ranked among the top 3% of life
insurance companies in America. Success has
come because they have delivered the best in
products and services for many years.
Alexander Hamilton has now moved into the
Financial Service Marketplace. They bring with
them a portfolio of quality products: Annuities,
Single Premium Whole Life and Universal Life plus a solid reputation for top quality service.
Watch for Alexander Hamilton Life. You’ll find a
group of people willing to work with you. They
fit right into your neighborhood.
For information contact either Gary Dace, CLU or
Jack Beith (800) 521-4397, in Ml (800) 482-3692

A Household International Company
33045 HAMILTON BLVD. • FARMINGTON HILLS, Ml 48018

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MID-CONTINENT BANKER for November, 1986

Securitization

Everybody
Wins
A great new A/L management tech­
nique. A partial cure for troubled ag
banks. An economic stimulant. A new
source of bank liquidity. Can securitizing
bank assets really be all of that, and
more?
By John L. Cleveland
Editor/Associate Publisher
N TH EO R Y , alm ost any set of cash flows w ith similar
characteristics can serve as th e raw m aterial from which
a saleable security can be forged. Banks sit atop huge
m ounds of such raw m aterials, and increasingly are learn­
ing to package th ese assets in ways th e in vestm ent com-

I

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m unity finds attractive. In addition to th eir role as issuers
of new types of asset-backed securities, banks are becom ­
ing m ore adept at utilizing such securities to restru ctu re
th eir balance sheets and diversify th eir loan portfolios.
The recent developm ent of securities backed by con­
sum er receivables and com puter leases is the short-term
counterpart of the w ell-established m ortage-securities
m arket, b u t the possibilities for pooling bank assets and
converting them into m arketable securities are only b e­
ginning to be explored. This tren d is helping to make
financial m arkets m ore efficient in transferring liquidity to
segm ents of the econom y w here it s needed, say advo­
cates, and providing investors w ith an ever-richer spec­
trum of alternatives.
In fact, the “everybody-w ins’ aura surrounding secur­
itization of bank assets is perhaps the only disturbing as­
pect of this growing phenom ena. Securitization almost
11

seem s too good to be tru e, b u t in the
asset-to-security conversions that have
occurred thus far, benefits indeed have
flowed to all concerned parties. F i­
nancing flows to th e consum er to p u r­
chase m ore goods and services. The
financial institution gets a new source
oi liquidity and th e in vestm ent com ­
m unity a new investm ent vehicle.
Short-Term Asset-Backed
Securities
The $50-million private placem ent
for Bank O ne, C olum bus, on M arch
31, was th e first — and so far only —
use of revolving lines of credit to back
a security. Bank O n e ’s CARDS (C er­
tificates for A m o rtiz in g R evolving
D eb tsSM) also are u nique in th e ir p ro ­
vision for a specified p eriod in w hich
they pay only interest.
As of July 25, 12 public issues to ­
taling $3.9 billion and several private
placem ents of securities backed by au­
tom obile loans and com p u ter leases
had b een sold, according to a booklet
titled, Introduction to Credit-Card
Backed Securities, p ublished by Sal­
omon B rothers, Inc., N ew York, u n ­
d erw riter for th e Bank O ne offering.
“Total single-family m ortgage d eb t
— at an estim ated $1.6 trillion (with
$440 b illio n , o r 28% , s e c u ritiz e d )
dwarfs th e am ount of consum er in­
stallm ent d e b t outstanding (which in ­
cludes auto loans),” the booklet says.
“The am ount outstanding does not fully
convey th e size of th e large m arket
because the loans are repaid quickly.
Total extensions of consum er install­
m ent d e b t in 1985 are estim ated at an
enormous $550 billion. The credit-card
category had th e highest volum e at
$250 billion, about equal to th e orig­
inations of single family m ortgages.
Com m ercial banks, followed by re ­
tailers and thrifts, are th e largest p o ­
tential issuers of credit-card-backed
securities, according to Thomas D elehanty of Salomon B ro th er’s M ortgage
Research D ep a rtm e n t and w ith M i­
ch ael W ald m an , also o f Salom on
B rothers, co-authors of th e booklet on
CARDS. The principal m otivation for
in s titu tio n s in issu in g c re d it-c a rd backed securities is to free up reg u ­
latory capital to expand business and
to diversify funding resources, he says.
Community Bank Involvement
C om m unity banks are not likely to
becom e prim ary issuers or purchasers
of CA R D S-type securities, Mr. Delehanty says. Sm aller banks don’t have
the credit-card base nor th e resources
to go through the complicated and time
consum ing process of getting regula­
tory approval for securities backed by

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MID-CONTINENT BANKER for November, 1986

credit cards and th e $5-million m ini­
m um buy-in for CARDS securities is
attractive only to th e largest of inves­
tors.
Yet Mr. D elehanty says th at sm aller
institutions increasingly will pool dif­
feren t types of assets and convert them
into securities ju st as they have in the
m ortgage m arket.
T h e first C M O s (C o lla te ra liz e d
M ortgage Obligations) w ere done by
the large hom ebuilders; then the thrifts
started to get into th e a c t,” Mr. D e l­
ehanty notes.
Securitizing Ag Loans
D evelo p m en t of securities backed
by agricultural loans is crucial to as­
sisting ag banks diversify th e ir loan
portfolios so they are less d e p e n d e n t

on one segm ent of the econom y for
grow th, according to Transitions in
A g ricu ltu re, a n ew re p o rt on th e
changing n ature of U.S. agriculture is­
sued last m onth by the ABA. In gen­
eral, sm aller banks and banks with
m ore than 40% of th eir assets in farm
loans have had the m ost difficulty in
the c u rre n t period of agricultural tra n ­
sition.
“T heir problem s do not stem d i­
rectly from th eir size b u t from th eir
high proportion of ag loans and from
high-cost sources of loanable fu nds,”
th e rep o rt says. “T hese sm aller banks
face challenges in remaining viable and
com petitive as th eir m arkets becom e
m ore complex.
“A gricultural loans need to be se­
curitized, m uch as hom e m ortgages

are, in o rd er to insure a steady and
adequate flow of capital to th e agri­
cultural secto r,” the rep o rt concludes.
M ichael E. F itc h , vice p re s id e n t,
W ells Fargo, San Francisco, and o u t­
going chairm an of th e ABA’s Agricul­
tural Bankers Division, m ade a similar
statem ent in a rep o rt to Congress last
m onth.
The ABA has proposed that the fed­
eral governm ent get involved in d e ­
veloping these pools and providing
guarantees. But not everyone believes
federal assistance is necessary before
a m arket in securities backed by ag
loans or o ther types of bank assets can
becom e viable.
“For exam ple, we think we could
p ut to g eth er an excellent pool of ag­
ricultural loans,” says N ate Collins,

W hy A S e c o n d a ry M a rk e t
In Ag Loans Is N eed ed

antee that continued involvem ent.
I served on a Joint Task Force of the Am erican Bankers
Association and the In d ep en d en t Bankers Association of
America that concluded a white paper on agricultural credit
On September 25, Michael Fitch, chairman o f the A B A ’s
problem s w ith the recom m endation of the developm ent
agricultural bankers division and a vice president at Wells
of a secondary m arket. O ur task force did so because it is
Fargo, San Francisco, presented testimony to the Flouse
one m echanism that will contribute to the continued in­
Banking Subcommittee on General Oversight and Inves­
volvem ent of com m ercial banks in farm lending.
tigations in which he presented a case fo r establishing a
Such a secondary m arket w ould enable banks to respond
secondary market in ag loans. Mr. Fitch’s testimony is
to a changing mix of dem and and tim e deposits. W ithout
expected to prepare the way fo r action next year. An edited
a long-term source of funds that can p rotect a bank against
transcript o f his remarks follow s.
a sudden shift in its deposit base, banks cannot becom e
deeply involved in m ortgage lending. But by increasing
S th e financial-services industry developed in the
the liquidity of m ortgages, a secondary m arket increases
1960s, 1970s and 1980s, new m echanism s to p erm it
m ore efficient and cost-effective allocation of capital w eretheir investm ent quality. It w ould p erm it banks that are
not traditional m ortgage lenders in farm real estate to
developed.
participate in this m ortgage m arket.
Secondary m arkets for loans to various sectors of the
In addition, a secondary m arket for farm real estate
econom y have b een part of this developm ent. Two good
would
facilitate the geographic transfer of funds from low
exam ples are th e develo p m en t of secondary m arkets for
to high loan-dem and areas in the farm sector in the same
loans to students and to hom e buyers seeking m ortgages.
way that it is now facilitating that transfer of funds in the
These secondary m arkets for stu d en t loans and hom e
hom e-m ortgage sector.
m ortgages provide access to capital w hich w ould otherw ise
The ABA firmly believes that opening these opportu­
not be d irected to th ese purposes by tu rn in g th e student
nities for com m ercial banks will result in the same advan­
and m ortgage loans into securities. O riginators of these
tages to farm borrow ers that are now being experienced
loans sell th em to entities such as th e S tu d en t Loan M ar­
by hom e-m ortgage borrow ers and student-loan borrow ers
keting Association (SALLIE MAE) or the F ederal N ational
as a result of the developm ent of secondary m arkets in
M ortgage Association (FA N N IE MAE). T hese entities as­
those econom ic sectors. M ortgage rates have been driven
sem ble th e loans into pools and sell securities backed by
down since secondary-m arket institutions have been able
these pools.
to tap sources of funds not traditionally available to the
Secondary m arkets, through th e creation of these pools
m ortgage m arket directly. The same should be tru e of the
of m ortgages w hich back securities sold to investors, m atch
agricultural real-estate m arket. The new sources of capital
two econom ic interests: th e investors who seek guaranteed
will be com bined w ith advances in technology and tele­
incom e from th e collection of principal and in terest pay­
com m unications that are continuing to im prove all phases
m ents on th e pooled loans, and th e loan originators who
of lending and securitization, thus increasing efficiency
m ust trad e long term periodic paym ents for a lum p sum
and decreasing costs to borrow ers.
paym ent in o rd er to both m atch long-term lending with
Today th e F ed eral Land Bank com ponent of the Farm
a reliable long-term source of funds and to retain liquidity.
C redit System already serves as a secondary m arket for
The A m erican Bankers Association supports th e devel­
that governm ent-sponsored cooperative financial-services
opm ent of a secondary m arket for agricultural real estate
institution. C om m ercial banks are asking for the same type
for a n u m b er of reasons. H ow ever, one m ajor reason is to
of access to capital for agricultural real estate that the
ensure th at th e com m ercial banks of this country can re ­
F ederal Land Bank now accesses by selling bonds to raise
main com petitive in agricultural lending. W e feel it is
funds for real-estate loans. The F ederal Land Bank already
im portant th at com m ercial banks continue to be a major
taps the long-term sources of capital that w ould be availcom ponent of agricultural finance. The d evelopm ent of a
(Continued on next page)
secondary m arket for farm real estate will help to guar-

A

MID-CONTINENT BANKER for November, 1986

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Federal Reserve Bank of St. Louis

17

executive vice p resident/asset m an­
agem ent, Valley National, Phoenix,
which was am ong th e first issuers of
securities backed by auto and smalltruck loans. “T h at’s not to say we plan
to do that, b u t w e’ve considered it.
Mr. Collins, a m em b er of a new
ABA-Robert M orris Associates (RMA)
cooperative task force on securitiza­
tion, says he is concerned about the
credit and docum entation standards of
the packages of huge com m ercial loans
p ut to g eth er for resale by m oney-cen­
te r banks to sm aller institutions. H e
says he believes th e ABA-RMA com ­
m ittee will have developed voluntary
guidelines bankers can use in p utting
togeth er such packages and in evalu­
ating them from an in vestm ent p e r­
spective before th e en d of the year or
by early 1987.

party credit enhancem ents becom e
available and rating agencies becom e
m ore familiar w ith credit-card assets
and deal structures, public offerings
will follow.
E arlier this year, F irst W isconsin
National, M ilwaukee, becam e the first
bank in the country to participate in a
new Small Business A dm inistration
(SBA) loan-pooling program . For sev-

N a th a n
C ollins,
e.v .p ./a s s e t m a n ­
a g e m e n t,
V a lle y
Nat'l, Phoenix, is a
member of the ABARMA co o perative
task force on secur­
itization.

SBA Loan Pools
D riven by th e p ressu re to im prove
capital adequacy and seek out new
sources of liquidity, larger banks can
be expected to continue to experim ent
w ith aggregating loans w ith similar
c h a ra c te ris tic s an d se llin g th e m to
investors. Issues of new C A RD S-type
securities probably will continue to be
private placem ents u ntil third-party
credit enhancem ents becom e avail­
able, according to th e Salomon B roth­
ers booklet. H ow ever, w hen third-

Secondary Market

eral years, individual SBA -guaranteed
business loans have been available
through a secondary m arket un d er
w hich a private len d er sold the guar­
an teed portion of the loan via a broker/
dealer to an investor.
The new pooling program allows
investors to buy shares in a pool of at
least four SBA loans (none of which
can account for m ore than 25% of the
overall pool) w ith a m inim um total

(Continued)

able also to com m ercial banks through th e developm ent
of a secondary m arket.
An ABA-commissioned research study, recently com ­
pleted, suggests th e following advantages of a secondary
m arket for agricultural real estate loans:
1) Access to m ore capital, w hich w ould enable banks to
continue m aking loans to farm ers.
2) R educing th e cred it risk of local, single-industry len d ­
ing (lending to agriculture in small towns in th e M idwest,
for example) by selling loans into a secondary m arket to
spread th e risk.
3) Offering banks an opportunity to specialize. A bank
could perform a single function, such as servicing loans,
which w ould increase efficiency and decrease costs. (The
ABA expects th at m any sm aller agricultural banks would
function prim arily as retail outlets and servicing operations
for real-estate loans w hich could be pooled and sold by
large, m oney-center banks).
4) The addition of real-estate m ortgages as a product
that a bank could sell will enable agricultural banks to
rem ain com petitive and rem ain involved in financing ag­
riculture. W ithout this developm ent, such continued in­
volvem ent will be m ade m ore difficult as o th er financialservices institutions encroach on th e traditional lines of
business followed by com m ercial banks in th e farm sector.
Farm ers w ould benefit from an agricultural secondary
m arket in m uch th e sam e way th at hom eow ners have b e n ­
efited: m ore com petitive credit w ould be available and,
therefore, in terest rates w ould be low er and servicing

18

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Federal Reserve Bank of St. Louis

value of $1 million. F irst W isconsin
has had two such offerings this year,
both in the $ 1-million to $ 1.5-million
range. Frank Pipp, assistant vice pres­
ident, says that F irst W isconsin sees
SBA loan-pooling participation as an
opportunity to learn about securitiza­
tion of assets for a future in w hich such
skills probably will be necessary for
banks above a certain level of assets.
A desire to get the maximum e d u ­
cational benefits from the experience
was partially responsible for F irst W is­
consin’s decision to bypass the normal
broker/dealer netw ork w ith its SBA
loan offerings. Mr. Pipp em phasizes
th a t F irs t W isco n sin c o n tin u e s to
m aintain excellent relations w ith b ro ­
ker/dealers around th e nation, b ut that
the bank’s long experience in SBA
lending and th e apparent strong d e­
m and for such securities convinced
m anagem ent to sell the SBA “certifi­
cates of participation” directly.
Since the bank could not legally as­
sum e ow nership of securities backed
by its own loans, the certificates had
to be presold before they w ere cre­
ated. F irst W isconsin sold the certif­
icates prim arily to well-known insti­
tutions located in its own m arket area,
according to Mr. Pipp.
First W isconsin’s SBA loan pools are
among 22 such pools nationally, only

(Continued on page 42)

should be im proved.
H.R. 5132 utilizes the fram ew ork of the existing sec­
ondary m arkets in stu d en t loans and hom e m ortgages as
the basis on w hich to develop a secondary m arket for
agricultural real estate. As such, it has the great advantage
of being based on institutions that now are working well
for com m ercial banks. H ow ever, the financial-services in­
dustry is developing and th ere are new concepts which
are being utilized today that w ere not even considered
w hen these first secondary m arkets w ere developed by
the federal governm ent. Some of these concepts may be
usefully incorporated into a federally sponsored secondary
m arket for agricultural real estate. F or example, while it
is clear that th e underw riting standards for such a sec­
ondary m arket are absolutely crucial to its long-term suc­
cess, it is not clear that the developm ent of a large federal
agency is necessary to develop and enforce these stand­
ards.
Recognizing the b u dget constraints now facing the C on­
gress and th e federal governm ent, ways should be ex­
plored that w ould reduce and eventually elim inate actual
cash outlays to th e federal governm ent of a secondary
m arket. The figure of $200 million proposed in H .R. 5132
may be able to be raised in some o th er fashion or reduced
considerably by greater involvem ent by the private sector
in the developm ent of a secondary m arket.
The ABA believes that it is absolutely essential that
com m ercial banks have the pow er to underw rite and deal
in these securities, as they do in th e securities of other
secondary m arkets created by the federal governm ent.
This pow er m ust be clearly delineated in federal legisla­
tion. • •
MID-CONTINENT BANKER for November, 1986

“If You Believe Your Investment
Portfolio Should Contribute More
To Your Earnings, We’re
Out To Prove You Right.”

Dr. James V. Baker

Chairman, James Baker & Company

Today, m ore th an ever before, the pressu re is on your
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CHALLENGE JAMES BAKER & COMPANY
TO PROVE YOU RIGHT.
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i JamesBaker & Company !
(405)842-1400
MB
L 1601 N.W. Expressway, 20th Floor Oklahoma City, OK 73118

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Federal Reserve Bank of St. Louis

i

Site Contamination:
Major Risk for Lenders
Banks face costly dilemma
when foreclosing a bor­
rower’s site that is contam­
inated

any environm ental issue before claims erty is about to be sold, the seller m ust
are p e rm itted to be paid. Thus it could set up a fund to pay for correction of
take years for the bank to be paid and the situation before th e sale can be
the cost of cleaning up the site could consum m ated.
In the past, bankers w ere advised
exceed the value of the estate.
T hese situations should signal to to be leery of lending to firms in the
com m ercial lenders th e im portance of refin in g an d p e tro c h e m ic a ls b u s i­
making sure a borrow er’s site is con­ nesses, Mr. Zoch says, b u t he rec­
By Jim Fabian
tam ination free at the tim e a loan is om m ends that th e electronics industry
Senior Editor
m ade, consultants say. L enders also be added to the “w atch” list. Bankers
BANK is faced w ith a foreclosure
should m ake every effort to m onitor a should insist that th ere be proof that
action on a loan th at w ould re ­
site during the loan term to make sure
no contam ination of sites involved has
sult in the bank’s ow nership of land
contam ination is not taking place.
occurred before they lend to such
that has b een nom inated for SuperR EI assists banks in assuring that
firms.
fund clean-up status. If th e bank fore­
sites are contam ination free. It does
Mr. Zoch is familiar w ith a situation
closes it assum es liability for the clean­
this by conducting “fatal-flaw” anal­ in which a transform er blew up at an
up, w hich may cost millions of dollars.
yses at the tim e a p roperty changes
electronics firm. T he explosion spread
W hat’s th e bank to do?
hands or if the len d er suspects conPCBs around the building, b u t his
“I t’s usually too late for it to do any­
thing b u t walk away from th e situa­
Commercial bankers can obtain assistance in as­
tio n ,’’ advises Bob Zoch, president,
Resource E ngineering, Inc., (REI) an
sessing potential hazards of a borrower’s site from
environm ent-m anagem ent firm h ead ­
firms that conduct on-site investigations.
q u artered in H ouston.
H azardous-w aste issues are adding
another layer of potential risk to banks
firm ’s audit of the area m ade note of
tam ination is taking place.
making com m ercial loans, Mr. Zoch
the situation and advised both th e firm
R EI p ersonnel study past operating
says. And not m any bankers are fully practices at the site in question. The
in terested in buying the p ro perty and
aware of th e consequences.
firm ’s staff of chem ical engineers con­ the bank that was expected to handle
In the instance cited above, the bank
ducts a “desk-top” evaluation that in­ the financing.
bore no responsibility for th e condi­ cludes a review of past regulatory his­
M ost reg io n a l an d m o n e y -c e n te r
tion of the site, yet, if it took control tory of the site. Personnel exam ine
banks are aware of th e dangers of en ­
through foreclosure, it w ould have to
state enforcem ent files that contain in­ vironm ental contam ination, Mr. Zoch
assum e that responsibility from the
says. Some have joined a group known
spection reports m ade by officials who
polluting firm, Mr. Zoch says.
as the Society for Risk Assessment. This
supervise firms engaged in operations
“The liability is jo in t and several,” th a t c o u ld re s u lt in e n v iro n m e n ta l
group puts on sem inars that instruct
he adds. “Any responsible parties could contam ination.
a tto rn e y s, le n d e rs and o th e rs c o n ­
bear th e cost of cleanup. In this case,
cerned about environm ental contam ­
If extended studies are called for,
“responsible” doesn’t necessarily mean R EI people conduct on-site inspec­ ination how to avoid th e dangers of
the pollu ter b u t th e party that takes tions, looking for evidence of spills.
such situations.
title to th e site.
The situation can only become worse
They also interview plant personnel to
“Banks are scram bling to pro tect learn how waste has been handled over for commercial lenders, Mr. Zoch says,
th em selv es,” Mr. Zoch says. “W hen th e years. They ask if the firm has b u r­ b e c a u se S u p e rfu n d leg isla tio n has
they consider th e options, they realize ied any containers “on the back 40” at
passed in Congress. T hat m eans 500
they can’t foreclose without placing the any tim e. If it has, a determ ination is
new contam inated sites will be added
bank in jeopardy. The collateral often m ade as to the effect of such disposal.
to the Superfund list each year. These
is useless if it’s contam inated. So they
The next phase is to test to d e te r­ won’t be only abandoned sites, he adds,
have little choice but to walk away from
m ine if a spilll has occurred on the since m ost contam inated abandoned
it.”
p roperty, Mr. Zoch says. G round- sites already are on the list.
E ven if a site d oesn’t qualify for Su­ w ater contam ination is the m ost com ­
And banks a re n ’t expected to fare
perfund status, he says, a bankruptcy
m on result of a spill. If evidence of any b e tte r in bankruptcy courts, since
court can req u ire the tru stee to satisfy contam ination is found and the prop- judges and juries are siding w ith en-

A

20


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Federal Reserve Bank of St. Louis

MID-CONTINENT BANKER for November, 1986

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17 on Reader Response Card

forcem ent agencies th at are calling for
cleanups of contam inated p roperties
involved in estates p rior to d istrib u ­
tion of assets.
The site-contam ination situation is
prom pting R obert M orris Associates
(RMA) to take action to assist its m em ­
bers, says D ennis E dw ards, chairm an
of th e R M A ’s re g u la to ry /le g is la tiv e
com m ittee.
“The RMA soon will publish a w hite
paper on this topic for its m e m b e rs,”
he says. “The p roject has high p rio r­
ity. Mr. E dw ards is senior vice p re s­
ident, Chase Rank of Arizona, Scotts­
dale.
H e term s site contam ination a m ajor
problem in certain areas of th e U. S.
Problem s a re n ’t lim ited to m ajor in ­
dustries, he adds, citing instances of
gas stations w ith leaking storage tanks
that are polluting city w ater systems.
Mr. E dw ards says it’s difficult for a
bank to m onitor pollution once a loan
has been made, but every effort should
be m ade to m ake sure the borrow er is
conform ing to pollution standards es­
ta b lis h e d by w h a te v e r g o v e rn m e n t
entity is involved.
H e thinks com m ercial lenders are

becom ing m ore aware of the dangers
site contam ination poses for banks.
Sm aller banks w ith little expertise on
the topic probably would refuse to take
on a custom er if th ere was danger of
contam ination. L arger banks typically
call in outside assistance to d eterm in e
if a site is contam inated.
Law firms are conducting sem inars
on site contam ination that provide val­
uable inform ation to lenders and other
in terested parties.
O ne such firm is Gage & Tucker,
Kansas City. It publishes a legal new s­
le tte r called “The A dvisory.” A recent
special issue rep o rted on the increas­
ing liability facing parties involved in
contam inated properties. The infor­
m ation is directed at buyers and sell­
ers, and it can be passed on to b o r­
rowers by lenders.
A ttorney Don E. Dagenais advises
in th e special issue that buyers and
sellers of p roperty take steps to ensure
that th eir interests are p rotected from
environm ental liability to the extent
possible. Among steps they can take
are th e following:
• Identify and assess potential lia­
bilities by getting the facts on both the

Major Benefit Seen in Tax Bill
By James E. Hamman
CEO, Capital City Bank, Topeka
H E TAX bill m andates th at corporate rates be reduced for the top
rate stru ctu re from 46% to 34%. This 12% reduction is equivalent
to $22,000 of additional before-tax incom e for each $100,000. This is
a m ajor benefit for any bank w ith a respectable ROA.
A new alternative minimum tax has been designed to prevent profitable
corporations from avoiding any tax liability.
ACRS will be retain ed w ith m inor adjustm ents to personal property.
Major changes will impact depreciable real property by requiring longer
lives and restricting com putations to straight-line m ethod.
An alternative $10,000 annual expense election could be provided
for personal p roperty. In v estm en t cred it will be repealed effective
January 1, 1986. Past repeals have only resulted in tem porary m ora­
torium s followed by reinstatem en t.
Capital gains will be taxed as ordinary incom e and individuals may
consider C D s a b e tte r investm ent. C D in terest rates are paying a real
rate of re tu rn and w ith th e new tax bill the “retu rn of my m oney will
be ju st as im portant as th e re tu rn on my m o n ey .” Banks can m arket
the econom ic advantages of C D s and not have to overcom e cu rren t
tax-law benefits of securities and tax shelters.
C onsum er lending has been a valued source of revenue for banks.
W ill repeal of this in te re st deduction change th e borrow ing habits of
consum ers? Such habits generally do not consider after-tax im pact. W e
probably will have no change in th e standard questions:
• W hat is th e in terest rate?
• W hat is th e m onthly paym ent?
To partially offset th e loss of an in terest deduction, individual tax
rates will be redu ced , personal exem ptions and standard deductions
will be increased.

T

22

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Federal Reserve Bank of St. Louis

environm ental condition of the pro p ­
erty and the environm ental record of
the seller.
• At closing, establish the environ­
m ental condition of the property as of
the date of transfer, perhaps including
a sam pling and assessing program .
• W henever possible, secure ade­
q u a te d isc lo su re s, re p re s e n ta tio n s ,
w arranties and releases.
• Be certain that docum ents relat­
ing to the environm ental condition of
the p ro perty are review ed by counsel
familiar w ith changes in the law.
Borrowers taking these steps place
them selves in a m ore advantageous
position to obtain financing.
Gage & Tucker states that increases
in funding for Superfund and state
hazardous-w aste program s will result
in increasingly vigorous investigation
and broadening liability for clean-up
costs. • •
ERT, Inc., a resource-engineering firm, will
sponsor three seminars next month. “RCRA
and Property Transfer” and “Plant and Fa­
cility Decommissioning” will be held in
Washington, D. C., on December 11; “Prop­
erty Transfers” will be held in Pittsburgh
on December 16. For information, call 713/
529-9900.

Healthy Economic Growth
Seen by Wis. Economist
Real econom ic grow th should in­
crease to a healthy 4%-5% annual rate
betw een now and the end of 1987, ac­
cording to the chief econom ist at First
W isconsin Corp.
That grow th will be accom panied by
a sharp rise in inflation and a m onetary
policy that continues to be stim ula­
tive, said C lare Z em pel at a F irst W is­
consin outlook sem inar last m onth.
The economist also predicted a jum p
in real exports and a shrinking trade
deficit; a 20% increase in interest rates
and buoying stock prices. The stronger
econom y also could lead to an effort
to reduce the federal deficit.
Risk of recession is “negligible” u n ­
til late 1988, he added, at which point
“the F ed will get around to dealing
w ith accelerating inflation.”
Inflation is likely to almost double
from its cu rren t level of less than 3%
over the next five quarters, Mr. Z em ­
pel said, due prim arily to stabilizing
oil prices. M onetary policy will rem ain
stim ulative w ith the F ed p erm itting at
least a 9% rise in “M l ” over the next
five quarters.
Mr. Zem pel said the federal trade
deficit is ready to com e down, reflect­
ing the effect of a decline in the value
of the dollar. H e sees an 11%-12% in­
crease in real exports betw een now and
the end of 1987, w hich should provide
a major boost to G N P growth.

MID-CONTINENT BANKER for November, 1986

Yield ahead
Improving the yield on your investm ents
takes constant, careful review. Under today’s
rapidly changing m arket conditions, knowing what
to buy, when to buy it,
and when it m atures is
essential.
T hat’s why you
should call the
Commerce Bank Bond
Investm ent Group.
Our Bond Group
representatives are
trained professionals in
portfolio management. They will keep you up to
date and informed of rapidly changing m arket
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-wT
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NA

M EMBER FDIC

Circle 14 on Reader Response Card

MID-CONTINENT BANKER for November, 1986

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Federal Reserve Bank of St. Louis

23

The D&O Situation:
Will it Ever Return to Normal?
What will it be: expensive
under-coverage or no cov­
erage? Captive firms: are
they offering too little, too
late?
By Jim Fabian
Senior Editor

RE D IC T IO N S VARY concerning
the re tu rn to so-called “norm al”
of the liability-insurance situation. But
few, if any, expect a change for the
b e tte r in th e short term .
“The D& O u n d erw riter is caught in
the m id d le ,” says Roy L. Phillips of
M uskie-P h illip s In su ra n c e A gency,
H ouston.
H e has an extrem ely lim ited n u m ­
b er of com panies from w hich to select
and he faces th e fury of th e banker
w hen it com es to affordability of the
product, Mr. Phillips says.
“A recen t quote on a new bank was
$38,600 for $1 million in coverage,”
he says. “Can you im agine th e shock
such a quote w ould give to a banker
— not to m ention his response to the
un d erw riter?”
Mr. Phillips has been in th e in su r­
ance field for 25 years, b u t says he has
not yet b een able to adjust to th e broad
swings of underw ritin g moods taking
place.
The D& O situation, he says, has re ­
sulted in a condition of absolute fear
on the part of u n derw riters. H e ’s been
w atching the small n u m b er of D& O
players com e in and out of the m arket.
But Mr. Phillips sees a direction to
which th e c u rre n t situation is p o in t­
ing, and it’s “back to th e basics”; back
to hard underw riting practices and
thorough investigative practices to as­
sure the status of each bank client.
The first echelon of defense for in­
dividual banks, he says, is selection of
quality directors and em ploym ent of
professional bankers.
“The day of directorships on any
board for ego purposes is g o n e,” he

24


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Federal Reserve Bank of St. Louis

says, “because it can cause the gravest
of co n sequences.”
Board participation, even as the
devil’s advocate, will be the tradem ark
of survivors, Mr. Phillips says. “Prog­
ress and creativity in any industry al­
ways has b een sired by the bold stance
of individuals who are not afraid to ask
‘w h y ’ at b o a rd m e e tin g s .’’ R ecen t
events have brought hom e the reali­
zation to directors that th eir personal
well being depends on their bank being
well m anaged.
M ore w ell-m anaged banks will re ­
sult from the liability crisis, Mr. Phil­
lips says. Bank m anagem ents can’t d e ­
pend on examinations being conducted
on a regular basis because regulators
are stretched too thin to m aintain nor­
mal ex am ination sch ed u les. T h e re ­
fore, m anagem ents are forced to pay

Delaware Eases
Director Liability
D elaw are has passed legisla­
tion that lim its or exem pts d i­
rectors from liability u n d er cer­
tain c irc u m sta n c e s . T h e le g ­
islation is designed to enable
firms such as banks to retain o u t­
side d ire c to rs w ho o th e rw ise
w o u ld c o n sid e r re sig n in g b e ­
cause of the liability crisis.
T h e law tak es th e m id d le
ground betw een protecting di­
re c to rs and s h a re h o ld e rs , ac­
cording to its author. It applies
only to directors and not to of­
ficers and d o e s n ’t ap p ly to
b re a c h e s of so -called duty -o floyalty situations, such as con­
flict of in terest, or to intentional
m isco nduct or illegal activity.
Shareholders retain th e right to
claim director negligence in suits
seeking to p rev en t m ergers or
o th er transactions, b u t only prior
to th e ir consum m ation.
The law requires approval from
a m ajority of shareholders to ef­
fect any liability exem ption.

closer attention to how th eir people
are running th eir institutions.
Mr. Phillips predicts it will be 1988
before D& O becom es m ore readily
available. But, even then, coverage will
be next to im possible to obtain for new
banks and banks u n d er $100 million
in assets.
“The m arket will rem ain tough b e ­
cause the players w ant to give their
cap acity only to lily -w h ite large
banks,” he says. Policies will be short­
term and will not cover problem s that
surface after a given period of tim e,
such as one year. U nderw riters live in
fear they will be called on to cover a
situation that comes to light in the next
century and th ey ’re m aking sure they
will not p erp etu ate such a possibility
in new policies.
The D& O crisis will be over for
banks in about two years, says William
H. T. Bush, bank consultant in St.
Louis.
Banks will be m ore fortunate in this
area than universities and hospitals,
he states, because underw riters see
banks as less risk prone than some
o ther types of operations.
Easing of the crisis will come grad­
ually, he adds, and signs of this easing
already are appearing as underw riters
begin to resum e m arketing efforts.
O nce these efforts begin, Mr. Bush
says, price cutting follows.
In the m eantim e, how ever, he says
a 200% increase in price, com bined
w ith a 50% decrease in coverage for
D&O is considered to be a good deal
for banks.
Captive Providing Coverages
It will be 1990 before the liabilityinsurance situation retu rn s to anything
approaching “n o rm al,” predicts Bill
M cW illiams at B anclnsure, head q u ar­
tered in O klahom a City.
“The situation is going to get worse,”
he says, “because m ore m arkets are
w ithdraw ing coverage and p utting up
obstacles to obtaining coverage.”
B anclnsure is supplying D& O cov­
erage to banks w ith up to $50 million

(Continued on page 26)
MID-CONTINENT BANKER for November, 1986

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Federal Reserve Bank of St. Louis

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(Continued)

in assets th at are m em bers of state
bankers associations sponsoring the
captive firm. Six state associations c u r­
rently are working w ith B anclnsure,
with 10 m ore in th e negotiation stage,
Mr. McW illiams says.
H e expects m ore state associations
to make inquiries about B anclnsure
because th e ABA s attem p t to create
a captive-insurance firm appears to be
faltering.
Maximum coverage available from
B a n c ln s u re is $400,000, b u t m any
banks w ant $1 m illion, he says.

B anclnsure isn’t the be all to end
all, he adds, because it can’t accept
banks that are experiencing problem s.
About 50% of applicants are tu rn ed
down. H ow ever, th ere is an appeals
process through the applicant’s state
association that can result in Banc­
ln su re taking a second look at an ap­
plication.
“W e have the broadest known ap­
plication form in the in d u stry ,” Mr.
M cW illiams says, b u t coverage has re ­
strictions, such as exclusion from reg­
ulatory suits and ‘insured vs. insured
suits.
M any banks are looking at D&O
prem ium s and deciding to self-insure,

Illinois Captive Gets Go-Ahead
O RE THAN 300 m em bers of the Illinois Bankers Association
have resp o n d ed positively to a survey by the association that
sought to enlist support for establishing a captive insurance firm.
A lthough 400 banks was th e IBA’s goal, its board has decided that
sufficient in terest has b een expressed to w arrant going ahead w ith
establishm ent of th e firm.
The association’s counsel is w orking on an offering circular and so­
licitations are expected to be in th e mail by D ecem b er 1.
The IBA believes th e project rep resen ts a unique opportunity for
Illinois bankers to w ork to g eth er to solve th eir D& O problem s w ithout
being d e p e n d e n t on th e vagaries of th e com m ercial-insurance m ar­
ketplace, an IBA spokesperson said.

M

Commissioner Says Wisconsin Banks
Are Tightening Their Managements
states.
H E BEST way to avoid violations
from th e state banking com m is­
H e expressed the b elief that W is­
consin w ould not lose m any banks.
sioner’s office is to tighten bank m an­
agem ent.
“W e’ll be b u y e rs,” he insists.
This is w hat W isconsin’s banking
His office expects to be receiving
com m issioner has b een telling bankers
requests for expanded pow ers p ro ­
as he tours th e dairy state.
vided by the state’s interstate-banking
C om m issioner Richard E. Galecki
law, although no rush has yet been
saw the n eed for tig h ter m anagem ent
apparent.
w hen he becam e com m issioner less
The law perm its banks to offer any
than two years ago. At that tim e he
activity, product or service d eem ed fi­
was surprised at th e n u m b er of vio­ nancially related by the com m issioner,
latio n s co m in g th ro u g h his office.
such as travel agencies, insurance or
Among them w ere p referen tial-len d ­ real estate.
The legislation also expands banks’
ing rates for directors and officers and
ability to make loans and investm ents
excessive overlines.
of certain types and perm its them to
H e feels th e re has b een a reduction
invest directly in business firms. That
in violations since he took office.
A nother thing th at has b een su r­ m eans a bank may m ake equity loans
prising to C om m issioner Galecki is the
through the bank or a subsidiary, sub­
lack of acquisition announcem ents from je c t to approval by the bank’s board,
provided th e am ount loaned doesn’t
banks intending to e n te r W isconsin
now th at state-line crossovers are le­ exceed 20% of capital and surplus or
a low er percentage set by th e com ­
gal. At the tim e he spoke to th e issue,
no bank had moved into Wisconsin and m issioner.
Mr. Galecki was a banker for 25 years
only th re e W isconsin banks had an ­
before being appointed com m issioner.
nounced intentions to m ove into oth er

T

26


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Federal Reserve Bank of St. Louis

Mr. M cW illiams says. They have no
other choice.
ABA Committed to Captive
Although B anclnsure is the first
captive u n d erw riter for banks, it isn’t
expected to rem ain the only one. The
ABA has been working on a captive for
its m em bers for about a year, and some
state bankers associations are creating
captive firms to serve th eir m em bers.
The q uest for a captive firm that will
be able to m eet th e needs of ABAm em ber banks for D& O and other in­
surance coverage has been som ewhat
illusive. The prim ary stum bling block
is the fact that reinsurance has not been
obtained, says Sheldon Golub of the
ABA’s press-relations staff.
But the ABA rem ains fully com m it­
ted to m eeting the needs of its m em ­
bers who w ant coverage, Mr. Golub
says.
H e reports that a firm has offered
to provide up to $2 m illion in D&O
coverage and up to $3 m illion in bond
coverage through a plan that will not
require reinsurance from a third party.
H ow ever, th e ABA w ould have to p ut
some of its reserved funds into an es­
crow account to get the program off'
the ground.
The ABA’s funds w ould be tied up
only until capital of the captive reached
a p red eterm in ed level, Mr. Golub
says.
The association plans to survey its
m em bers to d eterm in e th eir interest
in the coverages. An earlier survey
asking m em bers if they favored a cap­
tive firm resu lted in m ore than 3,000
responses in the affirmative, he says.
ft’s too early to tell ju st w hat re ­
strictions D& O from the ABA’s cap­
tive firm would carry, Mr. Golub adds.
Difficulties Explained
O ne reason banks are experiencing
difficulties obtaining D&O coverage
they can live w ith is the fact that m an­
agem ent waits too long before gearing
up for renew al of coverage, says D oug­
las Austin, bank consultant.
“It’s im portant not to wait until the
last m inute to gear up for renew al,”
Dr. Austin says. “At least six m onths
should be allotted to the renew al ef­
fort. ”
I t’s im portant for a bank to be in the
best possible condition at D&O re ­
newal tim e, he adds. It should obtain
applications from as m any carriers as
possible and they m ust be filled out
truthfully and com pletely. A fraudu­
lent application could result in denial
or cancellation of coverage.
C o n su lta n ts g e n e ra lly ag ree th a t
banks should consider the maximum

(Continued on page 47)

MID-CONTINENT BANKER for November, 1986

An Ounce of Prevention

t>ank board letter
To ensure your bank’s good health
and pro tect your directors and
yourself, a subscription to The Bank
Board L etter is w orth a pound of
D&O insurance.
Serving as a bank director “ ain’t what it used
to be.”
R e g u la to rs e xp e c t d ire c to rs to be m ore
knowledgeable than ever. Lawsuits by the FDIC
make the news. Disgruntled shareholders win
judgments. Consumer activists turn up the heat.
It’s enough to give your directors that queasy
feeling.
No w onder attracting and holding quality di­
rectors can give any CEO a headache.
Cool your fever with a subscription to The
Bank Board Letter. Adm inistered in pleasant
monthly doses, The Bank Board Letter will bring
your directors all the news and trends they need
to know, putting your directors at ease and back
in control. The Bank Board Letter presents the
big picture in capsule form each month, easily
readable, direct, to the point. Ideal for your busy
directors.

i----------------------------------------------------------------------------------

An informed director:
Your best prescription.
The BANK BOARD LETTER
408 Olive St., St. Louis, MO 63102

W hile other newsletters come and go, The
Bank Board Letter has been giving officers and
directors a com prehensive, independent point
of view for 17 years.

Please en ter my o rder for ____ subscriptions to
BANK B O A R D 'L E T T E R at $45 for the first sub­
scrip tio n and $15 for ad d itio n al su b scrip tio n s.
(Attach list of addresses for additional recipients.)

Think of this subscription as your best pre­
scription.

Address _______________________________________

MID-CONTINENT BANKER for November, 1986

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Federal Reserve Bank of St. Louis

Name _________________________________________

City ______________S ta te ________ Z I P __________

27

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approach to correspondent banking, working
closely with you to develop strategies that
improve profits, growth and efficiency. We offer
individualized service and comprehensive
capabilities, including:
• multiple investment consulting
• credit and financial services
• global trade finance
• merger and acquisition consulting
• trust, treasury and many other services
In addition, LaSalle ensures dependable,
cost-effective check processing, collections,
loan overlines and the other standards of cor­
respondent banking.
As your Midwestern neighbor, w e share
your perspective and regional loyalties. As a
Chicago bank with international resources,
LaSalle can share money-center banking
opportunities as well. Through our affiliation
with ABN Bank, a leading global institution,
w e o ffe r m a n y a d v a n ta g e s w e ll w orth
investigating.
Get acquainted with LaSalle's Correspondent
Bankers. Call Peter McGuire, Vice-President
and Division Head at 312-443-2750. Peter and
the LaSalle Correspondent Banking team will
give you unbeatable support—with better
service, better products and better ideas.
LaSalle National Bank
135 South LaSalle Street
Chicago, Illinois 60603
Member FDIC
Member of the ABN/LASALLE group

nBNO LASALLE
Your Correspondent Banking Bridge
c 1986 LaSalle National Bank

28


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

Circle 23 on Reader Response Card

Shop for Coverages:
Lesson of Ins. Crisis,
Says Bank Consultant
By Jim Fabian
Senior Editor

H E IN S U R A N C E crisis has
served to awaken m any bankers
to the fact th at they m ust shop care­
fully for coverage, says a St. Louis con­
sultant.
Gone are the days w hen a bank CEO
m erely let th e insurance broker who
sat on his bank’s board take care of the
institution’s insurance needs in a rou­
tine m anner, says W illiam H. T. Bush,
chairm an, Bush & Kobusch M anage­
m ent C onsultants, Inc.
It’s often necessary for the bank to
seek out a broker with the clout needed
to secure th e b est deal for the bank,
according to Mr. Bush, who sits on the
board of C ovenant G roup, H artford,
C onn., insurance firm.
A savvy broker can keep the C E O
abreast of the changes constantly tak­
ing place in the insurance industry,
Mr. Bush says. Lately, it’s b een dif­
ficult to keep track of w hich firm is
offering w hich coverages.
Not just any insurance broker should
do, he adds, since th e clout brokers
have w ith u n d erw riters varies, often
based on th e am ount of business they
send to u n d erw riters they represent.
Mr. Bush suggests that C E O s (or
chairm en of bank insurance com m it­
tees) query prospective brokers as to
th eir effectiveness in th e everchanging
insurance m arket.
“Ask the broker how m uch m oney
he places through his m ajor m arkets,”
he says. “If th e am ount is in the highsix figures, th at broker is likely to have
clout because he is en titled to lots of
attention from th e u n d e rw rite r.’’
Ask the broker if h e ’s a m em ber of
the pro d u cers’ club of underw riters he
rep resents, such as th e A etna E lite or
the St. Paul Top Brass, Mr. Bush sug­
gests. C lub m em bers are en titled to
clout.
If the broker goes through Lloyd’s
of London, check out th e stature of the
broker w ith Lloyd’s because stature
determ ines th e price of the products
the broker offers th e bank, Mr. Bush
says.
E xcept for blanket bonds and direc­
tors and officers coverages, the insur­
ance m arket for banks is p retty nor­
mal, Mr. Bush says. H e adds that he
feels bankers should be m ore con­
cerned about th e form er type of cov­
erage than th e latter, for a surety bond
is necessary for a bank to rem ain in
business.

T

MID-CONTINENT BANKER for November, 1986

I t’s not surprising that carriers are
m ore strict during a tim e such as this,
he says. M ost u n d erw riters are being
selective as to w hat they are insuring,
not to m ention who the broker is. Many
carriers are p u ttin g th e “80/20 rule ’
into full practice because they w ant to
get the m ost for th e ir efforts. W hen
th ere is a shortage of product, th e larg­
est producers get first crack at w hat’s
available.
W h at’s a bank to do to m ake it at­
tractive to a carrier? Mr. Bush offers
th e following suggestions:
• H ave an auditor who rep o rts d i­
rectly to th e board, not th e C E O . This
is im po rtan t for qualifying for suretybond coverage.
• Conduct annual reviews of all risks
in th e b ank’s portfolio.
• K eep buildings and grounds in
pro p er condition and m aintain records
of inspections and repairs.
• F in g e r p r in t all p e o p le on th e
bank’s staff.
A bank th at has m ajor loan p roblem s
faces a high litigation risk, Mr. Bush
says. Actually, it’s not th e loan p ro b ­
lems p er se, b u t th e litigation risk that
results from th e problem s, that b e ­
devil banks.
Mr. Bush is sym pathetic to bank­

ing’s plight. H e realizes that external
factors often are involved, and how is
the banker to combat such factors? “It’s
easier to clean up th e bank after a flood
than it is to clean up a portfolio full of

bad loans,’’ he says.
Mr. Bush established his consulting
firm recently after resigning as p resi­
dent, B oatm en’s National, St. Louis.
H e was with the bank for eight years.

CBA Head Calls for Education IRAs
D U CA TIO N IRA s have been suggested as a m eans to narrow the
growing gap betw een family incom es and the cost of higher ed ­
ucation by Thom as E. H oney, president, C onsum er Bankers Associ­
ation.
“Parents and students need help w ith the orderly planning of college
exp en ses,’ Mr. H oney said at the CBA’s recent Second National S tu­
d en t L oan/Finance C onference. “They need products and services
which will enable them to save, invest and earn for the ever-grow ing
financial burden.
H e called for IRAs for education savings, tax credits for principal/
in terest paym ents on loans for education, fair and equitable loans and
grant/assistance program s as ways the federal governm ent could extend
“positive stim uli to encourage thrift and good planning’ to parents and
students.
W ithout such a com prehensive program , Mr. H oney said, O ur
nation faces an evolutionary tre n d to a totalitarian society in which
only a few who can afford it will receive the quality higher education
essential to lead our governm ent, m anage our businesses and control
our society.’’
H e p red icted that a four-year college education would cost about
$100,000 by the tu rn of the century and added that the average student
of today amasses an average d eb t of $12,000 during his/her college
years.

E

MID-CONTINENT BANKER for November, 1986

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

NoOneShouldBeExpectedToSell
lnsuranceByTheSeatOfHisPants.
Too often, life insurance companies ask your employees to wing it. To try and
sell credit life insurance with no training. Not us.
Protective Life offers your financial institution the tools to help boost your
bottom line. Like our comprehensive, easy-to-use employee training program that
teaches your people to feel comfortable and confident about selling our products.
And how to close more sales.
We even provide monthly sales reports that help you track credit life sales.
So you can spot areas of lower production and give your branch or agent the help
they need to improve profitability.
r Yes, I ’d like some down to earth ideas f o r in­
We know the pitfalls involved in
creasing our bottom line. Please contact me
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with this im portant inform ation immediately.
especially for someone who isn’t
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For immediate response call TbllFree:
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orPhilSeibert, Regional Vice-President,
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InsideAlabama 1-800-421-5879.

Bus. Phone_________________________
Send to: Protective Life Insurance Company,
PO. Box 2606, Birmingham, AL 35202,
Attention: Les Longshore.

PROTECTIVE LIFE
IN S U R A N C E C O M P A N Y

When it comes to insurance, we 're Protective.

Circle 27 on Reader Response Card

Serious Problems for Banking
Seen in Tax-Reform Legislation
By James Blackman
First Vice President
First Wisconsin Corp.
Milwaukee

In addition, w hile the form ula for
calculating preference item s rem ains
sim ilar to the one used for th e cu rren t
add-on m inim um tax, th e bill calls for
E T W E E N an expanded defini­ a m uch w ider definition of w hat con­
stitute preference item s. For instance,
tion of p referen ce incom e and
th e bill w ould label as preference
th e adoption of an alternative m ini­
items:
m um tax, th e Tax Reform Bill poses
• Item 1. Reserves for losses on bad
some serious problem s for th e indus­
debts in excess of actual experience.
try.
• Item 2. The am ount of acceler­
In addition, it could en d up red u c­
ing m arketability of th e tax-exem pt in ­ ated depreciation in excess of d e p re ­
ciation calculated u n d er an alternative
v e s tm e n t in s tru m e n ts fav o red by
straight-line m ethod.
banks.
• Item 3. H alf the difference b e ­
W hile th e c u rre n t corporate m ini­
tw een financial statem en t pre-tax in­
m um tax is an add-on tax — an am ount
com e and taxable incom e.
added to th e regular tax liability — th e
T hese preference item s, plus any
m inim um tax is an alternative m ini­
m um tax (AMT). Such a tax w ould re ­ others that m ight apply, would be
quire banks to com pute th e ir tax lia­ added to regular taxable incom e. The
sum of th e preference item s and reg ­
bility based on th e ir regular taxable
ular taxable incom e constitutes the
incom e and th en com pute th e AMT
preferen ce incom e, w hich is subject
based on p referen ce incom e. If this
to a 20% AMT.
exceeded th e regular tax, th e larger
W hat w ould this m ean for banks?
am ount w ould be paid.

B

Book income (pre-tax)
Tax-exempt income and other deductions
Regular taxable income
Half the difference between book and
taxable income
Amount subject to tax
Tax due

R e g u la r Tax

A .M .T.

$1,000,000
565,000

$1,000,000
565,000

435,000

435,000

NA

282,500

435,000
x 33%
$143,500

717,500
x 20%
$143,500

Item 3 m eans that if the tax-exem pt
incom e and o th er tim ing deductions
ex ceed 56.5% of p re -ta x financialstatem ent incom e, the AMT applies.
That percentage w ould be even lower
if an institution had o ther preference
items.
The chart shows how the tax due on
ordinary incom e at th e regular 33%
rate is equal to w hat would be due
u n d er the proposed AMT system at
20 % .
Judging from a review of the annual
reports of a num ber of institutions, taxexem pt incom e for many is in excess
of 56.5% of financial-statem ent pre-tax
incom e. T h e se in s titu tio n s , b efo re
even considering o ther tim ing and
preference item s, w ould be subject to
the AMT. In addition, any tax credits
the institution would be entitled to may
fu rther reduce the level of tax-exem pt
incom e a bank could receive w ithout
being subject to the AMT.
Tax-exem pt incom e for some banks
com prises a m aterial portion of pre-tax
financial-statement income. In one case
we studied, tax-exem pt incom e ac­
tually exceeded pre-tax financial-state­
m ent incom e. In this instance, fed­
eral-tax expense for 1985 was negative.
U nder the proposed AMT, this insti­
tution w ould have incurred a federal
tax bill equal to about 10% of its fi­
nancial-statem ent pre-tax income.
A close reading of this bill leads to
a conclusion that w arrants attention
from the industry: An alternative m in­
im um tax plan sim ilar to the one p re ­
scribed e ith er will subject banks to
greatly increased incom e-tax expense
or force them to liquidate a significant
portion of th eir tax-exem pt portfolios.

NEWS BRIEFS

Blanket Bond Blues?

Are Your Underwriter’s Demands Excessive?
We Have Been Able to Solve Many Bond Problems for
Bankers At the Lowest Possible Premium

• A, M. (Steve) Marzano has been
nam ed vice president/sales, installa­
tion and service for M osier, Inc. He
succeeds Joe M acD onald, who plans
to retire next April.
• Henry C. Ruempler has been
nam ed director of taxation for the ABA.
H e had been w ith C itibank’s W ash­
ington office since 1983.

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IN
WISCONSIN
KANSAS BANKERS SURETY COMPANY
Box 1654
Topeka, Kansas 66601
1-913-234-2631

30


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Federal Reserve Bank of St. Louis

Circle 21 on Reader Response Card

• Nancy B. W olcott, vice p resi­
dent, H arris Trust, Chicago, has been
n a m e d c h a irm a n of th e se c u ritie slending com m ittee of R obert Morris
Associates.
• Friedrich M. (Fritz) Elm endorf
has joined the C onsum er Bankers As­
sociation as director of public relations
and com m unications. H e previously
was w ith th e ABA’s public relations
departm ent.
MID-CONTINENT BANKER for November, 1986

We’ve Spent 45 Years
Developing Our Good Name
to Stand Behind Yours.

Travelers Express has been in the
mainstream of financial processing
services for many years. In fact, we’re
the largest volume money order provider
in the commercial marketplace, .and
that didn’t happen overnight.
Teamwork and state-of-the art
equipment put us at the head of the class

for reliable and efficient processing of
money orders and official checks.
Official Check and Money Order
services from Travelers Express relieve
your institution of paper inventory and
storage costs, back office reconciliation,
stop payments, photocopies and tracing.
Our services also offer you an oppor­
tunity to earn income for your financial

institution through increased balances.
Best of all, we stand behind your
institution as well as our products. We’re
not a bank and don’t compete for your
customers’ attention.
For more information, contact
Terry Franzen, Marketing Manager,
1- 800 - 328- 5678 .

»Travelers Express
a rocvum
i\.ir» —
A
GREYHOUND

COMPANY

■

Circle 34 on Reader Response Card

MID-CONTINENT BANKER for November, 1986

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

31

each for your phone and call Central
Capital Markets Group Limited. You’ll
get first-rate personal service and a team
of experts who will expand your ability to
invest in taxable and tax-free instruments.
Contact Central Capital Markets Group

R

today. We’re a natural extension of your
potential. Call 1-800-331-9250.

Central
Capital
Markets Group Ltd.
of the Investment Banking Division of Central Bank of the South

4Extend your bank’s
investment resources.


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

Reducing Appraisal-Report Risk
The Sharp Decline in Appraisal-Report Quality in Recent Years —
and Subsequent Losses to Banks — Demands Attention

Losses due to poor quality appraisal reports can be
reduced significantly by raising the quality of appraisal
reports submitted to financial institutions. This article
tells how to do it
By Lori A. Laughlin
GREAT D E A L of attention is
given to quality control due to
losses experienced by th e financial in­
dustry. This atten tio n has stim ulated
an in terest in th e subject of risk.
A m ajor risk facing lending in stitu ­
tions — as well as th e private m o rt­
gage-insurance in dustry and second­
ary m a rk e t — is a p p ra isa l risk.
E xperience indicates th e re is a direct
re la tio n s h ip b e tw e e n p o o r-q u a lity
loans and poor-quality appraisal re ­
ports.
An exam ination of loan packages in
default at one large m ortgage-banking
firm revealed th at 29 out of 30 p ro p ­
erties w ere over-appraised. Many were
substantially higher, som e w ere ap­
praised at two to th re e tim es th e ir ac­
tual “fair-m arket” values. In addition,
a large sam pling of p ro p erties not in
default revealed th at 98% of th e ap­
praisers listed sales price as m arket
value. If sales price is m arket value,
we don ’t n eed appraisers! Financialinstitution p ersonnel already know the
sales price.
O ver th e past 15 years, th e re has
been a sharp decline in th e quality of
appraisal reports th roughout th e na­
tion. Real property, for a variety of
reasons, has b een over-appraised, cre­
ating th e possibility for substantial
losses.
The “fudge factor” in appraising has
increased dram atically over th e years.
For companies underw riting loans, this
has m eant th at w hat should have been
a small loss, if the appraisal report were
accurate, becam e a very large one.
Ms. Laughlin is executive director,
Professional Women’s Appraisal Asso­
ciation, Scottsdale, Ariz.

M any p ro p erties in default w ould not
have b een u n d erw ritten had the u n ­
d erw riter b een told the truth.
Thus, appraisers are in part respon­
sible for m uch of th e loss experienced
by th e financial com m unity. H ow ever,
th e prim ary cause of losses lies w ithin
th e financial institutions them selves.
M arket-share quest has caused many
financial organizations to abandon past
standards as well as traditional defense
systems.
It’s obvious that m uch of the loss
that has occurred in the financial com ­
m unity could not have h ap p en ed w ith­
out collaboration betw een loan officers

and appraisers. Thus, the relationship
betw een poor-quality appraisals and
poor-quality loans may not be one of
correlation b u t causation.
If the lending com m unity w ere se­
rious about m anaging risk, it would
break the connection betw een sales
and appraising because they don’t mix.
Mixing has p erv erted the appraisal
process. The appraiser’s role is to offer
an in d e p e n d e n t th ird -p a rty value
opinion. Thus, the appraiser’s work
should provide an im portant check
w ithin the lending system.
Unfortunately, many appraisers have
lost th eir in d ependence and have b e ­
come part of the system . In real estate,
almost everyone is an advocate. H ow ­
ever, this is not the appraiser’s p roper
role. U nfortunately, in m any firms
sales people select appraisers and or­
d er appraisal reports. This is inappro­
priate because appraisal reports are

Appraisers Called Threat to Banks
he
r e a l - e s t a t e -appraisal industry has been term ed a shaky
profession that threatens the safety and soundness of the nation s
financial system by a congressional-com m ittee study.
The study suggests extensive renovations to the industry that include
self regulation and federal oversight.
The study says th at “appraiser ineptitude, negligence and m iscon­
duct are w idespread. It adds that these factors are in large part re ­
sponsible for recen t real-estate-related failures of financial institutions
as w ell as for billions of dollars in losses at banks, thrifts, credit unions
and m ortgage-banking firms.
The rep o rt says Bank of America, W ells Fargo and C ontinental Il­
linois National banks had com bined appraisal-related losses of m ore
than $300 million in recen t years. Blame is to be shared w ith banks
and regulators, according to the study. “M any lending-institution ex­
ecutives, directors and loan officers are eith er essentially ignorant of
or ill-inform ed about the pro p er role of real-estate appraisals in loan
u n d erw ritin g ,” the study states.
“W orse still, m any such officials m aintain that it is not difficult to
find an accom m odating appraiser who can be counted on to come up
w ith w hatever results are d e sire d ,” the study states.
C ongressm an D oug B arnard Jr. (D ., Ga.) plans to introduce legis­
lation next year to deal w ith this situation. The legislation is expected
to create a self-regulatory body for appraisers and give regulatory agen­
cies authority to discipline offenders.

T

MID-CONTINENT BANKER for November, 1986
Digitized
^ -C for
irc FRASER
le 11 on Reader Response Card
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

33

underw riting, not sales, tools.
Financial institutions can save m il­
lions by becom ing concerned w ith the
issue of appraisal quality control. The
best way to m anage risk and ensure
profitability is to do a good job of u n ­
derw riting. This involves ensuring the
quality of docum entation received by
financial organizations. Sound u n d e r­
w riting m eans few er problem s to ad­
dress in th e future. In fact, a risk-m an­
a g e m e n t p h ilo so p h y an d so u n d
u n d e rw ritin g , co m b in ed w ith w ellconceived quality-control program s,
are th e keys to th e survival and prof­
itability of financial institutions.
Following are som e tips on p ro te c t­
ing banks from appraisal and o th er
types of real-estate risk:
• Im p lem en t appraisal, project and
loan quality-control program s. A scer­
tain reasons for com pany losses and
design program s to address th e p ro b ­
lems.
• M aintain a m arket-analysis capa­
bility. A ttention should be given to
areas e x p e rie n c in g eco n o m ic p r o b ­
lems. P articular concern m ust be d i­
rected to over-built m arkets w here
investor speculation and creative fi­
nancing schem es are apparent.
• D evelop tracking and m onitoring
systems that will reveal areas that need
to be addressed. Tracking and m oni­
toring activities are p art of a bank’s
defense system , used to p ro tect and
direct them selves.
• Train u n d erw riters so they will

be able to review appraisal reports in­
telligently. This task is part of the com ­
pany’s ongoing educational effort.
• E ncourage the bank to relate ap­
praisers to an underw riting, appraisal,
or quality-control departm ent. Sales
people in financial institutions should
not be allowed to select appraisers and
order appraisal reports.
• R equire narrative appraisals on
custom hom es and high-risk p ro p e r­
ties. F N M A /FH L M C forms are not
adequate for such properties. On cer­
tain types of properties and loans, fi­
nancial institutions need a m ore ind ep th look at the real estate providing
security for the loan as well as a m ore
in-d ep th look at th e surrounding m ar­
ket. N arrative appraisals cost m ore
than form appraisals but, considering
the chance of loss involved in high-risk
and high-dollar properties, they are
bargains.
• D o n ’t give appraisers the sales
price of a p ro perty being appraised u n ­
less th e appraisal req u est is part of the
com pany’s spot-check program . L en d ­
ing institutions should be encouraged
not to divulge the sales price to the
appraiser. If the appraiser learns the
sales price, that price will be listed as
the m arket price about 98% of the time.
• T here should be a com plete sep­
aration betw een sales and u n d erw rit­
ing departm ents. Sales departm ents
m ust not be allowed to control, direct,
or p ressure underw riting personnel.
U nderw riting should be allowed to

BBB Now FIB; Note Changes!
I T MAY be taking considerable tim e for th e new nam e for the bankers
blanket bond to take hold, b u t bankers should be aware of the
changes contained in its successor — th e financial institution bond
(FIB).
A b rie f sum m ary of these changes was given to bankers attending a
recen t sem inar hosted by th e St. Louis office of Peat Marwick by Mark
H. C um m ings, senior m anager.
The b ond now is a d efinite-term contract. I t’s no longer open ended.
This p erm its th e u n d erw riter to apply th e aggregate liability lim it for
all losses discovered during th e bond p eriod on an annual basis instead
of a continuous basis.
Loan losses caused by em ployee dishonesty are not covered unless
th e em ployee receives a financial benefit of at least $2,500 for him self/
herself.
The in su rer no longer is req u ired to indem nify th e bank for court
costs and atto rn ey ’s fees. If th e in su rer elects to defend legal p ro ­
ceedings in full or in part, only legal expenses incurred by the in su rer
are covered.
The application for FIB is m ade a part of the bond and m isrepre­
sentations or om issions are grounds to void the contract.
Mr. C um m ings recom m ended that renew al applications be made
th ree m onths in advance of bond term ination. Ask for a 30-day tu rn ­
around to give th e bank tim e to shop around if the new term s are not
to m an agem ent’s liking, he advised.

34


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Federal Reserve Bank of St. Louis

fulfill its mission. At one com pany I
w orked for, sales determ in ed u n d e r­
w riting policy and, in addition, sales
m anagers review ed underw riters for
th e ir an n u a l salary in creases. O b ­
viously, th e system was designed to
overw rite rath er than underw rite.
• In contacts w ith appraisers, let
them know you w ant quality appraisal
reports. Financial institutions will have
to convince appraisers that they will
be rew arded for doing good work. In
recent years, the system has rew arded
poor quality work and punished good
quality work. If financial institutions
were serious about managing risk, they
would pro tect appraisers from being
punished by loan officers.
• C ounsel w ith appraisers who do
questionable w ork and attem p t to get
them to im prove th e quality of their
work. C ounseling has a positive effect
on the quality of subm itted appraisal
work and will resolve m ost problem s.
• M o n ito r a p p ra isa l re p o rts and
elim inate appraisers who consistently
do poor quality work. If an appraiser
continues to subm it poor quality work
after counseling, use the services of
another appraiser.
• If an a p p ra is e r is c o n siste n tly
doing poor quality and/or unethical
work, subm it the poor-quality reports
to the ethics com m ittee of the ap­
praisal society of which the offender is
a m em ber.
• Q uality control, appraisal and u n ­
derw riting dep artm en ts in financial in ­
stitutions should relate directly to sen­
ior m anagem ent. It is recom m ended
that these dep artm en ts be headed by
individuals at th e vice-president level.
• R eview q u e s tio n a b le ap p raisal
reports before the loan is u n d erw rit­
ten. D on’t be afraid to get a second
opinion. Engage in preventive m edi­
cine — it’s preferable to post mortems!
A p ru d e n t bank will m aintain sound
underw riting practices and obtain ap­
praisal reports that m eet professional
standards. This will enable the bank
to arrive at judicious loan-underw rit­
ing decisions.
The purpose of any appraisal qual­
ity-control program is to ensure that
the inform ation received for loan u n ­
derw riting or any o th er purpose is
com plete, consistent, reliable, accu­
rate and free from fraud. In brief, sub­
m itted appraisal reports m ust be of ac­
ceptable quality. Q uality information
will allow the bank to make sound risk
decisions. Judgm ents based on poor
quality or faulty data will increase the
bank’s chance of loss. • •

Coming in December
1 9 8 7 C re d it-R e v ie w
F o re ca s ts

MID-CONTINENT BANKER for November, 1986

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Federal Reserve Bank of St. Louis

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P.O. Box 1126

Circle 35 on Reader Response Card

St. Louis, Missouri 63188

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Tax-Reform
Are Banks Bearing Brunt of Burden?
By John O. Eichhorn and Daniel J. DeMoss
AX R E FO R M has becom e law. After nearly two years
of debate, the Joint Congressional Com m ittee reached
an ag reem en t in A ugust on an outline from w hich the new
tax bill was drafted. The drafted bill m oved swiftly through
H ouse and Senate debates and was overw helm ingly ap­
proved by both branches of Congress and received the
p resid e n t’s signature on Oct. 22.
The 1986 Tax Reform Bill marks th e m ost substantive
reform of our tax laws since drafting of th e 1954 Internal
R evenue Code.
D ue to th e prev alen t b elief that corporations, particu­
larly financial institutions, receive unjust preferential
treatm en t u n d e r th e c u rre n t system , tax reform will elim ­
inate these “in eq u ities” in our tax system. The banking
industry not only will be affected by the m ajor overhaul
of general corporate provisions b u t also by changes to the
specific provisions relating to financial institutions.
This article will sum m arize the m ain provisions of the
Tax Reform Act of 1986 affecting banks. W e suggest you
use this article only as a guide. You should consult your
tax advisor to d eterm in e how th e provisions may affect
your institution.

T

Corporate Tax Rates
A principal objective of th e bill is to reduce marginal
tax rates on incom e taxes paid by individuals and corpo­
rations. The top m arginal rate paid by corporations would
be red u ced from 46% to 34% for taxable years beginning
after July 1, 1987.

Taxable Incom e

$

0 - 25,000
25,000 - 50,000
50,000 - 75,000
75,000 - 100,000
Over $100,000

P rior
Law Rate

N ew
Law Rate

15%
18%
30%
40%
46%

15%
15%
25%
34%
34%

The conference ag reem en t also im poses a 5% surtax on
taxable incom e b etw een $100,000 and $335,000, thus to­
tally elim inating the benefits of low er tax rates w hen taxMr. Eichhorn is a liaison tax partner in the commercial-banking
practice and Mr. DeMoss is a senior tax specialist. Both are
in the St. Louis office of Peat, Marwick, Mitchell & Co.

36


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Federal Reserve Bank of St. Louis

able incom e exceeds $335,000. C alendar-year taxpayers
will have a b lended rate w ith a top m arginal rate of 40%
for 1987 (excluding the 5% surtax).

Capital-Cost Recovery and Investment Credit
The com m ittee w anted to retain the simplicity of the
presen t law’s accelerated cost-recovery system , which pro­
vides a small n u m b er of depreciation classes and relatively
short recovery periods. U nder th e new law, the recovery
period for autom obiles and light trucks w ould be extended
from th ree years to five years, while m ost furniture, fix­
tures and eq u ip m en t would be extended from five years

The tax bill eliminates the so-called in­
equities favoring banks in the current tax
system through a major overhaul of gen­
eral corporate provisions and changes
to specific provisions relating to banks.
to seven years, applying the 200% declining-balance
m ethod.
R esidential real p ro perty will be recovered on a straightline basis over 271/2 years, w hile non-residential real pro p ­
erty will be recovered on a straight-line basis over 31/2
years. The m id-year convention will apply to the five- and
seven-year classes, and the m id-m onth convention will
apply to the 27/2- and 31/2-year classes. The $5,000 annual
first-year expensing lim itation is raised to $10,000; how­
ever, it is available only to taxpayers w ith property of less
than $210,000 placed in service during the taxable year.
W here such aggregate cost exceeds $200,000, the lim i­
tation is reduced dollar-for-dollar. The effective date for
depreciation changes generally will be D ecem ber 31, 1986.
The conference agreem ent repeals the investm ent-tax
credit effective for p roperty placed in service after D e­
cem ber 31, 1985. Investm ent-tax-credit carryovers will be
reduced by 35%. T he reduction in investm ent-tax-credit
carryovers is phased in w ith th e corporate-rate reduction.
The 35% reduction is fully effective for taxable years b e ­
ginning on or after July 1, 1987. Taxpayers having a taxable
year th at straddles July 1, 1987, will be subject to a partial
reduction th at reflects the reduction for the portion of their
year after that date. F or exam ple, for a calendar year
MID-CONTINENT BANKER for November, 1986

taxable year, th e reduction for 1987 is 17.5%.

Limitation on the Use of Cash Basis of Accounting

Corporate Alternative Minimum Tax

The agreem ent w ould req u ire all cash-basis corpora­
tions to switch to th e accrual basis of accounting if, for all
prior taxable years beginning after D ecem ber 31, 1985,
such corporation has average annual gross receipts for the
three-taxable-year period ending w ith such prior taxable
period g reater than $5,000,000. The change will be re ­
quired for tax years beginning after D ecem ber 31, 1986.
The am ount of the adjustm ent w ould be spread over a
period not to exceed four years.

F or taxable years beginning after D ecem b er 31, 1986,
the agreem en t repeals th e p re se n t add-on m inim um tax
for corporations and replaces it w ith a new alternative
m inim um tax. The alternative m inim um tax rate will be
20% of alternative m inim um taxable incom e that exceeds
$40,000. T he $40,000 exem ption will be redu ced by 25%
of the am ount by w hich alternative m inim um taxable in ­
com e exceeds $150,000. A lternative m inim um taxable in­
com e will be com puted by adding certain tax-preference
item s for th e year to regular taxable incom e. P reference
item s applicable to banks generally will be th e same as
those used in com puting c u rre n t add-on m inim um tax,
w ith the addition of the “business untaxed rep o rted prof­
its” preferen ce item .
The business untaxed rep o rted profits is equal to onehalf of th e excess of pre-tax book incom e of th e bank over
its alternative m inim um taxable incom e before this pref­
erence is taken into account. F o r exam ple, a bank with
pretax book incom e of $1,000,000 consisting of $800,000
of m unicipal incom e and no o th er book/tax differences and
preferen ce item s w ould have a regular tax liability of
$61,250, b u t u n d e r th e alternative m inim um tax would
have a total tax liability of $120,000, as follows:

Taxable income
Tax preference items:
Business untaxed reported profits
1/2 (1,000,000-200,000)
Alternative Minimum Taxable Income
Alternative Tax (at 20%)

$ 200,000
400,000
$600,000
$ 120,000

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Mergers and Acquisitions
The agreem ent repeals th e G eneral U tilities D octrine,
which generally allowed non-recognition of gain at the
corporate level in liquidation. This doctrine also allowed
corporate acquirors of stock to elect to treat the purchase
of stock as a purchase of assets. In these situations, o th ­
erwise non-deductible prem ium s could be assigned to as­
sets such as fixed assets, m arketable securities, etc., that
w ould produce a tax benefit. W ith the repeal of the G en­
eral U tilities D octrine, gain generally will be triggered on
the step-up in basis of th e assets. T herefore, except in
unusual situations, th e election to step-up basis in assets
on a stock acquisition will not be favorable. Such a stepup w ould req u ire th e paym ent of tax on gain today for
future tax deductions, the opposite of good tax planning.
C ertain exceptions for non-recognition are provided and
transitional rules may apply to certain liquidations and
stock acquisitions.

New Operating Loss Carrybacks and
Carryforwards
U nder cu rren t law, banks are p erm itted to carry losses

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MID-CONTINENT BANKER for November, 1986

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

Circle 9 on Reader Response Card

37

back against taxable incom e from th e prior 10 taxable years
and over to the succeeding five taxable years. The agree­
m ent treats banks u n d e r the same operating loss provisions
applicable to o th er corporations (i.e., carrybacks will be
perm itted to th e p rior th re e taxable years and carryovers
to the succeeding 15 taxable years). T hese provisions will
be effective for losses in cu rred in taxable years beginning
after D ecem b er 31, 1986. C om m ercial banks will be al­
lowed a 10-year carryback for th e portion of a n et operating
loss attributable to deductions for b ad-d eb t losses incurred
in tax years through 1993.

Loan-Loss Deductions/Recovery of Existing
Reserve for Loan Losses
U n d er p re se n t law, banks are allowed a deduction to
provide a reasonable addition to th e reserve for losses
com puted u n d e r th e experience m ethod or th e percentage-of-eligible-loans m ethod. The com m ittee believes that
deductions u n d e r th e reserve m ethods allow deductions
for losses th at may or may not occur. T herefore, th e agree­
m ent provides that for large banks (average assets of bank
or controlled group in excess of $500 million) the reserve
m ethod of accounting for bad debts generally should be
repealed, allowing b ad -d eb t losses to be deductible only
as loans are charged-off. The agreem en t retains present
law regarding th e use of reserves in com puting the d e ­
duction for losses on bad debts for small banks (average
assets less than $500 million). The tax-reserve account
would have to be recap tu red as incom e over a four-year
period for large banks. The recap tu re rules do not apply
to sm aller banks or to tro u b led banks (non-perform ing
assets exceed 75% of capital).

Interest on Debt Used to Purchase or Carry TaxExempt Obligations
U nder p re se n t law, in terest expense on indebtedness
incurred or continued to purchase or carry tax-exem pt
obligations p urchased prior to January f, Î983, is fully
deductible, w hile 20% of such in terest expense allocable
to tax-exem pt obligations purchased after D ecem b er 31,
1982, is non-deductible. The conference agreem ent dis­
allows 100% of th e in terest expense d eem ed allocable to
tax-exem pt obligations acquired after A ugust 7, 1986, for
taxable years ending after D ecem b er 31, 1986. A special
exception was provided for governm ents and th eir sub­
ordinated entities th at issue less than $10 million in ob­
ligations in a year th at allows these sm all-issuer obligations
to rem ain u n d e r th e old 20% interest-disallow ance p ro ­
visions.

Fundamental Tax Principles Still Apply
Assum ing th at a b ank’s 1986 m arginal tax rate is 46%
and a m arginal tax rate of 40% (calendar-year banks) in
1987, deductions should be m axim ized in 1986 and income
should be d eferred into 1987. Cash-basis banks will have
considerable flexibility of tim ing of incom e and expense.
Any contem plated fixed-asset additions should be p u r­
chased prior to year-end. N ot only will th e bank be en ­
titled to depreciation in 1986, b u t a shorter recovery p e ­
riod will apply to pre-1987 additions. Should th e bank be
in an alternative-m inim um -tax position in 1987, accel­
erated depreciation on personal p ro p erty placed in service
after 1986 will becom e a preferen ce item in com puting
the new alternative m inim um tax.
Any investm en t-cred it or o th er business-credit car­
ryovers should be utilized in 1986 if possible. C red it car­
ryovers not utilized in 1986 will be red u ced by 17V2% to
35%.
38


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Federal Reserve Bank of St. Louis

Are Munis Still Alive?
Because of the 100% interest-expense disallowance, it
generally becom es unattractive to buy or sell grandfath­
ered securities (obligations originally purchased prior to
August 7, 1986). Sellers of grandfathered tax-exempts gen­
erally will suffer an econom ic loss as the securities will
yield less on an after-tax basis to the purchaser subject to
the 100% disallowance than to the seller (and subsequently
sell for less).
Purchases of new issues that qualify for the sm all-issuer
exception will rem ain u n d er the old 20% interest-expense
disallowance. After-tax yields on these securities still may
be beneficial.
A small benefit still may be derived on new tax-exempts.
Should the yield on a tax-exempt security exceed the bank’s
cost of funds, the spread in rates will be non-taxable. It
should be noted that w hen a bank’s cost of funds exceeds
the rate on a tax-exem pt security, the incom e effectively
will be taxed in excess of 100%.

Maximize Bad-Debt Deductions
For large banks (assets greater than $500 million), 1986
will be the last year for use of the reserve m ethod. As­
sum ing a 46% rate in 1986, all questionable loans should
be charged-off (within capital-and-earnings constraints) in
addition to maximizing the tax reserve for any bad-debtdeduction deferrals from prior years. The reserve then
will be recap tu red over four years at the lower marginal
rates.
Banks w ith assets less than $500 million will be allowed
an experience deduction w ith no recapture of their baddeb t reserve. H ow ever, the base year u n d er the experi­
ence m ethod will be 1987 for all banks, starting in 1988.
In view of this change, the bad-debt reserve should be
m aximized at th e end of 1987.

Generating Net Operating Losses
If a bank has built-in losses in its assets, consideration
should be given to disposing of these assets and generating
a n et operating loss to recover taxes at 46% in the previous
10 years. After 1986, losses (except those relating to bad
debts) will only be able to offset incom e in the previous
th ree years. In addition, w ith the new law in effect, gen­
erating a n et operating loss to recover taxes will be more
difficult.

Alternative Minimum Tax
C onsideration should be given to setting up and m on­
itoring budgets and taxable-incom e projections in 1987 so
as to avoid or at least m inim ize alternative m inim um tax
in light of the “business untaxed rep o rted profits” pref­
erence item .
U nder the new law, it will be necessary for banks to
review th eir business plans to ensure that resources con­
tinue to be allocated productively and at acceptable level
of risk. A sset-and-liability-m anagem ent policies should be
analyzed, as after-tax yields on investm ents will change.
Y ear-end planning for 1986 and budgeting for future years
should include consideration of tax reform , as the changes
may dram atically alter cash flow and incom e projections.
Your tax advisor should be consulted to analyze the
effects of tax reform of your institution. • •

Correction. The author’s name appearing with the ar­
ticle “ In Business For Business” on page 12 of the Oc­
tober issue was incorrect. It should have read “ By Ira
Nathanson, marketing director, Affiliated Banc Group,
Chicago.”
MID-CONTINENT BANKER for November, 1986

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ABA Convention Report

Banks Taking Bum Rap,
Says a Feisty Senterfitt
ABA p re sid e n t’s tough talk
indicative of greater d e ­
term ination and unity on
need for com petitive e q ­
uity
By John L. Cleveland
Editor/Associate Publisher
FEISTY D onald S enterfitt, o u t­
going ABA president, took to the
podium at last m o n th ’s annual con­
vention to lam ent th e “bum rap ” the
banking industry has taken for recen t
problem s and to pledge that th e ABA
will continue to work for com petitive
equity.
The determ ination Mr. Senterfitt
displayed in his rem arks at the start of
the convention was picked up by oth er
speakers as the convention continued.

A

“To the doom sayers of banking, I
have a m essage and I w ant them to
listen very carefully,” Mr. Senterfitt,
vice chairm an, SunT rust Banks, Inc.,
O rlando, Fla., said in his final speech
as ABA president. The banks of A m er­
ica are m ore than equal to the new
challenges facing them and will “m ain­
tain — nay, increase — our p reem i­
n en t position in th e financial w o rld .”
The banking industry has been the
target of criticism for th e rash of bank
failures, in sen sitiv ity to c u sto m e rs’
needs, alleged selfishness in the p u r­
suit of new products/services and selfserving legislation, Mr. Senterfitt said.
“Votes against us in C ongress and the
silent votes against us in the (Reagan)
adm inistration show that th e nation’s
banks are taking a beating for all the
w ro n g re a s o n s ,” h e em p h a siz e d .
“W e’ve got to turn things aro u n d ,” he

Former MCB Publisher Dies
J

A M E S J. W E N G E R T , fo rm e r p u b lis h e r of M i d -C o n t in e n t
Ba n k e r , died in C edar Rapids, la., on O ctober 20 at the age of

86 .

Mr. W en g ert re tire d as pub lish er of MlDC o n tin en t Banker in 1967 after having been
associated w ith th e magazine for m ore than
42 years. H e was succeeded by th e late H ar­
old R. C olbert, who in tu rn was succeeded
by Ralph B. Cox. Mr. Cox retired as p u b ­
lisher of M id -C o n t in e n t Banker in July,
1985.
At th e tim e of his retirem en t, Mr. W en g ert
also was chairm an/C E O of C om m erce P u b ­
lishing C o., th e firm w hich publishes MlDC o n t in e n t B anker and four o th er trade
magazines: Life Insurance Selling, American
Agent and Broker, Club Management and Decor.
M id -C o n t in e n t B a n k er , founded in 1904 and purchased by D on­
ald H. Clark in 1923, was th e first of the C om m erce Publishing Co.
magazines. In 1925, M essrs. Clark and W engert founded Life Insur­
ance Selling, a publication devoted to sales and m arketing ideas in the
life insurance business. In 1929, M essrs. Clark and W engert — along
w ith H arold C olbert, who had joined th e firm in that year — founded
a publication for th e property-and-casualty insurance field called The
Local Agent, a magazine th at later was retitled American Agent and

Broker.
40

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Federal Reserve Bank of St. Louis

said, and then added a refrain that
would be heard several tim es during
his speech, “and we can .”
ABA’s solutions to the problem s in
the financial industry too often are
view ed as anti-consum er, according to
Mr. Senterfitt. “To make the ABA the
most respected, m ost listened-to ex­
p e r t on fin an cial-co m m u n ity d e ­
regulation, let’s talk directly about what
our proposals will bring to the con­
su m er,” he said.
Mr. S enterfitt pointed out that he
has asked the Reagan adm inistration
to becom e m ore involved in the d e ­
velopm ent of a new, forward-looking
national policy on banking.
“Today, I rep eat that call to the
President and his adm inistration,” said
Mr. Senterfitt. “I rem ind them that
th e last tim e b an k in g policy was
brought into alignm ent w ith national
policy was 50 years ago. That policy is
in tatters today — a haphazard patchwork of rules, loopholes and com pro­
mises prevents banks from fully serving
the national and public in te re st.”
In o rder for C ongress and the Rea­
gan adm inistration to take the banking
industry’s policy proposals m ore seri­
ously, how ever, the industry will have
to stop “dissipating our efforts through
fragm ented initiatives,” according to
Mr. Senterfitt. M ore than banking
unity will be n eeded, he added.
“L et’s stop funding our enem ies in
Congress, the ones w ho dam n us with
faint praise and the ones who oppose
us op en ly ,” he said. L e t’s stop ignor­
ing our friends, even w hen we find
th e m in so m eo n e e ls e ’s sta te or
congressional district. I challenge our
W ashington staff to do m ore to identify
who our friends are and who our e n e ­
mies are — and to let us know .”
W hen bankers give political sup­
port, eith er individually or through
ABA’s BankPac, they are entitled to
support in retu rn , said Mr. Senterfitt.
“W e have got to draw out latent sen­
tim ent in the S entate and H ouse of
R epresentatives for the very things
bankers w ant for th e ir cu stom ers,” he
said. “That will take some skill, b u t we
can do it.”

MID-CONTINENT BANKER for November, 1 9 8 6

Robert L. Clarke, Com ptroller of the
C urrency, d id n ’t show th e tough-asnails determ in atio n Mr. S enterfitt ex­
uded in his presentation, but he echoed
M r. S e n te rfitt’s “b a n k e rs-c a n -d o -it”
them e.
“You can e ith e r shape your destiny
or you can allow it to be shaped for
you by failing to resp o n d to th e e m erg ­
ing reality of th e global financial m ar­
k e tp la c e ,” said M r. C lark e. C itin g
G eneral M otors A cceptance C o rp .’s
sale of $4 billion in securities backed
by auto loans and th e deregulation of
the financial m arkets in L ondon (the
so-called “big b ang” w hich took place
the w eek of th e ABA convention) as
evidence of th e tre n d tow ard globali­
zation of financial m arkets, Mr. Clarke
noted that th e effects of that tre n d will
not show up w ith a great deal of fan­
fare. R ather, th e effects of in te rn a ­
tionalization will “trickle down into
your b re a d -a n d -b u tter m ark ets,” he
said.
“My concern — as a public official
charged w ith m aintaining th e safety
and soundness of th e A m erican bank­
ing system — is to ensu re that our
banking stru ctu re enhances the in te r­
national competitiveness of U. S. banks
in the global a re n a ,” said Mr. Clarke.
“My concern is to en su re th at our

banking stru ctu re is eq u ip p ed to m eet
the co m p etition.”
Mr. C larke said that he is concerned
that only one U. S. bank is am ong the
w orld’s 10 largest and that a Japanese
bank can propose to becom e a p artn er
in an A m erican securities firm while
American banks are limited in the types
of securities activities they can engage
in.
“I am concerned that our banking
system is not eq u ip p ed to beat the
com petition w hen an Am erican bank
can do things in London or Tokyo that
it is p ro h ibited from doing in the
U nited S tates,” he said.

P resent banking law in the U. S.
w eakens th e banking system , said Mr.
Clarke. “F or Am erican banking to be
p re s e rv e d , th e s e laws m u st be
ch an g ed .”
“In light of the global co m p etition,”
he continued, “we m ust ask ourselves:
what kind of financial stru ctu re do we
need? W e m ust ask: W hat kind of reg­
ulatory structure do we need? W e must
ask: Is th ere a place in the financial
structure for institutions that are spec­
ialized by law — especially if these
institutions are favored in governm ent
policy?”
Incom ing P resident M ark W. Ol-

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MID-CONTINENT BANKER for November, 1986

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Federal Reserve Bank of St. Louis

Phone.
VISA or MASTERCARD #_

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Signature________________

Circle 20 on Reader Response Card

41

son, p resid en t, Security State, Fergus
Falls, M inn., said th e banking indus­
try m ust build on its strengths w hich
com e from th e d iv e rs ity an d g e o ­
graphic distribution of financial insti­
tutions.
“To this day, th e U. S. banking sys­
tem rem ains a system characterized by
th a t p h e n o m e n o n o f d e c e n tra liz a ­
tio n ,” he said. “Take any o th er country
and th e d is tin c tio n is im m e d ia te ly
clear. France has a little over 400
banks. G erm any has about 240; C an­
ada 10; Japan roughly 85; th e U nited
Kingdom 290.”
W ith 14,300 banks and thousands of
branches, banks have becom e th e cus­
todians of th e nation’s paym ents sys­
tem and th e p re m ie r providers of its
capital needs, said Mr. Olson. In ad ­
dition, banks have com e to participate
actively in the econom ic health and
welfare of the communities they serve.
“I believe we can say in confidence
that no industry in this country has
m atched — and no ind u stry can m atch
— the com m itm ent of hum an and fi­
nancial resources th at th e banking in­
dustry has m ade to the economic health
and th e civic w ell-being of th e 55,000
U. S. com m unities th at banks se rv e ,”
according to Mr. Olson. “I only wish
the future could hold such p ro m ise.”
C om m unity banks are not im m une
to the com petitive inequities th at exist
for banks, Mr. Olson said.
“All of us re m em b er th e days w hen

Perspective

we could beat the auto industry’s af­
filiates in making new car loans,’ he
continued. “F o u r or five years ago
when those affiliates began using lower
rates to stim ulate sales, the m arket
d ried up for m any of us. W e expected
it would come back, b u t w ith the prac­
tice of packaging car loans for later sale
as securities — som ething banks can’t
do — we may nev er have access to
that m arket again.”
In addition to Mr. Olson, o th er ABA
officers elected and inducted at the
c o n v e n tio n w ere: C h a rle s P isto r,
chairm an/C E O , RepublicBank, D al­
las, new president-elect, and Thomas
P. Rideout, senior vice president/dire c to r-g o v e rn m e n ta l affairs, F irs t
U nion C orp., C harlotte, N. C ., re ­
turning for a second term as treasurer.

Securitization

12 of w hich are active, according to
the SBA. In fiscal 1986 (the first year
of th e SBA pooling program ), a total
of $321 million of the $1.9 billion in
SBA loans o u tsta n d in g have b e e n
pooled.
A lthough the SBA is guaranteed
funding through fiscal 1987- 88, the
agency could com e u n d er pressure to
cut back or dissolve as it did earlier
this year, Mr. Pipp concedes, yet he
doubts that investors holding SBA loanpool certificates w ould be adversely af­
fected even if the SBA w ere dissolved.

(Continued)

petition probably will force banks to becom e m ore ag­
gressive in pooling loans and selling them off in the form
of securities. A federal agency sim ilar to Fannie Mae could
arise to assist in pooling th e assets of ag banks and en ­
hancing them for resale. M oney-center and regional banks
will continue to explore m eans of pooling th e ir own assets
and those of their respondents for resale. Investm ent banks
such as F irst Boston and Salomon B rothers will continue
to pro sp er as u n d erw riters of these new securities. E v en ­
tually, th e m o ney-center and regional banks may find ways
around th e regulations to becom e m ore active as u n d e r­
w riters of d e b t securities.
eyond this, not m uch is certain. W ho can say what
new types of d e b t instrum ents will em erge from the
maw of th e huge securities-creation m echanism that
b een set in m otion? T he m ortgage-backed securities m ar­
ket hardly has rem ained stagnant since it took off in the
early 1970s. If you w ere ju st getting com fortable w ith the
concept of th e C M O — a m arket that has grown to $70
billion in th e less than four years since th e ir introduction
— p rep are yourself for the RE M IC (real estate m ortgage
investm ent conduit) com ing your way January 1 courtesy
of th e new tax-reform package P resid en t Reagan signed
into law late last m onth.
In addition to th e im plications for the nation’s economy,
the F ed eral R eserve’s ability to control th e m oney supply

B

42


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Federal Reserve Bank of St. Louis

(co n t.)

G uarantees on existing loans would
have to be grandfathered and, while
th ere m ight be decline in liquidity for
such s e c u ritie s , in v e sto rs p o ssib ly
would be com pensated by an ap p re­
ciation in th e scarcity value of secu­
rities backed by SBA loans, he says.

Mortgage-Back Securities
W h ile financial in stitu tio n s c o n ­
tinue to experim ent w ith securities
backed by new types oi assets, the
mortgage-backed securities market has
hardly been static. For example, Roger
F. M cM ahon, executive vice p resi­
dent, Securities Trading Systems, Inc./
RMJ Securities, Inc., New York, es­
tim ates that th e m arket in CM Os has
grown from approxim ately $4 billion
in 1983 — the year CM Os w ere in­
troduced — to m ore than $70 billion
this year.
Investors d id n ’t quite know w hat to
make of CM Os at the tim e of the first
F ederal H om e Loan M ortgage C orp.,
private placem ent on June 7, 1983, Air.
M cM ahon says. U ltim ately, investors
came to appreciate the call-protection
features of th e CM O s, and this year
the m arket has exploded, he says. H e
expects the m arket for o th er new as­
set-backed securities to follow a sim ­
ilar p attern — introduction followed
by a period of slow grow th as investors
gain experience w ith them and th en a
period of rapid grow th once the new
securities have b een accepted. • •

and the o th er questions raised in Air. Bryan’s article, a
host of bank-m anagem ent issues are related to securiti­
zation. A com plete rethinking of the principles of asset/
liability m anagem ent would seem ingly be in o rder in a
w orld in w hich banks book loans prim arily for resale by
another entity. Can depository institutions squeeze enough
profits out of transaction and servicing fees to rem ain vi­
able in a world in w hich they act m erely as brokers? By
w hat standards do financial institutions judge the new debt
securities from an investm ent perspective? Is the banking
industry’s investm ent in brick and m ortar really the waste
the investm ent banker quoted earlier suggests? After all,
som eone has to produce the raw m aterial from which debt
securities are forged, and it’s difficult to believe that all
borrow ing will be done electronically in the future.
These are some of th e questions related to securitization
that the banking industry is ju st beginning to grapple with.
Dr. G erald Fischer, RMA consultant currently engaged
hasin securitization research, says that answers to some of these
questions should begin to em erge from the ABA/RMA/
M cKinsey studies w ithin the next year. Voluntary guide­
lines bankers can follow in packaging assets for resale and
judging the credit quality of new debt security issues should
be ready by early 1987 w ith a com prehensive report on
securitization due later in the year.
For the banking industry, those answers can’t come too
soon.

— John L. Cleveland
Editor/Associate Publisher
MID-CONTINENT BANKER for November, 1986

Ag-Bank Marketing
A good marketing program
is one of the best tools to
avoid farm loan problems
By David R. Breeze
PPO R T U N IT IE S exist for new
ag business today. In fact, op­
portunities have nev er b een g reater
since my farm -credit experience b e ­
gan 20 years ago!
It’s no secret th at ag banks m ust
m aintain quality portfolios in this dif­
ficult econom ic transition period. To
do this, they m ust have adequate loan
supervision. But th ey also m ust have
m arketing program s that enable bank­
ers to counsel and guide farm ers who
will not survive off th e farm as well as
serve to rep len ish th e bank’s loan p o rt­
folio w ith high-quality new business.
These new loans can be obtained
through an active calling program that
takes th e ban k er to th e farm er’s place
of business.
Because m y $ 120-m illion-asset bank
has developed an aggressive m ark et­
ing posture th at seeks th e b est loans,
it is able to serve agriculture and m ain­
tain top earning assets. In th e past 10
m onths, m y bank has added 18 quality
farm custom ers to its portfolio of 320
farm custom ers. U nfortunately, that
n u m b er rep resen ts less than o ne-third
of th e applicants for such loans.
A so u n d m a rk e tin g p ro g ra m r e ­
quires devotion of tim e to business d e ­
velopm ent and creation of a selling e n ­
v iro n m e n t on th e p a rt o f b an k
em ployees. Such a program breaks
tradition since it d oesn’t consider w ait­
ing for custom ers to com e to th e bank.
Those days are gone forever. The only
business com ing in th e b ank’s front
door today is th e business nobody
wants.
The m odern bank m ust perform
b e tte r than any o th er financial in sti­
tution does.
Tools of a professional ag le n d e r in ­
clude th e following: double-colum n

balance sheets, projected profit-andloss statem ents, cash flows, tren d anal­
yses, farm -business-structure analyses
w ith inform ation provided on m icro­
com puters, partial budgets and strong
loan supervision coupled w ith on-thefarm cred it counseling.
L enders m ust encourage farm cus­
tom ers to do b e tte r at financial plan­
ning. T hey m ust be good listeners and
work in p artn ersh ip w ith custom ers in
an effort to help them achieve their
financial goals.
F arm ers som etim es have to be sold
on th e m erits of scaling down th eir
operation, a task that requires a great
deal of skill. Since 1980, 39 of our farm
custom ers have sold m ore than 5,000
acres of land to outside investors or
neighbors. This action has kept them
from e x p e rie n c in g serio u s financial
trouble today.
O u r o b je c tiv e sh o u ld b e to b e

professional lenders, not ju st note tak­
ers or collateral lenders. I like to think
of m yself as a profitability len d er and
my goal is to extend sound credit in
the best interests of my bank’s farm
custom ers.
Good m arketing involves attitudes.
Selling requires an aptitude as well as
an attitude. I try to em phasize the con­
sultive-selling approach, w hich d e te r­
m ines the m ost effective way to m eet
the prospective custom er’s needs. I
consider m yself to be a problem solver
in the people business.
M arketing actually may be the real
key to credit quality — as a solution
to loan problem s, not th eir cause. But
it takes disciplined m arketing to avoid
the pitfalls of w hat is considered m ar­
k e tin g by th o se w ho are n o t ac­
quainted w ith m arketing skills. Good
m arketing dem ands a high degree of
professionalism, thorough research and

This announcement appears as a matter of record only

Mr. Breeze is vice president/ag lending
at First Trust & Savings Bank, Taylorville,
III.
MID-CONTINENT BANKER for November, 1986

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

Firstbank of Illinois Co.
Springfield, Illinois
has announced its intention to acquire

Elliott Bancorp, Inc.
Jacksonville, Illinois
The undersigned acted as financial advisor to
Firstbank of Illinois Co.

Sheshunoff
Sheshunoff & Company, Inc.
Austin, Texas
Circle 31 on Reader Response Card

43

analysis. M arketing is a strategic re ­
sponse to th e bank’s m ission and ob­
jectives, and, as such, is com patible
with each. I t’s a lack of an effective
m arketing discipline th at has resulted
in problem loans, charge-offs and bank
failures.
The ideal bank-custom er relation­
ship is one in w hich the custom er d e ­
pends on th e banker. W hen I speak of
building relationships, 1 m ean finding
ways as m arketers to increase this re ­
liance. I w ant my custom er to do all
his business w ith m y bank. I w ant my
custom er to tu rn to m e first w hen he
has a financial question or need. I w ant
my custom er to use my b ank’s services
to th e exclusion of those of its com ­
petitors. I w ant m y custom er to con­
sult w ith m e on a financial decision
before he buys a com bine or a tract of
land.
It takes prospect calling to build
business. T h e re ’s no substitu te for it.
W hen calling on prospects, d o n ’t sell
interest rates, sell service and th en d e ­
liver it.
Ask th ese questions w hen evaluat­
ing sales efforts: “H ow well sold was
the custom er?” “W hy did th e cus­
tom er com e to m y bank?” The loan
com m ittee is especially in terested in
answ ers to th ese questions.

The farm d ep artm en t at my bank
develops a top-50 prospect list that is
u p dated every six m onths. The entire
staff concentrates on suggesting farm ­
ers for this list. One way we reach these
prospects is through our existing cus­
tom ers. W e harness some of our key
custom ers to help build business for
th e bank, som ew hat in the way the
Farm C red it System uses its advisory
com m ittee to bring in new business.
I use the telephone to make ap­
pointm ents w ith prospects. Part of our
prospect file is a diary that provides
th e inform ation we need about pros­

our custom ers know we care by taking
an in terest in th eir operations, re ­
m em bering them on anniversaries and
sending thank-you notes after calling
on them . W e also keep in m ind the
question: “W hat does this farm er want
from my bank?”
W hat he wants is security and sur­
vival. A banker can’t offer these qual­
ities convincingly if he doesn’t know
his financial institution. Keep a list of
services the bank offers and refer to it
w hen discussing a farm er’s situation.
The tru e m easure of leadership at
any level of business activity is the ca­

If bankers study and listen to their customers’
needs, they can become better salesmen and will
appreciate their work and themselves better.
pects. Selling aides include brochures,
business cards and lim ited new spaper
advertising.
An ag representative who uses fewer
than 150 business cards a year isn’t
calling on enough people.
F arm ers — like everyone — like to
do business w ith people who act as
though they care about them . W e let

D irectly o n the G u lf at

M A R C O IS L A N D
F L O R ID A

pacity of the banker to be sensitive and
understanding of the basic needs of
farmers. E stablishm ent of this u n d e r­
standing is a rew arding hum an expe­
rience and it bears fruit.
B ankers’ efforts to guide th eir cus­
tomers through troubled times will test
one’s abilities to rem ain at the farm er’s
side through good and bad tim es.
Bankers m ust be as flexible, innova­
tive and courageous as th eir farm cus­
tom ers for, in the end, the test is ours,
too! • •
• Two former m id-continent-area
bankers have joined the senior-advisor
group of G olem be Associates, Inc.,
W ashington, D. C. T hey are Jam es E.

LUXURY BEACHFRONT VILLAS
BROW N

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• Private screened balcony with view of
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(just 30 miles south of Naples)
44


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Federal Reserve Bank of St. Louis

KENNEDY

Brown, form er p resid en t, M ercantile
Trust, St. Louis, and W illiam H. K en­
nedy Jr., form er chairm an/C E O , Na­
tional Bank of C om m erce, Pine Bluff,
Ark. They serve as advisors to senior
m anagem ent at G olem be.
• James D. Rode has b een elected
chairm an of th e C onsum er Bankers
Association. H e is presiden t, AmeriT rust Co., Cleveland. Among board
m em bers elected are W illiam C. N el­
son, e x e c u tiv e vice p re s id e n t,
In terF irst Bank Dallas, and Jack H.
Shipm an, executive vice president,
Liberty National, Louisville.

MID-CONTINENT BANKER for November, 1986

Knowing Your Regulators
Statements of regulators
and attorneys defending
banks against regulatory
actions provide contrast­
ing views of regulator in­
tent
By Jim Fabian
Senior Editor

E D E R A L re g u la to rs a re c o n ­
cern ed th at banks are m aking lim ­
ited use of FASB-15, that trou b led
banks are not m aintaining adequate
loan-loss reserves and th at they are not
pleased w hen they “discover” a bank’s
problem s ra th e r than be inform ed about
them prior to an exam ination.
A panel of regulators discussed th eir
concerns at th e re c e n t annual conven­
tion of th e Iowa Bankers Association
in D es M oines. R epresentatives of
federal regulators included Charles
T h a c k e r, re g io n a l d ire c to r, F D IC ,
Kansas City; R obert Klinzing, d eputy
com ptroller, Office of C om ptroller of
the C urrency; and Jam es M orrison,
senior vice p resid en t, Chicago Fed.
Also on th e panel was W illiam Bernau,
Iowa’s su p e rin te n d e n t of banking.
Mr. Thacker said bankers d o n ’t u n ­
derstand FASB-15 and they think it
w on’t help farm ers w ith th e ir d eb t
problem s. O n th e o th e r hand, he said
many bankers are perform ing in terest
re s tru c tu r in g , a lth o u g h n o t u sin g
FASB-15 guidelines. The F D IC is
hoping that FASB-15 will be used more
in the future.
Mr. Thacker also told bankers that
capital-forbearance participations are
significantly small and m ost banks ap­
plying are those th at d o n ’t qualify due
to technical insolvency. H e rem in d ed
his audience th at th e program is d e ­
signed for ag banks th at can work out
th eir problem s over tim e. An informal
corrective program th at req u ires cap­
ital m aintenance is being used instead
of capital forbearance in som e cases,
he said. This program serves as a type
of capital forbearance. H e stressed that
capital forbearance isn’t window dress­
ing and it is being granted to qualified
applicants.

F

H e said that failure of troubled banks
to m a in ta in a d e q u a te loan-loss r e ­
serves is a “serious m anagem ent d e ­
ficiency” w hen capital forbearance is
available. Banks not m aintaining ad­
equate loan-loss reserves usually don’t
have w atch system s to help them es­
tablish p ro p er loan-loss reserves.
The typical problem bank has a
m o d e ra te v o lu m e of serio u s w eak ­
nesses, he said, and these weaknesses
usually a re n ’t being addressed in a sat­
isfactory m anner by bank m anage­

m ents. T hese banks have excessive
volum es of classified assets and d e­
clining earnings and th eir oversight
policies are ineffective. These banks
are given Cam el ratings of four or five.
H e a d m itte d th a t th e ex a m in e r
shortage is rife in the Kansas City re ­
gion. Some 45% of problem banks on
the F D IC ’s list haven’t been exam ined
in the last 12 m onths. A bout one-third
of the exam ining force has b een on the
job less than 18 m onths. O ne bright
spot: The agency is hiring what it terms

Panelists representing regulators at "Know Your Regulator" session at Iowa Bankers
Association convention included (from I.) W illiam Bernau, Iowa banking supervisor;
Charles Thacker, FDIC; Robert Klinzing, Comptroller of the Currency; and James Morrison,
Chicago Fed.

MID-CONTINENT BANKER for November, 1986

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

EXPERTS
IN B A N K
NEGOTIATIONS
AND SA LE S
Have you just received an unsolicited tender
oiler or bid for your bank3 Are you contemplat­
ing sale oi your bank ? If you are, Douglas
Austin & Associates is specialized to assist you
in obtaining the "best"price and the appropriate
terms for you and your shareholders. Call us.

(419) 841-8521

DAA

DOUGLAS
AUSTIN AND
ASSOCIATES, INC.

Suite 2, 3178 Republic Blvd. North • Toledo, Ohio 43615
Chicago •Lansing

Circle 4 on Reader Response Card

45

the “cream of the cro p ” of recen t col­
lege graduates, m any of whom have ag
bankgrounds.
Mr. Klinzing of th e C om ptroller’s
office declared that his agency wants
to help bankers, not p u t them out of
business. But it doesn t help w hen the
agency discovers a b ank’s problem s. It
would p refer to be told about these
problem s in advance of exam inations.
The goal of a m em o of u n d e rsta n d ­
ing is to try to identify a problem and
reach an ag reem en t to solve it. Reg­
ulators w ant to be assured th at banks
have form ulated plans to m anage th eir
problem s. They consider such plans as
road maps th at lead to solutions and
solvency.
Mr. Klinzing advised bankers not to
get h ung up on m atters of form; rather,
they should deal w ith m atters of su b ­
stance. H e added th at his re p re se n ­
tatives are willing to discuss and even
change th e w ording of m em os ol u n ­
derstanding. H e decried th e dispro­
portionate n u m b er of argum ents over
m atters of form. O ften bankers have
an attorney re p re se n t them and the
attorney tu rn s a discussion into a con­
frontation. W hy pay a high-priced a t­
torney to get concessions for the bank
that could have b een obtained at no
cost th ro u g h d isc u ssio n s b e tw e e n
banker and regulator, he asked.
Mr. Klinzing’s final recom m enda­
tion about attorneys was addressed the

The Comptroller and the
FDIC have no legal au­
thority to force a bank to
charge off any loans. This
situation gives the agen­
cies problems of enforce­
m ent_________________
next day at an o th er special-interest
sem inar — one featuring an attorney
from M inneapolis. The title of the ses­
sion was “C ontrolling Your Regulator
W hen Push Com es to Shove.
M ary C u rta in w ith L in d q u is t &
V ennum , M inneapolis, stressed the
im portance of knowing w hen a bank
needs assistance in the face of regu­
latory action.
She explained that a m em o ol u n ­
derstanding is not legally enforceable,
b u t that a w ritten ag reem ent is quasi
enforceable. A violation of the latter
can resu lt in a cease and desist order
and violation is sim ilar to a breach ol
contract.
She strongly advised bankers not to
sign a cease and desist o rd er before its
contents are understood. She added
that bankers should not sign a capital
provision in a cease and desist order
unless it places a specific capital re ­
q u irem en t on the bank, such as 7%,
including loan-loss reserves.

Bankers, Regulators Consider
Interstate-Banking’s Effects
A N K IN G regulators gave differ­
ing predictions as to the land­
scape of banking five years from now
at the annual bank sem inar of Peat
M arwick’s St. Louis office, held re ­
cently.
“ P ractically n atio n w id e in te rs ta te
banking” was p red icted by D elm er D.
W eisz, vice p resid en t of th e F ederal
Reserve Bank of St. Louis.
Similarly, Jam es D. M artin, Illinois
D ep u ty C om m issioner of Banks and
T rust C om panies, expects “probably
another attem p t to a national trigger
in Springfield” w ithin the next five
years.
On th e o th er hand, Thom as B. F itz­
simm ons, M issouri C om m issioner of
Finance, does not expect nationw ide
banking quite th at fast. Congress is
leaving th e question of nationw ide
banking to th e states and the presently
em erging banking regions may not be
ready for nationw ide banking in five
years.
The effects of in terstate banking p ri­
marily will be seen in th e m ajor urban

B

46


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

areas, said Mr. Fitzsim m ons. “I don’t
think we re going to bring capital into
the rural areas. The bigger players want
to play in the areas th e y ’re m ost fa­
miliar with and that’s the m etro areas.”
M ost bankers at th e sem inar w ere
not w orried about the future effects of
in terstate banking. A survey question
asked th e 200 attendees, “How do you
view the im pact of regional interstate
banking on your bank?” The responses
w ere 45% positive, 17% negative and
38% neutral.
A few years ago, the negative re ­
sponse was m uch higher, according to
J. Alan H arkness, p artn er in charge of
th e St. Louis office of Peat Marwick.
In addition, 77% of the attendees
rep o rted that they expect m oney-cen­
te r banks to have a significant influ­
e n c e in th e M isso u ri-Illin o is-K e n tu ck y b a n k in g m a rk e ts w ith in five
years.
A bout half of the bankers w ere from
Illinois and half from M issouri, and
80% w ere from banks of less than $200
million in assets. • •

In the area of bank m anagem ent,
Ms. C urtin said the F D IC wants to
rem ove incom petents even though it
has no legal authority to do so w ithout
taking an involved series of steps. She
said the F D IC will ask a bank to give
the agency the right to rem ove indivi duals in m a n a g e m e n t p o sitio n s.
N ever sign such a docum ent, she ad­
vised, because doing so rem oves lia­
bility from the F D IC . Such provisions
have b een litigated four tim es, with
the agency losing each tim e, she said.
Yet the agency continues to use this
practice in an attem p t to find out il
bankers involved know such a practice
can’t be used!
“The F D IC s authority consists of
that which th e banker gives it,” Ms.
C urtain said.
A problem national banks have with
the C om ptroller is that the C om p­
troller wants banks to act on prelim i­
nary reports rath er than the final re ­
port. The final report could be different
from th e prelim inary report, she said,
because it reflects review from head ­
quarters w hile th e prelim inary report
contains only the exam iner’s views.
The Com ptroller and the FD IC have
no legal authority to force a bank to
ch arg e off any loans, Ms. C u rta in
claimed. This situation gives the agen­
cies problem s of enforcem ent.
The C om ptroller uses call reports to
d eterm in e if an on-site exam ination is
necessary. Thus, she said, the practice
is only as good as th e inform ation sub­
m itted on call reports. And call reports
are req u ired to reflect m anagem ent’s
assessment of the bank’s condition, not
regulator’s assessm ents.
T he C o m p tro lle r’s office d o e s n ’t
want banks to question the views of its
exam iners, Ms.. C urtain said. She ad­
vised bankers not to change the call
rep o rt if th e bank receives a prelim i­
nary classification ju st before the call
report is subm itted to the C om ptrol­
ler. “Say you d idn’t receive it before
the rep o rt w ent o u t,” she advised.
Changing the rep o rt to conform to the
exam iner’s prelim inary classification
would indicate that the report reflects
the exam iner’s views, not bank m an­
agem ent’s.
If m anagem ent feels an exam iner is
w rong in his classifications, m anage­
m ent should confront the exam iner
w ith the facts, Ms. C urtain said. She
gave an illustration of a bank that w ent
from 75% classified loans to 250% in a
period of six m onths. The huge change
reflected th e views of a new examiner.
Should a bank decide to litigate
against its regulator, it shouldn’t do it
on a basis of principle, she said. “Do
it only if th e cost of litigation is less
than the cost of not litigating. ” • •

MID-CONTINENT BANKER for November, 1986

D&O

Bank Credit-Management Practices
Need Updating, Says Consultant
R A D IT IO N A L c r e d it-m a n a g e ­
m en t practices no longer are valid
because th e y ’re not solving today’s
problem s, said S tephen W. Rich, sen ­
ior m anager, Peat Marwick, St. Louis,
at a recen t sem inar for bankers.
C o m p e titiv e facto rs are fo rcin g
banks to “down m ark et” th eir lending
efforts in o rd er to find the custom ers
they seek. This m eans they often m ust
lend to new industries in an expanding
geographical m arket. O ften these in­
dustries and m arkets are ones bankers
are not com fortable w ith because they
are unfam iliar, Mr. Rich said.
D eflation also is a factor because it
im pedes rep ay m en t ability of borrow ­
ers. This factor is a new experience to
many bankers w hose m ind-set has
b een keyed to continuing inflation.
Loan growth is rapid, he said, which
m eans banks are taking m ore risks.
These risks increasingly are showing
up in categories th o u g h t to have been
relatively risk free in th e past.
M ergers am ong banks are anoth er
factor calling for en ligh ten ed creditm a n a g e m e n t p o lic ie s. M e rg e rs are

T

S t a t e m e n t o f O w n e r s h i p , M a n a g e m e n t a n d C ir c u l a t i o n (R e ­
q u i r e d b y 3 9 U .S .C . 3 6 8 5 )
IA . T i t l e o f P u b li c a t i o n : M I D - C O N T I N E N T B A N K E R .
IB . P u b lic a tio n N o . 4 8 2 5 9 0 .
2. D a t e o f f ilin g : S e p t e m b e r 1 8 , 1 9 8 6 .
3. F r e q u e n c y o f is s u e : M o n t h ly .
3 A . N o . o f is s u e s p u b l i s h e d a n n u a l ly : 12.
3 B . A n n u a l s u b s c r i p t i o n p r i c e : $ 1 2 .0 0 .
4. C o m p l e t e m a i l i n g a d d r e s s o f k n o w n o ffic e o f p u b l ic a tio n :
4 0 8 O l i v e S t r e e t , S t. L o u i s , M O 6 3 1 0 2 .
5. C o m p l e t e m a i l i n g a d d r e s s o f t h e h e a d q u a r t e r s o f g e n e r a l
b u s i n e s s o ff ic e s o f t h e p u b l i s h e r s : 4 0 8 O liv e S t r e e t , S t. L o u is ,
M O 63102.
6 . F u ll n a m e s a n d c o m p l e t e m a i l i n g a d d r e s s e s o f p u b l i s h e r ,
e d i t o r a n d m a n a g in g e d i t o r : P u b l i s h e r : W e s le y H . C la r k , 4 0 8
O l i v e S t . , S t. L o u i s M O 6 3 1 0 2 ; E d i t o r : J o h n L. C le v e l a n d , 4 0 8
O l i v e S t . , S t. L o u is , M O 6 3 1 0 2 ; M a n a g in g E d i t o r : N o n e .
7.
O w n e r ( I f o w n e d b y a c o r p o r a t i o n , its n a m e a n d a d d r e s s
m u s t b e s t a t e d a n d a ls o i m m e d i a t e l y t h e r e u n d e r t h e n a m e s a n d
a d d r e s s e s o f s to c k h o ld e r s o w n in g o r h o ld in g 1 p e r c e n t o r m o re
o f t o t a l a m o u n t o f s to c k . I f n o t o w n e d b y a c o r p o r a t i o n , t h e
n a m e s a n d a d d r e s s e s o f t h e i n d i v i d u a l o w n e r s m u s t b e g iv e n .
I f o w n e d b y a p a r t n e r s h i p o r o t h e r u n i n c o r p o r a t e d firm , its n a m e
a n d a d d r e s s , a s w e ll a s t h a t o f e a c h i n d i v id u a l m u s t b e g iv e n .)
C o m m e r c e P u b l i s h i n g C o m p a n y , 4 0 8 O liv e S t., S t. L o u is , M O
6 3 1 0 2 ; W e s l e y H . C la r k , D o n a l d H u g h C la r k T r u s t , J a m e s T .
P o o r , L a w r e n c e W . C o l b e r t , D a v id A . B a e tz , W illia m M . H u m b e r g , B e r n a r d A . B e g g a n , a ll o f 4 0 8 O liv e S t. , S t. L o u is , M O
6 3 1 0 2 ; G r i n n e l l C o ll e g e , G r i n n e l l , I o w a .
8.
K n o w n b o n d h o ld e rs , m o rtg a g e e s, a n d o th e r s e c u rity h o ld ­
e r s o w n i n g o r h o l d i n g 1 p e r c e n t o r m o r e o f to ta l a m o u n t o f
b o n d s , m o rtg a g e s o r o t h e r s e c u ritie s : N o n e .
10 . E x t e n t a n d n a t u r e o f c i r c u l a t i o n . T h e a v e r a g e n u m b e r o f
c o p i e s e a c h i s s u e d u r i n g p r e c e d i n g 1 2 m o n t h s a r e : (A) T o ta l N o .
c o p i e s p r i n t e d ( N e t P r e s s R u n ) 1 1 ,0 9 0 (B) P a id c ir c u l a t i o n : 1.
S a le s t h r o u g h d e a l e r s a n d c a r r i e r s , s t r e e t v e n d o r s a n d c o u n t e r
s a le s 0. 2. M a il s u b s c r i p t i o n s 1 0 ,0 5 8 (C ) T o ta l p a i d c ir c u l a t i o n
(S u m o f 1 0 B 1 a n d 1 0 B 2 ) 1 0 ,0 5 8 ( D ) f r e e d i s t r i b u t i o n b y m a il,
c a r r ie r o r o t h e r m e a n s. S a m p le s , c o m p lim e n ta r y , a n d o t h e r fr e e
c o p i e s 5 9 0 (E ) T o t a l d i s t r i b u t i o n ( S u m o f C a n d D ) 1 0 ,6 4 8 (F )
C o p i e s n o t d i s t r i b u t e d 1. O f f ic e u s e , le f t- o v e r , u n a c c o u n t e d ,
s p o i l e d a f t e r p r i n t i n g 4 4 2 . 2. R e t u r n s f r o m n e w s a g e n t s 0 (G )
to t a l (s u m o f E , F I a n d 2 — s h o u l d e q u a l n e t p r e s s r u n s h o w n
in A ) 1 1 ,0 9 0 . A c tu a l n u m b e r o f c o p i e s o f s in g le i s s u e p u b l i s h e d
n e a r e s t t o f ilin g d a t e : (A ) T o t a l N o . c o p ie s p r i n t e d ( N e t P r e s s
R u n ) 1 1 ,3 5 0 (B ) P a i d c i r c u l a t i o n : 1. S a le s t h r o u g h d e a l e r s a n d
c a r r i e r s , s t r e e t v e n d o r s a n d c o u n t e r s a le s 0 . 2. M a il s u b s c r ip ­
ti o n s 1 0 ,4 7 0 (C ) T o t a l p a i d c i r c u l a t i o n (s u m o f 10 B 1 a n d 1 0 B 2 )
1 0 ,4 7 0 (D ) F r e e d i s t r i b u t i o n b y m a il, c a r r i e r o r o t h e r m e a n s .
S a m p l e s , c o m p l i m e n t a r y , a n d o t h e r f r e e c o p i e s 5 4 0 (E ) T o ta l
d i s t r i b u t i o n (s u m o f C a n d D ) 1 1 ,0 1 0 (F ) C o p ie s n o t d i s t r i b u t e d
1. O f fic e u s e , l e f t - o v e r , u n a c c o u n t e d , s p o i le d a f te r p r i n t i n g 3 4 0
2. R e t u r n s f r o m n e w s a g e n t s 0 (G ) T o ta l (S u m o f E , F I a n d 2
— s h o u l d e q u a l n e t p r e s s r u n s h o w n in A) 1 1 ,3 5 0 .
11 . I c e r t i f y t h a t t h e s t a t e m e n t s m a d e b y m e a b o v e a r e c o r r e c t
a n d c o m p le te .
W esley H. C lark, Publisher

(Continued)

deductibles w hen making application
for D& O, Dr. Austin says. Applica­
tions should indicate that the bank has
an effective risk-control policy that in­
clu d es a lo a n -re v ie w p ro g ram and
codes of conduct for directors and of­
ficers.
Most carriers issue one-year policies
now, rath er than the traditional threeyear policies, Dr. Austin says.
I t’s not unusual for a bank to have
its policy cancelled for one reason or
a n o th er, in clu d in g th e u n d e rw rite r
getting out of the D& O -coverage busi­
ness. I t’s im perative that a bank that
has its D& O coverage cancelled make
efforts to find another carrier, Dr.
Austin says.
C arriers are tig h te n in g qualifica­
tions for banks seeking D& O cover­
age, often m aking dem ands th at are
out of the ordinary, Dr. Austin says.
H e adds th a t b an k m a n a g e m e n ts
should realize they are not p erm itted
to give carriers copies of exam ination
reports or to allow carriers to inspect
the reports unless regulators specifi­
cally authorize such action. • •

likely to create unanticipated pro b ­
lems th at are not covered by existing
policies.
A lthough loan approval by com m it­
tee still is com m on, it is becom ing in­
creasingly d etrim ental to credit qual­
ity, M r. Rich said. Yet a m o re
unstructured approval process also can
be dangerous because of an increas­
ingly lack of staff “seasoning” created
by hig h er staff turnover.
The result is a vicious cycle caused
by shareholders and directors putting
pressure on m anagem ent for a higher
bottom line that cannot be achieved
because of an o u tdated credit-m an­
agem ent policy.

Strategic/Credit Planning Vital
Strategic and credit planning are
necessary for a solution to this situa­
tion, Mr. Rich said. Strategic planning
can set direction for the portfolio and
item ize risks to be taken. C red it plan­
ning can take into account risks and
grow th desired.
P o rtfo lio -a c q u isitio n policy m u st
take into consideration business-de­
velopm ent goals; p ro p er credit anal­
ysis; policies for stru ctu re and nego­
tia tio n ; loan ap p ro v al and d o c u ­
m entation; and booking, closing and
disbursem ent.
Portfolio m aintenance is vital to e n ­
sure good loan perform ance, Mr. Rich
said. C ustom er relationships m ust be
m anaged in such a way that problem s
are quickly identified through contact
w ith custom ers and by portfolio anal­
ysis through loan review.
C red it m anagem ent should com ­
bine up-front planning, an efficient
delivery system and portfolio m oni­
toring. It should be inform ation drivern and be adjustable, he said. • •

BANK POSITIONS
Jr. Operations — $15MM rural bank
Comml. Loan — large suburban bank
AgriLoan — $40MM community bank
Second Officer — $30MM Ag Bank
R.E. Loan — AVP $200MM bank
Comml. Loan — $25MM suburban
AgriLoan/Operations — $30MM rural

$20K
$40K
$36K
$35K
$30K
$30K
$33K

These and additional positions located In
mldwestern states. All inquiries confidential.

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

816/474-6874
.

SERVING THE BANKING INDUSTRY
.
SINCE 1970

Circle 19 on Reader Response Card

BankPositions /Bonkers Available
s . :?rsLr

r

CC-2 AG LENDER - W. III. town of 50,000. ^ J25-$28.,0<^ CaNJean
3-5 yrs. credit. $23-$27,000.
DD-2 LOAN OFFICER — Understands credit.
CC-3 AG LOAN OFFICER - 5,000 pop. M id-1W0U' J r®hir®
r ' J S hi' 39 ^
west 5 yrs. exp. $27-$32,000.
In9- BS Ag. $21-$24,000. Call Sandi.
CC-4 AG LENDER — 60 MM bank, county DD-3 AG LENDER — Impressive young man.
seat 3-5 yrs. exp. $22-$28,000.
3 yrs. FmHA. “A real producer,” says ref. MS
CC-5 AG LOAN OFFICER — 60,000 pop. III. Ag. $22-$25,000. Call Jean.
Long/short term credit. $29-$36,000.
DD-4 SENIOR CREDIT OFFICER — Supv. 4
CC-6 EVP — 2nd in $50mm bank. Minn. Topag loan officers. “ Does excellent,” says ref.
rated bank. $40-$50,000.
$38-$42,000. Call Sandi.

aqri careers, inc .

MID-CONTINENT BANKER for November, 1986

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

_J

AG BANKING PERSONNEL SPECIALISTS

Sandi: 515 394-5827
Jean: 712 779-3567
Massena, Iowa 50853 New Hampton, la. 50659

Circle 1 on Reader Response Card

47

Use the Reader Inquiry Service on facing page to obtain further
information about the products reviewed on this page.
• 1st Financial Video Network has
re le a s e d “ S u p e rv iso ry & M a n a g e ­
m e n t,” a videotape training program
for establishing effective relationships
w ith em ployees. F o u r training m od­
ules deal w ith com m unication skills,
tim e m anagem ent, goal setting and
perform ance appraisal.

D oane Publishing. It allows banks, ac­
countants, farm -m anagem ent consult­
ants and others to set up a service cen ­
te r to provide financial record-keeping
and produce financial reports for farm ­
ers.

For information, circle 101

• A new illuminated awnings sys­
tem has been introduced by Lederal
Sign Corp. It allows banks to repack­
age th e look of th eir prem ises w ith a
tear resistant, translucent and fade-re­
sistant fabric awning th a t’s custom fit­
ted at th e factory.

*

*

*

• A tilt/swivel stand for IBM 4704
financial term inals is available from
Ergotron, Inc. The stands are said to

For information, circle 105

*

*

*

• N C R has in tro d u c e d its 6760
Tower-Check system for medium-sized
banks that process up to 100,000 item s
daily. F eatures include self-contained
intelligence and a processing speed of
up to 1,000 docum ents p e r m inute.
H ardw are options include a m icro­
filmer unit, alphanum eric ink-jet en ­
dorsers, a positional roll-on endorser

For information, circle 106

*

*

*

• A new spread sheet for com m er­
cial lending tren d and ratio analysis is
available from R obert M orris Associ­
ates. Lorm C-112 comes in 5- and 12colum n formats and allows space to
display dollar am ounts and p e rc e n t­
ages.
For information, circle 107

*

relieve operator stress, reduce glare
and im prove view ing comfort. They
have tilt and rotation capability.
For information, circle 102

*

*

*

• A software product to simplify
handling of N SF and re tu rn item s is
available from Inform ation T echnol­
ogy Inc. I t’s called “O n-line N SF/Return Item M odule’’ and is said to im ­
prove both th e quality and tim eliness
of pay or re tu rn decisions on N SF
items.
For information, circle 103

*

*

*

• A new student loan accounting
system is available from Norcom. Its
th ree m odules include loan origina­
tion, interim student-loan accounting
w ith stu d en t PLUS and repaym ent
student-loan accounting w ith p aren t
PLUS. M odules can be operated in ­
depen d en tly or as an integ rated unit.
For information, circle 104

*

*

*

• A new farm record-keeping-serv­
ice software package called “A gC H EK
S e rv ic e ’ has b e e n in tro d u c e d by
48


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

*

*

For information, circle 111

• A new softw are d ev elo p m en t,
nam ed “C ollector,” is available from
S ecureD ata Corp. to aid credit p ro ­
cessors in m anaging and collecting d e­
lin q u en t funds. It enables accounts to
be w orked in priority sequence auto­
matically.
For information, circle 108

*

*

For information, circle 109

*

*

*

*

• New video training programs for
lenders are available from Bankers
Training & C onsulting Co. They are:
“Collecting C onsum er Loans,” “Would
You Make This Loan — A Case Study”
and “Lessons From Loan W orkouts.”
For information, circle 112

*

• “A Practical Guide to the Law of
Secured Lending” is available from
Prentice-H all, Inc., that offers legal
answers, solves problem s and m ini­
mizes risks in the negotiation, drafting
and im plem entation of secured-credit
transactions.
*

and an auxiliary plasm a display for
m u ltip le -p o c k e t m o d u le co n fig u ra­
tions.

*

*

*

*

• An on-line loan application proc­
essin g sy stem for IBM m ain fram e
com puters is available from Anacomp,
Inc. “The BankServ Application Proc­
essing System ” is designed to im prove
productivity, reduce p aper usage, as­
sure uniform credit decisions and im ­
prove custom er service.
For information, circle 113

• A policies and procedures guide
for real-estate lenders has been p u b ­
lished by MCS Associates. The guide
provides guidance in loan origination,
from application through closing. The
set includes four books and two vol­
um es of sam ple forms covering single­
family residential p erm an en t loans,
construction loans, p erm an en t len d ­
ing on incom e pro p erty and purchase
of m ortgage loans.

• Banks can place orders for loanpaym ent books via diskette input to
Bank-A-Count Corp. The firm accepts
a bank’s existing diskette form at or
provides specifications for its own p re ­
fe rre d fo rm at. P a y m e n t books are
shipped the same day as the order in­
p ut is received.

For information, circle 110

For information, circle 114

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MID-CONTINENT BANKER for November, 1986

Reader Response Pago
Page No. Circle No.

A d ve rtise r

AgriCareers, Inc.
Alexander Hamilton Life
American Bank Stationery
Austin & Associates, Inc., Douglas
Baker & Co., James
Balboa Insurance Group
Bank Board Letter
Bank IV Wichita
Boatmen’s National Bank, St. Louis
Carleton Financial Computations
Centerre Bank, St. Louis
Central Bank of the South
Chase Manhattan Bank
Clayton Brown & Associates, Inc.
Club Regency of Marco Island
Commerce Bank, Kansas City

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November, 1986
Page No. Circle No.

A d v e rtise r

Data 3 Computer Corp.
Federal Home Loan
Mortgage Corp.
First Lease & Equipment
Consulting
Hagan & Associates, Tom
J. P. Consulting, Inc.
Kansas Bankers Surety Co.
Keffe, Bruyette & Woods, Inc.
LaSalle National Bank, Chicago
MPA Systems
North Central Life Insurance Co.
Plus System
Protective Life Insurance Co.

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MID-CONTINENT
6

BANKER

FREE, FAST
INFORMATION

Please send me more information. .. .

Advertiser Information

Bank--------------------------------- ------------------- ------Address------------------------------- -------------------------

New Product Information

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101
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119

Title________ Function ------------------------- ---------

Act While
the
Opportunity
Is Fresh

Phone (

) ------------------------------------------- --------

102
111
120

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112
121

Bank Asset Size:

Reason for Your Inquiry

A. [ ] Over $1 Billion

G. [ ] Immediate Need

B. [ ] $500 Million-$1 Billion

H. [ ] Future Need

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I. [ ] General Interest

C. [ ] $250-499 Million

[ ] Make sure I receive MID-CONTINENT BANKER each

D. [] $100-249 Million

month

E. [ ] $50-99 Million

It you w an t m ore in­

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Name--------------------------------- --------------------------

[ ] Send me advertising information

F. [ ] Under $50 Million

formation about products
and services advertised in

MID-CONTINENT

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86

propriate numbers and
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the

p o s t-p a id

BANKER

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cards at right to MCB.

Advertiser Information

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re will put the advertiser
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name and address


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

FREE, FAST
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Name-------------------------------------------------------------------Title________ Function------------------------------ -------------Bank----------------------------------------------------------- ----------

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C ity __________________ ____ State---------- Z ip ----------

102
111
120

103
112
121

104
113
122

105
114
123

106
115
124

107
116
125

) ------------------------ ------------------------------------

Bank Asset Size:

Reason for Your Inquiry

A. [ ] Over $1 Billion

G. [ ] Immediate Need

B. [ ] $500 Million-$1 Billion

H. [ ] Future Need

C. [ ] $250-499 Million
D. [] $100-249 Million
E. [ ] $50-99 Million
F. [ ] Under $50 Million

14
26
38
50
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New Product Information

Address-------------------------------------- --------------------------

Phone (

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I. [ ] General Interest
[ ] Make sure I receive MID-CONTINENT BANKER each
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A dvertiser

Page No. Circle No.

Rothschild/Unterberg/Towbin
Ryan, Beck & Co.
Schooler & Associates, Don
Sheshunoff Co.
Stifel/Nicolaus & Co., Inc.
Third National Bank, Nashville
Travelers Express
United Missouri Bank, Kansas City
Whitney National Bank,
New Orleans
Zahner & Co.

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Marketing Conference, Sheraton New Orleans

Hotel.
Nov. 16-19:

ABA National Ag Bankers Conference, Opry-

Dec. 3:

NACHA Corporate Cash Management Semi­
nar, Airport Sheraton Grand Hotel, Dallas.
ABA National Security and Risk Management
Conference, Sheraton Harbor Hotel, San Diego.
BMA Community Bank CEO Seminar, Mar­

land Hotel, Nashville.
Jan. 27-30
Feb. 15-18:

riott’s Mountain Shadow Resort, Scottsdale, AZ.
Feb. 22-25:
March 8-11:
March 15-18:

BMA Electronic Banking Product Strategies
Conference, Phoenix Hilton.
ABA National Conference for Community Bank­
ers, Hyatt Regency and Hilton, Phoenix.
NACHA Annual Conference, Intercontinental

Hotel, San Diego.

Corning Events
Nov. 16-19:
Nov. 16-19:

BAI ATM9, Electronic Delivery Systems Con­
ference, Bonaventure Hotel, Los Angeles.
BMA Trust and Personal Financial Services

April 1-5:
April 9-12:

Independent Bankers Association of America
Convention, Marriott’s Orlando World Center.
Louisiana Bankers Association Convention, New

May 7-9:

Oklahoma Bankers Association Convention,

May 11-14:

Alabama Bankers Association Convention, Co­

Orleans Hilton.
Shangri-La Resort, Afton.
lonial Williamsburg, Williamsburg, VA.

NO POSTAGE
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IF MAILED
IN THE
UNITED STATES

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FIRST CLASS

PERMIT NO. 79

ST. LOUIS, MO

POSTAGE WILL BE PAID BY ADDRESSEE

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BANKER
Attention: Reader Service Dept.

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St. Louis, Missouri 63102

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IN THE
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BUSINESS REPLY MAIL
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ST. LOUIS, MO

POSTAGE WILL BE PAID BY ADDRESSEE

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BANKER
Attention: Reader Service Dept.

408 Olive Street
St. Louis, Missouri 63102

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

Quality Investment Banking
and Consulting Services
for Regional and Community
Banks and Thrifts
Capital Formation Services

Thrift Conversion Services

•
•
•
•
•
•
•

• Conversion Assistance in Subscription/
Community Sales Efforts
• New Issue/Conversion Structuring, Pricing
& Marketing

New Issue Structuring, Pricing & Marketing
New Issue Offering Circular/Prospectus Preparation
Capital Planning Studies
Capital Source Evaluation
Dividend Policy Analysis
Treasury Stock/Debt Repurchase Programs
Director, Regulatory & Rating Agency Presentations

Merger & A cquisitions Services

•
•
•
•
•
•
•
•
•
•

Expansion Potential and Constraint Study
Merger/Acquisition Candidate Identification
Transaction Feasibility Determination
In-Depth Individual Bank Valuations
Negotiations, Presentations and Contract Assistance
Regulatory Applications and Presentations
Proxy Preparation
Fairness Opinions
Dissenting Shareholder Suits
Takeover Defense Strategies

Branch Sales Services

•
•
•
•
•
•

Identification of Offices
Organization & Structure
Preparation of Offering Memoranda
Identification of Buyers
Conduct of Sale
Assistance in Transition


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

H olding Com pany Formation & D evelopm ent

•
•
•
•

Financial & Operating Considerations
Director Presentations
Application Preparation
Operation of Multi-Bank Holding Companies

Shareholder & Investor Services

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•
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Bank Stock Market Development
Dividend Reinvestment Programs
Shareholder Survey & Analysis
Shareholder Report Critique & Preparation
Investors/Analysts Meeting Presentations
Bank Stock Valuation Studies
Financial Public Relations

Financial M anagem ent Services

• Asset & Liability Structure Analysis
& Strategy
• Non-Capital Funding Development
• Financial & Operating Analysis and Planning
• Peer Group Analysis
• Branch Profitability Analysis
& Measurement

For further information contact:
Fenwick H. Garvey, Executive Vice-President
(201) 325-3000 / (212) 349-6080

Ryan, Beck& Co.
I n v e s tm e n t B a n k e r s a n d B a n k C o n s u lta n ts

80 Main St. West Orange, NJ 07052 (201) 325-3000
Philadelphia, PA (215) 568-4433 / Indianapolis, IN (317) 846-7200
Dallas, TX (214) 744-5090 / New York, NY (212) 349-6080
Circle 29 on Reader Response Card

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

B oatm en’s Ted Sm others.
O perations A ssistan ce
O verline A ssistan ce.
Loan P articipations.
Investm ents.

Boatmen’s Vice President Ted Smothers working
with Bob Menz, Chairman and President of The
First National Bank o f Highland. Whatever your
correspondent needs, B oatm 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
Circle 8 on Reader Response Card

Member FDIC