A community bank in Lynnwood, Wash., has succeeded where many others have stumbled - its Internet subsidiary is making money.
City Bank, which has assets of $594 million, turned a profit online three years after it acquired Diligenz LLC for an undisclosed sum and then pumped about $10 million into the dot-com.
Diligenz lets banks and other finance companies record Uniform Commercial Code lien filings on property, equipment, and other sources of collateral owned by prospective customers. They can also search a database to see if a property already has a lien on it.
"They have a very rare item on their balance sheet: a profitable Internet company," said Louis J. Feldman, an analyst at Hoefer & Arnett Inc. in Portland, Ore.
Over the last several years many community banks and their larger rivals have launched a variety of Internet subsidiaries, many of which have failed miserably.
"There were a lot of ideas floating out there during the tech bubble, but banks realized that they weren't any better than others at identifying a good [Internet] business plan and making it work," said Christopher Musto, the vice president of research at Gomez Inc. in Waltham, Mass.
There have been a few notable exceptions, like eScout.com, which $8.7 billion-asset UMB Financial Corp. of Kansas City, Mo., developed and then spun off in a 2000 initial public offering. eScout pools the buying power of banks and their corporate customers to get them discounts on office supplies and other products.
City Bank's decision to buy Diligenz and beef up the dot-com was a no-brainer, according to the bank's president and chief executive officer, Conrad Hanson. "We thought that it could be a good noninterest revenue stream for us," he said.
Diligenz's revenues in the first quarter soared 87.8% from a year earlier, to $1.9 million, and on April 11 it posted a first-quarter net income of $118,410, compared with a loss of $295,644 for the same period last year.
The net income from Diligenz boosted City Bank's overall net income for the first quarter to $5.1 million, or 52 cents a share, and helped mitigate the effects of a sluggish Pacific Northwest economy.
Customers are attracted to Diligenz because they can use it to file multiple liens in separate states simultaneously, instead of filing them manually with each state, as they normally must do, Mr. Hanson said. In addition to lien filings, users can search for other corporate data, such as bankruptcy filings and good-corporate-standing status.
Unlike many other online ventures, Diligenz does not have to rely on advertising, because customers are accustomed to paying for this data, according to Ian Rubin, the director of online financial services research for IDC, a Framingham, Mass., technology research division of International Data Group.
"They've always had to pay for doing these types of filings, so it wasn't as challenging for City Bank to get them to pay for this service," he said.
James Bradshaw, an analyst at D.A. Davidson & Co. in Portland, said Diligenz's success may cause City Bank to spin it off, much like UMB did with eScout.com.
"The market will most likely continue to value the bank's stock at 10 to 15 times earnings, but a profitable tech company ought to be trading at much higher multiples," he said. "At some point it will make sense to spin it off or even sell it."
Mr. Hanson would not comment on the fate of Diligenz, but the unit's success may be one of the factors driving City Bank's stock surge. The shares, which were trading at $23.70 in early March, hit a high of $30.81 on May 17. The stock was trading at $28.37 Tuesday afternoon.
Investors also are attracted to City Bank's strong performance ratios, Mr. Bradshaw said.
The bank's return on assets in the first quarter was 3.52%, far exceeding the 1.2% average for comparable banks nationwide as of yearend, according to the Federal Deposit Insurance Corp.
City Bank's ROA is high because it has "really mastered turnover on assets," primarily a narrowly focused niche of construction and commercial real estate lending in the counties north of Seattle, Mr. Bradshaw said.
"They have a lot of short-term loans, so they don't take a lot of repricing risk and their yields are better," he said.
The bank's net interest margin has also remained strong - 6.9% in the first quarter, compared with an average of 4.39% for its peers at yearend, according to the FDIC.
Still, it's Diligenz that is "putting the sizzle in the stock," Mr. Bradshaw said. "I don't see it as a coincidence that City Bank's stock has moved up so dramatically now that Diligenz is profitable."
