Verne G. Istock gets a mixed reaction when he tells Wall Street that NBD Bancorp is making progress in franchise modernization, efficiency, and internally generated growth.

But Mr. Istock gets fervent support when he declares that NBD won't water down its underwriting standards: Supporters say keeping the faith on this one score may ultimately outweigh all else when analysts evahate the bank.

As chairman and chief executive of the $45 billion-asset NBD, Mr. Istock heads an institution that commands respect because of its reputation as a sound lender.

When the economic roof was falling in on banks four years ago, for example, NBD's. 0.4% ratio of net chargeoffs to average loans was a fourth that of its national peer group, according to Keefe, Bmyette & Woods Inc.

But this is not 1990, and Wall Street's current obsessions are revenue growth, margins, efficiency, and product development -- everything, it seems, but proven underwriting skills.

In a recent appearance at a McDonald & Co. investment conference in Cleveland, Mr. Istock did all but tap dance to assure investors that Detroitbased NBD is vigorously overhauling its franchise and culture to keep pace with the market.

But Mr. Istock also took the opportunity to underscore what appears to be a growing concern in the U.S. banking industry:

"You all remember credit quality, don't you?" he asked the conference's audience of bankers and analysts. "You are not 'concerned with it. But you should be. The problem will be back. The seeds are being sown today."

To be sure, underwriting mastery does not excuse Mr. Istock or any other banker from the rigors of competing in the modern financial services marketplace.

But this skill will grow in importance over the next few years, analysts contend, and it probably again will become a huge swing factor in the merger game.

"As margins narrow, you have to question whether banks are adequately pricing for credit risk," said Sandra Flannigan, a banking analyst with Merrill Lynch & Co. "Product development is very, very important. But the banks with outstanding underwriting skills most often will wind up in the better position."

In the consolidating banking industry, takeovers provide a key scorecard on which entities best balance creativity and conservatism, and NBD is on the winning side of the ledger.

Since 1972, NBD has completed 26 acquisitions involving $20.7 billion of assets. Along the way, it built a $9 billion-asset presence in Indiana and a $5 billion-asset unit in Illinois.

Mr. Istock makes it perfectly clear he also would like to bulk up in Ohio, where NBD currently has a $1 billion-asset operation. "We have every intention of growing in this state," he declared.

One reason Mr. Istock might be slow to realize this ambition: In a landscape where many weak banks have been cleared and survivors demand premium prices, "acquisitions are not worth the effort," said Mr. Istock. "The prices are too high."

The other inhibiting factor is that NBD's trading multiple could stand to he stronger, comparatively speaking. And this suggests Mr. Istock has to do something more than maintain a strict credit culture.

Primarily on account of postmerger difficulties in Indiana, analysts say, NBD suffered a $440 million drop in market capitalization last year as investors recoiled from the stock.

On a proportionate basis, the 8.43% drop was the third largest among the nation's top 50 banking companies, according to American Banker research.

Fighting through the difficulties, Mr. Istock chalked up some progress in Indiana this year while lifting NBD's profitability. That helped the stock somewhat.

The issue currently trades at about $31 a share, or a bit more than eight times analysts' consensus earnings forecast for 1995, as published by First Call Corp.

If his bank were in any other region, it would be an unstoppable juggernaut. But this is the Midwest, the fastest track in the country in terms of banking performance, and Mr. Istock must do more if he wants to prevail.

"I don't think the company is headed for the top tier anytime soon," says Fred Cummings, a banking analyst with McDonald & Co., Cleveland. "The market wants to see more fruits from Mr. Istock's efforts before meaningfully expanding NBD's multiple."

Mr. Istock, who declined to be interviewed, joined NBD in 1963 as a credit trainee. He was named executive vice president in charge of corporate banking in 1982, and became a vice chairman in 1985.

The executive took the helm at NBD in January, following the retirement of Charles T. Fisher 3d. It is said that Mr. Istock works closely with Thomas H. Jeffs 2d, a former vice chairman whose promotion to president and chief operating officer was concurrent with Mr. Istock's ascension.

A native of Grosse Pointe, Mich., Mr. Istock was animated and articulate during his talk in Cleveland. He told investors that NBD has an, avid interest in boosting fee revenues, citing the $6 .billion of mutual funds under NBD's management as one of the company's "significant strides in product development."

Insurance ranks as a huge priority at NBD, he added.

NBD already is selling credit, mortgage life, property, and casualty insurance via a third-party vendor stationed in branches, he said.

By the first quarter of next year, the company will be offering term, whole life, and universal variable life insurance through the same conduit, he added.

Acknowledging the changing role of branches, Mr. Istock said NBD is working to shift transaction-oriented, business, such as queries-on account balances, over to automated teller machines and telephone banking units, while at the same time expanding the array of products, customers can get in person.

"We are changing the focus of our branches, from deposit-gathering transaction centers to financial sales and service centers," said Mr. Istock

He went to great lengths to explain the importance of developing a marketing orientation, saying cultural change is "probably our greatest challenge" but assuring investors of NBD's commitment.

Wading into the ever-present issue of efficiency, Mr. Istock recounted telling NBD senior officers that "what we really need is a vice president in charge of killing-things."

He promised that the banking company would comb "every aspect" of its operations for expense cuts, and added that NBD had slashed the annual paper output in its trust department by 2 million pages.

By the end of the decade, Mr. Istock said, NBD is aiming for a 50% ratio of operating expenses to operating income, a proposed reduction of more than 7 percentage points from current levels. He said he is counting on a blend of expense controls and revenue growth.

NBD's third quarter offered some compelling evidence that the company walks like Mr. Istock talks. NBD lifted earnings 18% to $]47.7 million, and its annualized return on average assets rose 5 basis points, to 1.31%.

Among the components of this upsurge: Average loans rose 8.1% from a year ago; the loss provision fell 68%; and the ratio of operating expenses to operating revenues plunged by 234 basis points, to 57.4%.

This performance garnered some fresh converts on Wall Street, with some analysts predicting even greater things for Mr. Istock and NBD.

"We recommend NBD shares for purchase," said Lehman Brothers in a late October report. "Loan growth remains strong, expense control is great, and Indiana operations in the fourth quarter should adchieve their highest returns in recent history."

Other analysts look at NBD's third quarter and see something less than a leap to the stars.

For startees; they probe the balance sheet and-see a nearly 12% expansion of average residential mortgages, which could further trim NBD' s margin if rates keep rising.

And average commercial loans though up 6.3% from a year ago rose at a lesser 4.8% annualized rate in the third quarter.

Henry Dickson, a banking analyst with Smith Barney. said NBD's riegligible loss provision of $7.9 million probably has nowhere to go but up in forthcoming quarters.

And part of NBD's profits came from a 30% expansion of securities investments. which can prove tricky to manage in an era of rising rates.

Moreover, Mr. Dickson noted that NBD's 24.8% ratio of fee income to revenues remains "light." Said the analyst: "NBD has some good numbers coming through, but it's unclear whether the momentum is sustainable."

All this meticulous slicing and dicing overlooks a hugely important point about NBD, Mr. Istock contends. and that is the company's tradition of rigorous underwriting,

Current benign loan quality indicators make it tempting for investors to throw money at the brightest growth stories. said Mr. Istock. but that approach ignores the costly lessons surfacing in past credit cycles.

"The road is littered with the wreckage of banking organizations -- superior banking organizations -- that believed they were doing it right," said Mr. Istock. "That's why NBD will not waver from a commitment to credit quality, even when it means losing business."

If that anchor holds firm, analysts say, about the worst that can happen to Mr. Istock is that he plows through this economic expansion with middling results, then zooms closeq to the head of the pack when the next recession crumples lesser-disciplined lenders.

Would that be so terrible?

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