<THE BORING PORTFOLIO>
Taking on incumbents
by Dale Wettlaufer (TMF Ralegh)
ALEXANDRIA, VA (June 4, 1999) -- Taking a slight break from looking at Hughes, thankfully, since it's enormously complicated, today I wanted to talk about a company that was introduced into the Boring message board a few months ago. The company is NetB@nk (Nasdaq: NTBK), a savings & loan holding company that does business exclusively over the Internet.
At first I dismissed the idea, as I believed there was too much competition in banking from the incumbent banks and other financial services companies, I didn't believe the operating advantages of the Internet banks outweighed the lower funding costs of the incumbent banks, and I didn't like the valuation. I changed my mind a short time later, however, after a conversation with a friend who looks at as many companies as I do, and after deciding that it's not really that productive to dismiss something so out-of-hand.
A couple other things have been happening with my thinking on some of the big commercial banks. I've always thought of banks as retail companies, but I've been way too easy on some of the mega-regional banks whose customer service is obviously very poor. I've jumped off the mega-regional bank train, however, as I think there are now just too many choices out there for consumers for the incumbent banks to keep treating people as a source of fees rather than as valued customers.
To wit, noninterest-bearing checking deposits are going to go the way of the Dodo bird, in my opinion. In a world where banks are married to that source of capital to produce 30% of their deposits and to increase net interest margins, the Dodo-ing of those deposits is going to be pretty confounding for those companies. The bank that moves away from that model or grows up on a different model is going to be much better prepared for the competitive realities of 21st century banking.
Think of the problem this way. It's the 1950s and Sam Walton gets the idea that you can sell more merchandise by marking it down to move, thereby increasing customer satisfaction and absolute gross profits even with lower margins. With a much more productive overhead structure designed from the ground up, the company can take share as well as ending up as a more profitable (from the standpoint of return on capital) large company.
I'm way late on this today, so I can't cover this fully, but check out the takeout numbers on Telebank Financial (Nasdaq: TBFC) from earlier this week. When you add in the capital NetB@nk just raised, it's really not trading at ridiculous balance sheet multiples. I'll take a look at that next week. Now I'm off to find out who the Buffalo Sabres will play in the Stanley Cup finals. Have a good weekend.
- Discuss Boring Investing on the Boring Port message board.
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Stock Change Bid APCC + 3/8 18.94 BRKb +29 2337.00 CSL --- 47.69 GTW +3 9/16 62.13
Day Month Year History BORING +1.26% 0.43% 4.98% 40.96% S&P: +2.17% 1.99% 8.33% 120.94% NASDAQ: +3.12% 0.32% 13.03% 138.08% Rec'd # Security In At Now Change 8/13/96 200 Carlisle C 26.32 47.69 81.15% 4/20/99 460 American P 14.48 18.94 30.81% 12/31/98 12 Berkshire 2276.17 2337.00 2.67% 2/9/99 100 Gateway 20 72.38 62.13 -14.16% Rec'd # Security In At Value Change 8/13/96 200 Carlisle C 5264.99 9537.50 $4272.51 4/20/99 460 American P 6659.25 8711.25 $2052.00 12/31/98 12 Berkshire 27314.00 28044.00 $730.00 2/9/99 100 Gateway 20 7237.50 6212.50 -$1025.00 CASH $17972.40 TOTAL $70477.65
</THE BORING PORTFOLIO>