Weak Revenue Growth Spurs a Run on Net.B@nk Stock

The stock drops 11% on news of a second-quarter revenue shortfall.
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stock dropped sharply Tuesday after the Internet bank reported weaker-than-expected revenue growth, reviving doubts about its expansion plans.

Revenue, which frequently replaces earnings as the focus for investors in Internet companies, totaled $4.9 million after provisions in the second quarter, compared with $1.6 million in the year-ago period.

That's a whopping 197% increase. But latest second-quarter revenue fell substantially short of analysts' projections.

BancBoston Robertson Stephens

, which rates Net.B@nk a buy, had projected $6 million in revenue, while

First Security Van Kasper

, which has a sell recommendation on the stock, had predicted $5.4 million. (Robbie Stephens underwrote the bank's June secondary offering. First Security and Net.B@nk have no investment banking relationship.)

Net.B@nk didn't return calls seeking comment.

Net.B@nk, which went public in July 1997 after being founded in February 1996, was off 3 3/8, or 11%, at 27 3/8.

The bank's shares had more than tripled this year as investors came to believe in the bank's business model, which, put simply, envisions the institution rapidly attracting deposits with above-average interest rates. Net.B@nk can offer these higher rates, so the theory goes, because it doesn't have to spend large sums on bricks-and-mortar branches.

Account growth remained strong. At the end of the second quarter, Net.B@nk had more than 39,000 accounts, up 230% from the year-ago period and ahead some 60% from the first quarter's end.

But, says First Security's Jeff Runnfeldt: "What good is account growth if it doesn't translate into expected revenue growth?"

Runnfeldt advised investors to sell Net.B@nk in May, when he published a note that raised big questions about dedicated Internet banks. He points out that while Internet banks avoid branch costs, they are disadvantaged by higher funding costs and lower-yielding reinvestment strategies.

In addition, says Runnfeldt, Net.B@nk will feel the squeeze from established bricks-and-mortar banks that are setting up Internet services for customers.

Robbie Stephens' Bryan Keane, however, remains more sanguine about Net.B@nk's outlook. The disappointing second-quarter revenue growth can be explained chiefly by the fact that the bank didn't manage to use the deposits for higher-yielding loans as quickly as he had assumed, he says. "The Internet banking model is still valid," he adds.

For the second quarter ended June 30, Net.B@nk reported net income of $768,000, or 3 cents a share, up from $158,000, or 1 cent a share, in the year-before period. The year-earlier period's results exclude a $3 million tax benefit.