FRAMINGHAM (03/06/2000) - Problems with a software upgrade have threatened a merger aimed at creating the second-largest bank in the western U.S.
First Security Corp., based in Salt Lake City, announced last week that its revenue and income projections for the first quarter will be down sharply, in part because of a systems upgrade that appears to have caused more problems than it solved.
The announcement may threaten its planned $40 billion merger with Zions Bancorporation, also based in Salt Lake City.
Shareholders of the two companies were set to vote on the merger on March 22.
However, a March 3 announcement that first-quarter revenue at First Security would be down 8% has thrown the outcome of the vote into doubt.
Company 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.
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. But the software apparently worked the opposite way, sinking the worst loans to the bottom of the list for collection, thereby driving up chargebacks, according to analyst James Bradshaw at Great Falls, Mont.-based D. A. Davidson & Co.
The problem has been fixed, and company officials expect the chargebacks to level off this month, but not before they take a costly toll. According to Bradshaw, nearly a quarter of the loss in revenue can be attributed to the bad software.
First Security officials refused to reveal details about the software upgrade and did not release the vendor's name.
News of the decline in revenue sent stocks for both companies tumbling. First Security's stock fell from 22 3/4 the day before the announcement to 13 5/8 at midday today. Meanwhile, shares of Zions' stock fell from 51 7/16 to 40 during the same period.
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 last Thursday," Bradshaw said.
But others doubt the software problem will produce long-lasting fallout.
"(Banks) have problems, we have screwups, but we fix them," said Arthur Gillis, president of Computer Based Solutions Inc. in Dallas. "It doesn't sound like a catastrophe."