<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1997 Commission File No. 0-22361
NET.B@NK, INC.
(Exact name of registrant as specified in its charter)
Georgia 58-2224352
(State of incorporation) (I.R.S. Employer Identification Number)
7000 Peachtree Dunwoody Road
Building 10, Suite 300
Atlanta, Georgia 30328
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 392-4990
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Shares Outstanding at November 12, 1997
Common Stock, par value $.01 6,145,562
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
The following financial statements are included in this report:
1. Consolidated condensed balance sheets as of September 30, 1997 and as
of December 31, 1996.
2. Condensed consolidated statements of operations for the quarters ended
September 30, 1997 and 1996, the nine months ended September 30, 1997
and the period from February 20, 1996 (date of incorporation) to
September 30, 1996.
3. Statements of shareholders' equity (deficit) from December 31, 1996 to
September 30, 1997.
4. Consolidated condensed statements of cash flows for the nine months
ended September 30, 1997 and the period from February 20, 1996 (date
of inception) to September 30, 1996.
2
<PAGE>
NET.B@NK, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1997 1996
------------- -------------
<S> <C> <C>
CASH AND CASH EQUIVALENTS:
Cash............................................................................... $ 13,001 $ 768,666
Federal Funds Sold................................................................. 35,053,540
------------- ------------
Total cash and cash equivalents.................................................. 35,066,541 768,666
SECURITIES AVAILABLE FOR SALE--At fair value (amortized cost of $10,776,681)........ 10,724,355
STOCK OF FEDERAL HOME LOAN BANK OF ATLANTA--At cost................................. 225,000
LOANS RECEIVABLE--Net of allowance for doubtful accounts of $391,707................ 34,013,337
ACCRUED INTEREST RECEIVABLE......................................................... 229,941
FURNITURE AND EQUIPMENT--Net........................................................ 265,955 367,950
BANK CHARTER........................................................................ 347,666
OTHER ASSETS........................................................................ 231,453 109,833
------------- ------------
$ 81,104,248 $1,246,449
------------- ------------
------------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
LIABILITIES:
Deposits........................................................................... $ 46,031,211
Amounts Due to Carolina First Bank................................................. $ 883,606
Other payables and accrued liabilities............................................. 109,521 748,916
------------- ------------
46,140,732 1,632,522
SHAREHOLDERS' EQUITY (DEFICIT):
Preferred stock, no par (10,000,000 shares authorized, none outstanding)
Common stock, $.01 par (100,000,000 shares authorized, 6,145,662 and 1,249,342
shares issued and outstanding)................................................... 61,456 12,493
Additional paid-in capital......................................................... 43,631,314 1,069,088
Common stock subscribed (1,354,814 shares at December 31, 1996).................... 3,844,185
Stock subscriptions receivable (29,814 shares at December 31, 1996)................ (4,185)
Unamortized affiliate service contract expense..................................... (1,440,000)
Unamortized stock plan expense..................................................... (99,252) (28,472)
Accumulated deficit................................................................ (8,577,676) (3,839,182)
Unrealized loss on securities available for sale................................... (52,326)
------------- ------------
Total liabilities and shareholders' equity (deficit)........................... 34,963,516 (386,073)
------------- ------------
$ 81,104,248 $1,246,449
------------- ------------
------------- ------------
</TABLE>
See notes to financial statements.
3
<PAGE>
NET.B@NK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 20, 1996
THREE MONTHS ENDED NINE MONTHS (DATE OF
SEPTEMBER 30, ENDED INCORPORATION)
---------------------------- SEPTEMBER 30, TO SEPTEMBER 30,
1997 1996 1997 1996
------------- ------------- ------------- ---------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Short-term investments...................... $ 420,993 $ 128 $ 427,609 $ 128
Investment securities....................... 46,467 46,467
Loans....................................... 434,064 434,064
------------- ------------- ------------- -----------
Total..................................... 901,524 128 908,140 128
INTEREST EXPENSE--Deposits................... 464,536 604,544
------------- ------------- ------------- -----------
NET INTEREST INCOME.......................... 436,988 128 303,596 128
PROVISION FOR LOAN LOSSES.................... 391,707 391,707
------------- ------------- ------------- -----------
NET INTEREST INCOME (EXPENSE) AFTER PROVISION
FOR LOAN LOSSES............................ 45,281 128 (88,111) 128
OTHER OPERATING INCOME:
Service charges and fees.................... 28,793 28,793
Management fees............................. 60,000
------------- ------------- ------------- -----------
Total..................................... 28,793 28,793 60,000
OTHER OPERATING EXPENSES:
Salaries and benefits....................... 1,011,358 126,092 2,073,906 188,928
Marketing................................... 119,711 5,618 204,409 5,634
Depreciation and amortization............... 116,097 30,636 141,539 30,636
Customer service............................ 102,013 152,553
Other....................................... 97,314 36,577 156,442 9,452
Data processing............................. 54,267 39,611 266,052 62,013
Occupancy................................... 41,455 8,925 77,290 11,900
Office expenses............................. 37,243 126,868 6,048
Travel and entertainment.................... 12,980 9,171 40,117 13,317
Amortization of service contract with
affiliate.................................. 960,000 1,440,000 960,000
------------- ------------- ------------- -----------
Total..................................... 1,592,438 1,216,630 4,679,176 1,287,928
------------- ------------- ------------- -----------
NET LOSS..................................... $ (1,518,364) $ (1,216,502) $(4,738,494) $ (1,227,800)
------------- ------------- ------------- -----------
------------- ------------- ------------- -----------
NET LOSS PER COMMON SHARE.................... $ (0.32) $ (1.22) $ (1.96) $ (1.31)
------------- ------------- ------------- -----------
------------- ------------- ------------- -----------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING... 4,672,821 996,586 2,412,906 939,207
------------- ------------- ------------- -----------
------------- ------------- ------------- -----------
</TABLE>
See notes to financial statements.
4
<PAGE>
NET.B@NK, INC. STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (UNAUDITED)
<TABLE>
<CAPTION>
UNAMORTIZED
AFFILIATE
PREFERRED COMMON ADDITIONAL COMMON STOCK SERVICE
STOCK COMMON STOCK PAID-IN STOCK SUBSCRIPTIONS CONTRACT
(NO PAR) SHARES ($.01 PAR) CAPITAL SUBSCRIBED RECEIVABLE EXPENSE
---------- ---------- ---------- ----------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE-- December 31, 1996... 1,249,342 $ 12,493 $ 1,069,088 $3,844,185 $ (4,185) ($1,440,000)
Proceeds from issuance of
common stock March 31,
1997...................... 19,876 199 2,591 (2,790) 2,790
Proceeds from issuance of
common stock April 2,
1997...................... 9,938 100 1,295 (1,395) 1,395
Proceeds from issuance of
common stock July 28,
1997...................... 3,500,000 35,000 38,216,520
Proceeds from issuance of
common stock July 31,
1997...................... 1,366,406 13,664 3,951,336 (3,840,000)
Issuance of 163,976
compensatory stock
options................... 390,484
Amortization of service
contract.................. 1,440,000
Amortization of stock plan
expense...................
Unrealized loss on
securities available for
sale......................
Net loss for the nine months
ended September 30, 1997..
---------- ---------- ---------- ----------- ---------- ------------- -----------
BALANCE-- September 30, 1997
(unaudited)................. $ -- 6,145,562 $ 61,456 $43,631,314 $ -- $ -- $ --
---------- ---------- ---------- ----------- ---------- ------------- -----------
---------- ---------- ---------- ----------- ---------- ------------- -----------
<CAPTION>
UNREALIZED
LOSS ON
UNAMORTIZED SECURITIES
STOCK PLAN AVAILABLE FOR ACCUMULATED
EXPENSE SALE DEFICIT TOTAL
----------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE-- December 31, 1996... $ (28,472 ) $(3,839,182) $ (386,073)
Proceeds from issuance of
common stock March 31,
1997...................... 2,790
Proceeds from issuance of
common stock April 2,
1997...................... 1,395
Proceeds from issuance of
common stock July 28,
1997...................... 38,251,520
Proceeds from issuance of
common stock July 31,
1997...................... 125,000
Issuance of 163,976
compensatory stock
options................... (390,484 ) --
Amortization of service
contract.................. 1,440,000
Amortization of stock plan
expense................... 319,704 319,704
Unrealized loss on
securities available for
sale...................... $ (52,326) (52,326)
Net loss for the nine months
ended September 30, 1997.. (4,738,494 ) (4,738,494)
----------- ------------- ----------- -----------
BALANCE-- September 30, 1997
(unaudited)................. $ (99,252 ) $ (52,326) $(8,577,676) $34,963,516
----------- ------------- ----------- -----------
----------- ------------- ----------- -----------
</TABLE>
See notes to financial statements.
5
<PAGE>
NET.B@NK, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 20,
1996 (DATE OF
NINE MONTHS INCORPORATION)
ENDED TO
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................................... $(4,738,494) $(1,227,800)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation............................................................... 139,205 8,414
Amortization of service contract........................................... 1,440,000 960,000
Amortization of stock plan expense......................................... 319,704
Amortization of premiums on investment securities and loans................ 15,795
Amortization of premiums on purchased loans................................ 48,247
Amortization of Bank Charter............................................... 2,334
Provision for loan losses.................................................. 391,707
Changes in assets and liabilities which provide (use) cash:
Accrued interest receivable................................................ (229,941)
Other assets............................................................... (121,620) (18,218)
Payables and accrued liabilities........................................... (639,395) 107,051
------------- -------------
Net cash used in operating activities..................................... (3,372,458) (170,553)
INVESTING ACTIVITIES:
Purchases of securities available for sale.................................. (11,219,760)
Purchase of Federal Home Loan Bank stock.................................... (225,000)
Principal repayments on mortgage backed securities.......................... 427,284
Purchase of loans........................................................... (32,687,877)
Net decrease in loans....................................................... 3,234,586
Purchase of Premier Bank charter............................................ (350,000)
Capital expenditures........................................................ (54,948) (353,124)
Proceeds from return of equipment........................................... 17,738
------------- -------------
Net cash used in investing activities..................................... (40,857,977) (353,124)
FINANCING ACTIVITIES:
Transfer of deposits from Carolina First Bank............................... 42,977,650
Decrease in deposits........................................................ (1,946,439)
Advances from (repayments to) affiliate..................................... (883,606) 513,348
Net proceeds from the sale of stock......................................... 38,380,705 1,020,349
------------- -------------
Net cash provided by financing activities................................. 78,528,310 1,533,697
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS.................................... 34,297,875 1,010,020
CASH AND CASH EQUIVALENTS:
Beginning of Period......................................................... 768,666
------------- -------------
End of Period............................................................... $35,066,541 $ 1,010,020
------------- -------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION--Cash paid during the year
for interest............................................................... $ 576,566 $ --
------------- -------------
------------- -------------
</TABLE>
See notes to financial statements.
6
<PAGE>
NET.B@NK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996, THE THREE MONTHS ENDED SEPTEMBER 30, 1997
AND 1996, THE NINE MONTHS ENDED SEPTEMBER 30, 1997,
AND THE PERIOD FEBRUARY 20, 1996 (DATE OF INCORPORATION )
TO SEPTEMBER 30, 1996 (UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
Net.B@nk, Inc. (the "Company") was incorporated on February 20, 1996 for the
primary purpose of forming and, ultimately, operating Atlanta Internet Bank
("AIB"). As of the beginning of the quarter ended September 30, 1997,
pending regulatory approval and the acquisition of a bank charter, AIB was
operating as a development stage enterprise under an agreement with Carolina
First Bank ("CFB") whereby CFB agreed to hold and service the deposit
accounts generated by the Internet banking operations of the Company in
exchange for 1,325,000 shares of the Company's common stock valued at
$3,840,000. As of the beginning of the quarter ended September 30, 1997,
the Company was also party to an agreement with First Alliance/Premier
Bancshares, Inc. ("First Alliance") pursuant to which the Company had agreed
to purchase the charter of First Alliance's subsidiary, Premier Bank, $5
million of loans, $5 million of certificates of deposit, and $2 million in
unimpaired capital for $2,150,000 in cash, 41,406 shares of the Company's
common stock valued at $125,000, and a maximum of $100,000 in additional
cash for reimbursement of direct out-of-pocket expenses.
On July 11, 1997, the final regulatory approval from the Office of Thrift
Supervision was received. On July 28, 1997, the Company sold 3,500,000
shares of its common stock to the public in an initial public offering (the
"Offering"). On July 31, 1997, the Company received approximately $38.4
million in net proceeds from the Offering and consummated its agreements
with both First Alliance and CFB. As a result AIB, a federal savings bank,
became a wholly owned subsidiary of the Company.
In the opinion of management, the unaudited condensed consolidated financial
statements included herein reflect all adjustments, consisting only of
normal recurring accruals, which are necessary for the fair statement of the
results for the interim periods presented. Certain information and footnote
disclosures normally included in financial statements have been condensed or
omitted pursuant to applicable rules and regulations of the Securities and
Exchange Commission ("SEC"). The financial statements included herein should
be read in conjunction with the financial statements and notes thereto, and
the Independent Auditors' Report included in the Company's Registration
Statement on Form S-1 (Regis. No. 333-23717). The results of operations
for the interim periods reported herein are not necessarily indicative of
results to be expected for the full year. Certain 1996 amounts have been
reclassified for comparability with 1997 amounts.
7
<PAGE>
2. ACCOUNTING POLICIES
Reference is made to the accounting policies of the Company described in the
notes to financial statements contained in the Company's Registration
Statement on Form S-1 (Regis. No. 333-23717). The Company has followed
those policies in preparing this report. In addition, the following
accounting policies were adopted during the three-month period ended
September 30, 1997:
Consolidation - The consolidated financial statements of the Company include
the financial statements of AIB, the Company's wholly owned subsidiary. All
intercompany balances and transactions have been eliminated in
consolidation.
Investment Securities Available for Sale - Investment securities classified
as available for sale are carried at fair value. The related unrealized
gain or loss, net of tax, is included as a separate component of
shareholders' equity. Gains and losses from dispositions are based on the
net proceeds and the adjusted carrying amounts of the securities sold using
the specific identification method.
Allowance for Loan Losses - The allowance for loan losses is maintained at a
level estimated to be adequate to provide for potential losses in the loan
portfolio. Management determines the adequacy of the allowance based upon
reviews of individual loans, recent loss experience, current economic
conditions, the risk characteristics of the various categories of loans, and
other pertinent factors. Loans deemed uncollectible are charged to the
allowance. Provisions for loan losses and recoveries on loans previously
charged off are added to the allowance.
Bank Charter - Bank charter represents the charter purchased from Premier
Bank. The value of the charter is being amortized on a straight-line basis
over 25 years. The carrying value of the charter is periodically reviewed
to assess recoverability based on expected undiscounted cash flows and
operating income for AIB. Impairment would be recognized in operating
results if a permanent diminution in value was expected. The Company also
evaluates the amortization period of the bank charter to determine whether
events or circumstances warrant revised estimates of the useful life. The
Company believes that no material impairment of the bank charter exists at
September 30, 1997.
Interest Income on Loans - Interest on loans is generally recorded over the
term of the loan based on the unpaid principal balance. Accrual of interest
is discontinued when either principal or interest becomes 90 days past due
or when, in management's opinion, collectibility of such interest is
doubtful.
Premium on Loans Purchased - Premiums on loans purchased from third parties
are capitalized and amortized over the life of the loan as an adjustment to
yield. Such premiums are classified with the loan balance to which they
relate for financial reporting purposes.
3. PURCHASE OF LOANS
Effective August 1, 1997, the Company purchased $26.5 million in first and
second mortgage, auto, and unsecured loans from CFB. The purchase price
included a premium of $607,831. All of these loans will be serviced by CFB
for a fee ranging from 1.25% to .375%. The loans bear interest at rates
ranging from 6.0% to 12%. In addition, effective August 1, 1997, the
Company also purchased $6.1 million in 11.5% auto leases from a third party
who will continue to service the loans for a 2% fee.
8
<PAGE>
4. NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE
Net loss per common share is computed based on the weighted average number
of common shares outstanding during the period. Common equivalent shares
have not been included in the computation of net loss per share as such
shares would be anti-dilutive.
5. STOCK OPTIONS
The Company has a 1996 Stock Incentive Plan (the "Plan") which provides that
key employees, officers, directors, and consultants of the Company may be
granted nonqualified and incentive stock options to purchase shares of
Common Stock of the Company, derivative securities related to the value of
the Common Stock, or cash awards. The Plan limits the total number of
shares which may be awarded to 397,500, which have been reserved for the
Plan. Awards to officers and employees under the Plan during the nine-month
period ended September 30, 1997 were as follows: 124,219 nonqualified stock
options at an exercise price of $1.21 per share on January 5, 1997; 39,750
incentive stock options at an exercise price of $3.62 per share on February
25, 1997; and 173,906 incentive stock options at an exercise price of $10.00
per share on February 25, 1997. In connection with the awards, the Company
will record total compensation expense of $390,484 over the three-year
vesting period of the options. The majority of the nonqualified options
vested immediately on July 28, 1997 upon completion of the Offering, and
$319,704 of such unamortized compensation expense was recognized.
In addition, on July 30, 1997, the Company granted 15,000 nonqualified stock
options at an exercise price of $11.00 per share under the Plan. The
options vest one-third on the first anniversary of the date of issuance,
one-third on the second anniversary of the date of issuance, and one-third
on the third anniversary of the date of issuance. No compensation expense
will be recorded related to these options.
6. IMPACT OF NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") 128, "Earnings per
Share," and 129, "Disclosure of Information about Capital Structure." SFAS
128 established standards for computing and presenting earnings per share
and applies to entities with publicly held common stock or potential common
stock. SFAS 129 establishes standards for disclosing information about an
entity's capital structure.
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income" and
131, "Disclosures about Segments of an Enterprise and Related Information."
SFAS 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full
set of general purpose financial statements. SFAS 131 establishes standards
for, among other things, reporting information about operating segments in
annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders.
SFAS 128 and SFAS 129 are effective for financial statements issued for
periods ending after December 15, 1997. SFAS 130 and SFAS 131 are effective
for financial statements issued for periods beginning after December 15,
1997. None of these Statements is expected to have a material effect on
the Company's financial statements.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General - The Company was incorporated as a Georgia corporation on February
20, 1996 for the purpose of forming and, ultimately, operating Atlanta
Internet Bank ("AIB") as a wholly owned federal savings bank subsidiary. As
of the beginning of the quarter ended September 30, 1997, pending regulatory
approval and the acquisition of a bank charter, AIB was operating as a
development stage enterprise under an agreement with Carolina First Bank
("CFB") whereby CFB agreed to hold and service the deposit accounts
generated by the Internet banking operations of the Company in exchange for
1,325,000 shares of the Company's common stock valued at $3,840,000. As of
the beginning of the quarter ended September 30, 1997, the Company was also
party to an agreement with First Alliance/Premier Bancshares, Inc. ("First
Alliance") pursuant to which the Company had agreed to purchase the charter
of First Alliance's subsidiary, Premier Bank (the "Charter"), and $5 million
in loans, $5 million in certificates of deposit, and $2 million in
unimpaired capital for $2,150,000 in cash, 41,406 shares of the Company's
common stock valued at $125,000 and a maximum of $100,000 in additional cash
for reimbursement of direct out-of-pocket expenses.
On July 11, 1997, the final regulatory approval from the Office of Thrift
Supervision ("OTS") was received. On July 28, 1997, the Company sold
3,500,000 shares of its common stock to the public in an initial public
offering (the "Offering"). On July 31, 1997, the Company received
approximately $38.4 million in net proceeds from the Offering and
consummated its agreements with both First Alliance and CFB. As a result
AIB, a federal savings bank, became a wholly owned subsidiary of the
Company. As of September 30, 1997, the Company had 3,347 accounts and
approximately $46 million in deposits.
Financial Condition - The Company's assets amounted to $81.1 million at
September 30, 1997, compared to $1.2 million at December 31, 1996, an
increase of $79.9 million. This increase in total assets was due to the
receipt of approximately $38.4 million in net proceeds from the Offering and
approximately $47.8 million in cash related to customer deposits transferred
to AIB from CFB and First Alliance upon consummation of the servicing
agreement and purchase of the Charter. Net proceeds amounting to $11.2
million and $225,000 were invested in mortgage-backed securities and Federal
Home Loan Bank stock, respectively. Approximately $35 million in net
proceeds was invested in overnight federal funds at September 30, 1997. An
additional $35.7 million in net proceeds was used to purchase first and
second mortgage loans, auto leases and loans, and unsecured loans from CFB
and another third party. The remaining net proceeds were used for the
Premier Bank stock purchase ($2.3 million), reimbursement of CFB expenses
($2.1 million), bonus payments ($450,000), and general corporate purposes.
Total liabilities increased $44.5 million due to the transfer of
approximately $47.8 million in customer deposits from CFB and First Alliance
as a result of consummation of the Company's servicing agreement with CFB
and purchase of the Charter. This increase in customer deposits was offset
by the payment of advances owed to CFB in the amount of $2.1 million also as
a result of consummation of the servicing agreement.
Total shareholders' equity (deficit) increased approximately $35.3 million
from a deficit of approximately $386,000 to equity of $35.0 million due
primarily to the receipt of approximately $38.4 million in net proceeds from
the issuance of common stock, including shares issued in the Offering and
shares issued for the purchase of the Premier charter. The increase
resulting from the issuance of stock was offset by an increase in unrealized
losses on securities held for sale of $52,000 and losses for the nine months
amounting to $4.7 million. In addition, all remaining stock subscriptions
were issued during the third quarter, but the issuance had no effect on
total equity.
10
<PAGE>
Liquidity and Capital Resources - The Company's liquidity, represented by
cash and cash equivalents, is a product of its operating, investing, and
financial activities. The Company's primary sources of funds are deposits,
borrowings, amortization, prepayments and maturities of outstanding loans,
sales of loans, maturities of investment securities and other short-term
investments, and funds provided from operations. While scheduled loan
amortization and maturing investment securities and short-term investments
are relatively predictable sources of funds, deposit flows and loan
prepayments are greatly influenced by general interest rates, economic
conditions, and competition. The Company invests excess funds in overnight
deposits and other short-term interest-earning assets. The Company can use
cash generated through the retail deposit market, its traditional funding
source, to offset the cash utilized in investing activities. The Company's
available for sale securities and short term interest-earning assets can
also be used to provide liquidity for lending and other operational
requirements. As an additional source of funds, the Company may borrow from
the Federal Home Loan Bank of Atlanta or through securities sold under
repurchase agreements.
AIB is required by OTS regulations to maintain tangible capital equal to at
least 1.5% of adjusted total assets, core capital equal to at least 3.0% of
adjusted total assets, and total capital equal to at least 8.0% of
risk-weighted assets. AIB exceeded such requirements with tangible, core,
and total capital equal to 34.23%, 34.23%, and 69.95 %, respectively, at
September 30, 1997.
11
<PAGE>
Interest Rate Sensitivity--The table below shows the interest rate
sensitivity of the Company's assets and liabilities as of September 30, 1997:
<TABLE>
<CAPTION>
TERM TO REPRICING OR MATURITY
-------------------------------------------------------------
OVER THREE OVER ONE OVER FIVE
LESS THAN MONTHS THROUGH YEAR THROUGH YEARS AND
THREE MONTHS ONE YEAR FIVE YEARS INSENSITIVE TOTAL
------------- --------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Interest Earning Assets:
Federal funds sold............... $ 35,053,540 $ 35,053,540
Investment securities............ $ 10,724,355 10,724,355
Stock of Federal Home
Loan Bank of Atlanta............ $ 225,000 225,000
Loans receivable................. 8,820,955 8,765,058 $ 16,427,322 34,013,336
------------- --------------- ------------- -------------- -------------
Total interest earning assets.. 43,874,495 19,489,413 16,427,322 225,000 80,016,231
Noninterest earning assets....... 242,941 222,630 265,956 356,490 1,088,017
------------- --------------- ------------- -------------- -------------
Total assets................... $ 44,117,436 $ 19,712,043 $ 16,693,278 $ 581,490 $ 81,104,248
------------- --------------- ------------- -------------- -------------
------------- --------------- ------------- -------------- -------------
Interest Bearing Liabilities -
Interest-bearing deposits........ $ 36,928,924 $ 6,265,737 $ 2,095,858 $ 45,290,519
Interest free deposits........... 712,353 712,343
Other interest free liabilities
and equity...................... 137,859 $ 34,963,516 35,101,375
------------- --------------- ------------- -------------- -------------
Total liabilities and equity... $ 37,779,136 $ 6,265,737 $ 2,095,858 $ 34,963,516 $ 81,104,248
------------- --------------- ------------- -------------- -------------
------------- --------------- ------------- -------------- -------------
Net Interest Rate
Sensitivity Gap.................. $ 6,338,300 $ 13,446,306 $ 14,597,420 $ (34,382,026)
Cumulative Gap.................... 6,338,300 19,784,606 34,382,026
Net Interest Rate
Sensitivity Gap as a Percent of
Interest Earning Assets......... 14.4 69.0 88.9 (152.81)
Cumulative Gap as a Percent of
Cumulative Interest Earning
Assets.......................... 14.4 31.2 43.1
</TABLE>
Results of Operations for the the Three Months Ended September 30, 1997 and
1996 and the Nine Months Ended September 30, 1997 as Compared with the Period
from February 20, 1996 to September 30, 1996
General--Net losses for the nine months ended September 30, 1997 amounted to
$4.7 million, an increase of $3.5 million (286%) when compared to the period
from February 20, 1996 to September 30, 1996. Losses for the quarter ended
September 30, 1997 totaled $1.5 million as compared with $1.2 million for the
quarter ended September 30, 1996, representing a 24.8% increase. The
statement of operations for the period from February 20,
12
<PAGE>
1996 to September 30, 1996 reflects the initial phase of the Company's
operations, including the acquisition, testing and implementation of the
Internet banking platform, marketing expenses, and the accrual of CFB's
expense reimbursements. Under the operations agreement, customer deposits
and the related assets resulting from the Company's marketing efforts, which
began in August 1996, were included in CFB's financial operations.
Interest Income - Interest income for the three months and nine months ended
September 30, 1997 was $902,000 and $908,000, respectively. No significant
amount of interest income was recorded for either the three months ended
September 30, 1996 or the period from February 20, 1996 to September 30,
1996 as the Company had no investments or loans at that time. During the
three months ended September 30, 1997, the Company received the net proceeds
from the Offering and customer deposits held by CFB and invested those
proceeds in federal funds, mortgage-backed securities, and loans purchased
from CFB and an independent third party. Those investments generated
interest income for the Company for the first time in the third quarter of
1997.
Interest Expense - As the Company did not begin originating deposit accounts
until October 1996, no interest expense was recorded for either the quarter
ended September 30, 1996 or the period from February 20, 1996 to September
1996. On July 31, 1997, based on the terms of the servicing agreement and
the Charter purchase agreement, CFB and First Alliance transferred
approximately $47.8 million in customer deposits and related assets to AIB.
As a result, the Company recorded approximately $465,000 of interest expense
during the three-month period ended September 30, 1997. Approximately
$140,000 of additional interest expense was recorded during the nine months
ended September 30, 1997. This additional amount represents the difference
between interest expense paid to customers and interest income paid to the
Company by CFB at contractual rates prior to the transfer of customer
deposits and was included in the Company's operations.
Net Interest Income - Net interest income is determined by the Company's
interest rate spread (i.e., the difference between the yields earned on its
interest-earning assets and the rates paid on its interest-bearing
liabilities) and the relative amounts of interest-earning assets and
interest-bearing liabilities. Net interest income was $437,000 and $304,000
for the three and nine months ended September 30, 1997, respectively. As
the Company did not have any significant investments, loans, or customer
deposits during the entirety of the period from February 20, 1996 to
September 30, 1996, no significant amount of net interest income was
recorded for either the three-month period ended September 30, 1996 or the
period from February 20, 1996 to September 30, 1996.
Provision for Loan Losses - As the Company purchased loans during the three
months ended September 30, 1997, $392,000 was recorded as a provision for
loan loss. The allowance for loan losses is maintained at a level estimated
to be adequate to provide for potential losses in the loan portfolio.
Management determines the adequacy of the allowance based upon reviews of
individual loans, recent loss experience, current economic conditions, the
risk characteristics of the various categories of loans, and other pertinent
factors. As the Company did not have any loans during the period February
20, 1996 to September 30, 1996, no provision for loan loss was recorded for
the three months ended September 30, 1996 or the period from February 20,
1996 to September 30, 1996.
Other Operating Income - For both the three- and nine-month periods ended
September 30, 1997, the Company recorded approximately $29,000 in loan and
deposit service charges and fees. As the Company did not have any loans, or
customer deposits during the period February 20, 1996 to September 30, 1996,
no such service fees were recorded for the three months ended September 30,
1996 or the period from February 20, 1996 to September 30, 1996. Only
miscellaneous management fees in
13
<PAGE>
the amount of $60,000 were recorded during the period from February 20,
1996 to September 30, 1996. No amount of other operating income was
recorded for the three-month period ended September 30, 1996.
Other Operating Expenses - Other operating expenses increased $376,000
(30.8%) from $1.2 million to $1.6 million for the three months ended
September 30, 1997 as compared with the three months ended September 30,
1996. The primary components of the increase during the three months ended
September 30, 1997 were an increase of $885,000 in salaries and benefits
which reflects the payment of approximately $450,000 in bonuses to officers;
the amortization of approximately $207,000 in stock plan expense; an
increase of $102,000 and $114,000 in customer service and marketing
expense, respectively, reflecting the continued growth of the Company's
deposit base and related support functions; and an increase of approximately
$61,000 in other operating expenses. The above increases were offset by a
$960,000 decrease in the amortization of service contract with affiliate as
the service contract was fully amortized during the second quarter of 1997.
Other operating expenses increased $3.4 million (276%) from $1.3 million to
$4.7 million for the nine months ended September 30, 1997 as compared with
the period from February 20, 1996 to September 30, 1996. The expenses for
the period from February 20, 1996 to September 30, 1996 reflect only the
initial phase of the Company's operations, including the acquisition,
testing, and implementation of the Internet banking platform, marketing
expenses, and the accrual of CFB's expense reimbursements. The most
significant components of the increase were an increase of $480,000 in
amortization of service contract with affiliate due to the inclusion of
more months of amortization in the 1997 period versus the 1996 period.
In addition, salaries and benefits for the nine months ended September 30,
1997 reflect the payment of approximately $450,000 in bonuses to officers
during the third quarter and the amortization of approximately $319,000 in
stock plan expense. The increase of $153,000 and $204,000 in customer
service and data processing expense, respectively, reflects the continued
growth of the Company's deposit base and related support functions.
14
<PAGE>
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits
11.1 Statement regarding computing of per share earnings
27.1 Financial Data Schedule (for SEC use only)
(b) No reports on Form 8-K were filed during the quarter for which this
report is filed.
15
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NET.B@NK, INC.
By: /s/ Robert E. Bowers
Robert E. Bowers
Chief Financial Officer
Dated: November 13, 1997
16
<PAGE>
EXHIBIT 11.1
Schedule Regarding Computation of Per Share Loss
<TABLE>
<CAPTION>
ACTUAL For the Three For the period For the Three For the Nine
Months Ended February 20, 1996 Months Ended Months Ended
September 30, 1996 (Date of Incorporation) September 30, 1997 September 30, 1997
to September 30, 1996
<S> <C> <C> <C> <C>
Net loss $ (1,216,502) $ (1,227,800) $ (1,518,364) $ (4,738,494)
-------------- --------------- -------------- --------------
-------------- --------------- -------------- --------------
Weighted average common
shares outstanding 996,586 939,207 4,672,821 2,412,906
-------------- --------------- -------------- --------------
-------------- --------------- -------------- --------------
Net income (loss) per
common and common equivalent share $(1.22) $(1.31) $(.32) $(1.96)
-------------- --------------- -------------- --------------
-------------- --------------- -------------- --------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 13001
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 35,053,540
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 10,724,355
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 34,405,044
<ALLOWANCE> 391,707
<TOTAL-ASSETS> 81,104,248
<DEPOSITS> 46,031,211
<SHORT-TERM> 0
<LIABILITIES-OTHER> 109,521
<LONG-TERM> 0
0
0
<COMMON> 43,692,770
<OTHER-SE> (8,729,254)
<TOTAL-LIABILITIES-AND-EQUITY> 81,104,248
<INTEREST-LOAN> 434,064
<INTEREST-INVEST> 474,076
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 908,140
<INTEREST-DEPOSIT> 604,544
<INTEREST-EXPENSE> 604,544
<INTEREST-INCOME-NET> 303,596
<LOAN-LOSSES> 391,707
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4,679,176
<INCOME-PRETAX> (4,738,494)
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,738,494)
<EPS-PRIMARY> 1.96
<EPS-DILUTED> 1.96
<YIELD-ACTUAL> 7.01
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 60,000
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 391,707
<ALLOWANCE-DOMESTIC> 391,707
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
