Bank One and Mercantile Going For State Payments

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.

Ohio Bank Approved To Expand Financial Services

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 Consolidates Name For Competitive Edge

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

Mercantile Wants To Be All Things To Some People

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

GAAP Tightens Loan Losses, But Where’s The SEC?

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.)"

Wall Street Panache Moves To Community Banks

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."

Huntington Shoots For Title Insurance

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.

FASB Agrees To Busy Schedule

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.

Bank’s Participation Sought for Office-Product Auction Service

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,

Credit Card Risk Management Tool Coming Soon

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., 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 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 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, 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 officials noted, can’t hurt banks.