First Call Move Diminishes Merger Accounting Proposal

An accounting proposal that bankers feel could significantly dampen the future earnings of merged companies (See FMR 4/12/99, p.1) may, practically speaking, not be so bad after all.

The Financial Accounting Standards Board’s business combinations project is currently on path to limit the life of goodwill–the premium paid in an acquisition–to 10 years and not more than 20 under certain circumstances. Currently, the limit is 40 years for most companies and 25 years for banks, which means the goodwill would have to be amortized in most cases in less than half the time period, significantly increasing the hit to earnings and making the mergers appear less attractive for investors.

Investors, however, may not care about goodwill, after all. The first official sign of that arose last week when First Call Corp., which forecasts companies’ earnings, said it would emphasize earnings without goodwill adjustments for five high-tech companies and may do so for 15 more. Called “cash EPS,” the new number reflects technology analysts’ priorities, said Chuck Hill, director of research at First Call. He added that the number will be extended to other industries if there is investor demand.

Robert Willens, managing director and accounting expert at Lehman Brothers, said he thinks that is a likely outcome. “I don’t think there would be much opposition to it. Everybody wants to see higher earnings,” he said.

Practically speaking, Willens noted, a shift in investors’ priorities toward cash EPS would largely limit the relevance goodwill information to 10Ks and 10Qs, and leave earnings per share untouched. “You know that this is going to happen in the banking arena, where analysts are very attuned to this kind of thing.”

Gramm’s Flowers Trampled

The Senate version of financial modernization legislation is likely to be delayed by congressional debate and action on the Kosovo crisis, according to sources, further lessening what momentum remains for passage this year.

Sen. Phil Gramm, R-Texas, made such a comment to industry officials during a fund-raiser last week in Washington. A meeting with Gramm and Sen. Trent Lott, R-Miss., the Senate majority leader, as well as Sens. Tom Daschle, S.D., minority leader, and Paul Sarbanes, Md., ranking member of the Senate Banking Committee, was postponed because of the issue, according to congressional staffers. The meeting was scheduled to take place April 13.

And, in a meeting with financial services industry lobbyists April 15, Gramm was noncommittal about when the Senate would consider the bill. Gramm’s other comments dealt primarily with the reported visit of 13 busloads of community activists to his home April 11. “They knocked on my windows and trampled my little flowers,” Gramm related to the assembled lobbyists. He also said they shouted through the windows, “Wendy, we know now where you live!” Wendy is Gramm’s wife; she is a former chairman of the Commodity Futures Trading Commission.

The only deadline for action on the bill is the need for the House Commerce Committee to report it out on a sequential referral by May 14. It is unclear what changes the panel will make to the bill. But Rep. John D. Dingell, D-Mich., ranking minority member of the panel, said he would likely propose an amendment to the bill during the panel’s consideration of it that would subject those barred from the banking, securities or the insurance businesses to “statutory disqualification” if they have been found by a state securities or insurance commission, or state or federal banking agency to have committed fraudulent acts or violated statutes enforced by these agencies.

“The (Clinton) Administration has admonished us against sending a bill with ‘inadequate consumer protections’ to the president,” Dingell said in a letter to the Comptroller General April 13

Big Banks Trounce Financial Modernization’s CRA Provisions

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 Voices Dissent On Modernization

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 Bills Consumers Over net

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 First With Its Own BPP

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