Insight Into Banking.

Just after Digital Insight Corp. announced its second quarter results late last month, the stock was downgraded by two different securities firms. Deutsche Banc Alex. Brown cut Digital's rating to "market perform" from "buy" and J.P. Morgan downgraded the company to "long-term buy" from "buy." That's surprising, given that the online banking services provider more than doubled its revenues and narrowed its net losses.

So what gives? According to DB's Richard Zandi, the good news about the company's revenues has been substantially priced into the stock. He set a price target of $14.

One other concern, he said, is that most banks that are going to adopt Internet banking already have selected another kind of solution.

If that's true, Digital Insight will have to enter what Zandi called "the replacement cycle," in which the company goes aggressively after potential customers with existing Internet services.

The banking industry's frenetic mergers and acquisition activity is another potential weakness. Almost every time a bank gets acquired, Digital Insight loses a customer, Zandi said.

But Digital Insight is one of the few business-to-business plays in L.A. that enjoys strong revenue growth. As of June 30, it had contracts with 1,336 financial institutions.

Chief Executive John Dorman dismissed Zandi's comments. Most regional and community banks, he said, are thriving and multiplying, taking customers from top-tier banks.

"When Bank of America or Wells Fargo merges and become bigger, they become more difficult to deal with for customers," Dorman said. "So customers switch to smaller banks."

As for those smaller banks already having Internet services, Dorman said "roughly 50 percent" have the services. "There's a huge untapped market out there," he said.

Dorman also took Zandi to task for writing in a recent report that Digital Insight has not been spending enough on research and development.

"He says we're under-investing in R&D and I passionately disagree," Dorman said. "We're spending more on R&D than our next five competitors combined. We're investing $20 million this year in R&D."