Moving to bolster its corporate banking unit, Mercantile Bancorp. of St. Louis has established a derivatives division for midsize businesses.
The company has hired John L. Stapleton from the Commonwealth Bank of Australia's New York office to be senior vice president in charge of a new interest rate management division.
Joseph Hasten, Mercantile's president of corporate banking, said the new division offers interest rate swaps, caps, and collars, mostly for its core business customers-midsize companies that log annual sales of $100 million to $1.5 billion.
"We're not going to compete for the Fortune 2000. We're going to compete in a market we already know," Mr. Hasten said. "We're about vanilla swaps, collars, or floors."
Mr. Hasten said many customers, including agricultural, health-care, retail, financial, and communications companies, have demanded derivatives, which are essentially contracts whose value is based on the performance of an underlying financial asset.
Derivatives were much in the news in the mid-1990s when several banking companies, including Bankers Trust Corp., were accused of securities fraud and inadequate disclosure in selling the instruments to customers. But Mr. Hasten said Mercantile is prepared to avert such problems.
"We think derivatives earned something of a bad rap," Mr. Hasten said. Customers "have to be educated and moved from their initial fear of derivatives. We have to work through the process that this is risk reduction. If the company is unsophisticated, than the onus is on the bank to explain."
Kevin Prust, a partner in the Des Moines office of accounting firm McGladrey & Pullen, said small and midsize companies have sometimes shunned derivatives because of their perceived complexity.
However, he said, "the need for higher-end financial products is being pushed down to smaller and smaller entities."
The $36 billion-asset Mercantile has been boosting its commercial banking business for the past three years, adding capital markets and commercial products. Derivatives, Mr. Hasten said, is "the last set of products for now that we have added that we needed."
William R. Katz, an analyst at Merrill Lynch & Co., said Mercantile commercial lenders had benefited from some of the business disruptions accompanying big bank mergers in the Midwest in recent years. So building on its corporate base is a good move, he said.
"It further complements their product mix," Mr. Katz said. "What I like is, they're bringing in someone with skill. I'd be more concerned if they were doing this home-grown."
Mr. Stapleton, 42, spent the last two years as vice president and head of the corporate sector for Commonwealth Bank. Before that, he spent two years at Dresdner Bank and 10 years at Standard Chartered Bank, both in New York, and five years at Chase Manhattan Corp. in New York and Houston.
Initial interest among St. Louis and Kansas City business customers is strong, Mr. Stapleton said, and eventually Mercantile will market derivative products throughout its banking markets, which include other Missouri cities, downstate Illinois, Iowa, Arkansas, and Kansas.