CASE 9: Nexity and the U.S.

Banking Industry Overview Nexity, one of the nations leading virtual banks, was established in 1999 when David Long and Greg Lee, along with two other partners, formed the Nexity Financial Corporation, a bank holding company. An initial public offering in August of 1999 raised $22.5 million which was used to purchase the Peoples State Bank of Grant, Alabama. Long, President, and Lee, CEO, relocated the offices of the Peoples State Bank, changed the name to Nexity, and by February, 2000 Nexity had opened for operations. Nexitys business model centered on keeping overhead costs low and passing the savings on to customers in the form of better rates while offering more and better products and services than other virtual banks. Nexity targeted a diverse geographic and demographic customer base throughout the U.S. and differentiated its services with a dedication to outstanding customer service. Nexity focused its marketing efforts on Internet-based advertising channels and direct mail advertising, and benefited from free advertising through articles in the New York Times and Wall Street Journal. While the number of virtual banks has declined since Nexitys founding, Nexity has experienced continuous asset and deposit growth and broke even 18 months after it was established, compared to the industry standard of three years. Beginning in March, 2002 Nexity had experienced six straight profitable quarters and was poised for continued growth. The most significant threats to Nexitys future success included growing Internet fraud, which raised security concerns among potential customers, and increasing competition from large, well-funded traditional banks with brand name recognition that seek proficiency in online banking in order to directly target Nexitys customer base. However, in March, 2004 Nexity had offices in Birmingham, Alabama, Atlanta, Georgia, and Myrtle Beach, South Carolina and reported net income for the year ended December 31, 2003 of $4,675,942, compared with $1,206,730 during the same period in 2002. Nexitys return on average assets was 0.95% with a return on average equity of 17.21%; total deposits were $388.0 million, with total assets of $523.4 million and total loans of $324.1 million at December 31, 2003. According to Chairman Greg L. Lee: 2003 was a year of tremendous success and achievement for Nexity Financial Corporation. In less than four years from its grand opening on February 22, 2000, Nexity has grown to over one-half billion in total assets and in 2003 generated over a

15% annual return on equity. . .Nexity will continue to seek attractive growth opportunities in its correspondent banking network and via the Internet that will improve our productivity and profitability. As of 2004 the banking industry was continuing to make significant investments in online banking: A study by Treasury Strategies revealed that 34% of banks had webbased payment services, 32% had web-based services under development, and the remaining 34% were not developing any webbased payment services. Information Technology spending on new browser-based cash management solutions was predicted to be $500 million on 2004 and grow to $635 million in 2005. The number of U.S. households using online banking was expected to grow from 35.3 million in 2004 (with 57% of these households using online payment services) to 56 million in 2008 with 85% using online payment services. U.S. commercial banks were expected to spend $4 billion on new technologies in 2004 and $5.3 billion annually by 2007. However, the U.S. lagged behind Western Europe (47.7 million registered users in 2003) in terms of online banking and wireless banking (48 million in Europe in 2003, 42 million in Asia-Pacific, and 5 million in the U.S.). QUESTIONS: 1) What is the competition like in the online banking industry? Which of the five competitive forces is the strongest? Which is the weakest? What is your assessment of the long run profitability of this segment based on your competitive analysis? 2) What does a SWOT analysis reveal about Nexitys situation? Is the company in an attractive position? Has it built a competitive advantage? Is this advantage sustainable? 3) What issues do Nexitys senior managers need to address? Which ones should be top priority? Which ones should be lower priority? Do you agree with David Longs assessment that the future of Nexity is bright?

4) What recommendations would you make to David Long and Nexitys top management team concerning the future of the company and how it can sustain its growth? What challenges might Long face in implementing your recommendations?