Leasing News

5-attorney creditors rights law firm, in biz 25 yrs +, specialize all aspects of creditor representation. Primarily represent equipment lessors & funders,plus collection and creditor rep. in bankruptcy. Email:phemar@hemar.com

Los Angeles -statewide: CA Practice limited to collections, bankruptcy and problem accounts resolution. Decades of experience. 10-lawyer firm dedicated to serving you. Call Ronald Cohn, Esq. (818)591-2121 or email. Email: rrcohn@aol.com "ELA "

NY Metro and National: Hackensack, NY

Attorney specializing in equipment lease matters for at least 10 years with a 50-State operating network of attorneys experienced in leasing matters. Email:wuscher@uqur.com "ELA"

National: http://www.leaselawyer.com/

Full staff of attorneys and legal assistants work with Group Leader Barry S. Marks to ensure prompt, cost-effective responses to client needs: Email:bsm@blik.com

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Washington State Gary Locke Democrats “Side”

“I read your newsletter daily and it helps keep me in the "industry loop".

I suggest you add the link relative to the Democratic response to the State

of the Union Address.

“Not just to present balanced coverage but I was really impressed with the

delivery and content of the response.

“The governor of Washington State Gary Locke

http://www.democrats.org/news/200301290001.html did a fantastic job of what

I felt are the real problems we face and highlighted the significant

shortcomings of the Bush administration.

“Thanks again for your great newsletter!”

Ken Sullivan

21st Century Leasing

800.540.3900

619.225.0066 fax

kens@21stcenturyleasing.com

(The intention was not as a “political story.” Amazingly no one wants to

talk how it has affected their sales or leasing business, which was our

angle. In the course, Leasing News did give a link to the White House

and a “pdf” file of President’s Bush’s “State of the Union” speech.

Several readers, from all sides, have sent e-mails regarding the pending war, the president--- pro and con. Leasing News is not going to print them. We are non-political. It was no our purpose to promote one side or the other. The president’s speech was “The State of the Union.” However, the televisions stations did give Governor Locke’s message..

Again, it was our view this was not a “political speech,” but a “State of the Union.” We assume that not everyone watched or listened. The Super Bowl only got a 40% of all households, and I am sure the president’s speech was 20%, if that ( don’t know). So I am assuming not all of our 5,000 readers watched or listened to the speech, therefore we put a link to the White House and to a copy of the speech to download.

It is appropriate we present the “other side.” We were remise in doing so.

Ken, thank you for reminding us to be “fair.” Editor )

Netbank reported a net loss of $15.9 million (or $.36 per share) for the full year 2002, according to its press release.

(Parent of Republic Leasing of South Carolina)

"The bank's financial performance continues to be adversely affected by the non-performing business equipment leases in the bank's portfolio. The leases were originated by Commercial Money Center, Inc. and represent an outstanding principal investment of approximately $82 million. As reported previously, the bank has initiated litigation against Illinois Union Insurance Company, Royal Indemnity Company and SAFECO Insurance Company of America to guarantee performance of surety bonds these carriers issued on the leases in default. The bank's action against the sureties has been consolidated into a multi-district litigation proceeding in Federal District Court in Ohio. The schedule instituted by the judge assigned to the case requires completion of briefs by March 14, 2003, on the issue of whether the investors are entitled to judgment on the pleadings. The bank expects a ruling on these motions in Spring 2003."

"The company finished the year with record results by posting the highest quarterly earnings per share figure in its six-year history.

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Financial highlights of the fourth quarter include:

-- A 336% increase in net income, from $2.9 million in fourth

quarter 2001 to $12.6 million in fourth quarter 2002;

-- A 150% increase in fourth quarter EPS, from $.10 last year to

$.25 in the current year;

-- Quarterly mortgage production of $4.7 billion, representing a

30% increase from production in the preceding quarter; and

-- Loan and servicing rights sales into the secondary market of

$4.4 billion, representing a 27% increase from sales in the

preceding quarter and a balance sheet turn of 5.0 times on an

annualized basis.

Including non-operating charges of $73.8 million related to the acquisition of Resource Bancshares Mortgage Group, Inc. and the subsequent repositioning of the company's balance sheet, the company reported a net loss of $15.9 million (or $.36 per share) for the full year 2002. Excluding the acquisition and repositioning charges, core operating earnings totaled $30.4 million (or $.68 per share). On a core earnings basis, the results represent an increase of 360% from year-end 2001 when earnings totaled $6.6 million (or $.22 per share).

Management Commentary

"We are extremely proud of the solid financial results that we delivered on behalf of our shareholders during the second half of the year and especially the fourth quarter," said Douglas K. Freeman, chairman and chief executive officer. "Our 2,000 associates remain focused on building the country's premier, new era financial institution. We concentrate on select market segments where we can leverage our technology and customer service competencies to offer consumers superior value. This year's results show the progress that our associates are making on all fronts."

"Given the continued low-interest rate environment, each of our business lines performed well during the quarter," said Steven F. Herbert, chief financial executive. "At the bottom line, low interest rates fueled record production, sales and margins in our conforming mortgage operation. This area maximized the earnings opportunity by keeping expenses in check while handling the significant increase in loan volume."

"We know the favorable mortgage lending conditions that gave our fourth quarter results additional lift cannot continue indefinitely," Freeman added. "Industry forecasts currently predict a rise in interest rates during the second half of 2003. Our mortgage operations are well positioned to compete. They offer a full line of products to meet changing consumer demand. Any earnings volatility caused by a decline in conforming business should be partially offset by increased production of adjustable-rate mortgages, home equity products and non-conforming loans as well as our investment in servicing rights."

"...to grow during the fourth quarter. The bank finished the year with a total of 152,560 customers, representing a quarterly increase of 2,326 customers. The average NetBank account balance increased to $9,037, representing a 6% increase from third quarter and a 62% increase from year-end 2001. Average balances across all account types rose significantly year-over-year. Compared with 2001, checking balances were up by 51%; money market by 52%; and certificates of deposit (CDs) by 9%.

"Total deposits remained relatively flat quarter-over-quarter, although core deposits actually grew. From October to December, approximately $140 million in brokered CDs matured. Management made a strategic decision not to replace these brokered accounts since there were no underlying core customer relationships. For year-end 2002, deposits totaled $2.1 billion, representing an increase of $551 million or 37% from 2001."

Mortgage Banking Operations

"The company's collective mortgage operations continued to benefit from the current low interest rate environment. As highlighted earlier, production and sales reached record levels for the company. Production for the quarter totaled $4.7 billion while sales totaled $4.4 billion. Compared with last quarter's results, production increased by 30% and sales by 27%."

"b) Non-performing loans includes $83.8 million of CMC leases"

"About NetBank, Inc.

"NetBank, Inc. (Nasdaq:NTBK) operates with a revolutionary business model through a diverse group of complementary financial services businesses that leverage technology for more efficient and cost-effective delivery of services. Its major subsidiaries include NetBank(R) (www.netbank.com), the country's first commercially successful Internet bank; RBMG, Inc., a wholesale mortgage lender that generates residential mortgages through a nationwide network of independent brokers and correspondent lenders; Market Street Mortgage Corporation, a retail residential mortgage lender that conducts business in 39 states; Meritage Mortgage Corporation, a wholesale mortgage lender that originates non-conforming residential mortgages through a nationwide network of independent brokers; and Republic Leasing Company, Inc., a wholesale originator and servicer of commercial business equipment leases. NetBank is a Member FDIC. NetBank, RBMG(R), Market Street Mortgage(R) and Meritage(R) are Equal Housing Lenders."

CONTACT:

NetBank, Atlanta

Rich Jeffers, 678/942-7596

rjeffers@netbank.com

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Fitch: Structured Finance Will Demonstrate Resilience During 2003

Fitch Ratings-New York-Fitch Ratings believes that the global structured finance market will demonstrate resilience overall, although performance characteristics of individual asset types may vary widely. Today, Fitch published its outlook for 2003 and a review of 2002, including analyses broken down by individual sector.

'In 2002, the U.S. structured finance market had some of its best and worst performance. This contrast reflects the divergent trend between the U.S. residential mortgage-backed securities and almost all other structured finance sectors,' said Claire Mezzanotte, Managing Director, Fitch Ratings. 'The outlooks for 2003 span the entire range, from mostly stable for transactions backed by high quality consumer assets, mostly negative for securities backed by commercial finance assets and stable to positive for transactions backed by prime residential- and commercial-mortgage backed securities.'

According to the new report, the structured finance market demonstrated uncharacteristic volatility during 2002, as U.S. structured finance ratings showed by number of tranches, 5.4% more upgrades than downgrades. However, upgrades have been largely concentrated in the U.S. prime residential mortgage-backed securities (RMBS) sector, which has enjoyed an unprecedented favorable interest rate environment and price appreciation, features that will be less beneficial for future rating actions. In the U.S., net positive rating actions in RMBS and commercial mortgage-backed securities (CMBS) outnumbered the net negative rating actions in asset-backed securities (ABS) and collateralized debt obligations (CDOs).

'Ratings in Europe experienced 2.0% more negative than positive rating actions, with negative rating actions in the whole business, emerging market and CDO sectors exceeding positive rating actions in the traditional ABS, RMBS, and CMBS sectors' said Kimberly Slawek, Group Managing Director, Fitch Ratings.

The European structured finance market shares similar outlooks, with the exception of transactions backed by subprime assets, although its upgrade and downgrade rating performance has been less volatile due to the lack of transaction seasoning.

The report includes an outlook for CDOs, noting that performance for cash and synthetic structures composed of corporate assets is expected to reflect the continuing negative environment for defaults and recoveries, albeit with some stabilization as corporate defaults trend downward. Transactions backed by structured finance assets and leveraged loans are expected to fare better.

The report 'Global Structured Finance: 2003 and 2002 Review' can be found on the Fitch Ratings web site at 'www.fitchratings.com' or by contacting the Ratings Desk at 1-800-893-4824. Contact: Claire Mezzanotte 1-212-908-0503, Roger Merritt 1-212-908-0636, New York or Kimberly Slawek +44 (0) 20 7417 6251, London.

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Portfolio Financial Servicing Company and AssetExchange Announce Agreement

Strategic Alliance Streamlines Lease Portfolio Transactions

PORTLAND, Ore., -Portfolio Financial Servicing Company (PFSC), the nation's largest independent commercial lease and loan servicing company, and AssetExchange, a leading portfolio brokerage firm, are working together to

provide companies and investors an easier and more efficient way to buy and sell lease portfolios. The alliance provides buyers and sellers a new option for streamlining transactions.

AssetExchange, with its network of more than 1,000 financial institutions, provides access to lease portfolio acquisition opportunities and allows sellers to easily gather competitive offers. PFSC provides processing to buyers that do not currently have lease processing capabilities but would benefit from adding leases to their portfolios.

"We are very pleased to be able to offer a total solution to companies that wish to sell or buy lease portfolios," said Frank Selker, President of AssetExchange. "We are removing obstacles for investors that may not have processing capabilities, or simply do not wish to process the portfolio. Now a broader spectrum of investors can purchase leases that fit their strategy."

Portfolio Financial Servicing Company's President, Jerry Hudspeth, commented, "PFSC is pleased to partner with AssetExchange because of their reputation for bringing efficiency to portfolio sales and purchases. We believe PFSC's ability to

quickly and seamlessly convert, and assume servicing of portfolios will be key in facilitating the purchase of portfolios."

About Portfolio Financial Servicing Company

PFSC is the largest independent commercial lease and loan servicing company is the U.S. and is headquartered in Portland, Oregon. PFSC provides primary/master servicing, backup/successor servicing, and consulting for leasing portfolios. It currently services over $3.0 billion in assets. More information can be found at www.pfsc.com.

About AssetExchange

AssetExchange is an independent brokerage firm for banks and other financial institutions that buy and sell lease portfolios, loan

portfolios and loan participations. AssetExchange enables sellers to present their portfolios to a diverse national network of

buyers to obtain multiple, simultaneous offers and partnership opportunities. For additional information, please visit

www.AssetExchange.com or call (503) 220-0007.

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Fed leaves interest rates at 41-year low, predicts better growth once geopolitical uncertainties lifted

By Martin Crutsinger

ASSOCIATED PRESS

WASHINGTON – The Federal Reserve decided on Wednesday to leave interest rates unchanged at a 41-year low, optimistically predicting that the feeble U.S. economy will revive once geopolitical risks – a reference to a possible war with Iraq – recede.

The Fed's widely expected decision means the continuation for borrowers of rates that have spurred record home sales and a wave of mortgage refinancings.

Federal Reserve Chairman Alan Greenspan and his colleagues, striking an upbeat tone in their brief statement, contended that many of the economy's current problems were temporary and caused by the uncertainties surrounding possible military action in Iraq.

"Oil price premiums and other aspects of geopolitical risks have reportedly fostered continued restraint on spending and hiring by businesses," Fed policy-makers said in explaining their 12-0 decision.

"As those risks lift, as most analysts expect, the accommodative stance of monetary policy, coupled with ongoing strength in productivity, will provide support to an improving economic climate over time," they said.

The federal funds rate, the interest that banks charge each other on overnight loans, will hold at 1.25 percent. It has remained there since a half-percentage point rate cut in early November, the 12th rate reduction in an aggressive easing campaign that began in January 2001.

Banks' prime lending rate, the benchmark for millions of consumer and business loans, will keep steady at 4.25 percent, the lowest level since May 1959.

Some economists said the Fed decided to conserve what few rate cuts it has left in case further reductions are needed should an Iraqi war take a turn for the worse with a possible disruption in global oil supplies or a terrorist attack.

"The risk is that something really bad could happen in a war," said David Wyss, chief economist at Standard & Poor's in New York. "They only have five shots left and they want to conserve their ammunition for as long as possible."

If the Fed decided to move the 1.25 percent funds rate down in quarter percentage point moves, it would take five steps to reach zero.

Analysts, citing comments Greenspan made last year, said the central bank would not hesitate to push the funds rate down to that level if necessary to bolster plunging consumer and business confidence.

Wall Street investors, who have pushed stock prices down to last fall's levels, took heart from the upbeat tone of the Fed's announcement. The Dow Jones industrial average, which had been down more than 100 points in early trading, finished the day up 21.87 at 8,110.71.

The part of the Fed's statement intended to signal possible future moves was unchanged from its neutral policy stance – indicating that economic risks were equally balanced between inflation and weak growth.

Some analysts had predicted the Fed, given Wall Street's weakness, would take a position suggesting an inclination for additional interest cuts ahead. Other analysts, though, believed the Fed did not take that step because it would indicate more pessimism about the economy's prospects than was warranted.

The Fed next meets March 18.

"If a war starts in late February or early March, the Fed won't know the outcome by their March 18 meeting," said Sung Won Sohn, chief economist at Wells Fargo in Minneapolis.

If the war proceeds as the Bush administration hopes and is over quickly, then Wall Street is likely to enjoy a big rally and businesses will unfreeze their investment plans. Those developments could gain momentum from President Bush's $674 billion economic proposal.

The jobless level now stands at an eight-year high of 6 percent and many analysts forecast it will hit 6.5 percent by early summer before starting to improve.

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AOL Posts Nearly $100 Billion Loss

Historic Shortfall Announced as Vice Chairman Ted Turner Decides to Leave Post

By David A. Vise

Washington Post Staff Writer

AOL Time Warner Inc. yesterday reported a $98.2 billion loss for 2002, the biggest annual loss ever by a U.S. corporation and a total largely attributable to a steep drop in the value of once highflying America Online.

The company also announced that Vice Chairman Ted Turner, founder of CNN and the media company's largest individual stockholder, will step down at the annual meeting in May. Turner may remain on the company's board of directors, paralleling a recent move by America Online founder Steve Case, who also plans to step aside in May as a senior officer while remaining a director.

Turner, 64, who played a role in forcing Case's ouster as chairman, has moved from Atlanta to Florida and wants to spend less time on business and more time on personal and philanthropic endeavors, people who have spoken to him said.

The enormous financial loss comes just two years after the widely heralded $112 billion merger of Dulles-based America Online and Time Warner, a melding of new and established media that Case, Turner and others predicted would lead to a global colossus in the digital age. Instead, the deal has devolved into a corporate catastrophe, with stockholders of both companies losing tens of billions of dollars, and thousands of executives and rank-and-file employees forfeiting once-promising jobs, careers and fortunes.

The merger has gone so sour that top corporate officials no longer talk about the prospects for rapid growth and corporate synergy. The new priority for AOL Time Warner, according to chief executive Richard D. Parsons, is for the corporation to reduce its $26 billion in debt by at least $6 billion in the coming year so it will be under less financial pressure and have greater flexibility to adjust to changing business circumstances.

The debt reduction will be achieved through continued cost-cutting and the sale of various holdings, including a portion of the cable television unit, and the possible sale of both Turner's beloved Atlanta Braves and Time Warner's book publishing unit. On Tuesday, the company took a first step, selling its minority stake in Hughes Electronics Corp. for roughly $800 million.

The nearly $100 billion annual loss for 2002 stems not from operations, but mostly from charges of more than $80 billion, reflecting changes in accounting rules and a decline in the value of America Online, an Internet service provider, and other holdings. The corporation took a charge of $33.5 billion in the fourth quarter alone because of the decline in the value of America Online. The steep drop in "goodwill" reflects a measure of the difference between the current value of the AOL unit and its higher valuation at the time of the merger with Time Warner in January 2001.

The company announced the record loss after the close of trading on the New York Stock Exchange yesterday. In aftermarket trading, AOL Time Warner stock dropped $1.08, to $12.58

Parsons said that amid the gloomy financial news, the company recently restructured the terms of debt covenants and lending agreements with banks. He said the outlook for 2003 remains negative due to anticipated drops in ad revenue and the poor performance of America Online, which is struggling to maintain its subscriber base in the United States amid heightened competition from high-speed Internet providers. The company announced that for the first time in years the number of subscribers in the United States dipped during a three-month period, by 176,000, to 26.5 million.

"In 2003, our company will strive to run each of our businesses as well or better than before, with a continued major focus on stabilizing and revitalizing America Online," Parsons said.

For 2002, AOL Time Warner reported a loss of $98.7 billion ($22.15 a share) vs. a loss of $4.9 billion ($1.11) in 2001. Revenue climbed 7 percent, to $41.1 billion, from $38.5 billion. The outlook for 2003 is for slow growth in sales.

Parsons said that for 2002, one key measure of AOL Time Warner's profitability, earnings before interest, depreciation, taxes and amortization (EBIDTA), increased 5 percent, to $9.1 billion from $8.6 billion in 2001. The figure does not include the one-time charges related to the decline in value of America Online and the re-valuation of other parts of the company, including its cable holdings. Parsons said each of the company's reporting divisions posted double-digit growth except for America Online.

At America Online, revenue in 2002 fell 4 percent, but the loss of high-margin advertising meant that EBIDTA dropped 22 percent. Parsons and AOL Time Warner Chief Financial Officer Wayne Pace also warned that the cost of obtaining new subscribers is rising.

In the fourth quarter, AOL Time Warner reported a net loss of $44.9 billion ($10.04) vs. a loss of $1.8 billion (41 cents) in 2001's fourth quarter. Revenue grew 8 percent, to $11.4 billion.

In a letter to employees, Parsons, who will consolidate his authority atop the company by adding the title of chairman to his CEO title in May, praised both Turner and Case, whose decisions to step aside mean the company can focus on operating its businesses and paying down its debt, rather than boardroom power struggles.

Turner's influence at the company has waned in recent years. When he sold CNN and his sports teams to Time Warner, Turner became an executive without portfolio who could be found weighing in on whatever decisions interested him. But after the merger with AOL, he was stripped of authority, the value of his stock and net worth fell by more than $1 billion, and he came to view Case with bitterness and suspicion.

By resigning as an officer, Turner would become freer to criticize the company, or pursue efforts to recover some of his lost wealth.

For now, though, Turner's departure brings to a close his colorful career as a media maverick. Ever the entrepreneur, Turner founded CNN and increased the value of his Atlanta Braves by beaming game coverage across the country on Turner Broadcasting System's cable outlets. He grabbed headlines as a celebrity married to Jane Fonda, and he pledged billions to support environmental preservation, the United Nations and other causes. He is believed to be the largest private landowner in the United States and recently opened a chain of restaurants called Ted's, which sells bison burgers made from animals raised on his millions of acres.

"After much reflection, I have decided to resign from my executive duties as vice chairman of AOL Time Warner," Turner said in a statement. "I have not come to this decision lightly. As you know, this company has been a significant part of my life for over 50 years."

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A look at the history of AOL Time Warner

By Associated Press

A look at the history of AOL Time Warner Inc., which announced Wednesday that former cable TV mogul Ted Turner is stepping down as vice chairman.

1923: Warner Brothers founded by brothers Harry, Albert, Sam and Jack Warner.

1923: Time Inc. founded by Henry Luce and Briton Hadden. Published first weekly issue of Time magazine.

1985: AOL founded under original name, Quantum Computer Services. Offers an online service, Q-Link, for Commodore users.

1989: Quantum introduces America Online service for Macintosh & Apple II computers.

1990: Time purchases Warner Communications for $14 billion, creating the world's largest entertainment and media concern.

1991: Version of AOL software introduced for IBM-compatible computers, company changes name to America Online Inc.

1992: AOL sells stock to the public on the Nasdaq Stock Market.

1994: AOL reaches 1 million subscribers.

1995: AOL teams with German media firm Bertelsmann to offer online services in Europe.

1996: Time Warner and Turner Broadcasting System merge in $7.57 billion deal that combines names such as CNN, Fred Flintstone and the Atlanta Braves. AOL moves trading to New York Stock Exchange, reaches 10 million members.

1998: AOL buys CompuServe, a competing online service.

1999: AOL buys Netscape Communications and MovieFone; surpasses 20 million members; AOL Instant Messenger ICQ surpasses 50 million users.

January 2000: AOL announces plans to buy Time Warner.

January 2001: $106 billion merger is finalized.

December 2001: AOL Time Warner CEO Gerald Levin, who had been head of Time Warner and a key architect of the merger, announces retirement; Co-COO Richard Parsons named successor; CNN founder Ted Turner renews contract as vice chairman.

April 2002: AOL Time Warner takes $54 billion charge to account for the company's stock decline.

July 2002: Bob Pittman, former AOL leader who had championed merger, resigns as COO and is replaced by two veterans from the Time Warner side.

Jan. 12, 2003: Chairman Steve Case, founder of AOL and architect of the merger, announces plans to resign.

Jan. 29, 2003: Turner says he will step down as vice chairman in May, AOL Time Warner announces a $45.5 billion charge to account for the decline in the value of its assets.

Former GE chairman Welch seeks to keep divorce case papers confidential

By Associated Press

BRIDGEPORT, Conn. (AP) Former General Electric Co. Chairman Jack Welch, who has suffered embarrassing disclosures in his divorce case, is seeking a court order to keep his pretrial testimony and other documents confidential.

A hearing on the issue was planned for Thursday. Welch, who retired from GE in 2001, is not expected to attend, said his attorney, Samuel Schoonmaker.

Attorneys for his estranged wife, Jane Welch, denounced the move as a violation of her free speech rights.

Under the motion, filed earlier this month, the parties would be prevented from disclosing any pretrial discovery materials. However, it does not seek to seal the court file or to preclude the public or media from attending any court hearing or trial, Schoonmaker said.

A financial affidavit disclosed earlier identified numerous perks Welch was receiving from GE at a time when corporate scandals were sparking outrage. The perks included the use of GE aircraft, tickets to sporting events and a Manhattan apartment.

Welch asked GE's board to rescind most of the perks after they became an issue in the divorce.

The Welches disclosed plans to divorce in March, shortly after Suzy Wetlaufer then editor of the Harvard Business Review revealed she had become romantically involved with Welch.

At the time, Mrs. Welch was fighting her husband's offer of $35,000 a month in temporary support. She had also refused a settlement of $35 million in cash, stock and a new home, and a stream of income that could have had a value of $5 million a year.

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Citibank Gets Internet License from China

Bank Technology Weekly News

Citibank has gotten the nod from the Chinese government to move ahead with its efforts to offer on-line banking to both China's consumers and corporations. Citi, when it begins offering the services, will be the first foreign bank to offer on-line services in China to both sectors.

HSBC and Bank of East Asia are currently offering on-line banking to Chinese consumers, but not to the country's businesses. Citi is in the middle of creating a version of its CitiDirect Online banking platform in Chinese, a product it will offer to corporations seeking real-time processing and integration with their in-house treasury systems.

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Bank’s Changing Role in the Economy

----Financial Institutions Consulting Report

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Recent bank earnings reports are publicly stating what we have been seeing

at our clients for several months: the nature of retail bank earnings and

future areas for growth are changing.

THE CHALLENGES

Three major factors are impacting retail bank profitability: a slowdown in

mortgage originations, pressure on deposit margins, and, in many

geographies, a much tougher competitive environment.

- Mortgage origination slowdown. In the U.S., the refinancing boom has been

a mainstay of bank profitability and growth. As rates have dropped and

dropped again, homeowners refinanced in record numbers to take advantage of

lower interest rates and to cash out equity. However, with rates unable to

go much lower, our bank clients are finally beginning to see a slowdown in

refi activity. Oftentimes, the positive interest arbitrage opportunity for

the customer is significantly less compelling today than one year ago.

As refis slow down, those banks that rely on mortgage origination income are

going to hit a speed bump. Conversely, those with large servicing portfolios

will reap the benefits of slower churn and increased stability of earnings.

Our concern is that the fall-off in mortgage origination income will hit

some unprepared players like a tidal wave. While enjoying the refi boom,

these banks have failed to anticipate the need for additional sources of

income and develop the business model for doing so.

- Pressure on deposit margins. At many banks, the spread between cost of

funds and interest rates offered on deposits is at a historic low. The wider

gap that once existed has been eroded as market rates declined. Some banks

are also concerned about dropping rates so low that near-term deposits (and

long-term customer relationships) go elsewhere.

- Competitive environment. We have written recently about "new" players

entering New York City. But, "established" New York banks are hardly alone

in experiencing tougher and more nimble retail competitors.

In the Midwest, banks like TCF, Charter One and Guaranty Bank have made

inroads with innovative products such as no-fee checking. Community banks

have been reenergized as they focus on delivering improved service and as

they are able to deliver increasingly sophisticated capabilities. Credit

Unions have established themselves as alternatives to banks. On the high

end, players like Merrill Lynch continue to cherry pick the best customers,

marketing their suite of services as superior to a bank's.

In years past, banks benefited from the inertia factor. Many customers

simply did not want to experience the substantial hassle of moving their

accounts from one financial institution to another. That hassle has been

largely eliminated. Technology and a heightened sensitivity by some

companies to customer needs have made it much easier to change banks.

STEPS TO TAKE NOW

We think there are a least four steps to take as part of refocusing the

retail bank.

1. Scenario planning. Last week, we lead a meeting of financial services

industry executives. During the meeting, we discussed their perspectives on

when the economy will turn around. Understandably, depending upon the

segment in which the executive operated, the answer ranged from "the

turnaround has already begun" to "end of 2003-early 2004."

As became clear during our meeting, the geopolitical situation is

compounding the level of economic uncertainty. No one can know with

certainty where the economy will head and the pace at which it will change.

Anyone who claims to be able to do so loses all credibility. Therefore,

senior executives need to consider several economic scenarios and develop

plans related to each of them.

For many bankers, one critical variable for discussion has to center around

the pace of decline in mortgage originations; another is around interest

rate levels.

Holding a one-day internal scenario planning session should also result in

greater consensus across the bank and, ideally, a more consistent plan of

action. Although somewhat self-serving, our view is that, ideally, an

outside party facilitates these sessions. The facilitator should be able to

provide an external perspective as well as help cut through internal

political issues.

2. Prepare now. What happens if mortgage originations stop suddenly? Now,

you may dismiss this as unlikely, but one of the comments we hear from

executive after executive in certain financing areas is that their business

has "fallen off the table." The same can happen in the mortgage business. It

may not, but the issue for executives has to be "What do you do if it does?"

and "What should you be doing today to prepare…just in case?"

Some banks we know are both cutting costs (selectively, that is, not cutting

sales or critical customer service staff). Some are evaluating new areas to

emphasize. Furthermore, part of the bank interest we see in capturing

increased small business and business owner accounts reflects the view that

these customers can provide a more stable source of earnings for banks.

3. Determine high opportunity areas. As one growth well dries up, where

should you head? First, management needs to understand that no one area will

likely be able to replace the bonanza offered by the mortgage-refinancing

spike. Rather, banks will need to execute better in several areas, including

the core consumer bank and small business. Market changes raise the

imperative for effective cross-sell and improved segmentation to an even

higher priority. Some of the cost cuts from low priority areas need to be

invested in these initiatives.

4. Leverage the sales staff already in place. The best mortgage sales

persons should be able to sell more that just mortgages. Management needs to

add to this group's product set, but it needs to make explicit decisions for

these sales people. If you want them to sell more than mortgages, what are

the two-three (and no more) additional areas that you want them to focus on?

Don't turn them into generalist bankers because that will kill their impact.

CONCLUDING THOUGHTS

Banks will differ in the degree to which their retail earnings are changing.

So too, will they differ in their optimal responses to these changes.

However, standing still and denying that a sea of change may be occurring is

not an option. Or, at least not an option if you want to be a long-term

winning performer.

FINANCIAL INSTITUTIONS CONSULTING, INC.

475 Fifth Avenue, 19th Floor

New York, NY 10017

212-252-6700

www.ficinc.com

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THE 8TH ANNUAL BEST PRACTICE IN RETAIL FINANCIAL SERVICES SYMPOSIUM, MARCH2-4, 2003, BONITA SPRINGS, FL. THIS EVENT IS THE WORLD'S MOST CONTENT RICHSENIOR RETAIL FINANCIAL SERVICES EVENT. NO OTHER PROGRAM COMBINES OUR SENIOR

LEVEL ATTENDEES, EXPERT SPEAKERS, PEER NETWORKING, CUTTING-EDGE CONTENT ANDSOLUTION PROVIDERS. THIS EVENT IS TRULY THE MUST ATTEND RETAIL PROGRAM OFTHE YEAR.

FOR MORE INFORMATION, GO TO:

http://www.tfconferences.com/conferences/Retail03/index.html

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FIC NOW OFFERS A ONE-DAY SEMINAR/BRAINSTORMING SESSION ON STRATEGIES OF

BUSINESS BANKING. This workshop, specifically tailored to address your

bank's needs, focuses on the issues and topics of critical importance to

small business bankers, including: customer's needs and desires, customer

profitability and retention, segmentation, cross-sell, deposit gathering,

and priorities for success. For more information, click on the link below

or e-mail mharvey@ficinc.com

http://www.ficinc.com/Workshop/biz_banking_workshop.htm

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NOW AVAILABLE FOR ONLY $500: 2001 SMALL BUSINESS STATE OF THE MARKET

REPORT - a comprehensive study of the small business market and its use of

financial services products and providers. By joining the perspective of

over 400 small business owners with FIC's extensive knowledge of the small

business market and financial services industry, the report looks at market

size, use of products, product providers, credit cards, credit, primary

providers, delivery channels, online banking, and segmentation. For more

information or to purchase, e-mail: mharvey@ficinc.com.

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ABOUT FINANCIAL INSTITUTIONS CONSULTING

FIC is a strategy consulting firm addressing issues related to growth and

profitability for financial services clients. We emphasize practical,

bottom-line results based on quantitative and qualitative research and an

in-depth understanding of industry dynamics.

For more information about our consulting services or if you have questions

or comments, please e-mail info@ficinc.com.

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