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

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."

American Banker/Bond Buyer Hibernia Corp. has just been granted approval by the Office of the Comptroller of the Currency to establish a de novo operating subsidiary to raise funds to invest in companies.

The new entity, called Hibernia ACP, LLC., is structured as a general partnership and has a goal of raising $20 million from corporations and wealthy individuals to invest in mezzanine debt, according to a company spokesman. The companies to be invested in will be located in the Gulf-area states, especially Louisiana, home base of Hibernia.

While commercial banks are not strangers to these types of funds, they have largely been the domain of investment banks. Nevertheless, the fund represents an opportunity for Hibernia to start up a new business and please its existing clients at the same time.

"Here’s an opportunity to stay with that (existing client company) that may be looking to go public at some point. It provides "angel" funding for a company with maybe $10 million in sales. They tend to be operating companies–not start ups–that need some capital to grow," said R. Harold Schroeder, an analyst and Keefe, Bruyette & Woods Inc. He added that the fund also provides the bank’s corporate and wealthy individual investor clients with another investment opportunity.

"First Commerce, which was Hibernia’s competitor across the street, had a fund like this before Hibernia bought it," Schroeder said. o J.H. & E.W.