First Union has joined several of the nation’s large banks in opposing a rollback of Community Reinvestment Act mandates contained in a version of financial modernization legislation passed by the Senate Banking Committee last month.

The bank’s letter, sent to all members of the Senate Banking Committee (and different from the one mentioned in the previous story), undermines the position of Sen. Phil Gramm, R-Texas, chairman of the committee. Gramm included several CRA rollback provisions in financial modernization legislation reported out of his committee March 11. These provisions include a one-year safe harbor from additional scrutiny of a bank’s CRA compliance record when applying for approval of a merger or acquisition if the institution has a satisfactory or outstanding CRA rating. The bill also exempts institutions with assets of less than $100 million from CRA compliance.

“It is the position of First Union National Bank that a strong bank cannot exist in a weak community,” said Jane N. Henderson, a First Union corporate official based in Charlotte, in a letter to all members of the Senate Banking Committee. A similar letter was written several weeks ago by officials of Bank of America. “Moreover, the bank realizes that lending to low and moderate-income customers can be profitable.”

It adds that, “First Union also has a core corporate principle that it must be a leader in the communities in which it serves. Such leadership is manifest through creative and innovative lending, investing, services, contributions and volunteerism.”

First Union, the nation’s sixth-largest bank, is voicing deep concerns about the current versions of financial modernization legislation, including provisions that the industry fears could greatly increase the cost of and unreasonably delay mergers and acquisitions.

In its comments to the American Bankers Association, First Union specifically referred to the House version of the bill, which contains a provision giving the Federal Reserve Board the authority to hold hearings in all communities affected by a potential merger. This will “expand the processing time for applications and give opposition groups unprecedented opportunities to inappropriately impede bank transactions,” a bank official said.

While some difficult language was watered down during committee consideration, First Union remains convinced that the legislation’s effect will be to mandate expensive, time consuming hearings in virtually every merger transaction.

The letter, signed by Marion A. Cowell Jr., executive vice president, general counsel and secretary of First Union, also voiced concerns about certain powers issues, especially as they deal with sales of insurance and other products and services. It also sought to prod the industry’s Washington lobbyists to back off from support of the bill.

The upshot of the letter is that banks might be better off with their current lot, relying on federal pre-emption power and the National Bank Act, instead of depending on the functional regulation proposed in the bills. It also says that while the legislation as currently written may benefit certain mega-banks, “First Union believes that any comprehensive review of the legislation will find very little in the way of new banking powers and instead reveals the imposition of significant, as well as unnecessary new restrictions on banks and bank holding companies.” Industry lobbyists said the banks First Union is talking about include institutions such as BankAmerica, Citigroup, Bank One and J.P. Morgan.

“We do not believe that this represents “modernization” for the banking industry and hope that the ABA shares our view,” the letter says. First Union added that “it remains disappointed” in the ABA’s “continuing support or non-opposition” to the insurance safe harbors contained in both the House and Senate versions of financial modernization legislation. The safe harbors would allow certain states to treat banks differently than other distributors in sales of insurance. “We have already seen these safe harbors that allow for discrimination against banks can cause problems in certain states and we believe that the ABA’s acquiescence to these provisions has been extremely counter-productive to the industry.”

The letter also says that First Union “continues to believe that the removal of the Office of the Comptroller’s agency deference will be a significant problem for the industry. The banking industry would not be able to offer the products and services that are offered today without the strong support of the OCC and the agency’s litigation success,” it says.

An ABA staff official said last week the trade group is taking no position on the bill–the same day, the ABA joined a group of securities, mutual funds and insurance industry trade groups in sending letters to the Senate leadership seeking prompt action on a version of the bill passed by the Senate Banking Committee March 11

Bank One Corp. became the second major bank to make electronic bills available to its on-line customer base April 14, through a third party provider Checkfree Corp. It followed First Union Corp. by about six months.

On the same day, BankAmerica Corp. officially introduced its own system that it called “comprehensive electronic bill presentment and payment solutions” that could reach all 32 million of its business and consumer customers (see previous story).

Through Checkfree, Bank One’s 310,000 on-line customers can elect to receive bills over the Internet from some of the corporations signed up to send Checkfree’s e-bills.

Bank One is hoping that on-line presentments will encourage more of its customers to pay that way. Currently, 20% to 25% of its on-line banking customers use the bill payment offering.

Bank One’s financial arrangement with Checkfree remained unchanged with the addition of presentment services, said Bruce A. Luecke, president of interactive delivery services in Bank One’s retail group. Bank One is not charging its customers beyond the $4.95 they already pay for bill payment. Basic on-line banking is free.

The Chicago-based banking company is the first to use the Checkfree service through the Integrion Financial Network.

Bank One does not plan to work exclusively with Checkfree, Luecke emphasized. “We want to be able to present as many bills as we can.”

Forty-three corporations have signed contracts to have Checkfree deliver their electronic bills. So far, only a handful, including MCI Worldcom and BellSouth, are sending such bills, a spokeswoman said.

Fifteen of the 43 have agreed to deliver their bills to Bank One. Seven are listed on its Web site, including American Electric Power, BellSouth, Consumers Energy, HomeSide Lending, and MCI WorldCom.

“I don’t believe by working with a single presentment provider that any bank will be as successful as it can be,” Luecke said. “You have to be as open as possible.”

He said he would like to see more providers enter the market. Bank One has completed the first phase of a pilot with Transpoint, the other main presentment service provider, but a second phase has not been scheduled, Luecke said. — Chris Costanzo, American Banker

BankAmerica made a big splash in the e-commerce world last week when it won the race to be the first bank to introduce its own bill payment and presentment service in pilot mode. Experts said, however, that it remains to be seen if it can execute the service. Chase and Citibank have programs a step behind.

“They’ve proved it can be up and running which is a major accomplishment,” said Avivah Litan, director of research for the GartnerGroup. Litan, an expert in bill payment and presentment, said the development is “a big deal” not only because BankAmerica controls 10% of the consumer deposits in the U.S., but because it means competition for industry leader Checkfree and up-and-comer Transpoint, a joint venture of Citibank and Microsoft. BankAmerica wants to be seen as “a comprehensive alternative to the limited number of other bill presentment options” on the market, said BankAmerica senior vice president Jane Wallace.

“If they’re successful with this service, they could control where consumers go to pay their bills. They don’t want to lose their franchise consumers to other bill presentment providers. They can retain them and attract new ones,” Litan said. She added that the big question is whether or not BankAmerica can execute. “Will consumers go to them? Will the billers want to use them?” She said the final, and perhaps most important, question, is what this means to the relationship BankAmerica has with the Integrion Financial Network (see next story.)

That consortium, which recently streamlined its ownership structure, is now controlled by BankAmerica, Bank One, and Washington Mutual Inc., with several other institutions participating. Checkfree is Integrion’s “preferred provider” of electronic bill payment and presentment. Litan said it would be interesting to see which pill payment provider gets used–whether the group sticks with Checkfree, or starts using BankAmerica. “They’ll probably use both until they see which one is more successful,” she said.

BankAmerica’s system was developed internally and has been tested with employees since late March. Competing against other vendors, BankAmerica wants to be seen as “a comprehensive alternative to the limited number of other bill presentment options” on the market, Wallace said

The joint venture of Bank One and Mercantile Bank to collect federal tax payments electronically has done so well that the banks are looking to expand their data processing and cash management services to other federal agencies and states.

The joint venture, now called Anexsys, was formerly First Chicago/Mercantile Services, L.L.C., which formed in 1995, before First Chicago’s merger with Bank One. The company recently applied to the Office of the Comptroller of the Currency to expand the subsidiary’s powers.

The system collected about $600 billion in fiscal year 1998 for the federal government according to John McGuire, director of collections modernization for the financial management service division of the Treasury. Bank One covers predominantly the northern half of the country; NationsBank, at the time of the deal, now BankAmerica, covers the southern half of the country. The project to develop the infrastructure to do the collection was expensive, the Bank One spokesman said, although he declined to say how much it cost, calling it proprietary information.

The bank, in a letter to the OCC, gave examples of opportunities to expand the subsidiary’s business. The joint venture was recently named by the state of Kentucky as one of 15 vendors able to handle various projects, including collection of funds and the possible design of new software programs, said Harry Mueller, division manager in charge of special industries in Mercantile Bank’s corporate banking department.

The other opportunities include bidding on CA$H-LINK, a global cash concentration and information reporting system for the Treasury Financial Management Service.

However, Riggs Bank was awarded the right to be the fiscal agent for the CA$H-LINK system redesign in early February. Another opportunity Bank One cited in its letter was a request from the state of New Jersey to design, develop, implement and operate the state’s new hire directory.

The spokesman for the bank declined to discuss the bank’s plans further, again calling them proprietary.

The First National Bank of Zanesville recently gained approval from the Office of the Comptroller of the Currency to move into the financial planning, brokerage, insurance and annuities businesses, in a move to help expand its market presence.

The $1.2-billion-asset parent company, BancFirst Ohio Corp., recently acquired Chornyak and Associates Inc., a financial planning firm which also sells insurance but is not a full-service broker. It receives a commission, however, if customers purchase the mutual funds the planners recommend. The bank already has a trust company with insurance capabilities, but it was a small part of its business activities, mainly selling life insurance and annuities, according to chief financial officer Kim Taylor. Taylor said the trust subsidiary also offers some customers brokerage products.

"This provides a higher level of financial planning services to our customer base," he said, explaining the bank will provide the firm with its list of bank customers to solicit products, and brokers already in the bank’s branches will refer customers to the new affiliate.

Chornyak is located in Columbus, 50 miles from the Zanesville headquarters, and provides the added bonus of giving the bank additional presence in that market, where it currently has only one branch.

BancFirst acquired the financial planner by issuing 82,000 shares of stock, valued at around $2 million. The company is expected to bring in revenues in the $1.2 million-$1.6-million range.

First Maryland Bancorp is putting the finishing touches on its sixyear long "rebranding" project, announcing last week that it would change the names of its numerous affiliates to Allfirst. The change, which gives the previously-scattered entity a unified image and what the bank believes will be a stronger competitive brand going ahead, will be effective June 28.

First National Bank of Maryland, Dauphin Deposit Bank, The York Bank, Farmers Bank, Bank of Pennsylvania and Valleybank will all take on the new moniker. In addition, the $18.3-billion-asset parent company’s various businesses, involving brokerage, annuities and insurance, mortgages and trust services, will also take on the name Allfirst. Two subsidiaries, Allied Investment Advisors and Zirkin-Cutler Investments, will retain their names but begin using the Allfirst logo.

"Our new name reflects both our heritage of customer service and our continued commitment to relentlessly satisfying our customers’ needs," said CEO Frank Bramble. Also, the name reinforces the company’s goal to be the number one, two or three bank in terms of market share in each of the contiguous markets it serves: southern Pennsylvania, Maryland, Washington, D.C. and northern Virginia.

First Maryland Bancorp is a wholly-owned subsidiary of Allied Irish Banks

Rather than try to satisfy every need of every customer, Mercantile Bancorp.’s corporate banking division is working to spin industry specialties such as broker/dealers into a big business. It chose that particular industry because, despite the emerging confluence of brokerage services, insurance and commercial banking, Mercantile believes the dynamic industry will always be in need of old and new services it can provide.

The St. Louis-based company has been in the business of providing corporate banking services to broker/dealers since the early 1980s, but since 1996, when the manual clearing of funds moved to an electronic clearing through settlement banks, the industry opened up from its New York base. The result for Mercantile, one of about 50 banks with settlement powers, of which only about 30 are active, was a massive expansion–35% growth in the broker/dealer division every year since 1996. The section makes up 8% of the corporate banking revenues.

Of the two philosophies of getting as many clients as possible, or getting as much as possible from select customers, Mercantile is definitely in the latter camp. Joe Imbs, senior vice president and manager of service industries/public services, said all the specialty areas, also including beverage and communications, agribusiness, retail and government services (see related story on Mercantile’s joint venture with Bank One, p. 3), run in that vein. "The main idea is to bring value-added services and products to our customers by virtue of specializing in these industries. We can bring a better understanding of their industry to the table so that, hopefully, we can provide a higher level of service to differentiate ourselves from the rest of our competition." He added that the bank aims to serve not just St. Louisbased companies, with which it has a healthy chunk of market share, but to grow its business nationwide.

Mercantile is in the enviable position of being one of only about 15 settlement banks located outside of New York, and one of only about three actively accepting any new business. That makes it attractive not only to St.Louis-based firms such as A.G. Edwards, Edward Jones and Stifel Nicolous & Co., but to brokers all over the country which may not want to deal with the northeastern establishment.

Ann Vazquez, vice president and team leader of the broker/dealer section, stressed that Mercantile is a relationship bank which cares about small- to-mid-size brokers as well as larger ones which might have a higher volume of transactions. She said she anticipates doubling the client base to 20 settlement relationships in the next two to three years. The bank currently has some sort of banking relationship with 30 brokerage firms.

To illustrate her point that Mercantile is serious about getting more clients, Vazquez proudly told of a broker in New Jersey that Mercantile wooed away from the New York establishment by providing better service. The firm found that by sending off its paper checks to Mercantile, halfway across the country, it could get timelier lockbox service and have access to cash with only a one-to-two day float, instead of a four-day float provided by its previous bank in New York.

Although settlement isn’t really where the money is, it’s an open door to the profitable cash-management services, such as wire transfers–some clients can use as many as 5,000 per month–controlled disbursements, and lockbox collection. The bank also issues standby letters of credit, and lends money to clients to cover trades. Small clients might need from $5 million to $10 million a day, larger clients $60 million to $100 million.

Vazquez said her department is driven by the customers, who have helped develop new products. For instance, the bank established a back office system to support a large New Jersey Internet broker which wanted to offer its customers checking on its proprietary money-market accounts.

"Not everybody offers check-writing capabilities on their proprietary funds. This is something that now small- to -mid-size brokerage firms are interested in providing to their customers and Mercantile is able to assist them with this new product offering," she said.

Mercantile is ready to begin offering the service to other clients. The bank is already working on an upgrade to existing service which would allow imaging of check copies for the broker to verify signatures and return to the bank pay/return decisions. Those check clearing capabilities come from Mercantile’s correspondent banking expertise. It is one of the nation’s largest with 350 customers, providing more than $700 million in federal-fund liquidity lines.

The way Mercantile is competing with the New York establishment is by providing more "handholding" to smaller and medium-size firms. "They look to us for advice on managing their finances," Imbs said.

In addition, some of the northeastern traditional settlement banks have begun raising the bar on size of accounts they are interested in taking on. "We are interested in dealing with customers who the larger banks feel are too small, i.e. not profitable enough for them," Vazquez said

The issue of whether banks are using their loan loss reserves to manage earnings reached an uncomfortable point for bankers last week when an explanation of the relevant generally accepted accounting principles (GAAP) was posted on the Internet. In fact, it appears banks have loosely interpreted the rules, but the Security and Exchange Commission’s ruling on their accounting behavior may be awhile.

The issue is of particular importance to banks, which were once viewed as very volatile in terms of earnings due to their dependence on interest rates. Banking regulators gave the go-ahead to build up reserves several years ago, providing banks with a cushion when unexpected losses occur. Last fall, the SEC questioned the legitimacy of those cushions, and then backed off when the industry cried unfair.

Last week, Financial Accounting Standards Board posted an article on its Web site interpreting financial accounting statements 114 and 5. While there is still room for a special task force from the American Institute of Certified Public Accountants (AICPA) to clarify how to reserve for possible bad loans and remain within GAAP, the FASB staff’s interpretation provides guidance that industry sources said was not apparent to bankers before. An example is the observation that a loss must be incurred before it can be written down, which sources said is generally not the approach today. Instead, there now is a liberal interpretation of FAS 5, which holds that a loss has occurred once a borrower enters prolonged financial trouble, not when bankruptcy occurs.

"It could have a serious effect on the amount of allowances banks could have. This comes out hours or days before people put out first quarter earnings and file 10Qs," said one source at top-five accounting firm.

A FASB staffer said, however, that "nobody’s particularly arguing it needs to be applied retroactively."

Nevertheless, bankers contacted by Financial Modernization Report were eager to hear from the SEC, which ultimately enforces the accounting. SEC staffers said that the agency was waiting for someone–specifically, a bigfive accounting firm–to ask them for the guidance on when, how and by how much to revise allowances.

But even then it may be awhile before the SEC acts, according to staffers, because Lynn Turner, the chief accountant, has been out of the office, and because the issue is a complex one.

"This is going to take a couple of weeks. I haven’t fully thought this out. Usually those things are treated prospectively, or by cumulative catchup," where a bank recognizes the effect of the change in one line below net income and before cumulative effect on the financials. The staffer added that the possibility of restatement was practically nil. Further, he said, the staff might have to turn around and consult with FASB on the issue and even the top five accounting firms. "We’d really need to understand the extent of the problem before we come up with a solution," he said.

Meanwhile, the AICPA is scheduled to meet April 20 to continue studying implementation issues and work on a proposed statement of position on how to apply GAAP to loan reserves. The proposal must be approved by both FASB and the AICPA’s Accounting Standards Executive Committee.

Pascal Desroches, SEC accounting fellow and member of the task force, said the issue of when a loss is incurred may appear straightforward but, in fact, is complicated. As an example, he cited the differing opinions on a bank allowing for the default of a corporate borrower due to Y2K problems. "Some may say if the borrower hasn’t fixed the bug, then it’s a fair allowance. But some would say whether or not they fix this bug is a future problem; the company hasn’t gone bankrupt, therefore you can’t provide an allowance."

One controller at a major regional bank voiced a popular opinion when he said he hoped FASB’s interpretation merely means regulators are "sensitizing everyone to put more discipline in the process. We’re not going to change the world, but we’re going to control the current situation. We’ll keep an eye on you. You better tighten up your documentation (of the rationale for reserving for loans that have not defaulted yet but are expected to.)"

Salomon Smith Barney contracted to open one of its own brokerage branches in a community bank last week, a move that appears to be the first of its kind by a Wall Street firm. It hopes to bring its expertise to smaller institutions nationwide.

The new so-called investment center is to be placed in a downtown Lewiston, Idaho-based branch of FirstBank, and could prove a major advantage to FirstBank and any other community institutions as they vie with larger competitors to offer a wide array of investment products.

Although hundreds of smaller institutions currently work with brokerage houses to bolster their investment offerings, Salomon is equipped to provide a unique level of service to its clients, according to the company. Further, the program is the first to bring the prestige and know-how of a major Wall Street firm into local community bank branches, said Jeffrey H. Champlin, a Salomon vice president.

"What it does is airlift community banks to the front of the brokerage business," Champlin said. "Now they can have a more sophisticated brokerage firm than many of the biggest commercial banks. Customers are requiring a lot more from their brokers than they used to and the average community bank program cannot do this anymore."

He said the program will help banks broaden and deepen their relationships with customers, so they do not look to invest with larger banks, and possibly transfer some of their traditional banking business there as well. Salomon hopes to establish several hundred additional centers in the next two to three years, Champlin said.

He continued that Salomon can offer banks better services because of the approximately 450 branch locations the firm has around the country. "In many cases, when banks work with brokerages, the firms can be located hundreds of miles away. But with us, the investment centers keep in direct contact with any of Salomon’s branches, which might be located right down the street."

He added that some brokerages leave much of the maintenance of such centers up to the bank. Salomon, however, provides them with all the necessary equipment and easy access to all of the latest research tools and facilities available to any of its representatives.

Clyde E. Coklin, president of FirstBank, said he welcomed the opportunity to offer securities, mutual funds and other non-insured products through a "well-respected company like Salomon. (Salomon) brings national recognition, has a large portfolio of investment products, and maintains a business approach respecting customers’ needs," he said.

Salomon began piloting the program in several community banks over a year ago. But Champlin said the firm is now prepared to roll out the service across the country. He said the firm is beginning to educate its regional representatives about the program and meet with bank managers to discuss a possible strategy. "We don’t want to helter skelter put this thing together," Champlin said.

Champlin said some banks have been wary of the service, fearing the firm may intrude on some of their existing business. "But what we do is sign an agreement with the bank not to sell any products they want to keep selling."

Salomon will also be selective when choosing banking partners, he said. "We want them to be strategic for us. We look for banks with a good reputation and ones that won’t be snapped up by a larger bank. We want banks that want to be in the community banking business for the long haul."

The investment representatives are jointly hired and managed by Salomon and the bank. The fee income is also split by both entities. Besides working with bank customers, the representatives will help the bank generate business in the local area.

The compliance issues arising from the program are similar to any instance in which banks offer brokerage services, Champlin said. "The physical space between the brokerage and the rest of the bank must be clearly defined. And we have a disclosure document for the customer explaining that the products are not FDIC insured, are not products of the bank and that you can lose all or part of the principle."