Software Snafu Could Put Bank Merger in Jeopardy

FRAMINGHAM (03/13/2000) - A Salt Lake City bank's problems with a software upgrade contributed to lower earnings this year, which in turn, according to one analyst, may threaten its planned merger with another bank.

First Security Corp.'s $40 billion deal with Zions Bancorporation will create the second-largest bank in the Western U.S. if shareholders approve it March 22.

But earlier this month, First Security said its revenue and income projections for the first quarter will be down 8% and 25%, respectively, in part because of a systems upgrade that appears to have caused more problems than it solved.

That announcement may threaten its planned merger with Zions, also based in Salt Lake City, said analyst James Bradshaw at Great Falls, Mont.-based D.A.

Davidson & Co.

In a statement, First Security officials blamed the poor numbers on a decline in mortgage business as a result of rising interest rates and a botched systems upgrade that increased chargebacks for indirect auto and consumer loans. First Security officials declined requests for interviews.

The software upgrade, installed in October, was intended to simplify the collection process by flagging the company's most outstanding loans and moving them to the top of the list for collection efforts, according to Bradshaw.

But the software apparently worked the opposite way, sinking the worst loans to the bottom of the list for collection, thereby driving up chargebacks, Bradshaw said.

The problem has been fixed, and company officials expect the chargebacks to level off this month, but not before they take a their toll. According to Bradshaw, nearly one quarter of the loss in revenue can be attributed to the bad software.

In press statements, officials at both banks have reaffirmed their commitment to complete the merger, but shareholders may have their doubts. "The market is telling us that the merger is less likely to happen today than it was" before the announcement, Bradshaw said.

Bill Bradway, an analyst at Meridien Research Inc. in Newton, Mass., said he thinks that the merger will be approved but that Zions' shareholders will demand a lower price.

Bradway speculated that the software problem may have occurred in the "race to Y2k," noting, "They might, in fact, have locked in an upgrade and not necessarily had all the time they needed to test all the operational aspects."

A Zions official declined to comment.

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