Huntington National Bank recently received approval to get its foot in the door of title insurance sales in Ohio, anticipating a time when banks in that state will be able to own title insurance companies entirely. An accompanying lawsuit could have a significant impact on financial modernization legislation.

The Columbus-based company received approval from the Office of the Comptroller of the Currency April 8 to own a 10% stake in a local title insurance agency, Mound and Forth Title Agency, Ltd. In the application letter from the bank’s counsel to the OCC, the bank said the only reason it was applying for a minority stake is that it is prohibited from owning a majority interest in the company by state law. It added that it believes the state law is inconsistent with federal law and is "a prohibition or significant impairment on the powers of a national bank under the National Bank Act to own and operate a title insurance agency "

The bank, along with the Ohio Bankers Association, is suing the Ohio insurance commissioner in federal court to rectify that situation. Oral arguments are scheduled for this week.

Jeff Quayle, general counsel for the Ohio Bankers Association, said the state rule barring banks, Realtors, homebuilders and others from owning a title insurance company or a controlling interest in one "flies straight in the face of Barnett." Barnett refers to a Supreme Court decision which overturned an antiaffiliation law that severely limited banks’ ability to sell insurance to their customers. While bankers are fighting the rule in court, the Ohio Association of Realtors is working to overturn it with state legislation.

He added that the model Huntington is following of minority ownership has been done by other non-bank companies, such as homebuilders.

Industry watchers believe the case could have far-reaching effects on the banking and insurance industries because of its impact on financial modernization legislation.

"If this goes through before H.R. 10 passes, then clearly national banks can sell title insurance and it would be much harder for them to hold the provision in the House version of H.R. 10 that prohibits the sale of title insurance," said Buzz Gorman, legislative counsel for the Conference of State Bank Supervisors.

The Financial Accounting Standards Board’s recently released technical plan reveals expectations of a heady year remaining, with a slew of exposure drafts and final drafts of proposals slated to be released. The following proposals and their status are listed according to their relevance to banks.

Business Combinations–Banks and other financial institutions appear to be those most opposed to FASB’s efforts to simplify and harmonize accounting for mergers and acquisitions. The board will be addressing the issue of when it is appropriate to use the pooling and purchase methods of accounting next week (See story on p.1). An exposure draft is anticipated in the third quarter.

Financial Instruments–The grand project to develop a standard to account for all financial instruments at fair value is still viewed as some way off, but bankers will have a chance to comment on the board’s early deliberations later this year. A document providing preliminary views is expected to be released for comment in the fourth quarter.

FAS 125 Amendment–Of most interest to credit card issuers, although also affecting repurchase agreements which banks use for funding, the proposed amendment to recently released FAS 125, accounting for transfers of assets, is expected to be released for comment in June.

Interpretation 25–Fine tuning the accounting for stock compensation, an exposure draft of the proposal was released for public comment March 31.

Consolidation–Dealing with the issue of control of affiliate companies, the longstanding and controversial proposal was recently issued in exposure draft form–comments due May 24–and is scheduled to come out as a final standard in the fourth quarter.

Asset Impairment and Disposal Issueso Addressing the accounting for the impairment and disposal of assets including bank branches, the proposal is now anticipated in exposure-draft form in the fourth quarter, bumped back a quarter from previous expectations.

The popularity of on-line auctions is spilling over into business-tobusiness purchasing with the launching of a consortium that is seeking a bank partner.

The selected bank would work with three companies that have formed an alliance to let businesses bid for office supplies over the Internet. The partners would benefit by doing business they might not be able to develop on their own.

The alliance is in talks with Bank of Montreal and its U.S. subsidiary, Harris Bank of Chicago, according to John Jensen, president of Analytics Inc., one of the consortium’s three constituents. It is seeking a bank to supply electronic funds settlement services and accounts-payable options, he said.

The alliance is talking to "a few other large U.S.-based banks," Jensen added.

The consortium’s purchasing system, E2E, is based on an on-line bidding network supplied by Interactive Buyers Network International of Ventura, Calif. Interactive Buyers’ Virtual Source Network, started in December, lets suppliers post bids on-line in response to buyers’ requests for quotes.

The other consortium members are Analytics of Madison, Conn., which is to analyze purchases and offer real-time reporting to clients, and PricewaterhouseCoopers, which is to supply technology support and integration of back-office accounting systems. The consortium plans to open a Web site in the next few weeks, E2Ebiz.com.

Banks may soon be able to manage the risk from merchant clients’ credit-card transactions more efficiently with a new software tool being piloted now.

The risk management tool will allow merchants’ banks, also known as acquiring banks, to manage the risk from fraudulent credit card charges over the Internet with a 100-item checklist that analyzes the risk of the transaction at the time it transpires. By pinpointing transactions that look suspicious, banks’ risk management departments can either accept the charge, or prompt the merchant to ask for more information on the customer, or even refuse the transaction.

Although the merchant typically takes the risk for fraudulent transactions when the credit card is not present, such as over the Internet or with mail orders, the bank is also at risk if the merchant can’t pay, goes out of business, or is itself committing the fraud. Although rare, such a scenario can mean much more collateral damage than the more common dishonest credit card customer.

Part of the due diligence a merchant’s bank goes through when opening an account with a merchant is to inspect the store’s physical location. But, a merchant on the Internet may not have a storefront, making those inspections problematic. Such a merchant’s start-up costs are lower, but it might have a higher probability of going out of business, said Ken Musante, manager of Humboldt Bank’s merchant bankcard department.

"We should have lower merchant losses because they should be captured and stopped before the money is paid out to the merchant," Musante said the of new risk management tool, which it is not yet using. The bank piloting the new software could be not be determined by press time.

Authorize.net, a firm that helps banks collect and manage payments over the Internet, will be introducing the net-risk management tool as part of the upgrade to its current server-based software at the spring Internet World trade show in Los Angeles April 14. Humboldt works with Authorize.net and resells the company’s software to merchants. The Eureka, Calif.-based bank is the 27th largest acquiring bank in the U.S., processing roughly $225 million in credit card transactions a month.

The checkpoints in the new software are set by the bank. Several key indicators of fraud have been suggested by banks Authorize.net works with and have been included in the pilot program. Some of the 100 things that can set off red flags include the country the card transaction is coming from–a large amount of credit card fraud comes from Nigeria, for example–or what time of day the transaction happens.

Musante said some of the key checklist points to detect merchant risk are average ticket charges out of line with normal limits, a monthly volume of sales out of character, and credits or returned items that are out of line for the merchant. By estimating the general perimeters of a business, the bank can get a good idea of when suspicious transactions are taking place. For instance, if a retailer usually sells $20-$30 pieces of costume jewelry and charges in the thousands of dollars start showing up, the risk management tool will alert the bank.

Although Musante said it is too early to tell how much money the bank stands to save with the new bank-based fraud detection tool, he said it should be a big help.

Jeff Knowles, chief technical officer at Authorize.net, said the ultimate goal is to enable banks to take on more Internet-based merchants as customers and be able to offer them lower interchange rates by having lower losses due to fraud. Industry watchers do not expect card associations like VISA and MasterCard to lower the rate charged for card-not-present transactions–currently 1.8% compared to 1.2% for card present transactions. But a drop in fraud, as Authorize.net officials noted, can’t hurt banks.

The banks furthest ahead in offering customers a wide array of financial products through the most advanced delivery channels also charge the highest fees on checking accounts. Coincidence?

Bank Rate Monitor’s pricing study from February shows that none of the country’s top 50 banks offered bargains on checking accounts. But few industry observers saw this as cause for concern.

"These large banks are better informed as to overall customer profitability and they do provide more delivery channels and more products overall than most of the smaller banks, and so convenience can play a role in a customer’s willingness to pay a higher charge," said Sandra Flannigan, bank analyst at Merrill Lynch. "But, she added, you have to look at the overall package and not zero in on one single charge."

The survey found the nation’s best account to be offered by $141- million-asset Bay Financial Savings Bank in Tampa, Fla., which will net the holder $26.70 annually. It also noted that the 15 of the 20 most expensive accounts are offered by some of the nation’s largest banks: Citibank, BankAmerica and First Union. In fact, Citi, which is widely recognized as a leader in on-line banking, has the second-, third-, fourth- and fifth-most expensive accounts. Bank Rate Monitor bases that assessment on the $10,000 minimum requirement to avoid a $25-per-month service charge.

Jon Arfstrom, analyst at US Bancorp Piper Jaffray, said that while the glitz of new products and services might be a factor in the ability to charge high fees, customer ignorance might also play a role.

"I think if you asked the average person on the street, ‘How much did you pay in consumer banking fees this year?’ I don’t think you’d get very many correct answers."

He added that perhaps the answer is that Citibank has a certain type of customer and they are not as averse to paying fees as a community bank-type customer. But in any case, the big banks aren’t yet scared of the smaller banks’ strategy of giving out free checking, a trend analysts have noted for the last 12 to 18 months–particularly among thrifts.

"Initially some of these offerings are not profitable. It’s too early to tell–the success might be measured not over weeks and months, but years," said Thomas Theurkauf, analyst at Keefe Bruyette & Woods.

Not all industry watchers agreed."Technology is the great equalizer, so big banks may not be well served to continue to rely on (customers’ attachment to a wide array of products on the Internet)," said Sean Ryan, bank analyst at Bear Stearns

So devoted to the ideal of customer service are bankers at Synovus Financial Corp. that some will work nights and weekends. That extra touch they believe will set them apart from competitors was highlighted when a customer called the head of private banking–a program only a year and a half old–on a Sunday night. He announced he was leaving the country for a trip in the morning and would need a passport. The banker opened up the customer’s safe deposit box and produced the needed document.

"The products we deliver are all pretty much the same, but where we’re going to beat the competition is we’re going to deliver them however and wherever the customer needs it. We have better relationships because we extend ourselves," said Walter M. "Sonny" Deriso, Jr., vice chairman of the board of Columbus, Ga.-based Synovus, and the executive in charge of the company’s "New Bank" effort.

The New Bank program means moving toward modernization of the company, which translates into delivery of products and services in ways that customers want, Deriso said.

The bank is stepping up catering not just to the wealthy–with the private banking program it’s rolling out to 10 more of its subsidiary banks from the pilot site–but to the ordinary customer’s needs. It recently completed a 14-month conversion to M&I’s data warehousing capabilities and can do more sophisticated target marketing.

The $10.5-billion-asset holding company, which maintains independent boards and charters at each of its banks, is gearing up to complete another chapter in its New Bank effort. By adding insurance bank-wide, and brokerage and financial planning services for all customers, the southeastern bank company hopes to round out its offerings and achieve what is becoming the holy grail for banks: to be the place where customers get all their financial products.

The three-phased introduction of the insurance subsidiary has begun at flagship Georgia-state chartered Columbus Bank &Trust (CB&T) and two other banks in Alabama and South Carolina. The final state in Synovus’s market, Florida, has somewhat simpler insurance regulations, and will be added after the pilot periods in the other three states.

After examining a study of other banks’ methods of offering insurance prepared by KPMG Peat Marwick, which showed most are not profitable yet, and speaking with its own bank managers, Synovus management decided not to acquire an insurance agency. It will instead offer insurance to its customers through a partnership with a third party, which has been chosen but will not be announced until June, Deriso said. The carrier will provide backroom operations, a call center and licensed agents who can work as consultants or specialist to customers with sophisticated needs, Deriso said. The bank plans to get customers to the insurance agents, who must be located in a separate area of the bank, by referrals from tellers and customer service representatives, and targeted marketing.

The first phase of the three-phase roll-out includes the simplest products for novice salespeople to understand: credit life and accident insurance which most banks have offered for years, and fixed annuities, which Synovus has offered for about a year. In addition, it will offer title insurance, through a partnership with a local firm, and worksite-related supplemental insurance for commercial customers with specialist AFLAC.

The bank is also creating a reinsurance captive for mortgage insurance. In that line of business the bank will deal with several carriers, the split depending on the amount of work done by the bank or the carrier. Because reinsurance is still a fairly new line of business for banks, Deriso said special approval would be needed from regulators. He added that he had discussed the bank’s plans with regulators in all four states as well as with the Office of the Comptroller of the Currency, and all were comfortable with the bank’s plans and indicated there should be no snags in obtaining approval.

The second phase, to begin in the fourth quarter, will offer homeowners and auto insurance. The third phase, to start late in the year 2000, will offer life, disability, long-term care and group disability insurance.

Deriso said in addition to having some employees trained to sell insurance, the plan is to have some of these specialists licensed to sell securities and be able to do financial planning for all customers. Currently, the banks can offer some customers a limited version of that service. Some of the specialists on the asset-management side of the bank can act as gatekeepers and refer some of the trust clients to the brokers. Whenever an annuity is sold, that customer has a financial profile done, a sort of minifinancial plan. But CB&T will begin piloting in May the use of what Deriso calls "superpeople," employees licensed to sell insurance and all brokerage products.

Another new program which Deriso said ties several of the bank’s financial services together, an asset management account, also requires specialist employees to sell it. In the pilot stage now and set to be rolled out in the second or third quarter, the wealthy-customer’s account has a brokerage feature and allows funds to be swept into an FDIC-insured account. The specifics of minimum account balance–probably around $10,000–and working with the data processor to clear all trades, are being worked out now.

Deriso is in the thinking stage now of the latest piece of the plan to offer customers as broad an array of financial services as possible: additional money management. He is grappling with whether to hire more money managers to complement the team that runs the company’s fixed income and equity funds, ranked by PIPER in the nation’s top ten, or to form an alliance to continue to get value from the $7 billion under management with an outside firm

The fate of the pooling method of accounting, the favored approach in the mergers of banks using their high stock prices as acquisition currency, will start to be addressed April 21 by the Financial Accounting Standards Board, which may do away with it altogether.

FASB will be looking at either eliminating or, at best, restricting its use, according to Kim Petrone, a FASB project manager. Such a move could dramatically affect the ongoing consolidation of the banking industry. And, in fact, banks have been some of the most vocal opponents of the proposal to date, which until recently has focused on accounting for goodwill, an integral part of the project.

In the most recent outburst of criticism, eight banks–including Chase, Citibank, KeyCorp, First Union and Bank One–and five banking trade groups submitted comments on a position paper to account for mergers by the G4+1, a consortium of international accounting standard setters. The paper is relevant because part of FASB’s goal in the business combinations project is to harmonize accounting standards internationally, and because it advocates eliminating the pooling method of accounting. FASB will be considering the paper and the comments in its deliberations.

The American Bankers Association, which has objected to most of the major accounting changes proposed recently by FASB, states high up in its comment letter that both the pooling and purchase methods of accounting should be retained. That’s in part because the "pooling method better reflects the long-term interests of shareholders and the long-term contribution of each (merged) entity to the performance of the combined entity than the purchase method," it says.

Bonnie Zoccola, vice president of accounting policy at First Tennessee, which greatly expanded its mortgage lending operations in recent years through acquisitions, tied the possible elimination of pooling more closely to banks.

"Purchase accounting is prohibitive especially in the banking industry because of the intangibles created–intangibles reduce capital on a one-to-one basis," he said.

A number of companies, largely excluding banks, have expressed reserved support for the business combinations project as long as accounting for goodwill is rejiggered to simplify and standardize it. FASB just finished addressing how to determine the measurement and life span of goodwill and intangible assets–tentatively deciding to limit the life span of goodwill to 10 years with a maximum of 20 years, down from the current 25 years for banks–and concluded that it must reconsider its deliberations later. The current version of the proposal would significantly increase merging banks’ amortization costs.

"Higher amortization would be prohibitive (for mergers). A couple of large banks have done mergers on a cash basis of accounting instead of accrual, and it’s been a bumpy ride," Zoccola said.

The comment letters did provide FASB with some alternatives to make goodwill less burdensome. Although he was averse to eliminating pooling, Princeton, N.J.-based Summit Bank’s comptroller Paul V. Stablin noted in his bank’s comment letter that treating goodwill as a one-time acquisition expense, or amortizing it into comprehensive income, would make the purchase method of accounting more attractive.

Not all bankers oppose eliminating the pooling method of accounting. Craig Dabroski, accounting specialist at America’s Community Bankers, said, "Several of our members would not be upset with purchase accounting, depending on how to measure goodwill."

He added that while he ultimately sees "a train down the track that’s going to intercept goodwill," the biggest problem today with purchase accounting is the ambiguity measuring goodwill and intangible assets.

"Now it’s very difficult to come up with, for example, fair value for core deposit intangibles," he said. He noted that another controversial FASB project dealing with accounting for all financial instruments at fair value, while now scheduled to be finished long after the business combinations project, would ultimately answer a number of questions.

The insurance underwriting industry won a sweeping victory when a panel of the 11th U.S. Circuit Court of Appeals, based in Atlanta, said insurance regulators have the sole authority to determine whether a hybrid bank or insurance product is banking or insurance.

Banking lawyers cautioned that the ruling conflicts with other recent court decisions, including two by the Supreme Court. Efforts to contact the Washington offices of American Deposit Corp., which has a pending patent on the product, were unsuccessful. It would be the only entity able to appeal the decision to the Supreme Court. Michael Crotty, deputy general counsel for litigation for the American Bankers Association, reacted to the decision by saying, "These guys just missed it. It is flat wrong.

"It flies in the face of several recent unanimous Supreme Court decisions, including Barnett, decided in 1996, and Valic II, which was handed down in 1995," he said. It also is contradicted by Valic I, handed down in 1959, which says annuities are securities and not insurance, Crotty said.

The court held that the National Bank Act is a minor law and is "trumped" by the McCarran-Ferguson Act when an analysis is made whether a product is banking or insurance. The case deals with a Montana bank’s effort to sell a fixed annuity as a bank product. The product, called a "Retirement CD," was advertised as providing tax-deferred treatment on earnings inside a bank’s federally-insured certificate of deposit. Upon maturity, the accumulated value of the product would be distributed to the owner in periodic payments, like an annuity.

"The Retirement CD was an annuity, an insurance product," said Gary Hughes, vice president and general counsel of the American Council of Life Insurance. "Equally important, the court noted that the Office of the Comptroller of the Currency overstepped his authority in 1994 by giving the product the green light. What this shows is that Congress, not the OCC, will decide whether banks or their affiliates will be allowed in the future to underwrite annuities and other insurance products," he added.

With his eye on pending legislation that would bar banks from underwriting annuities in operating subsidiaries, Hughes added, "If any banker had considered sidestepping Congress and underwriting annuities in a bank’s operating subsidiary, this should significantly dampen those plans."

But David Roderer, a banking lawyer in Washington, called the decision "backward-looking, static and simplistic." He explained that the court looked at the issue as if there were no hybrid products, only banking, insurance and securities products. He added that the National Bank Act, and the Supreme Court’s interpretation of that law "clearly indicate that the agency has the authority to adjust banking products to the times."

Wells Fargo will be rolling out a new program this summer to help small business customers get their store fronts on the Web, about the same time two large corporate clients will roll out their larger, multi-lingual bank-enabled sites.

The California-based giant started up a special unit to focus on Internet commerce in January, although it has worked with business customers on the Web since 1995 and currently has more than 300 Internet merchant customers. It is now working on a system to integrate all the basic components a small business would need to get set up on the Internet, to act as the "broker" for the client.

"If you think about your small business segments, their primary need is a trusted, knowledgeable partner. ‘I need to get a URL. I need to get a Web-page designer, a payment processor.’ Most small businesses don’t know how to do that. They’ll have to contract with between seven and nine companies. We think we have an advantage. We can bring the strategic partners together so we can create a cohesive opportunity for the small business," said Michelle Banuagh, vice president with the e-commerce group. Although the bank now refers small business clients getting onto the Web to other companies for advice, the new program, called Wells Fargo iBox and expected to roll out in June, would be a packaged solution to the site development quandary.

For the large corporate business clients who are mostly already established on the Web, Wells has just unveiled the fruits of a partnership with Mitsubishi last month to develop merchant Web sites that can crack foreign markets. The new Web sites can deal in foreign currency and overcome the language barrier by displaying information in the local language. Wells takes the local currency by credit card, converts the payment into dollars for the U.S. company, and the bill appears in the local currency on the customer’s credit card bill. Formerly, if a customer bought a product over the Internet in yen, for example, the charge appeared on his or her bill in dollars, which led to some confusion.

The new feature, Banaugh said, goes a long way toward helping the merchant reduce customer service telephone calls and contributes to customer satisfaction. Wells and three more large U.S.-based companies are working on sites, which are looking for a late summer launch in preparation for the holiday season.

A recent decision provides banks with a reduced compensation hit stemming from excess employee stock options withheld for tax purposes, at least in the short term.

The Financial Accounting Standards Board’s Emerging Issues Task Force, which deals with the most urgent accounting issues, came to a cheaper conclusion than its parent board on the question of what to do when a company has withheld more than the minimum required number of stock option shares for tax purposes.

The EITF decided in a recent meeting that cost associated with only the excess number of shares should be expensed.

FASB had decided earlier in its work on an interpretation of Opinion 25 that compensation costs related to the entire award had to be recognized.

An exposure draft of the interpretation was released last week. If that proposal is adopted, it will govern the accounting. But until then, the EITF’s looser conclusion goes.

The board also decided that the effective date of the provision affecting excess tax withholding would apply to options granted after Dec. 31, 2009.

"The delayed effective date is to allow banks to modify their plans, to not allow excess withholding," said Lailani Moody, senior manager, assurance services, of Grant Thornton.

"There’s a big difference in terms of costs between the EITF version and FASB’s version," Moody said. She added the EITF’s decision could affect options for some time, because although it only pertains to options granted for the end of this year, those options might not be exercised for several more years.