AMERICAN BANKER - As E-Pay Shines, Lockbox Losing Luster

As banks continue to push corporate clients to handle payments electronically, they are showing less interest in processing paper checks and invoices at lockbox facilities.

Bankers say that offering electronic payments services enables them to offer a variety of other for-fee features, while the arduous work of opening envelopes and sorting checks is becoming less viable, particularly as people write fewer of them.

This is especially true for retail lockboxes, which process consumers' payments to billers. And Citigroup Inc.'s deal last week to sell its entire operation to First Data Corp. shows that the same trends are starting to hit the wholesale business where business-to-business transactions are handled.

Amol Gupte, the head of Citi's North American treasury and trade solutions unit, said the New York company agreed to sell its retail and wholesale lockbox units to First Data in order to focus on more lucrative payments services, such as receivables management and information reporting.

He noted that lockbox sites typically have complicated machinery and extensive automated systems that need to be maintained, making them more like an industrial plant than a banking service. Citi concluded that lockbox "is a manufacturing business we did not want to be doing ourselves," Gupte said.

Earlier this month JPMorgan Chase & Co. sold its retail lockbox business to the payments processor Regulus Group LLC.

Barry Barretta, a principal at the Chicago consulting firm Treasury Strategies Inc., said the two deals signal an inflection point in the lockbox business, as more banks exit the market.

"The retail trend is almost completely played out," Barretta said. "The wholesale piece, you're just seeing that start."

Banks have been more willing to outsource their retail lockbox functions while retaining the wholesale businesses, which handle more complicated transactions and therefore carry a higher fee.

Craig T. Vaream, a managing director in the JPMorgan Treasury Services unit and its receivables product executive, said that handing off its lockbox unit was a tough call.

"Owning something is always better than not," Vaream said. "We need to be close to the client and understand how to provide that capability for them."

But retail lockbox is a straightforward job, Vaream said, processing checks for amounts that correspond to payment coupons and posting the payments to customers' accounts. The increasing use of electronic payments and credit cards eventually led JPMorgan Chase to conclude that it was a declining business.

But wholesale lockbox services are more complex and more lucrative, he said, because a single check can cover multiple invoices and include a range of disputed items, partial payments or other adjustments. "We will not be exiting this business," Vaream said.

Still, vendors that offer lockbox service say they are preparing for more wholesale volume.

Regulus, a unit of 3i Infotech Ltd., is the country's largest provider of outsourced lockbox services, and focuses almost exclusively on retail contracts. It is considering expanding its wholesale processing services, according to Josh Wendroff, the product marketing manager at 3i Infotech.

Regulus provides clients with a single file of payments information, whether those payments come in over the Internet, by phone or through a lockbox, he said, which gives the company the ability to handle complex, wholesale payments.

"We clear almost all of our payments electronically," he said.

Nancy Etheredge, a First Data spokeswoman, said the Kohlberg Kravis Roberts & Co. unit would integrate Citi's six lockbox sites into its own Remitco unit, which has seven locations around the country and processes 48.3 million transactions a month for more than 300 clients.

Remitco already does some wholesale business, and expanding its wholesale operations is "definitely a consideration," Etheredge said by e-mail.

Neither First Data nor 3i Infotech disclosed the price of their acquisitions.

The First Data deal, which is scheduled to close in September, would not affect Citi's processing of its own mortgage, credit card or auto loan accounts or its public-sector business that provides purchasing and travel cards to government agencies.

Rather than focusing on the physical processing of paper payments, Citi plans to concentrate on electronic services, including information reporting and financial management services for clients, Gupte said. "We're building out a whole strategy to help our clients manage their receivables."

He said the fundamental issue in lockbox is scale — with fewer people writing checks, there is less need for lockbox services.

"On the one hand, this is a critically important piece of the overall treasury services business that we provide," Gupte said. "On the other hand, it's a business that is very difficult to get scale in."

And in lockbox, where efficiency is measured by slicing fractions of a penny off processing costs, scale is critical.

Citi is not the first to get out of wholesale lockbox. Northern Trust Co. created a joint venture in 2001 with the vendor Fiserv Inc., and SunTrust Banks Inc. outsourced its wholesale and retail operations in April of last year to Symcor Inc., along with its check clearing and statement production.

Barretta said that while processing retail lockbox payments can be worth just pennies per item to a bank, a B-to-B payment can net up to $1 per check, largely because of the value of the imaging and data capture to the corporate client. As a result, wholesale lockbox remains an attractive business for big cash-management banks.

However, many of these banks have developed electronic payments services that are starting to take off. These enable banks to offer new types of automated cash management services, but the trade-off is that they also cut into their wholesale lockbox volume.

AMERICAN BANKER - Bair Offers New Route for Obama Reform Plan

WASHINGTON — As President Obama's regulatory reform proposal sputters, Federal Deposit Insurance Corp. Chairman Sheila Bair stepped up with an alternative strategy Thursday that dodges many major political obstacles and could rally support for the plan.

Bair continued to argue that a regulatory council, not the Federal Reserve Board, should oversee systemic risk and countered criticisms leveled against the council by Treasury Secretary Tim Geithner. Most members of the Senate Banking Committee endorsed her approach at a hearing Thursday, showing it is attracting broad bipartisan support. The FDIC chief also suggested a new way to structure a proposed consumer protection agency that would likely ease the banking industry's objections.

Geithner will likely react to her suggestions today when he testifies alongside Bair and the other regulators before House Financial Services Committee hearing.

While the Treasury continues to insist its regulatory reform plan is on track, even supporters like Rep. Barney Frank and Sen. Chris Dodd have questioned key elements. The options Bair laid out Thursday would eliminate much of the opposition to the Obama plan while still achieving many of its goals.

During a Senate Banking Committee hearing on Thursday, Bair dismissed as too weak the administration's proposed systemic risk council, which would advise the Fed but have no real authority.

"The oversight council described in the administration's proposal currently lacks sufficient authority to effectively address systemic risks," Bair said.

Asked by Dodd to respond to Geithner's criticisms that a more powerful regulatory council would lack the necessary accountability and speed to act during a crisis, Bair said she disagreed.

"Bringing multiple perspectives together is going to strengthen it, not weaken it," she said. "You are talking about tremendous regulatory power being invested in whatever this entity is going to be, and I think in terms of checks and balances it is also helpful to have multiple views … and come to a consensus."

Also testifying at the hearing was Fed Gov. Dan Tarullo, who likened a powerful council to the model adopted by the United Kingdom when it created the Financial Services Authority.

"If you pick the council that basically is able to direct everybody to do what the council thinks it ought to do, it's not that far from the Financial Services Authority mechanism in the U.K. or something like that," Tarullo said.

But Bair received support from Securities and Exchange Commission Chairman Mary Schapiro, who also argued that a stronger regulatory council was necessary.

"I agree with what Sheila was saying," Schapiro said. "I think a council is really critical to bringing a diversity of views about financial markets to the deliberations. … If you don't bring those diverse views together, you run the risk of any one regulator not appreciating the risk to stability and not understanding the risk that might impact a particular financial institution for which it does not have direct responsibility."

So far, it appears the Treasury is planning to stick to its guns on Fed oversight despite the fact it enjoys little support in the Senate. During Thursday's hearing, just about every committee member present endorsed a systemic risk council or emphasized that such power should not be vested solely in the Fed.

Dodd described himself as "agnostic" but appeared to be leaning toward a systemic council over the central bank.

"I share my colleagues' concerns about giving the Fed additional authority to regulate systemic risk," Dodd said. "Systemic risk regulation involves too broad of a range of issues for any one regulator to oversee."

Sen. Richard Shelby, the panel's lead Republican, rejected giving such power to the central bank.

"I strongly believe we should consider every alternative possible to the Fed as systemic risk regulator," he said.

Bair also suggested ways to save the Obama administration's proposed consumer protection agency, which is under heavy fire from the banking industry.

Frank opted to cancel a planned House Financial Services Committee vote next week on a bill creating the new agency in part because he wanted to generate more support for it.

While Bair supported the creation of a new agency to write new consumer protection rules, she said banking regulators should keep their existing enforcement authority over banks.

"We strongly, strongly, recommend the examination and enforcement component [stays] with the bank regulators," she said. "There are important synergies between prudential and consumer supervision. We typically cross-train our examiners … abusive mortgages that are abusive to consumers are also unsafe and unsound and frequently we will find those consumer affairs problems."

Her plan is likely to address the industry's objection that being regulated by two different agencies is too difficult.

Bair also raised practical problems with handing enforcement over banks to the new agency.

"We don't understand why taking all the examiners from the bank regulators and putting them in this new agency and making them responsible for all banks and nonbanks is going to work," she said. "I don't think it would work. I think it would be highly disruptive to the FDIC. That's about 25% of the examiners at the FDIC, and I assume it is a similar percentage for the other regulators."

But Bair did recommend strengthening consumer protection by focusing the new agency's enforcement powers on nonbanks. She also suggested there could be better coordination between regulators and the new agency if regulators had a seat on its board, and suggesting the consumer protection supervisor gain a seat on the FDIC board.

"The goal should be to balance the nonbanks' compliance gap with an examination and enforcement mechanism that should focus outside the banking sector, where you really don't have any examination at all," she said.

"There were a lot of abuses outside the banking sector that we think could and should be addressed by this agency."

AMERICAN BANKER - Banks Tweak PFM Software to Stand Out in the Crowd

As financial management tools become a more common online banking feature, executives have realized that to be successful, they have to be different.

Several vendors offer personal financial management applications, but banks and credit unions that are among the early movers here say these products are too generic.

Some have pushed their vendors to customize the software, while others have tweaked the applications in-house. The goal, bankers say, is to maintain their lead with this emerging technology by delivering services their rivals cannot easily copy.

"Your Web site should reflect the personality of the organization, and if you go with these cookie-cutter things you really sort of hand that over to somebody else," said Stu Fisher, the senior vice president of e-commerce for Addison Avenue Federal Credit Union. "I don't think people should do that with their branches — just stamp them out so that they all look the same and they are undifferentiated — but somehow when it comes to the Web we tend to do that."

Addison Avenue, of Palo Alto, Calif., is preparing to roll out by September a financial management product based on technology from two vendors; it is adapting software from Jwaala to develop the basic tools to help its members monitor deposits and track spending, and is adding community features developed by Wesabe Inc.

Fisher said that working with two vendors is a challenge, but the credit union wanted to create a unique financial management product. "We've chosen to take a bit of a harder road in getting this work done but feel that, at the end of it, it should reflect the personality of Addison Avenue," he said.

Mark Schwanhausser, a research analyst for Javelin Strategy and Research in Pleasanton, Calif., said Addison Avenue and other financial companies working on financial management tools now are in the vanguard but would quickly lose their advantage over the competition if they relied on off-the-shelf products.

"The barrier is much lower to being able to match" a rival that hasn't customized the software, he said. "The whole goal, in many cases, is to be distinctive."

Banks have tried in the past to introduce personal financial management tools, but these earlier efforts gained little traction, largely because they offered few of the features that are becoming popular now.

The products, then and now, are typically based on aggregation technology, which presents in one place account data from various financial companies. But the earlier products did little to show consumers how to interpret this information.

In the past two years, Web sites operated by nonbank providers such as Wesabe and Mint Software Inc. have become popular destinations for consumers who want to keep tabs on their finances; these companies use aggregation technology originally developed for banks to gather users' financial details and then apply their own software to help people make sense of the data.

Joe Polverari, the senior vice president of strategy and development for the technology vendor Yodlee Inc., said this combination is helping financial management tools catch on with mainstream users, and that many banks are taking the same approach. (Mint is a Yodlee client.)

Polverari agreed that banks need to differentiate their offerings. If they thought that offering generic personal financial management tools was all it took to satisfy their customers, "they would just put up the hosted solution as fast as they could, and market it as quickly as they possibly could and be satisfied with the result," he said.

Instead, half of Yodlee's 155 financial management software clients have opted to adapt its basic offering. "I think they're all planning for the future," he said.

PNC Financial Services Group Inc., for example, built on Yodlee's software to add a spend-tracking feature to its Virtual Wallet product, which presents financial data in an interactive calendar.

Mike Ley, a senior vice president in PNC's payments and e-business group, said no off-the-shelf product would have worked for Virtual Wallet.

"Some of the out-of-the-box things are very broad and they're targeted at solving the needs of a lot of different people," he said, but Virtual Wallet is aimed at a very specific market — young adults who have recently graduated from college — and PNC needed to modify the generic software to appeal to this user group.

Stanford Federal Credit Union asked its vendor to take on a task that wasn't even on its product menu. The Palo Alto, Calif., credit union uses financial management software from Geezeo Inc., and also wanted to make the tools available through mobile phones; Geezeo's developers found a way to make it possible.

Kelly Dowell, Jwaala's chief operating officer, said many clients have a vision for their financial management products that goes beyond what his company's software supports.

"We wanted to make our product very open because we know this is emerging, we know people come up with new ideas," Dowell said. He said that he is often competing against his potential clients, which must decide whether to build something themselves, or buy it.

Jwaala chose to provide a third option: build and buy. It offers clients access to its source code, the building blocks of its software, which they can then assemble as they wish.

"The beauty of that source code is they don't have to start from scratch," he said. "They can license the source code and then build on top of what we have and tailor it any way they want it."

Seven of Jwaala's 32 clients, including Addison Avenue, have chosen this approach, he said.

Fisher said that he picked Jwaala's PFM software over Wesabe's because "it was architecturally a better fit. We would get access to the source code, which we can then choose to develop further on our own."

The one thing that Jwaala did not have was a community component to allow Addison Avenue's members to interact with one another online; for that, the credit union turned to Wesabe.

Marc Hedlund, Wesabe's co-founder and chief executive, said he does not mind having his software paired with that of another vendor.

"All of the engagements that we've done so far have involved some other vendor, whether it's the online banking platform provider, usually, or something else," he said. Just as Jwaala did not build a community element, "there are things that we don't do yet."

Though Wesabe, like any vendor, aspires to offer its clients as much as they want, he said there will likely be other times when a client chooses to mix Wesabe's product with others in the same space.

"Nobody wants, 'Can you give me exactly what everybody else has?' " Hedlund said.

Javelin's Schwanhausser said that although there are a growing number of vendors in the PFM space, their products are still developing.

"Part of the problem right now is: nobody has the whole solution," Schwanhausser said, "so they're having to go out and buy 'partial PFM' here and there and piece it all together."

AMERICAN BANKER - Citi: Right Direction, But Small Steps

There is no denying that Citigroup Inc. is making progress in its restructuring efforts. But is it making enough progress?

Cheerleaders for and at the company point to its recent divestitures, its head-count reductions and its stronger capital ratios as clear evidence of improvement. Skeptics point to the high turnover of executives, the continued drag from assets identified as undesirable, and the economic headwinds confronting the businesses that Citi plans to keep.

Friday's second-quarter earnings report did little to settle the issue, with both sides finding evidence to support their arguments.

The only people who did not find what they were looking for were the ones waiting for a radical overhaul, for the type of grand gesture that would be transformational in its own right while also helping to lift the company out from under the protection of the federal government. But even if Citi wanted to make such a move, it is unclear how the company should proceed.

"Grand gestures may require a magician, and magicians generally provide illusion rather than reality," said Gary Townsend, the chief executive officer of Hill-Townsend Capital LLC in Chevy Chase, Md. "So I'm not looking for something grand and great. There is sufficient runway to be patient."

Government aid has accounted for the bulk of the reduction in insolvency risk at Citi. But the company also has taken action to help build a cushion. The June 1 sale of Smith Barney into a joint venture with Morgan Stanley generated a $6.7 billion gain in the second quarter — enough to offset losses and put Citi in the black — and helped lift its Tier 1 capital ratio from 11.9% at the start of the quarter to 12.7% at the end of it.

Citi also struck a deal to sell its Nikko Cordial Securities Inc. business in Japan to Sumitomo Mitsui Banking Corp. for about $7.9 billion, and it is in the middle of an exchange offer, set to expire Friday, that would swap out $33 billion of dividend-paying preferred securities for common stock.

But even with those moves, analysts worried about whether Citi could find its sense of direction, let alone stay on course, as it made a series of management changes — including the replacement of Edward "Ned" Kelly as chief financial officer a week before the earnings release — and clashed with some of its regulators in Washington.

"Between the constant shuffling of senior management and the various reports we've seen in the past few months about conflicts between different constituencies of regulators, I don't think the company has been putting out a strong sense of who's in charge," said Kathleen Shanley, an analyst with the independent debt-research firm Gimme Credit.

Vikram Pandit, Citi's chief executive, seemed determined to telegraph a different message Friday, taking part in a conference call with analysts after skipping the previous quarter's presentation to Wall Street. He spent most of his time on the call trumpeting the progress the company has made in cutting costs and reducing balance sheet risk. Head count, targeted at 300,000 by June 30, came in even lower at 279,000, he said, down 30,000 from the previous quarter. Total deposits rose 6%, though they were flat with the year-ago quarter.

"We are delivering on our plan," Pandit said. "Upon the successful completion of the exchange offer, we will be very strongly capitalized by any measure."

The new CFO, John Gerspach, said the clear delineation between Citi's core and noncore assets, announced in January when the company split its businesses into divisions (Citicorp and Citi Holdings) has helped to maintain focus. On Friday the company broke out results for the two divisions for the first time.

"It is more than just a change in the way we report the numbers. It's a change in the way that we actually manage the business," Gerspach said.

But until Citigroup can actually sell or otherwise unwind the unwanted assets of Citi Holdings — including consumer lending businesses dependent on securitization in the secondary markets — the separation means little to investors.

"We think Citi's ability to sell assets apportioned to Citi Holdings is critical to [the] success of company," Stuart Plesser, an analyst with Standard & Poor's Equity Research, wrote in a note to clients.

Ironically, though, it was the Citi Holdings assets that generated higher second-quarter revenue versus last year, not the consumer banking and institutional clients businesses that make up Citicorp.

Citi Holdings got a boost from the gain on the Smith Barney transaction, along with higher valuations for certain securities that are accounted for on a mark-to-market basis. Its revenue, tempered by sharply higher credit costs, jumped from $2.1 billion in last year's second quarter, to $15.8 billion.

At Citicorp, revenue dropped 11%, to $15 billion, as credit losses, lower volumes and the impact of foreign exchange offset expense reductions. Total credit costs for the group jumped 57%, to $2.8 billion, reflecting $1.6 billion of net credit losses and a $1.2 billion addition to loan-loss reserves.

Gerspach defended the makeup of the Citicorp division, saying the businesses it includes have far more predictable revenue than the assets in Citi Holdings.

The Smith Barney gain helped lift Citi's companywide revenue by 71%, to $30 billion. Net income from continuing operations was $4.28 billion, or 49 cents a share, compared with a year-earlier loss of $2.5 billion, or 55 cents.

Total credit costs soared 81%, to $12.4 billion; they consisted of $8.4 billion in net credit losses and a $3.9 billion loan-loss reserve build. "Our expectation is that until Citi Holdings is substantially wound down, there will continue to be some volatility in the earnings stream," Gerspach said.

But he and Pandit indicated that the pace of credit deterioration is set to moderate, as a result of a slowdown in the number of loans turning delinquent. That would be an important milestone for anyone looking for improvements at Citi.

"There's been demonstrable progress. It's particularly evident in the capital structure," Townsend said. "The big question for them, and for Bank of America and JPMorgan Chase for that matter, is how long into the future it will be before we see actual reductions in credit expense. I would call that progress in its own way."

AMERICAN BANKER - Inroads on Consumer Protection?

Enforcement, product choice, preemption and liability on table

WASHINGTON — Industry lobbyists accept that they are unlikely to stop the creation of a new consumer protection agency, but many are confident they can curtail its powers.

Before the House Financial Services Committee votes on the issue next week, industry representatives are working to convince lawmakers that new agency should not have the power to examine and enforce rules against banks. They are also trying to soften language requiring lenders offer "plain vanilla" products before alternatives. Also on the table: ensuring state consumer protection laws are preempted and lenders are shielded from legal liability.

Lawmakers are listening.

"We are looking at several things," Rep. Mel Watt, a co-sponsor of the bill and the House Financial Services Committee's monetary policy subcommittee chairman, said in an interview Monday. "What we are trying to figure out, No. 1, are they legitimate concerns? And if they are, how do you address them in a way that doesn't create more disruption?"

At the top of his list, the North Carolina Democrat said that he believes the committee needs to consider how to divvy up powers among consumer protection and safety and soundness regulators, how enforcement will work, how conflicts would be resolved, what the costs are, and how to handle personnel shifts from the existing agencies to the new one.

But while the banking industry — and its regulators — are lobbying hard to leave current enforcement authorities over financial institutions alone and merely let the new agency write consumer protection regulations, Watt is not convinced.

"You've got to put rule writing and enforcement in the same place," he said. "There are people who are out there advocating separating the two, but I don't think you can separate those two functions without doing jeopardy to what you are trying to do."

But Watt said lawmakers are still weighing "if any of the existing regulatory agencies should retain any consumer protection responsibilities."

"If so, how do you keep those things that get retained from having potential conflicts with the part of the same issue that gets transferred?" he said. "It may be better for all or none in that context of consumer protection issues."

Still, industry representatives said they are continuing to press the point, arguing that giving a consumer agency enforcement authority will leave lenders caught in the middle between the new agency and existing supervisors.

"The fundamental question is if we are going to split prudential regulation and consumer protection. I believe that's the direction that the chairman is headed," said Bill Himpler, an executive vice president for the American Financial Services Association. "We believe as long as that's the direction that is a fundamental flaw. … Everything is nibbling around the edges on a fundamentally flawed approach."

Himpler contends that lawmakers have expressed reservations about what happens to existing consumer protection laws and potential complications that a transition to a new agency might incur. "We believe members have concerns about the scope of the new authority and what that does to existing regulations such as Truth in Lending, HOEPA, UDAP and others," he said. "It gives the new CFPA the primary responsibility over a number of the provisions in each of those regulations. At the same time, it's going to take a new agency three to four years to get up and running. So what happens in the interim? This raises more questions."

Scott Talbott a senior vice president with the Financial Services Roundtable, agreed many lawmakers share industry's concerns with the bill.

"There are number of members that have issues," he said. "In fact, I can't find anybody who is completely happy with it. It raises a lot more questions than answers. Some of the concerns are on the lack of uniformity, that it's not a uniform national standard, that it's not preemptive. Then all the way down are the nuts and bolts of how it would actually work. Who would pay for it? How would products be rolled out?"

Watt said that potential conflicts between the new agency and banking regulators may not be as big a problem as bankers are suggesting.

"I've been trying to understand the extent — if any — to which the consumer issues conflict with … the other safety and soundness and prudential regulators responsibilities that the existing agencies have," he said. "The regulated people keep saying that there is this potential conflict … but I haven't really been able to identify what that conflict is."

But the North Carolina Democrat acknowledges other complaints, including whether employees from the banking regulators would be transferred to the new agency "and what disruption that would create."

"Then there is the question of how you pay for the agency," Watt added. "The existing regulators have a built-in fee schedule with the entities and this new consumer agency wouldn't necessarily have that same built-in fee structure."

Observers said many of the details may be left for the Senate to resolve. House Financial Services Committee Chairman Barney Frank has pledged to pass the bill through his panel by the end of next week.

One of the biggest questions is whether lawmakers will end preemption. Under the bill, the new consumer agency would set a minimum for lenders that states could exceed. State authorities could also examine covered institutions and enforce all federal and state standards.

Industry representatives have made little traction in arguing to keep preemption intact among House lawmakers, but observers say they will likely receive a stronger reception in the Senate.

"I don't think you can get much at the House level; they seem to be going their own way," said Laurence Platt, a practice area leader of K&L Gates' financial services practice. "I don't see as much of a concern about balancing the interests of industry and consumers at the House level. So I think there might be a more temperate approach at the Senate level."

Industry representatives are more hopeful about curbing restrictions that would require lenders to offer so-called vanilla products before attempting to sell more creative alternatives.

Banking lobbyists are also looking for protection from legal liability if they offer a nonstandard product. They fear that under the bill as currently written, any product that is not "vanilla" could result in a lawsuit claiming the product is unfair or deceptive.

"There would be no reason to offer anything other than a plain-vanilla product. It's just the uncertainty. If a plain-vanilla product is not very nice you are subject to fines up to a million dollars a day. How do you maneuver within that kind of a framework?" Platt said.

But Platt said lawmakers are likely to add language that would require the new agency to take into consideration the availability of credit and potential legal liability problems. "At some point you have to look at the regulatory impact of the rule on the availability of credit, so my hope is that construct is built into the rulemaking process," he said.

AMERICAN BANKER - Old Bank of America Swagger Could Be Gone with Branches

Some question if Lewis will stick to plan

In the end, was it all just blind ambition?

Famous for its desire to be the bank of America, Bank of America Corp. announced this week that it will shrink its sprawling branch system. For the Charlotte company, the move is a sea change in self-perception, from grand to … realistic.

Observers point out that CEO Kenneth D. Lewis has for years touted the need for scale and steadfast support for the U.S. consumer. But the prolonged recession and a belief that retail banking mores are changing may be reshaping the executive's philosophies, leading the company to cut back significantly on a branch network it spent years building, they said.

"I think they have moved away from the goal of doing business with every household in the U.S.," said D. Anthony Plath, a finance professor at the University of North Carolina at Charlotte. "From now on, the emphasis is quality over quantity."

But others aren't sure whether to give B of A that much credit given the lack of details — the company has not said how many branches it will cut — and its constant changes of direction in recent years under Lewis. Far from a move of conviction and intent, the branch cutbacks could merely be another meandering strategic detour, they say.

"They have an identity crisis over who they want to be," said Gaurav Patankar, a managing partner at 360 Global Partners Inc., pointing to substantial executive turnover in recent years and the extra oversight that has come from securing $45 billion in capital from the government. "This goes beyond their scope and size."

In any event, observers said, thinking smaller, more high-tech — and more profitable — makes sense for a struggling company that is still trying to resolve huge credit-quality problems, digest some controversial acquisitions and fight off criticism from investors and federal officials.

Red Gillen, an analyst at Celent, a research and consulting unit of Marsh & McLennan Cos., said he expects Bank of America "to place considerably more emphasis" on improving its mobile and online technology. "New services are now probably a lot closer to the center of B of A's radar screen," he said.

But there are numerous examples of the $2.32 trillion-asset company charting a strategic course only to abandon it soon thereafter.

In the last five years there have been four chief financial officers, four general counsels and two chief risk officers. In the past year the company moved two key executives, Brian Moynihan and Neil Cotty, to new posts only to return them to their previous jobs a few months later.

Analysts recall a February 2007 conference in Florida where Lewis told attendees that he wanted growth without relying on acquisitions, only to spend nearly $46 billion over the next two years on U.S. Trust Co., LaSalle Bank, Countrywide Financial Corp. and Merrill Lynch & Co.

Bank of America also went from investing more than $500 million to build up its investment bank to an aggressive purge after a substandard quarter in 2007, when Lewis infamously declared that, "I've had all the fun I can stand" in the business. A year later he swooped in to buy Merrill, simply telling investors that, "I like it again."

Lewis said in an American Banker interview last fall that the 2007 comment was "reactionary" and had taught him a lesson. "Cute comments always get you in trouble, and they always come back to haunt you," he said.

Some are saying the same of the company's actions. Its bold bets on the U.S. consumer have given it substantial exposure to the recession.

Losses embedded within its trading book, notably those at the once-coveted Merrill, led to more government aid and oversight and contributed to Lewis' ouster as chairman in April.

The board has also been reconstituted, with Walter Massey promoted to replace Lewis as chairman, along with seven departures and four additions this year.

The frenetic pace of change, along with capital constraints, has heightened concern among observers who normally tout execution as B of A's greatest attribute.

Andrew Marquardt, an analyst at Fox-Pitt Kelton Cochran Caronia Waller, said B of A's "lack of consistency frustrates" investors. "Clearly it has been questionable if they have really stuck to their strategic initiatives," he said.

B of A spokesman Bob Stickler acknowledged the concerns but said the volatile economic conditions have to be taken into account.

"What they're seeing is that the road isn't always straight," he said. "We can understand people's frustration. Nobody likes to run in place, but it is better than falling down."

"We think Bank of America's strategy has been consistent, focusing on how do we grow the company. … We have been opportunistic. When things come up that fill holes in your franchise, you take advantage of that."

Not everyone is criticizing the company's willingness to change direction, particularly by scaling back its 6,100 branches — and their costs — to focus on alternative channels.

While Lewis told a group of investors last week that a 10% cut was possible, a B of A spokeswoman said Wednesday the company continually evaluates the size of its network, but it does not yet have a target.

Kenneth Thomas, a bank branching consultant, said banks can spend $1 million each year to run a branch, with half the costs tied to staffing.

Using that estimate, B of A could cut annual expenses by $610 million by closing 10% of its branches.

(It would have the third-biggest network, behind Wells Fargo & Co. and JPMorgan Chase & Co.)

"It would allow them to reallocate financial resources," said Darryl Demos, the general manager of the banking group at Verint Systems Inc., a Melville, N.Y., technology provider.

"Branches are only one small part of the consumer relationship. This is an absolute rebalance that would be natural for the company."

AMERICAN BANKER - PayPal Looks Past Web to Find Its Future

American Banker  |  Monday, July 27, 2009
By Daniel Wolfe

PayPal Inc. is moving beyond the browser.

The company is one of the premier names in online shopping, but during a major conference last week in its hometown of San Jose, executives made little mention of traditional e-commerce in discussing the next phase of PayPal's evolution. Instead they spotlighted innovative electronic payment formats that do not involve the familiar trappings of a Web page or digital shopping cart.

"It's time to take the handcuffs off," Osama Bedier, PayPal's vice president of platform and emerging technology, said in a presentation Thursday. "This will make it easy to pay on other platforms, from mobile to gaming to set-top boxes and beyond."

The conference focused on how PayPal, a unit of eBay Inc., would open its platform to third-party software developers. Scott Thompson, PayPal's president, said the company hopes to tap into the creativity and energy of the entire payments industry by permitting outsiders to build applications that link to its core systems.

The goal, he said, is for PayPal to become the enabler for electronic products and services that otherwise might have no way to be monetized.

The open platform, Thompson said in a presentation, "puts the developer in the driver's seat."

PayPal is already in place with systems that do not use browsers.

Research In Motion Ltd. is using PayPal to process all purchases at the application store for users of its BlackBerry devices. Microsoft Corp. is also weaving PayPal into its coming Azure cloud computing platform. And Twitpay Inc., which offers a person-to-person payment service for users of Twitter Inc.'s microblogging service, is an early user of PayPal's new developer tools.

Features supported by these new tools include the ability to disburse a single payment to multiple recipients automatically, and to authorize and complete payments at separate times. The system is currently being tested by a a handful of companies, and should be opened to more by November.

Bruce Cundiff, a director of payments research and consulting for Javelin Strategy and Research, said PayPal is entering a space where there are often few options for developers other than building payments systems from scratch.

PayPal is going "anywhere the online channel reaches, so they're certainly not dependent on the browser," he said.

For products that do not conform to typical e-commerce models, the only clear option developers had before PayPal's announcement was the automated clearing house system, Cundiff said. ACH is cheap and ubiquitous, he said, but it's "not product-ized, not as people-oriented," he said.

Many popular online services, such as the namesake applications of Facebook Inc. and Twitter, have long prompted questions about how they might bring in revenue.

Cundiff said that despite their enormous user base, the payment question cannot go unanswered forever. "All these things are happening," he said, but "it is finite, in terms of running a business that isn't making money."

Aaron McPherson, a research manager for payments at IDC Financial Insights, said opening PayPal's platform to outsiders is a major change. "They've got to have an implementation that works with cloud computing and software-as-a-service and the new digital marketplace," he said. "It's a very important development."

PayPal has been through two major shifts in the past, McPherson said. In the first, when it shifted from a service designed to move money among personal digital assistants to one that helped people make payments at online auctions, PayPal was filling a void, and "really did unleash a lot of economic activity that wasn't otherwise happening," he said. "That's not what's happening here."

The current transition is more akin to the second major shift, when PayPal began tailoring its service to work through e-commerce sites besides eBay. In that transition, the company was expanding into a space that was already healthy, he said.

Though the market was eager for PayPal's service when it became available to eBay shoppers, moving into new electronic payments systems will not be as easy, McPherson said.

"The success of this strategy is going to be much more dependent on PayPal's ability to cut deals with the platform providers than it is to unleash innovation in the developers' community," he said.

Andrew Schmidt, a research director at TowerGroup Inc., an independent research unit of MasterCard Inc., said that "opening the payments platform really does position them to achieve much greater growth."

However, he acknowledged "there are a lot of hurdles."

Most notably, Web browsers are tried-and-true technology, but moving into new formats such as gaming consoles or set-top boxes will require developers to craft new interfaces.

Schmidt said PayPal's overall strategy is noteworthy. "If their model works the way they want it to, you don't need your wallet, you don't necessarily need your phone," he said. "You just need to hook into PayPal."

AMERICAN BANKER - Quality Overshadows Wells' Profit

Wells Fargo & Co. did a lot of things a public company is supposed to do at earnings time — report a flashy profit gain and appear to exceed an ambitious capital plan, to name two — but it just wasn't enough to silence the alarm bells from a larger-than-expected deterioration in credit quality.

The guarded reaction of analysts and investors not only speaks volumes about the complexities of a banking giant like Wells Fargo, it underscores how in this earnings season, deep scrutiny of credit-quality statistics has supplanted routine measures such as earnings per share.

Besides a double-digit jump in the bottom line, the $1.3 trillion-asset Wells reported solid revenue growth — not only from mortgage banking but across many of its business lines — as well as margin expansion from core deposit growth. It also said it could fulfill its capital-raising plan without another stock offering.

However, chargeoffs and nonperformers rose more than expected, in both legacy Wells commercial real estate and consumer loan portfolios, and from option adjustable-rate mortgages inherited from its Wachovia Corp. acquisition last year.

Wells' credit quality is still better than many banks', and early delinquencies in some portfolios showed signs of slowing. But the unexpected deterioration overall concerned many analysts and drove Wells' stock down 3.6% Wednesday, to $24.45 per share.

Howard Atkins, Wells' chief financial officer, said credit issues will likely not abate for some time.

"Until the economy comes back, credit losses will remain elevated, but we hope they'll be a bit more moderated given the actions we've taken," Atkins said in an interview.

In particular, Wells has been aggressive in working through problems with commercial real estate borrowers, writing down much of the losses on Wachovia mortgage loans through purchase accounting, and lowering its risk in some consumer portfolios such as indirect auto lending, Atkins said.

Still, observers focused on the fact that chargeoffs unexpectedly rose 35% from the first quarter, to $4.39 billion, and nonperforming assets rose 45%, to $18.3 billion.

Adam Barkstrom, an analyst at Sterne, Agee & Leach Inc., said Wells has more exposure to consumers relative to other banking companies, which may not bode well if the economic recovery drags out.

"With unemployment continuing to go up, it's going to be a tough road for them," Barkstrom said. "Additionally, the option-ARM portfolio they acquired from Wachovia — I don't think we've fully seen that played out, either."

Paul Miller, an analyst at Friedman, Billings, Ramsey & Co. Inc., wrote in a note Wednesday that given the big increase in chargeoffs and nonperformers, Wells is underprovisioning for future losses, because it built reserves by only about $700 million in the second quarter.

"Unless Wells' net chargeoffs stabilize over the next few quarters, Wells will have to start materially increasing its provision expense, which will put pressure on earnings and valuations," Miller wrote.

Not all analysts were bearish on Wells' credit deterioration, however. Anthony Polini at Raymond James & Associates said he was encouraged that nonperformers were increasing at a slower rate than in previous quarters, and that they were still a relatively low percentage of total loans (2.23% at June 30).

Additionally, better-than-expected revenue growth from a number of business lines, including mortgage banking, and from margin expansion (14 basis points from the first quarter, to 4.3%), should help Wells better absorb higher credit costs down the road, said Joe Morford, an analyst at Royal Bank of Canada's RBC Capital Markets.

Revenue rose 28% from the first quarter, to $22.5 billion, including $3 billion from mortgage activities, of which $1 billion came from a write-up of mortgage servicing rights net of hedge results.

Overall, Wells' net income rose 47% from a year earlier, to $2.58 billion, or 57 cents a share, after paying preferred dividends. Subtracting several one-time items, including a $565 million FDIC special assessment and merger-related and restructuring expenses from the Wachovia acquisition, Wells easily beat the average analyst estimate of 34 cents.

The San Francisco company also posted pretax, pre-provision net revenue of $9.8 billion, and said that it has now generated $14.2 billion toward addressing its $13.7 billion capital shortfall, as per the government's stress test results in May. The company raised $8.6 billion from a common stock offering in May, and the $5.6 billion balance came both from second-quarter revenue and other internal sources of capital, including realization of tax assets, Atkins said.

Though analysts were not sure whether regulators would agree with Wells' assertion that it had met the capital shortfall a quarter early, Atkins said it was "undisputed that we raised $14.2 billion."

Bottom line: both Atkins and analysts were confident that Wells would not need to raise additional capital.

Atkins also said the company had not set a timetable for repaying the $25 billion in capital it received from the Troubled Asset Relief Program.

Wells generated $2.2 billion in revenue from mortgage activities on $129 billion of mortgage originations.

Analysts said that Wells' mortgage banking activities, particularly refinancings, might taper off in the second half of the year as interest rates rise. Atkins agreed, saying it does depend to a certain extent on the movement of interest rates.

The second quarter was one of the company's best production quarters ever, and "as long as interest rates remain relatively low, this level of activity will continue for a reasonable period of time," Atkins said.

But even if mortgage activity subsides, the company is continuing to post strong revenue growth in about half of its business lines, Atkins said.

"Wells is a revenue machine — we have always had very strong revenues, irrespective of the cycle," Atkins said.

Moreover, a good part of its revenue growth in the second quarter was margin expansion stemming from strong core deposit growth, he said.

Average consumer checking and savings deposits increased 20% from the first quarter on an annual basis, to $613.3 billion.

"We have a much higher percentage of core deposits in the form of checking and savings accounts than any other bank in the country, which accounts for our wide margin," Atkins said.  

AMERICAN BANKER - The Fed, the Council, and a Whole Lot of Gray

As the debate over regulatory reform unfolds, a key question is just how much control over large companies should be vested in one agency.

The Obama administration wants to hand sole authority to identify and oversee companies that pose systemic risks to the Federal Reserve Board. A council of eight regulators would be created to advise the Fed, but the central bank would not have to heed its recommendations.

Proponents praise this model as nimble, efficient and accountable, and say the Fed is the obvious choice for the job.

But critics claim the Fed already has a wide range of responsibilities, some of which it failed to fulfill in the run-up to the crisis, and should be counterbalanced by a strong advisory council.

Karen Shaw Petrou, managing director for Federal Financial Analytics Inc., neatly summed up the question: "The real heart of the matter is the qualms with the Fed and the lack of a clear alternative to it as a systemic risk regulator."

Dealing with systemic risk is a key goal of President Obama's 88-page proposal to revamp financial services oversight.

The administration envisions that the council would serve as a forum for discussing systemic risk issues and identifying gaps in regulation. But it would have no supervision, enforcement or rule-writing authority. The Fed would hold all those powers.

In an interview Friday, Michael Barr, the Treasury Department's assistant secretary for financial institutions, reiterated the point both the administration and Fed officials have made time and again — this proposal simply builds on the Fed's existing mandate.

"The Federal Reserve Board is our central bank and the central bank should be involved in the supervision of the largest, most systemically important firms," Barr said. "They are already regulating the largest, most interconnected firms in the country so it is, in our mind, a modest expansion of that authority."

As one might expect, the Federal Deposit Insurance Corp., which would get a seat on the council, wants its authority beefed up.

"This council ends up falling by the wayside if it's got no teeth," said Paul Nash, FDIC deputy to the chairman for external affairs.

Sentiment on Capitol Hill is more closely aligned with the FDIC position. There have already been five hearings on the best way to ensure a large company does not threaten the financial system and the Fed has come in for more than its fair share of criticism. On Friday, Rep. Paul Kanjorski, D-Pa., became the latest lawmaker to weigh in. "I have extreme doubts about the Fed" as systemic risk regulator, he said at a House Financial Services Committee hearing. "I don't know how they can manage that and all monetary policy decisions."

Even the panel's chairman, Barney Frank, who once supported making the central bank the sole systemic risk regulator now says that is not politically feasible. "I originally said the Fed," the Massachusetts Democrat said in a May interview. "I think politically there's going to be a problem with that, and I think some form of group is going to have to do it."

The Fed's primary job is to run the country's monetary policy, but it also regulates financial holding companies, some state-chartered banks and the payments system. It has a big say in how consumers are protected from financial fraud.

That list leads to concern about putting even more power in the Fed's hands.

"Should we create the be-all-end-all super regulator?" asked Kevin Jacques, the Boynton D. Murch Chair in Finance at Baldwin-Wallace College and a former Treasury official. He laid out the pros and cons and concluded the Fed should get input from other agencies.

"The Fed, despite its expertise and brilliance, can't solve this on their own," he said.

Ernest Patrikis, a lawyer at White & Case LLP and a former official at the Federal Reserve Bank of New York, said he suspects the central bank would pay close attention to advice it got from the council, which beyond the FDIC chairman would include the Fed chairman, Treasury secretary, the new national bank supervisor, the head of the new Consumer Financial Protection Agency, the chairs of the Securities and Exchange Commission and the Commodity Futures Trading Commission and the director of the Federal Housing Finance Agency.

"If a council made a recommendation to the Fed, and it didn't follow it, I think the Fed would have some answering to do," he said.

Nash of the FDIC is not convinced, and argued it is another reason why the council needs more power. "You would have more opportunity for dialogue so rash actions aren't taken without proper vetting," he said.

Fed officials declined to provide substantive comment for this story, but noted Fed Gov. Dan Tarullo will testify on the issue Thursday before the Senate Banking Committee.

But Fed veterans were quick to defend the agency.

"There's a very good case for giving it to the Fed up front," said Gil Schwartz, a partner at Schwartz & Ballen LLP who used to work at the Fed. "The Fed was created to deal with systemic risk."

"You have to separate whether you like the people doing the job right now or whether the structure is a good structure," said Oliver Ireland, a partner at Morrison & Foerster LLP and a former Fed lawyer.

Ireland said a strong advisory council could just create barriers to action. "If you have too many checks and balances, you never get anything done," he said.

Schwartz agreed.

"Interagency councils don't work," he said. "There's too much rivalry. Someone has to be in charge."

That's exactly the point Treasury Secretary Tim Geithner has been making, saying a strong council "would risk more confusion and less accountability."

Bob Clarke, a senior partner at Bracewell & Giuliani LLP and a former comptroller of the currency, agreed — to a point.

"It's always easier if you just have one person to be accountable, but I don't think accountability goes away just because you have a council rather than one entity," he said.

Some sources cited a third option: create a new agency solely dedicated to gauging systemic risk.

William Isaac, a former FDIC chairman, said it should be an independent agency chaired by a presidential appointee. "It must have some teeth," he said. "It must be independent. It shouldn't be an arm of the Department of Treasury."

Bill Longbrake, an executive in residence at the University of Maryland, said the agency could be modeled after the Congressional Budget Office or the General Accountability Office, reporting directly to Congress. Existing regulators would coordinate and provide data to this new agency.

"Such an arrangement would reduce the potential for subordination of risk assessment to other matters, as would be the case if systemic risk assessment were a Fed responsibility, or the potential for delay and watered down findings and recommendations as would be the case for a council," he said.

AMERICAN BANKER - Western Union's Latest Bank Service: Fast Bill-Pay

Western Union Co.'s push for bank partnerships is advancing on a new front — expedited payments.

The Englewood, Colo., company has signed a string of deals this year to offer its remittance services through bank branches, and it said Tuesday that Wells Fargo & Co. of San Francisco has become the first financial company to offer its same-day bill-payment capabilities online.

As the first major bank to offer such speedy payment services, Wells Fargo's move may prompt other companies to follow suit.

"It's a big deal in terms of revenue opportunity. We're talking about billions of dollars in fee revenue here that can be applied to expedited payments," said Bruce Cundiff, a research analyst at Javelin Strategy and Research.

David Shapiro, a senior vice president of marketing in Western Union's payment services unit, said his company is in talks with other banking companies about linking their online bill-pay services to Western Union's payments network.

"The banks are looking to differentiate themselves and generate fee revenue where they can," he said. "The opportunity for banks to add value to their bill-payment channel is something they all are looking for."

Some obvious candidates are U.S. Bancorp in Minneapolis, which began offering Western Union's remittance services at its branches in March, and Fifth Third Bancorp in Cincinnati, which did so this month. Shapiro would not say whether expedited payment services are on the table with either company.

Neither company would comment, though a Fifth Third spokeswoman said it is considering offering expedited payments.

Shapiro said consumers are showing increased interest in receiving expedited payment services from their banks. Western Union's research said that 38% of consumers prefer to pay their bills through their banks' Web sites, compared with 26% who prefer the mail and 25% who use billers' Web sites; 27% of consumers said they would be likely to switch to a bank that offers expedited payments.

Expedited services let consumers pay billers at the last minute, and they are often happy to pay their bank a moderate fee to ensure on-time delivery and avoid hefty late fees.

The idea has been around for several years but to date has gained little traction at banks, especially the largest.

More than 40% of Americans have made expedited payments, including 31% in the past year, but nearly three-quarters of them have done it directly, through the biller, Cundiff said. "This potentially has the ability to tip the scales toward the financial institution."

Cundiff said consumers often object to various bank fees, but are willing to pay for same-day payments. The expense is "not seen as onerous," he said. "They're seen as a bargain."

Adam Vancini, a senior vice president in Wells Fargo's Internet services group, said the banking company examined several expedited payment alternatives before picking Western Union.

"Western Union has a very solid record of delivering expedited payments in a number of different ways," Vancini said. "We're making a guarantee to our customers. We felt very comfortable that Western Union could help support that commitment."

The service is available now for people who pay their bills through Wells Fargo's Web site, and it is to become available to customers of the former Wachovia Bank on a state-by-state basis as Wells converts them to its in-house system, beginning in Colorado in the fourth quarter, Vancini said. Wells Fargo bought Wachovia in December.

The company is charging $7.95 for same-day payments to any biller except credit card issuers and mortgage lenders; the latter fee is $14.95 because these payments are typically larger, he said.

Vancini said Wells would consider using Western Union's remittance services but has made no commitment.

Wells initially is offering same-day payments to about 25 billers, he said, but expects to expand the list "to at least a few hundred" by yearend.

Shapiro said Western Union's online network reaches more than 4,000 U.S. billers and closely tracks each one's processing schedule.

If a mortgage lender, for instance, has a 6 p.m. cut-off time, "I want to know that, if I come in at 7 p.m., it won't be a same-day payment, but at 5 p.m., it will be," he said. "That is critical to the consumer experience."

ANNOUNCEMENTS - Innovative New Universal Life Insurance Rider...

ANNOUNCEMENTS - Union Bank Introduces New Corporate Brand Identity

Signaling a new era in its banking history, UnionBanCal Corporation and its primary subsidiary, Union Bank, N.A., today unveiled the company’s new brand identity, which includes an updated logo and related branding treatments that will over the course of the next several months adorn all Union Bank branches, ATMs and business offices in California, Oregon, Washington and other domestic U.S. and international locations where the company maintains specialized lending offices.

In addition, the company has started the process of incorporating the new logo mark on customer forms, bank statements, checks, ATM cards, product brochures and other materials.  On December 18, 2008, the company legally changed the name to Union Bank, N.A.; it had been Union Bank of California, N.A., since 1996.

"Changing our name to Union Bank last year was an important first step toward achieving our strategic goals and our desire to have a higher degree of national brand recognition in the financial services marketplace," said Union Bank President and Chief Executive Officer Masaaki Tanaka.  "Today marks a significant milestone in our bank’s history, and I am confident that our customers and employees will embrace this exciting change."

According to Tanaka, the shortening of the company's name to Union Bank -- and the subsequent rebranding efforts -- more accurately reflects the growth and transformation of the company in recent years.  "While we have had a three-state charter  -- California, Oregon and Washington -- for more than 100 years, we also have offices in several major U.S. and international markets where we’ve been expanding our footprint in commercial real estate, energy and utilities lending, and commercial banking.  Going forward, our recognizable logo and related rebranding efforts will better position us for future growth," said Tanaka.

Brand Attributes

The stylized red "U" adjacent to the blue Union Bank wordmark reinforces that the company is focused on the community and "You, the customer," according to Tanaka.  "For 145 years, Union Bank and its predecessor institutions have embodied the strength, stability and resilience of its customers," said Tanaka.  "For this reason, we selected a contemporary, elegant symbol that is evocative of growth and strongly supports the existing "Invest In You" tagline, which has been one of our most successful advertising and marketing campaigns."

BANKINSURANCE.COM – AIG Announces Impending IPO for ...

...American Life Insurance Company (ALICO) Unit

BANKINSURANCE.COM - NEWS IN BRIEF - JULY 20 - 26, 2009

New York City-based American International Group announced it will seek an initial public offering and a public listing on the New York Stock exchange for its American Life Insurance Company (ALICO) unit as soon as market conditions and regulatory approvals allow.  ALICO Chairman and CEO Rodney Martin, Jr. said, “Today’s announcement represents a roadmap for our independence.”  ALICO’s 40,000 agents offer life, accident and health insurance, retirement planning and wealth management services from offices in 54 countries worldwide.  Currently, the insurer boasts 19 million customers and $89 billion in assets under management.
BankInsurance.com News in Brief' is provided each Thursday courtesy of Michael White Associates @ www.BankInsurance.com.

BANKINSURANCE.COM - Court Orders SEC to Reconsider Classification...

...Of Indexed Annuities as SEC Regulated Securities

BANKINSURANCE.COM - NEWS IN BRIEF - JULY 27 - AUGUST 2, 2009

The U.S. Court of Appeals has ordered the Securities and Exchange Commission (SEC) to reconsider its Rule 151A, which classifies indexed annuities as securities to be regulated by the SEC.  The Court ruled on July 21, 2009, in American Equity Investment Life Insurance, et. al. v Securities and Exchange Commission that the SEC “failed to properly consider the effect of the rule upon efficiency, competition and capital formation” and ordered the SEC to “address the deficiencies with its analysis.”
     U.S. House of Representatives Bill 2733 and U.S. Senate Bill 1389, collectively, the Fixed Indexed Annuities and Insurance Products Classification Act of 2009, would repeal 151A and define indexed annuities as insurance products to be regulated accordingly.
Click here to read the Court’s opinion.
BankInsurance.com News in Brief' is provided each Thursday courtesy of Michael White Associates @ www.BankInsurance.com.

BANKINSURANCE.COM - Five Bank Broker-Dealers Fined for Deficient Supervision

BANKINSURANCE.COM - NEWS IN BRIEF - JULY 27 - AUGUST 2, 2009

The Financial Industry Regulatory Authority (FINRA) has fined five bank broker-dealers a total of $1.65 million for deficient supervision and procedures in variable annuity (VA), mutual fund and unit investment trust (UIT) transactions: McDonald Investments/KeyBanc Capital Markets ($425,000), IFMG Securities ($450,000), Wells Fargo Investments ($275,000), PNC Investments ($250,000), and WM Financial Services/Chase Investment Services Corp. ($250,000).  McDonald Investments/KeyBanc Capital Markets was also charged with unsuitable variable annuity sales to elderly customers and ordered to offer to rescind unsuitable transactions and return the purchase value plus interest, surrender charges and adjusted withdrawals.  FINRA Chief of Enforcement Susan Merrill said, “Bank broker dealers have access to a broad customer base through their retail bank branches.  Proper care must be taken to appropriately supervise sales to those customers, particularly the elderly, who can be unfamiliar with securities products as they seek alternatives to certificates of deposit and other bank offerings.”
BankInsurance.com News in Brief' is provided each Thursday courtesy of Michael White Associates @ www.BankInsurance.com.

BANKINSURANCE.COM - MetLife to Combine Business, Auto and Home Units

BANKINSURANCE.COM - NEWS IN BRIEF - JULY 20 - 26, 2009

New York City-based MetLife, Inc. will combine its Institutional and Individual Businesses and its Auto and Home unit into a single U.S. business organization as of August 1, 2009.  The intent is to enhance MetLife’s product design and distribution capabilities, streamline its decisions-making processes, and drive profitable growth.  MetLife Chairman, President and CEO C. Robert Henrickson said, “With this realignment we are recognizing that we can better serve both employee benefit plan sponsors and individual customers through a single integrated organization while preserving our unique franchises.”  The company expects integration to be fully completed in 2010.
BankInsurance.com News in Brief' is provided each Thursday courtesy of Michael White Associates @ www.BankInsurance.com.

BANKINSURANCE.COM - NAVA Moves, Gets New Name

BANKINSURANCE.COM - NEWS IN BRIEF - JULY 27 - AUGUST 2, 2009

The Association for Insured Retirement Strategies (NAVA) has been renamed the Insured Retirement Institute (IRI) and has moved its headquarters from Reston, VA to Washington, DC.  IRI said it will focus on promoting best practices and high ethical standards in the industry, work to further understanding of insured retirement value, and serve as a public advocate for issues surrounding insured retirement strategies.  IRI President and CEO Cathy Weatherford said, “We will provide consumers with the knowledge and confidence in retirement planning that can no longer be taken for granted.”
BankInsurance.com News in Brief' is provided each Thursday courtesy of Michael White Associates @ www.BankInsurance.com.

K@W - The Coming 'Wall' of Refinancings

A Trial for Private Equity Firms -- and Their Portfolio Companies

Private equity faces a difficult environment as credit markets try to absorb maturing debt from large leveraged buyouts. Panelists at the 2009 Wharton Private Equity & Venture Capital Conference said financial sponsors are scrambling to prepare for the refinancings that will start coming onto markets in 2012. They also noted that firms are focusing on portfolio company operations, exploring new positions in the capital structure and considering strategic, synergistic transactions.

LINK TO ARTICLE: http://knowledge.wharton.upenn.edu/index.cfm?fa=viewArticle&id=2300&specialId=89

K@W - 'True Turnaround Specialists'

...Are Poised to Survive in Today's Challenging Private Equity Market

As the economic downturn continues and bankruptcies rise, private equity is turning away from traditional leveraged deals and toward investment in distressed companies, according to speakers at the 2009 Wharton Private Equity & Venture Capital Conference, "Multiplicity Without Rhythm: Investing in Chaotic Markets." Specialists in distressed businesses expect a tidal wave of private equity deals made in 2006 and 2007 to go bad in the next few years. Given the number of opportunities and the lack of bankruptcy credit, many restructurings will occur outside of bankruptcy court and could result in swift liquidation.

LINK TO ARTICLE: http://knowledge.wharton.upenn.edu/index.cfm?fa=viewArticle&id=2303&specialId=89

MISCELLANEOUS - Americans Need a Safe Harbor to Weather Financial Storms

MISCELLANEOUS - Prudential Webinar

PERSONNEL CHANGES - ABA Nominates 2009-2010 Officers and Board Members

The American Bankers Association's Nominating Committee has selected the official slate of candidates for ABA officers for election at the association's annual convention to be held in Chicago starting Oct. 25.   

The committee, chaired by Bradley E. Rock, chairman, president and CEO of Bank of Smithtown in Smithtown, N.Y., nominated these candidates for ABA officer positions:

• Chairman: Arthur C. Johnson, chairman and CEO, United Bank of Michigan, Grand Rapids, Mich.;
• Chairman-Elect: Stephen P. Wilson, chairman and CEO, LCNB National Bank, Lebanon, Ohio;
• Vice Chairman: Albert C. Kelly, president and CEO, SpiritBank, Bristow, Okla; and
• Treasurer: William R. White, chairman and president, Dearborn Federal Savings Bank, Dearborn, Mich.

The committee also selected these nominees to join the ABA Board of Directors:

• Dorothy J. Bridges, president and CEO, City First Bank of D.C., Washington, D.C.;
• Paul G. Willson, chairman and CEO, Citizens National Bank, Athens, Tenn.;
• Joseph R. Ficalora, chairman, president and CEO, New York Community Bancorp, Inc., Westbury, N.Y.;
• Steven B. Wiggs, senior executive vice president and chief marketing officer, BB & T Corp., Winston-Salem, N.C.;
• Craig Blunden, chairman, president and CEO, Provident Savings Bank FSB, Riverside, Calif.; and
• Stephen G. Crowe, president and CEO, Williamstown Savings Bank, Williamstown, Mass.

PERSONNEL CHANGES - Citigroup Board Names Three New Outside Directors

…and Announces Other Governance Actions

Citi's Board of Directors today announced three new outside directors. In addition, the Board announced a new, non-executive Chair for Citibank, N.A., a new oversight committee for Citi Holdings and a new Chair of its Audit and Risk Management Committee.

The three new outside directors are:

• Diana L. Taylor, the former Superintendent of Banks for the New York State Banking Department, and current Managing Director of Wolfensohn Capital Partners, a fund manager.
• Timothy C. Collins, Chief Executive Officer of Ripplewood Holdings L.L.C., an investment firm that invests in financial services and other sectors.
• Robert L. Joss, Ph.D., Dean and Philip H. Knight Professor of the Graduate School of Business at Stanford University, and former Chief Executive Officer and Managing Director of Westpac Banking Corporation Ltd.

The new directors, who will stand for election at Citi's next Annual Meeting, bring the total on the Board to 17 members – only one of whom (Citigroup Chief Executive Officer Vikram S. Pandit) is a member of Citi management.

"The newly appointed directors are the latest additions to our group of exceptionally talented individuals," said Richard Parsons, Chairman of the Citi Board. "Like the other directors who have recently joined the Board, each brings deep and valuable experience in various dimensions of financial services. Further, as we periodically rotate Board assignments, we will be able to take optimal advantage of the specific skills of each new director."

Mr. Parsons added, "The newly constituted Board is an extraordinary resource for the Company as it works to build on Citi's many strengths, address its challenges and capitalize on its great opportunities. As in the past, the Board members will continue to work with Vikram and the management team as they implement Citi's strategy and return the Company to sustained profitability and growth."

Other actions by the Citigroup Board include:

• The Board announced that Jerry A. Grundhofer, who was elected at Citi's 2009 Annual Meeting, will be the non-executive Chairman of the Board of Citibank, N.A. and that two additional Citigroup outside directors, Michael E. O'Neill and Anthony M. Santomero, will be directors of Citibank, N.A. Mr. Grundhofer will replace Bill Rhodes, who will step down as Chairman and CEO of Citibank, N.A. as announced on July 9. Mr. Rhodes will be Senior Vice Chairman of Citibank, N.A. and will remain on its Board. As announced earlier, Mr. Rhodes will also continue to serve as Senior Vice Chairman of Citigroup, where he will focus more of his time on Citi's strategically vital international franchise. The Citibank, N.A. Board will thus consist of five outside directors of Citigroup (Messrs. Grundhofer, O'Neill, Ricciardi, Ryan and Santomero) and two internal directors (Messrs. McQuade and Rhodes).
• The Board announced a new Citi Holdings Oversight Committee. Michael E. O'Neill, who was elected at Citi's 2009 Annual Meeting, will chair this Committee, which will oversee management's strategy and execution for the disposition of Citi Holdings' assets and businesses. John M. Deutch will step off the Citibank, N.A. Board and the Citigroup Audit and Risk Management Committee so he can focus more of his attention on operations and technology matters, an area in which he has particular expertise, and will join the Citi Holdings Oversight Committee. Ms. Taylor and Mr. Joss will also be members of this Committee.
• The Board announced that Mr. Grundhofer will Chair the Audit and Risk Management Committee, replacing Mr. Deutch. Mr. Collins will join the Audit and Risk Management Committee.

All other Citigroup Board committee assignments remain unchanged.

Since Board committee rotations in July of last year, Citi has named a new independent chairman and appointed seven new outside directors, including the three outside directors announced today. As stated in Citi's Proxy Statement, Corporate Governance Guidelines and committee charters, committee memberships and chairs rotate periodically. Citi's Board believes this process reflects its continued commitment to strong corporate governance practices and has committed to reviewing Board Committee chairs and membership each year.

Biographies of the Board appointees:

Diana L. Taylor
Ms. Taylor, 54, is the former Superintendent of Banks for the New York State Banking Department, and currently serves as Managing Director of Wolfensohn Capital Partners, a fund manager. Earlier in her career, Ms. Taylor served as Chief Financial Officer of the Long Island Power Authority and Founding Partner and President of M.R. Beal & Company, a full service investment banking firm. Ms. Taylor also held various executive positions with KeySpan Energy, Donaldson, Lufkin & Jenrette, Lehman Brothers Kuhn Loeb, Inc., and Smith Barney, Harris Upham & Co. Currently, Ms. Taylor serves on the Board of Directors of Allianz Global Investors Fund Management, LLC, Brookfield Properties, LLC and Sotheby's Holding, Inc. Ms. Taylor earned a M.P.H. from Columbia University, an M.B.A. in Finance from Columbia University-Graduate School of Business and an A.B. in Economics from Dartmouth College.

Timothy C. Collins
Mr. Collins, 52, is Chief Executive Officer and Senior Managing Director of Ripplewood Holdings L.L.C., an investment firm that invests in a broad array of industries, including financial services, automotive, manufacturing, consumer and business services. Previously, Mr. Collins held executive positions with Onex Corporation, Lazard Freres & Company, Booz Allen & Hamilton and Cummins Engine Company. Currently, Mr. Collins serves on the Board of Directors of Reader's Digest Association, Inc., RHJ International, S.A., RSC Holdings, Inc., Commercial International Bank of Egypt and Weather Investments S.p.A. Mr. Collins earned an M.B.A. from Yale University and a B.A. in Philosophy from DePauw University.

Robert L. Joss, Ph.D.
Mr. Joss, 68, is Dean and Philip H. Knight Professor of the Graduate School of Business at Stanford University. Before Stanford, he was Chief Executive Officer and Managing Director of Westpac Banking Corporation Ltd. Prior to Westpac, Mr. Joss held executive positions at Wells Fargo & Company, including Vice Chairman. He also served as Deputy to the Assistant Secretary for Economic Policy at the U.S. Department of the Treasury. Currently, Mr. Joss serves on the Board of Directors of Agilent Technologies, Inc., C.M. Capital Corporation, Macquarie DDR Trust and Makena Capital Management LLC. He received his M.B.A. and Ph.D. in Finance from Stanford University and a B.A. in Economics from the University of Washington.

PRODUCTS - Protective Life Introduces a New Survivorship Term Product

REGULATORY - Federal Reserve Proposes Significant Changes to Regulation Z

...(Truth in Lending) intended to improve the disclosures consumers receive in connection with closed-end mortgages and home-equity lines of credit

The Federal Reserve Board on Thursday proposed significant changes to Regulation Z (Truth in Lending) intended to improve the disclosures consumers receive in connection with closed-end mortgages and home-equity lines of credit (HELOCs). These changes, offered for public comment, reflect the result of consumer testing conducted as part of the Board's comprehensive review of the rules for home-secured credit. The amendments would also provide new consumer protections for all home-secured credit.

"Consumers need the proper tools to determine whether a particular mortgage loan is appropriate for their circumstances," said Federal Reserve Chairman Ben S. Bernanke. "It is often said that a home is a family's most important asset, and it is the Federal Reserve's responsibility to see that borrowers receive the information they need to protect that asset."

To shop for and understand the cost of credit, consumers must be able to identify and understand the key terms of the mortgage. In formulating the proposed revisions to Regulation Z, the Board used consumer testing to ensure that the most essential information is provided at a suitable time using content and formats that are clear and conspicuous.

"Our goal is to ensure that consumers receive the information they need, whether they are applying for a fixed-rate mortgage with level payments for 30 years, or an adjustable-rate mortgage with low initial payments that can increase sharply," said Governor Elizabeth A. Duke. "With this in mind, the disclosures would be revised to highlight potentially risky features such as adjustable rates, prepayment penalties, and negative amortization."

Closed-end mortgage disclosures would be revised to highlight potentially risky features such as adjustable rates, prepayment penalties, and negative amortization. The Board's proposal would:

         Improve the disclosure of the annual percentage rate (APR) so it captures most fees and settlement costs paid by consumers;

         Require lenders to show how the consumer's APR compares to the average rate offered to borrowers with excellent credit;

         Require lenders to provide final Truth in Lending Act (TILA) disclosures so that consumers receive them at least three business days before loan closing; and

         Require lenders to show consumers how much their monthly payments might increase, for adjustable-rate mortgages.

The Board will also work with the Department of Housing and Urban Development to make the disclosures mandated by TILA, and HUD's disclosures, required by the Real Estate Settlement Procedures Act, complementary; potentially developing a single disclosure form that creditors could use to satisfy both laws.

In developing the proposed amendments, the Board recognized that disclosures alone may not always be sufficient to protect consumers from unfair practices. To prevent mortgage loan originators from "steering" consumers to more expensive loans, the Board's proposal would:

         Prohibit payments to a mortgage broker or a loan officer that are based on the loan's interest rate or other terms; and

         Prohibit a mortgage broker or loan officer from "steering" consumers to transactions that are not in their interest in order to increase the mortgage broker's or loan officer's compensation.

The rules for home-equity lines of credit would be revised to change the timing, content, and format of the disclosures that creditors provide to consumers at application and throughout the life of such accounts. Currently, consumers receive lengthy, generic disclosures at application. Under the proposal, consumers would receive a new one-page Board publication summarizing basic information and risks regarding HELOCs at application. Shortly after application, consumers would receive new disclosures that reflect the specific terms of their credit plans. In addition, the Board's proposal would:

Prohibit creditors from terminating an account for payment-related reasons unless the consumer is more than 30 days late in making a payment.

Provide additional protections related to account suspensions and credit-limit reductions, and reinstatement of accounts.

The Federal Register notices are attached. The comment periods end 120 days after publication of the proposals in the Federal Register, which is expected shortly.

RESEARCH - Michael White-ABIA Report

Michael White-ABIA Report Record Bank Annuity Fee Income in First Quarter 2009

Income earned from the sale of annuities at bank holding companies (BHCs) rose 12.4% to a quarterly record of $734.5 million in first quarter 2009, up from $653.3 million in first quarter 2008, according to the Michael White-ABIA Bank Annuity Fee Income Report™.    First-quarter annuity commissions were also 12.1% greater than the $655.2 million earned in fourth quarter 2008.

Compiled by Michael White Associates (MWA) and sponsored by American Bankers Insurance Association (ABIA), the report measures and benchmarks the banking industry's performance in generating annuity fee income.  It is based on data from all 7,447 commercial and FDIC-supervised banks and 940 large top-tier bank holding companies operating on March 31, 2009.

Of the 940 BHCs, 381 or 40.5% participated in annuity sales activities during first quarter 2009.  Their $734.5 million in annuity commissions and fees constituted 15.7% of their total mutual fund and annuity income of $4.67 billion and 19.5% of total BHC insurance sales volume (i.e., the sum of annuity and insurance brokerage income) of $3.76 billion.  Of the 7,447 banks, 886 or 11.9% participated in first-quarter annuity sales activities.  Those participating banks earned $255.7 million in annuity commissions or 34.8% of the banking industry's total annuity fee income.  However, bank annuity production was down 2.6% from $263.5 million in first quarter 2008.

LINK TO FULL PRESS RELEASE: http://www.bankinsurance.com/about/press-releases/2009-07-21-PR-Bank-Annuity-FIR-1Q-09.pdf

RESEARCH - OCC Survey Finds Bank Underwriting Standards Tightening

The Office of the Comptroller of the Currency released today its 15th annual Survey of Credit Underwriting Practices and reported that commercial and retail underwriting standards tightened for the second consecutive year following a four year period of eased underwriting.

The 2009 survey is a compilation of examiner observations and assessments of credit underwriting standards at the largest national banks. The survey indicates that the renewed focus on fundamental credit underwriting principles that followed the 2007 market disruption has continued.

Despite tightened underwriting, examiner assessments found that risk in both the commercial and retail portfolios increased for the second consecutive year and they expect portfolio risk to increase over the coming year. The economy was a major factor in the 2009 survey findings and was reported to be the primary reason changes were made to underwriting standards. Loan production and underwriting standards were also influenced by the depressed real estate market, changes in risk appetite, refinancing concerns, and the impact that relaxed underwriting standards from prior years had on payment performance. This year’s survey also indicates that the majority of banks now use generally the same underwriting standards regardless of the intent to hold or distribute. The OCC reminds national banks that underwriting standards should not be compromised by competitive pressures or the assumption that loans will be sold to third parties.

Despite the general tightening of underwriting standards banks continue to extend credit with 37 percent of the banks in the survey reported as increasing loan production while 31 percent experienced no measurable change in loan volume.

The 2009 survey included the 59 largest national banks and covered the 12-month period ending March 31, 2009. The aggregate total of loans was $3.6 trillion, which represented over 84 percent of all outstanding loans in the national banking system.

CAST SERVICE HIGHLIGHT

Fee Revenue Optimization

Results-driven revenue optimization analysis and execution 

A persistent challenge within the financial service industry is the continued need to create top line revenue growth. The need for revenue generation becomes more acute as industry leaders become aware, once again, of the overall strategic limitations of cost cutting and expense control. Lack of organic growth has contributed to pressures to grow both through acquisition and by broadening into new service offerings. These sometimes disruptive growth tactics can obscure opportunities to improve revenue growth.

Revenue Inhibitors

• Lack of cultural emphasis on revenue generation
• Primary focus on cost cutting
• Conflicting and inconsistent alignment of existing products
• Misunderstood customer behavior and preferences
• Inadequate process and controls for collecting fees
• Limited understanding of competitor revenue-related 'learnings' and trends

 Why CAST for Fee Revenue Enhancement

• Database of proven revenue enhancement practices
• Fact-based, rigorous analysis  
• Extensive cross industry experience
• In-depth revenue knowledge:
  • Retail banking
  • Commercial banking
  • Mortgage banking
  • Trust
  • Brokerage securities
  • Insurance
• Results oriented culture
• Collaborative/team approach

If you would like additional information, please contact Tom Vleisides at (213) 614-8066 ext. 244 or email tvleisides@castconsultants.com.

ABOUT CAST . SERVICES . CLIENTS . CAREERS . CONTACT

CAST Management Consultants, Inc.
700 S. Flower Street, Suite 1900
Los Angeles, CA 90017
ph. 213.614.8066  fx. 213.614.0760
www.castconsultants.com

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