Bank Radar (Bore Port) April 5, 1999

<THE BORING PORTFOLIO>
Bank Radar
A look at NextCard.com

By By Dale Wettlaufer (TMF Ralegh)

ALEXANDRIA, VA (April 5, 1999) -- You may have noticed some banks and financial institutions on our radar. I pay as much attention as possible to this part of the market. That's not because I think it's somehow the key to the rest of the market or anything as grand as that. It's simply because I find these companies interesting and I believe they're within my circle of competence.

One company that has attracted my notice is Heritage Bank of Commerce (Nasdaq: HTBK) of San Jose, California. Here's why: A few weeks ago, I was cruising around on some website and ran into a banner ad for NextCard.com, which I have known about for a little more than six months. The first place I heard about it was in venture capitalist Stewart Alsop's column in Fortune. In this column, Alsop posits that NextCard, whose main product right now is VISA cards, is "the first powerhouse bank of the virtual world." In the following except, Alsop talks about what he perceives to be the possibilities of NextCard and the vision of Jeremy Lent, former CFO of Providian Financial and now CEO of NextCard:

"But what Jeremy Lent has figured out is that he can build a healthy business now as preparation for a huge business once cash does disappear. Once cash goes away, you will no longer have to do business with a financial institution in a real building (which costs money), an old-world place that has trained employees to move slowly and be conservative as heck (which also costs money), a place that must own a large network of very expensive computers called ATMs in order to do business. Instead, you'll want to do business with a slender outfit that's grown up in the virtual world, where management and employees are trained in how to make the most of something as virtual as a smart card. So as NextCard builds its credit card business, as it adds other services and assembles a rich database of tech-savvy customers, Jeremy Lent will bide his time until the regulatory system, technology, and society figure out low to store cash on a smart card. Then, when NextCard becomes the first powerhouse in the world of virtual banking, you'll remember that you read it here first. And that you laughed at me."

This is a little new age for me, but I can see what Alsop means. Experience in effectively running a Web-centric financial services company is going to be a valuable asset as distribution systems in retail banking evolve. Smart cards, which have a chip on the face of the credit card, will turn an issuer of VISA into more of an American Express sort of company, where the issuer knows where you shop and what your preferences might be. NextCard offers customers an easy-to-use interface that allows for instantaneous credit approval and transfer of balances, real-time recordkeeping abilities, and very likely fully integrated banking services in the future. This kind of retail financial services innovation reminds me of what Merrill Lynch did with its resource management account 20 years ago and what Fidelity Investments did with money market mutual funds and telephone service 25 years ago. In other words, if you get the marketing and distribution right, you can grow assets very quickly. If you run the company properly, cash will flow from those assets.

Here's the problem, though. Heritage Bank of Commerce is, as far as I can tell from NextCard's S-1 registration statement, likely to end its relationship with NextCard by December of this year:

"Heritage's obligation to establish new credit card accounts terminates on September 30, 1999, and the remaining terms of the agreement (other than certain indemnification and similar obligations) terminate on December 31, 1999. The agreement may be extended if certain conditions are satisfied. However, if we are successful in creating NextBank, our proposed credit card banking subsidiary, we expect to have NextBank issue the NextCard Visa."

I talked to a couple people at Heritage and, unfortunately, it looks like the benefits of the unique assets and the rapid asset buildup will accrue mainly to NextCard shareholders rather than Heritage shareholders. In the meantime, then, Heritage looks like a Silicon Valley bank with potential and with a willingness to try out new things, but not the highly unique company I thought it was when I started to look into this.

The reason I became interested was that I found out how diligent NextCard is about checking on applicants. I applied a couple of weeks ago and last week received a call from NextCard verifying my income, bank references, and the like. I was highly impressed that this company isn't just growing for the sake of growth without paying attention to credit costs. We'll keep an eye on NextCard's IPO.

On to another bank. This one is First Citizens Bancorporation of South Carolina (OTC: FCBN). I've mentioned this before, as I own the company and I think the demographics of South Carolina are highly attractive. First Citizens is the second-largest bank holding company in South Carolina, but it's hard to assess market share straight from the Federal Reserve's National Information Center website. So we'll do this manually. Institutions in South Carolina, ranked by number of branches:

Bank of America (NationsBank): 211
First Citizens: 132 + 127 ATMs
Wachovia: 123
BB&T: 94
Carolina First: 65
First Union: 64
Regions Bank: 31
The Anchor Bank: 22

So we have an attractive retail presence in a state with attractive demographics. Performance-wise, First Citizens is not a stunner, but it does fine. Below you'll find the raw data that I've constructed on the company's performance in 1998 (performance ratios with a "2" in the title indicate that I have removed goodwill amortization expenses from the earnings component). On Wednesday, we'll deal with growth, business plan, credit quality, company performance, and valuation. Have a good Monday night and we hope to see you on the Boring message board.

(data in millions, expect per-share)

Price/Valuation

Share Price...$285
Market Cap...$264.12
Price/Book...1.52
Price/ Tangible Book...1.65
BVPS...$187.94
Price/Assets...10.63%
Price/Net Loans...17.10%
Price/Deposits...12.96%
Price/Tangible Assets...10.70%
Price/Revenues...2.18

P/E...11.26
Amortization-Adjusted P/E...9.03
Earnings Yield...11.1%
EPS...$25.30
Cash EPS...$31.57
Diluted Sharecount...0.93
1999 EPS Estimate...$34.72
2000 EPS Estimate...$38.20
Multiple on 1999 Est....8.21
Multiple on 2000 Est....7.46
Earnings yield on 1999 amort-adjusted ests....13.40%

Capital Productivity/Efficiency

Asset Turnover...5.12%
ROE2...17.59%
ROE...14.10%
Amortization Adjusted ROE...19.49%
ROA2...1.24%
Net margin2...24.13%
Net Margin...19.34%
Efficiency Ratio...61.69%
Interest Income/AEA...7.72%
Interest Expense/AEA...3.41%
Net Interest Margin...4.31%
Net Share Buybacks (Including preferred)...$2.9
Dividends on Common...$0
Preferred Dividends...$171
Retention Rate...100.00%
Payout Ratio on Amort. Adjusted Earnings...0.00%
Internal Capital Generation Rate...17.59%
Owners' Yield...1.09%
Insider %...50+%

Balance Sheet

Cash & Nonearning Assets...$115.8
Cash & Nonearning Last Year...$126.3
Long Term Debt...$53.3
Shareholder's Equity...$174.2
Last Year Equity...$158.4
Tangible Equity...$159.7
Last Year Tangible Equity...$140.6
Tangible Assets...$2,469.2
Last Year Tangible Assets...$2,232.66
Total Assets...$2,483.8
Earning Assets...$2,256.4
Last Year Earning Assets...$2,028.8
Last Year Assets...$2,250.5
Total Liabilities...$2,309.6
Goodwill...$14.5
Last Year's Goodwill...$17.8
Gross Loans...$1,573.1
Loan Loss Reserves...$28.31
Loan Loss Reserves %...1.80%

Leverage

Equity/Tangible Assets...7.05%
Average Equity/Average Assets...7.03%
Average Equity/Average Assets (Tangible)...6.39%
Assets/Equity...14.23
Avg. Assets/Avg. Equity (Tangible)...15.66
Loans to Deposits...77.21%
LT Debt/Equity...30.59%
Tier 1 Capital Ratio...13.01%
Total Risk Based Capital Ratio...14.27%

Income Statement

Revenues...$121.25
Interest Income (TTM)...$165.4
Interest Expense (TTM)...$73.0
Net Interest Income...$92.3
Provision for Loan Losses...$4.30
Noninterest Income (TTM)...$28.9
Noninterest Expense (TTM)...$80.61
Net Income for Common (TTM)...$23.45
Amortization Adjusted Earnings...$29.25
Noninterest income/revenues...23.84%
Noninterest income/NII...31.31%
Amort. Adjusted Net/Revs....24.13%
Amortization of Goodwill...$5.81

Credit Quality

Nonperforming Loans...$2.25
Nonperforming Assets...$3.8
Loan Loss Provision/Net Interest Income...4.66%
Loan Loss Provision/Gross Loans...0.27%
Charge Offs...$3.87
Recoveries...$1.74
Net Charge Offs...$2.13
Nonperforming Assets Ratio...0.24%
Reserves/Nonperforming Loans...1259.16%
Months Net Charge-Offs in Reserves...159.3
Months Charge-Offs in Reserves...87.8
Loan Loss Provision/Net Charge Offs...201.83%

Deposits

Deposits...$2,037.5
Noninterest bearing deposits...$354.2
Noninterest bearing deposits last year...$1,683.2
Noninterest deposits/deposits...17.39%
Deposits/Liabilities...88.22%

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                   Day    Month   Year  History
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    Rec'd   #  Security     In At       Now    Change
  6/26/96  225 Cisco Syst    23.96    114.44   377.71%
  8/13/96  200 Carlisle C    26.32     44.44    68.80%
 12/31/98    8 Berkshire   2244.00   2382.00     6.15%
   2/9/99  100 Gateway 20    72.38     72.38     0.00%


    Rec'd   #  Security     In At     Value    Change
  6/26/96  225 Cisco Syst  5389.99  25748.44 $20358.45
  8/13/96  200 Carlisle C  5264.99   8887.50  $3622.51
 12/31/98    8 Berkshire  17952.00  19056.00  $1104.00
   2/9/99  100 Gateway 20  7237.50   7237.50     $0.00


                             CASH   $7658.52
                            TOTAL  $68587.96