XLF, Banking and Financial Sector Stocks

Suit Against NetBank Points To Limits of Online Banking

Top 146. Jun 18, 2001 7:22 AM

» JenL_2 - Online or Brick&Mortar Banking?

This from 6/18 WSJ:

By STACY FORSTER

ShelleyRae Norbeck and Martin Lindhe were ready to close on their dream house in Seattle when they discovered a mysterious snag.

On May 12, they needed to show $6,000 in their account to cover closing costs. But NetBank Inc. had put an "administrative hold" on their account. In desperation, they renegotiated their mortgage to put less money down and pay a higher interest rate, which will cost them an extra $400 a month, say Ms. Norbeck.

The couple has filed a lawsuit against NetBank, and Ms. Norbeck says next time, she will stick with a company "that I know has a longstanding history with a brick-and-mortar bank."

That excludes NetBank. One of the leading Web-only banks, it has 230,000 accounts, $2 billion in assets, but not a single branch. The Alpharetta, Ga., company acknowledges that it froze a "small number" of the 50,000 accounts it acquired from online rival CompuBank.

The incident has sparked an uproar by former customers of Houston-based CompuBank and underscored the vulnerabilities of banking without branches.

"There's an advantage to being able to go and get in someone's face with the local bank," says Tony Pondel, a certified public accountant in Wilmette, Ill. He says his account at the old CompuBank was frozen for two weeks without explanation. During that time, Mr. Pondel couldn't get through to the bank by telephone to ensure it was processing checks he'd written to cover his business expenses.

"It was a total nightmare," Mr. Pondel says. In the end, none of his checks bounced, but he says he is finished with Internet-only banking.

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It is unclear how many CompuBank accounts were frozen as part of the NetBank acquisition. On Yahoo!, an Internet message board is brimming with purported former customers of CompuBank and claims that thousands were locked out of their accounts.

Officials of NetBank say only a few hundred customers had trouble during the rollover. "I know people were inconvenienced and I'm sorry for that," says D.R. Grimes, NetBank's chief executive officer. The freezes were part of NetBank's examination of the acquired CompuBank to screen for questionable addresses or other potential signs of fraud.

"It's something we do to protect our depositors from someone stealing their identity and making off with their money," says Mr. Grimes. He added that NetBank is pleased that the transition went smoothly for most customers.

But a former CompuBank executive close to the conversion says thousands of accounts were likely frozen in the change-over. NetBank used a computer program during the rollover that flagged 4,000 to 5,000 accounts with potential problem, the executive says.

Ms. Norbeck's lawsuit, filed in U.S. district court in western Washington, alleges that NetBank failed to uphold its responsibility to customers under the Expedited Funds Availability Act. The federal law passed in the mid-1980s was intended to ensure that customers have access to their funds within a reasonable amount of time. In the case of Mr. Lindhe and Ms. Norbeck, the funds had already been deposited and Keith Dubanevich, an attorney with the Seattle firm of Garvey, Schubert & Barer, which is representing Mr. Lindhe and Ms. Norbeck, said it was unreasonable for the bank to restrict them for so long.

NetBank's Mr. Grimes says the company has received the suit and will file a response shortly.

Mr. Dubanevich says more than a dozen other disgruntled CompuBank customers have contacted him about joining the lawsuit. The law firm is prohibited from seeking out others until it is certified as a class action.

The lawsuit and customer complaints are uncharacteristic setbacks for NetBank. The company has been profitable for 12 consecutive quarters, and is considered a leading independent online bank.

Its profit for quarter ended March 31 was $797,000, or three cents a share, down from $4.6 million, or 16 cents a share, a year earlier. But the company's shares have held up relatively well. At 4 p.m. on the Nasdaq Stock Market Friday, NetBank shares were down 50 cents to $9.50, but well off their 52-week low of $6.

The company has emerged as one of the leading consolidators in the Internet banking space, also picking up Market Street Mortgage, a mortgage originator with 40 offices in 11 states, in April.

Mr. Grimes said the company is likely to continue making acquisitions as the online banking industry consolidates. And though that opens the possibility for a repeat of the problems faced by some CompuBank customers, Mr. Grimes downplays the risk.

Still, NetBank and other Web-only banks may be limited by their lack of physical branches, analysts say. Jupiter Media Metrix, a New York e-commerce research firm, says 12.5 million households were banking online at the end of 2000, compared with the 21 million who are shopping online.

And data suggest that old-line banks with an online presence are recovering ground lost to Internet upstarts, said Jim VanDyke, an electronic finance analyst with Jupiter Research. Web traffic at banks that also have branches, including Bank of America, Chase and Citibank, is up 44% in the last six months, according to Jupiter Media Metrix. During the same time period, traffic was up only 32% at pure-Internet banks such as NetBank and E*Trade Bank, a unit of E*Trade Group Inc. with about 400,000 accounts.

Customers place high value on branch access, says Mr. VanDyke. According to a recent survey of nearly 4,000 online finance customers, 52% said the availability of nearby physical branches would be an influential factor in picking a company to provide online banking.

Many analysts say the benefits of Internet banking outweigh the negatives. Because Internet-only banks don't have to pay the high overhead costs of maintaining branches, they can offer products and services to customers at lower cost and better rates, says Tim Butler, an analyst with Pacific Crest Securities in Portland, Ore.

Still, it has been difficult to convince large blocks of consumers to give up that offline presence in favor of an Internet bank. "People's financial habits change very slowly, and that's been one of the key obstacles," Mr. Butler says

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.....Jen

-- posted by JenL_2

Top 147. Jun 18, 2001 8:06 AM

» Kirk - Re: Online or Brick&Mortar Banking?

In response to message posted by JenL_2:

Interesting article Jen.

I think it is pretty clear to most that "clicks and Bricks" is the future.

The internet is a great tool that will help many brick n mortar companies lower their costs and interact better with their customers. Pure play internet companies will have a very tough time of it as your article showed. I am the type that has online brokers where I can march myself into their office and erect a tent should I need proper attention. That psychological "good feeling" that I get just from having that option is hard if not impossible to duplicate on the internet.

-- posted by Kirk

Top 148. Jun 18, 2001 11:12 AM

» DennisL - Re: Online or Brick&Mortar Banking?

In response to message posted by JenL_2:

This story sort of reminds me of what I went through a couple of years ago when I decided to try dumping PG&E and switching to an Internet-only gas and electric utility company (Utility.com). That experiment turned out to be a total disaster fraught with overcharges, double billings, etc. It took me several months and several dozens of phone calls to straighten out the mess. The minute I got it straightened out, I switched back to PG&E and swore off Internet-only businesses forever.

-- posted by DennisL

http://www.suite101.com/discussion.cfm/i...

Top 149. Jul 15, 2001 10:10 AM

» JenL_2 - Schwab Fined $10 Million

Awhile back on this thread we were talking about the possibilities of the brave new world when online brokers, banks and insurance companies would be able to merge and co-mingle services....

....well it's been a learning curve for Schwab in financial services merger-land....this from 7/13 WSJ:

Federal and State Regulators Fine Charles Schwab Unit $10 Million

By PAUL BECKETT

Federal and state bank regulators fined Charles Schwab Corp.'s U.S. Trust unit $10 million -- one of the largest fines levied against a U.S. bank -- as part of a settlement of allegations that its internal controls and record-keeping were inadequate.

The hefty fine, $5 million of which was levied by the Federal Reserve, $5 million by the New York State Banking Department, was accompanied by a cease-and-desist order, the second-highest level of bank enforcement action short of a license revocation.

Without admitting to any of the allegations, U.S. Trust consented to the issuance of the order, which concerned alleged violations and deficiencies related to a lack of internal controls and procedures. The allegations also related to inadequate compliance with the Bank Secrecy Act, which deals with money laundering, and failure to maintain accurate and complete books and records in connection with the operations and activities of the Strategic Trading Group of the bank.

"U.S. Trust is promptly addressing the concerns raised in the supervisory action, and we are well along on our timetable for improving our compliance," said Jeffrey S. Maurer, chief executive officer of U.S. Trust, in a statement. "Our work to improve our compliance infrastructure continues, and we believe we are rectifying the important deficiencies raised by our regulators."

Mr. Maurer said that none of U.S. Trust's clients' $91 billion in assets have been exposed to any risk of loss, and there was no evidence of misuse of clients' money by any company employee. The actions that U.S. Trust is taking under the settlement won't affect its ability to conduct business, he added.

People familiar with the matter say that some of the alleged offenses that caused the severe regulatory action concerned the bank's failure to report to the federal government currency transactions over $10,000, as required by a federal law designed to aid in combating money-laundering.

The bank also failed to report transactions that appeared designed to skirt those thresholds, for instance, when a customer either deposited or withdrew an amount just shy of $10,000, these people said. One person familiar with the matter said there were such transactions for $9,999. Another scenario involved customers making a series of withdrawals close together that totaled more than $10,000 but were not in keeping with the client's normal pattern of activity, people familiar with the matter say.

Mr. Maurer, in an interview, said that description of the bank's activity "is not a fair description of what was going on."

Separately, the bank's Strategic Trading Division, a small team that handles sales of restricted stock for clients such as venture capitalists and Internet entrepreneurs, also was alleged to have compliance problems.

Those related chiefly to helping clients avoid the securities-law restrictions placed on shares held by insiders by selling shares and booking the profits in the firm's own accounts, called "convenience accounts." One person familiar with the matter said that had the effect of disguising the appearance of insider trading.

"I don't think that's the issue," Mr. Maurer said, adding that regulators had been focusing on convenience accounts at several firms.

U.S. Trust hired PricewaterhouseCoopers in May to review the trading division's "business practices, policies, procedure and controls," including "compliance with all applicable laws and regulations concerning securities trading and reporting requirements."

The bank regulators' order also said U.S. Trust will provide the PricewaterhouseCoopers report to any inquiry made by the Securities and Exchange Commission, raising the prospect that further regulatory action may arise. A SEC spokesman wasn't immediately available for comment.

Mr. Maurer said U.S. Trust's rapid expansion in the past five years "stretched our compliance infrastructure" and that one of the reasons for selling the firm to Schwab, the nation's largest discount brokerage, was to obtain the resources to improve the bank's technology platforms.

In May 2000, the Fed approved Schwab's purchase of U.S. Trust for $2.94 billion in stock, which was the financial industry's first major melding of old and new in the 21st century. It was the first big transaction after sweeping legislation took effect in November 1999 to remove Depression-era barriers and allowing banks, securities firms and insurance companies to get into each other's businesses.

The move allowed Schwab to reach out to wealthy investors, who have shown an increasing desire in recent years to participate in online investing. U.S. Trust has provided investment advice and private banking services to some of America's richest families since 1853; its earliest clients included railroad barons, shipbuilders and industrialists.

But the alleged violations at U.S. Trust continued well after Schwab purchased the firm in May 2000. In April, the bank hired KPMG to review its internal controls and procedures.

Mr. Maurer said the bank was committed to implementing state-of-the-art compliance technology and procedures. Of the regulators' action, he said, "We appreciate their wake-up call."

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.....Jen

-- posted by JenL_2

Top 150. Sep 2, 2001 7:56 AM

» JenL_2 - Barron's Interview with Susan Byrne

9/3 Barron's has the latest in a string of interviews with value and fixed income fund managers. Some find value in the financials:

An Eye for Yield

In this market, says a money manager, look for stocks that provide high total returns

by Sandra Ward

(excerpts)

An Interview With Susan Byrne ~....... After lowering her forecast for corporate profits this year and with expectations of modest growth next year, Byrne is keeping sharply focused on "total return" investments -- companies delivering solid earnings growth, paying sustainable dividends, and offering higher returns than what are available from other asset classes. Cyclicals are in her mix, as are real-estate investment trusts and, yes, energy companies.......Her approach, honed in 30 years of investment experience, is simply to buy stocks at a discount to their growth rate in industries that are best positioned according to her macroeconomic outlook. ....

Q: What does this mean for portfolios?
A:Beyond cyclicals, people should look for companies that could be considered solid total-return candidates.

Q: Companies that pay dividends?
A: Yes, and companies with the ability to grow the dividend, not just pay it. If we are talking about an environment of slow growth, low interest rates and low inflation, the big competition for your money is 2½%-3% on a money-market fund and 4½% in bonds. For some, there will be high-yield instruments, but that is not my milieu. In that kind of environment, a barbell approach that includes the best cyclical recoverers with the best fundamental valuations -- and that may or may not include technology, depending on your risk tolerance -- as well as good moderate growers with good yields should provide a rate of return modestly above the historical 8%-10% returns of the equity market.

Q: What are some of these total-return stocks?
A: The financials -- say, a package of money centers and a couple of regionals. Bank of America and J.P. Morgan Chase both yield around 3½% up front. The combination of the dividend and modest 8% growth, which I have every confidence they could well exceed, gets you above the 10% bogey that the stock market has historically delivered.

Q: Are you concerned about their loan portfolios?
A: I think it is in the price of the stocks, and I am confident they have the reserves to help them through any problems. In the end, I think the problems with their loan portfolios will be like the watched kettle; they won't boil.

Q: What's a regional bank you like?
A: KeyCorp, a Midwestern regional yielding 4½% and well into a very sustained turnaround of its business. The composition of their earnings is an ever increasing percentage of fee-based income, a business that has always been afforded a high P/E. I really like it, and the dividend pays me to like it.

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.....Jen

-- posted by JenL_2

Citigroup's Diversification Helps Combat Turbulent Market

Top 151. Oct 21, 2001 6:00 PM

» JenL_2 - Citigroup : C

This from 10/18 Barron's Online:

By Allison Krampf

Banks and brokerages reported mixed quarterly results this week. Some met earnings estimates with falling revenue, while others missed earnings estimates but reported increasing revenue.

As we reported yesterday (Lehman, Morgan Stanley Offer Ways to Spread Risk), some institutions have benefited from a strategy started long ago of diversification, reducing their dependence on equities and drawing more of their revenue from fixed income.

But others haven't been so lucky. Firms such as Merrill Lynch and Bear Stearns have announced plans for massive staff cuts in the wake of a faltering economy, and the September 11 tragedies.

But one bank that's still performing relatively well is Citigroup, which announced a $5 billion stock buyback on Tuesday.

Yesterday, the financial services giant said it earned $0.61 per share in the third quarter, matching estimates. Citigroup reported a loss of $0.04 per share, related to the World Trade Center attacks, based mainly on insurance claims at its Travelers Group unit.

Profits at its investment and corporate banking businesses fell 27%, to $1.2 billion. But profits at its consumer business, which includes mortgages and credit cards, rose 26%, to $2.2 billion.

The bank has gained in areas such as global equity, where it now ranks third, up from the number five spot it held last year, according to Deutsche Banc Alex. Brown.

New York-based Citigroup, which has operations in more than 100 countries, has a diversified revenue stream, including brokerage Salomon Smith Barney, insurance concern The Travelers Group, and Citi's original retail operations.

When we last looked at Citigroup, shares traded for 51.31 (see Weekday Trader, "Citigroup, Merrill May Be New Finance Beacons," October 19, 2000).

Citigroup remains attractive, changing hands at a recent 46.50, which is 19% below its 52-week high of 57.38, reached in January. The stock sunk to a 52-week low of 34.51 on September 21, as the bank along with other financial stocks suffered in the aftermath of the terrorist attacks.

The stock trades at about 14 times the consensus earnings per share estimate for 2002 of $3.30, a discount to its expected 15% annual long-term earnings growth rate, according to Thomson Financial/First Call.

Of course, while economic recovery is predicted for next year, there is still uncertainty about the capital markets and how the war against terrorism will unfold.

But Citigroup has a stellar reputation and solid balance sheet. Sanford Weil, who runs this $234 billion battleship, should successfully navigate these troubled waters, as he has done before.

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.....Jen

-- posted by JenL_2

http://www.marketwatch.com/news/yhoo/sto...

Top 152. Dec 19, 2001 12:27 PM

» SteveT - Citi shares rise on news of spinoff

NEW YORK (CBS.MW) - Citigroup shares jumped more than 4 percent Wednesday after the nation's largest financial services group announced plans to sell up to 20 percent of its Travelers insurance unit via an IPO in a move to boost earnings growth.

-- posted by SteveT

Top 153. Dec 20, 2001 1:07 PM

» SteveT - Re: Citi shares rise on news of spinoff

In response to message posted by SteveT:

I have not yet seen anyone that thinks this is a bad deal for current Citigroup shareholders.
http://money.cnn.com/2001/12/19/sivy/siv...

-- posted by SteveT

Top 154. Dec 20, 2001 5:33 PM

» SteveT - Citigroup and the future

Anyone beside me own Citigroup? I am not the most qualified to comment on the spinoff and if the numbers make sense. I have owned Citigroup/Citicorp going back to 1990. I feel they have always had some of the strongest management bar none. This opinion has not changed after the 1998 merger and subsequent take over of Sandy Weill. In fact he maybe the best yet for shareholders, employees may give you the opposite opinion. Sandy is well known when it comes to cutting costs and one of the first places he looks to cut them is from labor. I know he has lost some good people because of this but on the other hand they seem to have an eager pool of up and comers ready to show what they can do. I know some changes in compensation and benefits are planned for next year and this will reduce costs.

From what I have read Citigroup is expected to use the money from the deal to go shopping for other profitable businesses. Weather they can do so is another matter. One thing I have come to realize about Sandy is he always comes out on top of any deal he makes. It would not surprise me if he has some uses for the money in mind. I am not sure how much longer Sandy is planning on staying on as CEO, but as I see it he is the type that would like to go out on top and with just one more deal under his belt. My gut tells me as the economy starts to grow next year and earnings increase if the P/E will also rise Sandy will step down about the time the stock price is at an all time high. Anyone have some ideas on what he may be looking at buying? The credit card business and brokerage are among the consistently profitable arms of the business, my guess is it will one or both of them.

-- posted by SteveT