CityBank expansion leads to profit drop

  • Herald staff
  • Friday, January 21, 2005 9:00pm
  • Business

Lynnwood-based CityBank said Friday that its year-end profits slipped, in part due to the expansion of its nonbanking subsidiary.

The bank reported a profit of $19 million for 2004, down 1.6 percent from its 2003 profit of $19.3 million.

On a per-share basis, profits slipped to $1.88, down 6 cents.

CityBank reported that its income from interest charged on loans fell 2.4 percent, to about $44.6 million over the year. That was offset, however, by cost-cutting that trimmed lending expenses by more than 11 percent.

Sales revenue at Diligenz, CityBank’s wholly-owned subsidiary, grew 36 percent, to $17.7 million for the year. But costs at the business unit, which offers online searches of Uniform Commercial Code filings, grew by close to 47 percent, to about $8.4 million.

CityBank officials said that was the result of increasing the payroll by adding sales and customer service personnel at Diligenz, a move it described as an investment for future growth.

During the fourth quarter, CityBank reported that profits dropped 2.6 percent, to $4.5 million, from $4.6 million in the fourth quarter of 2003. On a per-share basis, profits were 44 cents, down 2 cents for the quarter.

Military investors are due refunds

An estimated 13,000 military investors who bought and later terminated a systematic investment plan marketed by First Command Financial Planning Inc. of Fort Worth, Texas, are due restitution payments in the coming weeks that likely will average about $300.

Letters of explanation are being mailed to former First Command investors at their last known addresses. An enclosed verification form must be signed and returned, said lawyer Wayne Secore, an independent consultant hired to distribute $4 million to eligible former investors.

The payments are part of a $12 million settlement First Command reached with the Securities and Exchange Commission and NASD, the private regulator of the securities industry, after the agency found that the company had misled investors. The remaining $8 million is to be used for investor education programs for service members and families.

Only a fraction of former First Command investors are eligible for restitution. They must meet all of the following criteria:

* Purchased a Systematic Investment Plan on or after Jan. 1, 1999.

* Terminated the plan, in writing, on or before Dec. 15, 2004, the date of the SEC settlement.

* Paid an effective sales charge greater than 5 percent, which the SEC presumably views as reasonable for some higher-priced load funds.

Payments to individuals will vary. They are to get back any sales charge they paid that exceeded an effective rate of 5 percent, plus interest.

The year 1999 is significant because the SEC found that “at least” from that year forward, First Command used a sales process that included “misleading statements and omissions” to persuade military people, mostly officers and midgrade or senior enlisted members, to invest in systematic plans.

These plans, which the company stopped selling in December, allowed investors to buy mutual fund shares indirectly by making fixed monthly contributions of$100 to $500 over at least 15 years.

The plans imposed a sales charge, or load, set at 50 percent of the first 12 payments, with no charges thereafter. If the investor makes the required 180 payments, the effective charge falls to 3.3 percent. But the SEC said most systematic investors pay substantially higher sales rates than are customary, even for load mutual funds. That’s because, based on First Command’s own data, only 43 percent of investors make the required 180 payments.

The SEC censured First Command for misleading investors on how effective front-end sales loads are to customers committing to systematic investing, and on how systematic plans perform compared with other mutual fund investments. The SEC said First Command also failed to advise prospective investors that the government’s Thrift Savings Plan, open to the military since 2001, has many features of a systemic plan at far lower cost.

As a result, First Command violated the Securities Act’s prohibition on making untrue statements or omissions in selling securities, the SEC said.

The SEC quoted from company sales scripts that said no-load mutual funds, which generally are popular, “frequently have some of the highest long-term costs” and are intended primarily for speculative investors.

“In reality,” the SEC said, “the average long-term costs of owning no-load funds are substantially lower than the costs of owning load funds, and many long-term investors invest in no-load funds.”

The company did not admit or deny the SEC allegations or findings, but accepted an SEC order to stop violating provisions of the securities law. As part of the settlement, the company agreed to hire an independent consultant to review sales scripts and agent training.

In explaining the agreement that First Command compensate customers who bought into then bailed out of systematic plans since 1999, the SEC said, “By prematurely terminating their plans, these customers have incurred effective sales charges well above the average load charged by conventional-load equity mutual funds.”

The SEC settlement has no effect on First Command investors or existing systematic investment plans. Company life insurance and banking services were not involved in the enforcement action, nor was a problem found with any of the mutual funds First Command offers.

Former investors who believe they qualify for restitution but have not received a letter may contact Secore at secore@secorewaller.com or by writing to Wayne Secore, P.C. Secore &Waller L.L.P., Three Forest Plaza, 12221 Merit Drive, Suite 1100, Dallas, TX 75251.

To comment, write Military Update, P.O. Box 231111, Centreville, VA, 20120-1111, e-mail milupdate@aol.com, or go to www.militaryupdate.com.

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