<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, 1998 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)
950 North Point Parkway
Suite 350
Alpharetta, Georgia 30005
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 343-6006
------------------
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 10, 1998
- ----------------------------------- ---------------------------------------
Common Stock, par value $.01 6,147,637
<PAGE>
FINANCIAL INFORMATION
Financial Statements
The following financial statements are included in this report:
1. Condensed consolidated balance sheets as of September 30,
1998 (unaudited) and December 31, 1997.
2. Condensed consolidated statements of operations and
comprehensive income (unaudited) for the three months and
nine months ended September 30, 1998 and 1997.
3. Condensed consolidated statement of shareholders' equity
(unaudited) from December 31, 1997 to September 30, 1998.
4. Condensed consolidated statements of cash flows (unaudited)
for the nine months ended September 30, 1998 and 1997.
5. Notes to condensed consolidated financial statements
as of September 30, 1998 and December 31, 1997 and for
the three-month and nine-month periods ended September
30, 1998 and 1997 (unaudited).
2
<PAGE>
NET.B@NK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1998 1997
(UNAUDITED)
------------- ------------
<S> <C> <C>
CASH AND CASH EQUIVALENTS:
Cash $ 71,274 $ 250,535
Federal Funds sold 9,596,790 28,853,057
------------- -------------
Total cash and cash equivalents 9,668,064 29,103,592
SECURITIES AVAILABLE FOR SALE - At fair value (amortized
cost of $41,307,248 and $18,137,209) 41,350,339 18,054,146
STOCK OF FEDERAL HOME LOAN BANK OF ATLANTA - At cost 251,500 225,000
LOANS RECEIVABLE - Net of allowance for doubtful
accounts of $3,706,152 and $453,444 200,138,090 44,479,963
ACCRUED INTEREST RECEIVABLE 1,917,644 372,237
FURNITURE AND EQUIPMENT - Net 1,052,456 388,508
BANK CHARTER 333,667 344,167
DEFERRED INCOME TAXES 3,026,476
LOAN PROCEEDS RECEIVABLE 20,347,536
OTHER ASSETS 5,342,742 252,196
------------- -------------
$ 283,428,514 $ 93,219,809
------------- -------------
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES:
Deposits $ 241,324,818 $ 58,726,763
Other payables and accrued liabilities 4,096,786 375,649
------------- -------------
245,421,604 59,102,412
SHAREHOLDERS' EQUITY:
Preferred stock, no par (10,000,000 shares authorized,
none outstanding)
Common stock, $.01 par (100,000,000 shares authorized,
6,147,637 and 6,145,562 shares issued and outstanding) 61,476 61,456
Additional paid-in capital 43,638,804 43,631,314
Unamortized stock plan expense (34,988) (75,689)
Accumulated deficit (5,685,960) (9,416,621)
Accumulated other comprehensive gain (loss), net of tax 27,578 (83,063)
------------- -------------
Total shareholders' equity 38,006,910 34,117,397
------------- -------------
$ 283,428,514 $ 93,219,809
------------- -------------
------------- -------------
</TABLE>
See notes to condensed consolidated financial statements
3
<PAGE>
NET.B@NK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- --------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans $ 4,500,723 $ 434,064 $ 9,301,741 $ 434,064
Investment securities 726,066 46,467 1,881,541 46,467
Short-term investments 57,266 420,993 559,925 427,609
------------ ----------- ---------- -----------
Total interest income 5,284,055 901,524 11,743,207 908,140
INTEREST EXPENSE:
Deposits 3,049,422 464,536 6,632,573 604,544
Short-term borrowings 170,350 604,683
------------ ----------- ---------- -----------
Total interest expense 3,219,772 464,536 7,237,256 604,544
------------ ----------- ---------- -----------
NET INTEREST INCOME 2,064,283 436,988 4,505,951 303,596
PROVISION FOR LOAN LOSSES 5,887 391,707 15,559 391,707
------------ ----------- ---------- -----------
NET INTEREST INCOME (LOSS) AFTER
PROVISION FOR LOAN LOSSES 2,058,396 45,281 4,490,392 (88,111)
NON-INTEREST INCOME - Service charges and fees 189,626 28,793 415,844 28,793
NON-INTEREST EXPENSE:
Salaries and benefits 288,611 1,011,358 1,033,783 2,073,906
Marketing 143,773 119,711 564,029 204,409
Depreciation and amortization 79,398 116,097 177,714 141,539
Customer services 336,029 102,013 887,598 152,553
Data processing 146,605 54,267 316,719 266,052
Occupancy 41,762 41,455 107,848 77,290
Office expenses 34,682 37,243 125,040 126,868
Travel and entertainment 12,208 12,980 51,234 40,117
Amortization of service contract with affiliate 1,440,000
Other 206,652 97,314 595,674 156,442
------------ ----------- ---------- -----------
Total non-interest expense 1,289,720 1,592,438 3,859,639 4,679,176
------------ ----------- ---------- -----------
NET INCOME (LOSS) BEFORE INCOME TAXES 958,302 (1,518,364) 1,046,597 (4,738,494)
INCOME TAX BENEFIT (EXPENSE) (345,000) 2,684,064
------------ ----------- ---------- -----------
NET INCOME (LOSS) 613,302 (1,518,364) 3,730,661 (4,738,494)
OTHER COMPREHENSIVE INCOME:
Unrealized holding gains (losses) on
securities arising during period
net of taxes of $29,498 and $60,466
for the three and nine months ended
September 30, 1998, respectively 57,260 (52,326) 117,337 (52,326)
Less reclassification adjustment for gains
included in net income (loss)
net of taxes of $3,450 for the nine months
ended September 30, 1998 (6,696)
------------ ----------- ---------- -----------
Total other comprehensive income 57,260 (52,326) 110,641 (52,326)
------------ ----------- ---------- -----------
COMPREHENSIVE INCOME (LOSS) $670,562 $(1,570,690) $3,841,302 $(4,790,820)
------------ ----------- ---------- -----------
------------ ----------- ---------- -----------
NET INCOME (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE:
Basic $ 0.10 $ (0.32) $ 0.61 $ (1.96)
Diluted $0.10 $ (0.32) $ 0.58 $ (1.96)
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING:
Basic 6,147,460 4,672,821 6,146,444 2,412,910
Diluted 6,443,196 4,672,821 6,433,184 2,412,910
</TABLE>
See notes to condensed consolidated financial statements
4
<PAGE>
NET.B@NK, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
Accumulated
Other
Preferred Common Additional Unamortized Comprehensive
Stock Common Stock Paid-in Stock Plan Accumulated Income
(No Par) Shares ($.01 Par) Capital Expense Deficit (Loss) Total
--------- --------- ---------- ----------- ------------ ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE -
December 31, 1997 $ - 6,145,562 $61,456 $43,631,314 $(75,689) $(9,416,621) $ (83,063) $34,117,397
Exercised stock
options 2,075 20 7,490 7,510
Net income for
the nine months
ended
September 30, 1998 3,730,661 3,730,661
Other comprehensive
income (loss) 110,641 110,641
Amortization of
stock plan expense 40,701 40,701
------- --------- ------- ----------- -------- ----------- -------- -----------
BALANCE -
September 30, 1998 $ - 6,147,637 $61,476 $43,638,804 $(34,988) $(5,685,960) $ 27,578 $38,006,910
------- --------- ------- ----------- -------- ----------- -------- -----------
------- --------- ------- ----------- -------- ----------- -------- -----------
</TABLE>
See notes to condensed consolidated financial statements
5
<PAGE>
[GRAPHIC OMITTED]
NET.B@NK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION> Nine Months Ended
September 30, 1998
----------------------------------------
1998 1997
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 3,730,661 $ (4,738,494)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation 166,819 139,205
Amortization of service contract 1,440,000
Amortization of stock plan expense 40,701 319,704
Amortization of premiums on investment securities 207,510 15,795
Amortization of premiums on purchased loans 1,524,177 48,247
Amortization of Bank Charter 10,500 2,334
Provision for loan losses 15,559 391,707
Changes in assets and liabilities which provide (use) cash:
Accrued interest receivable (1,545,408) (229,941)
Other assets (5,090,546) (121,620)
Loan proceeds receivable (20,347,536)
Payables and accrued liabilities 3,721,137 (639,395)
Deferred tax asset (3,026,476)
-------------- --------------
Net cash used in operating activities (20,592,902) (3,372,458)
INVESTING ACTIVITIES:
Purchases of securities available for sale (32,834,865) (11,219,760)
Purchase of Federal Home Loan Bank stock (26,500) (225,000)
Principal repayments on mortgage backed securities 9,457,316 (427,284)
Purchase of loans and premiums (234,636,497) (32,687,877)
Principal payments on loans 77,423,122 3,234,586
Capital expenditures (488,365) (54,948)
Capitalized software costs (342,402)
Proceeds from return of equipment 17,738
Purchase of Premier Bank Charter (350,000)
-------------- --------------
Net cash used in investing activities (181,448,191) (40,857,977)
FINANCING ACTIVITIES:
Increase (decrease) in deposits 182,598,055 (1,946,439)
Repayments to affiliate (883,606)
Net proceeds from the sale of common stock 7,510 38,380,705
Short-term borrowing, net of repayments
Transfer of deposits from Carolina First Bank 42,977,650
-------------- --------------
Net cash provided by financing activities 182,605,565 78,528,310
-------------- --------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (19,435,528) 34,297,875
CASH AND CASH EQUIVALENTS:
Beginning of period 29,103,592 768,666
-------------- --------------
End of period $ 9,668,064 $ 35,066,541
-------------- --------------
-------------- --------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION - Cash paid during the period for interest $ 3,764,244 $ 576,566
-------------- --------------
-------------- --------------
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
NET.B@NK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1998
AND DECEMBER 31, 1997 AND FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
1. ORGANIZATION AND BASIS OF PRESENTATION
Net.B@nk, Inc. (the "Company") is a bank holding company that wholly owns
the outstanding stock of Net.B@nk, formerly Atlanta Internet Bank, a
federally chartered savings and loan. The Company was incorporated
February 20, 1996 for the primary purpose of forming and, ultimately,
operating Net.B@nk. As of January 1, 1997, pending regulatory approval and
the acquisition of a bank charter, the Company 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.
In addition, as of January 1, 1997, the Company was a 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 $75,000 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, Net.B@nk, 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, included in the Company's Form
10-K filed with the SEC on March 27, 1998. The results of operations for
the interim periods reported herein are not necessarily indicative of
results to be expected for the full year. Certain 1997 amounts have been
reclassified for comparability with 1998 amounts.
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 Form 10-K for
the year ended December 31, 1997. The Company has followed those policies
in preparing this report. In addition, the following accounting policies
were adopted during the nine-month period ended September 30, 1998:
7
<PAGE>
Comprehensive Income - As of January 1, 1998, the Company adopted
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130 establishes new rules for the
reporting and display of comprehensive income and its components. SFAS 130
requires unrealized gains or losses on the Company's available-for-sale
securities, which prior to adoption were reported separately in
shareholders' equity, to be included in other comprehensive income. The
adoption of SFAS 130 had no impact on the Company's net income or
shareholders' equity.
Capitalized Software - As of April 1, 1998, the Company adopted Statement
of Position No. 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 allows for
the capitalization of costs related to the development and implementation
of software obtained for internal use including materials, payroll, and
interest costs once the criteria of the SOP have been met. As of September
30, 1998, approximately $342,000 of these related costs have been
capitalized.
3. LOANS
During the three-month period ended September 30, 1998, the Company
purchased approximately $29.3 million in first mortgages and home equity
loans. The purchase included a premium of $.5 million. In connection with
the purchase, an estimate of the loss inherent in the purchased portfolio
was made and an allowance for loan losses of $53,000 was recorded by
adjusting the premium associated with the purchased loans. The interest
rates range from 6.5% to 8.3% on these loans.
During the three-month period ended June 30, 1998, the Company purchased
approximately $80 million in home equity loans. The purchase included a
premium of $5 million. In connection with the purchase, an estimate of the
loss inherent in the purchased portfolio was made and an allowance for
loan losses of $1.2 million was recorded by adjusting the premium
associated with the purchased loans. The interest rates range from 7.5% to
13.5% on these loans.
During the three-month period ended March 31, 1998, the Company purchased
approximately $71 million in first and second mortgages, home equity
loans, and construction loans. The purchase included premiums of
approximately $4.8 million. In connection with the purchase, an estimate
of the loss inherent in the purchased portfolio was made and an allowance
for loan losses of $2.0 million was recorded by adjusting the premium
associated with the purchased loans. Interest rates range from 6% to 16%
on these loans.
An analysis of the allowance for loan losses for the nine-month period
ended September 30, 1998 follows:
Balance, January 1, 1998 $453,444
Allowance recorded in connection with the purchase
of loan pools 3,388,499
Provision for loan losses 15,559
Loan charge-offs (151,350)
------------
Balance, September 30, 1998 $ 3,706,152
------------
------------
8
<PAGE>
4. INCOME TAXES
During the nine months ended September 30, 1998, the Company reversed the
valuation allowance previously associated with its deferred tax assets.
The majority of the assets relate to future tax benefits associated with
previous net operating losses of the Company. As the Company achieved
profitability in the second quarter of 1998, management now believes that
it is more likely than not that such assets will be realized, and thus
reversed the valuation allowance in accordance with Statement of Financial
Accounting Standard No. 109, "Accounting for Income Taxes."
5. NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128") was issued. SFAS 128 establishes
standards for computing and presenting earnings per share information for
entities with publicly held common stock. In accordance with SFAS 128,
basic net income (loss) per share is computed based on the weighted
average number of common shares outstanding during the period. Diluted net
income (loss) per share is computed based on the weighted average number
of common and common equivalent shares outstanding during the period. All
previously reported per share amounts have been restated to conform to
SFAS 128.
6. 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. Previously, the Plan limited the
total number of shares which could be awarded to 397,500. Effective with
shareholder approval on April 23, 1998, the Plan was amended to increase
the total number of shares reserved for the Plan to 600,000.
During the nine-month period ended September 30, 1998, the Company awarded
23,000 incentive stock options at an exercise price of $11.25 per share on
January 12, 1998, 3,000 incentive stock options at an exercise price of
$16.75 per share on February 12, 1998 and 64,000 incentive stock
options at an exercise price of $15.75 per share on August 31, 1998.
Grant prices approximated fair value of the stock at the grant date.
Also, during the nine-month period ended September 30, 1998, 2,075
stock options were exercised at a price of $3.62 and 16,856 options
were terminated.
7. NEW ACCOUNTING STANDARDS
In June 1997, Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information"
("SFAS 131") was issued. SFAS 131 establishes annual and interim reporting
standards for an enterprise's business segments and related disclosures
about its products, services, geographic areas, and major customers. The
Company will adopt SFAS 131 in its financial statements for the year
ending December 31, 1998 and the adoption is not expected to impact the
Company's financial statements.
9
<PAGE>
In February 1998, Statement of Financial Accounting Standards No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits"
("SFAS 132") was issued. SFAS 132 standardizes the disclosure requirements
for pensions and other postretirement benefits to the extent practicable,
requires additional information on changes in the benefit obligations and
fair values of plan assets that will facilitate financial analysis, and
eliminates certain disclosures that are no longer useful. The Company will
adopt SFAS 132 in its financial statements for the year ending December
31, 1998. SFAS 132 is not expected to have an effect on the Company's
financial statements.
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133") was issued. SFAS 133 establishes standards for derivative
instruments and hedging activities and requires that an entity recognize
all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS 131
is effective for all fiscal quarters of fiscal years beginning after June
15, 1999. SFAS 131 is not expected to have an effect on the Company's
financial statements.
8. LOAN ORIGINATION AGREEMENTS
On April 1, 1998, the Company entered into an agreement with First
Mortgage Network, Inc. ("FMN") whereby the Company acts as a loan
originator on behalf of FMN. Under the terms of the agreement, FMN may
purchase, at the Company's option, loans originated by the Company. As a
result of the agreement's structure, loans originated for FMN for which
the purchase price has not yet been received are accounted for as
receivables.
On August 7, 1998 and October 1, 1998, the Company entered into similar
agreements with the Fidelity Group and E-loan, respectively.
9. BORROWING AGREEMENTS
During the nine-month period ended September 30, 1998, the Company and
Net.B@nk entered into various line of credit agreements with Georgia
Banker's Bank ("GBB"). Under the terms of the Company's agreement, the
Company may borrow 50% of the tangible equity of Net.B@nk, up to $17
million, using the stock of Net.B@nk as collateral. The lines bear
interest at a fixed rate of 8% per annum. During the nine-month period
ended September 30, 1998, the Company borrowed and repaid $12 million
under the line.
Net.B@nk has entered into two other lines of credit agreements with GBB,
one for a $5 million unsecured general purpose line and one for 99% of the
value of its investment securities. There were no amounts outstanding
under the general purpose line of credit at September 30, 1998. During the
nine-month period ended September 30, 1998, Net.B@nk borrowed and repaid
$45 million under the investment securities line of credit. Both of the
lines bear interest 25 basis points above the Fed Funds rate, or 5.25% at
September 30, 1998.
10
<PAGE>
10. CREDIT CARD AGREEMENT
On July 3, 1998, Net.B@nk entered into an agreement with The Bankers Bank
("TBB") whereby Net.B@nk acts as the originator of new credit card
customers for TBB. The credit cards will have Net.B@nk's logo and name
attached. TBB is the debt holder. Net.B@nk receives 2% of the interest
payment from credit card customers originated by Net.B@nk. The fees to
Net.B@nk are subject to limitations based on the amount of defaults within
the portfolio. However, Net.B@nk's fees cannot be reduced below zero. Once
the fees received by Net.B@nk have been completely offset with defaults,
the remaining losses revert back to TBB.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General - The Company is a holding company that wholly owns Net.B@nk,
formerly Atlanta Internet Bank, a federally chartered savings and loan.
The Company was incorporated as a Georgia corporation on February 20, 1996
for the purpose of forming and, ultimately, operating Net.B@nk as a wholly
owned federal savings bank subsidiary. As of January 1, 1997, pending
regulatory approval and the acquisition of a bank charter, the Company 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. In addition, as of January 1, 1997, the Company was
a 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 $75,000 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
Net.B@nk, a federal savings bank, became a wholly owned subsidiary of the
Company. As of September 30, 1998, the Company had 14,634 accounts and
approximately $241 million in deposits.
Financial Condition - The Company's assets were $283.4 million at
September 30, 1998, compared to $93.2 million at December 31, 1997, an
increase of $190.2 million. This increase in total assets was primarily
due to growth in the Company's loan portfolio resulting from the purchase
of approximately $181.1 million in home equity loans, first and second
mortgages, construction loans, and other participation loans. In addition,
the Company recorded a $3 million deferred tax asset related primarily to
previous net operating loss carryforwards expected to be realized for tax
purposes. As the Company achieved profitability in the second quarter of
1998, management now believes that it is more likely than not that its
deferred tax assets will be realized. Loan proceeds receivables of $20.3
million related to loan origination agreements with third parties have
also been recorded (see Note 8 of Notes to Condensed Consolidated
Financial Statements).
Total liabilities increased $186.3 million from $59.1 million at December
31, 1997 to $245.4 million at September 30, 1998 primarily due to the
rapid growth of the Company's deposit portfolio as a result of marketing
programs introduced by the Company in the fourth quarter of 1997 and
continued through September 30, 1998.
Total shareholders' equity increased $3.9 million from December 31, 1997
to September 30, 1998. The increase resulted from net income of $3.7
million, $110,000 in other comprehensive income, and a reduction of
$40,000 in unamortized stock plan expense.
12
<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, 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
payments 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
availability 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 has two line
of credit agreements totaling $100 million (see Note 9 of Notes to
Condensed Consolidated Financial Statements).
Net.B@nk 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. To be categorized as "well capitalized" under a
prompt corrective action plan, Net.B@nk must maintain minimum Tier I,
core, and risk-based capital ratios of at least 6%, 5%, and 10%,
respectively. Net.B@nk exceeded such requirements with tangible, core,
total, and Tier I capital ratios of 12.57%, 12.57%, 16.66%, and 15.62%,
respectively, at September 30, 1998.
Market Risk.
Asset and Liability Management - The Company's principal business is the
making of loans, funded primarily by customer deposits and, to the extent
necessary, other borrowed funds. Consequently, a significant portion of
the Company's assets and liabilities are monetary in nature and
fluctuations in interest rates will affect the Company's future net
interest income and cash flows. This interest rate risk is the Company's
primary market risk exposure. The Company does not enter into derivative
financial instruments such as futures, forwards, swaps, and options.
Also, the Company has no market risk-sensitive instruments held for
trading purposes. The Company's exposure to market risk is reviewed on a
regular basis by its management.
Interest Rate Sensitivity - The Company measures interest rate
sensitivity as the difference between amounts of interest-earning assets
and interest-bearing liabilities which either reprice or mature within a
given period of time. The difference, or the interest rate repricing
"gap," provides an indication of the extent to which an institution's
interest rate spread will be affected by changes in interest rates. A gap
is considered positive when the amount of interest-rate sensitive assets
exceeds the amount of interest-rate sensitive liabilities and is
considered negative when the amount of interest-rate sensitive
liabilities exceeds the amount of interest-rate sensitive assets.
Generally, during a period of rising interest rates, a negative gap
within shorter maturities would adversely affect net interest income,
while a positive gap within shorter maturities would result in an
increase in net interest income, and during a period of falling interest
rates, a negative gap within shorter maturities would result in an
increase in net interest income while a positive gap within shorter
maturities would have the opposite effect.
13
<PAGE>
The table below shows the interest rate sensitivity of the Company's assets
and liabilities as of September 30, 1998:
<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:
Cash and cash equivalents $71,274 $71,274
Federal fund sold 9,596,790 9,596,790
Investment securities 1,341,939 $ 40,008,400 41,350,339
Stock of Federal Home
Loan Bank of Atlanta 251,500 251,500
Other interest-bearing
receivables 20,347,536 20,347,536
Loans receivable 125,704,113 $ 4,581,202 $ 18,775,880 51,076,895 200,138,090
------------ -------------- ------------ ----------------- ------------
Total interest-
earning assets 157,313,152 4,581,202 18,775,880 91,085,295 271,755,529
Noninterest-earning assets 6,935,911 3,026,476 1,710,598 11,672,985
------------ -------------- ------------ ----------------- ------------
Total assets $ 164,249,063 $ 4,581,202 $ 21,802,356 $ 92,795,893 $ 283,428,514
------------ -------------- ------------ ----------------- ------------
------------ -------------- ------------ ----------------- ------------
Interest-Bearing Liabilities:
Interest-bearing deposits $ 84,344,281 $ 147,531,145 $ 4,513,141 $ 236,388,567
Interest free deposits $ 4,936,251 4,936,251
Other interest-free
liabilities and equity 42,103,696 42,103,696
------------ -------------- ------------ ----------------- ------------
Total liabilities
and equity $ 84,344,281 $ 147,531,145 $ 4,513,141 $ 47,039,947 $ 283,428,514
------------ -------------- ------------ ----------------- ------------
------------ -------------- ------------ ----------------- ------------
Net Interest Rate
Sensitivity Gap $ 79,904,784 $(142,949,943) $ 17,289,215 $ 45,755,946
------------ -------------- ------------ -----------------
------------ -------------- ------------ -----------------
Cumulative Gap $ 79,904,784 $ (63,045,159) $ (45,755,944) $ -
------------ -------------- ------------ -----------------
------------ -------------- ------------ -----------------
Net Interest Rate
Sensitivity Gap as a
Percent of Interest-
Earning Assets 48.65 % (3120.36)% 79.30 % 49.31 %
Cumulative Gap as a
Percent of Cumulative
Interest-Earning Assets 48.65 % (1376.17)% (209.87)% -
</TABLE>
14
<PAGE>
Results of Operations for the Three Months Ended September 30, 1998.
General - Net income for the three months ended September 30, 1998 amounted
to $.6 million, an increase of $2.1 million when compared to the $1.5 million
loss for the three months ended September 30, 1997. The increase in net
income is the result of the growth of the operations of Net.B@nk from 1997 to
1998.
Interest Income - Interest income related to the Company's loan and
investment portfolio for the three months ended September 30, 1998 was $5.3
million as compared with $902,000 for the three months ended September 30,
1997. The three months ended September 30, 1997 was the first quarter of the
Company's operations following the acquisition of the bank charter. The
Company recognized interest income on loans purchased from CFB and on
investment securities purchased with proceeds from the Offering.
Interest Expense - For the three months ended September 30, 1998, $3.0
million in interest expense was recorded as a result of the Company's
increase in customer deposits. Interest expense of $465,000 was recorded
during the three months ended September 30, 1997 as the Company transferred
its deposits to Net.B@nk from CFB and began paying interest on those
deposits. In addition, during the three months ended September 30, 1998, the
Company recorded approximately $170,000 in interest expense associated with
short-term borrowings under its line of credit agreements.
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 $2.1 million for the
three months ended September 30, 1998 as compared with $437,000 for the three
months ended September 30, 1997. The increase in net interest income results
from the increase in amount of loans and deposits from September 30, 1997 to
1998.
Provision for Loan Losses - In connection with the purchase of the loan
portfolios, the Company assesses the inherent loss in the portfolios and
records the necessary allowance by adjusting the premium associated with each
portfolio. In addition to this allowance, the Company then records an
additional allowance pervasive to all loans. The Company recorded a $6,000
provision for loan loss for the three months ended September 30, 1998 as
compared with $392,000 recorded during the three months ended September 30,
1997. 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.
Noninterest Income - For the three-month period ended September 30, 1998, the
Company recorded approximately $190,000 in loan and deposit service charges
and fees as compared with $29,000 recorded during the three months ended
September 30, 1997. The significant increase in service charges from the
three months ended September 30, 1997 to the three months ended September 30,
1998 was driven by the significant increase in both the loan and deposit
portfolios.
15
<PAGE>
Noninterest Expense - Noninterest expense includes all operating expenses
including salaries and benefits, marketing, general and administrative
expenses (excluding interest expense, provision for loan losses and income
taxes) of the Company. Noninterest expense decreased 19%, or $302,000, for
the three months ended September 30, 1998 as compared with the three months
ended September 30, 1997 as the Company was able to leverage its existing
infrastructure. From 1997 to 1998, the Company replaced many of its services
provided by an affiliate with outside vendor relationships.
Results of Operations for the Nine Months Ended September 30, 1998.
General - Net income for the nine months ended September 30, 1998 amounted to
$3.7 million, an increase of $8.4 million when compared to the $4.7 million
loss for the nine months ended September 30, 1997. The statement of
operations for the nine months ended September 30, 1997 reflects the
Company's operations before and immediately following the acquisition of the
bank charter. As the charter was not acquired until July 31, 1997, the
Company had no earning assets prior to that date. A substantial portion of
the income for the nine months ended September 30, 1998 resulted from the
recognition of approximately $3 million in tax benefits. The benefits
resulted from the reversal of a valuation allowance previously associated
with the Company's deferred tax assets. As the Company achieved profitability
during the three months ended June 30, 1998, management now believes it is
more likely than not that such deferred tax assets will be realized.
Interest Income - Interest income related to the Company's loan and
investment portfolio for the nine months ended September 30, 1998 was $11.7
million as compared with $908,000 for the nine months ended September 30,
1997. The three months ended September 30, 1997 was the first quarter of the
Company's operations following the acquisition of the bank charter. The
Company recognized interest income on loans purchased from CFB and on
investment securities purchased with proceeds from the Offering during that
quarter. The increase in interest income for the nine months ended September
30, 1998 as compared to 1997 is a result of the growth of the operations of
the Bank.
Interest Expense - For the nine months ended September 30, 1998, $6.6 million
in interest expense was recorded as a result of the Company's increase in
customer deposits. Interest expense of $605,000 was recorded during the nine
months ended September 30, 1997 as the Company transferred its deposits to
Net.B@nk from CFB and began paying interest on those deposits during the
three months ended September 30, 1997. In addition, during the nine months
ended September 30, 1998, the Company recorded approximately $605,000 in
interest expense associated with short-term borrowings under its line of
credit agreements.
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. With the growth in the Company's operations,
net interest income increased to $4.5 million for the nine months ended
September 30, 1998 as compared to $304,000 for the nine months ended
September 30, 1997.
Provision for Loan Losses - In connection with the purchase of various loan
portfolios, the Company assesses the inherent loss in the portfolios and
records the necessary allowance by adjusting the premium or discount
associated with each portfolio. In addition to this allowance, the Company
then records an additional allowance pervasive to all loans. The Company
recorded a $16,000 provision for loan loss for the nine months ended
September 30, 1998 as compared with $392,000 recorded during
16
<PAGE>
the nine months ended September 30, 1997. 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.
Noninterest Income - For the nine months ended September 30, 1998, the
Company recorded approximately $416,000 in loan and deposit service charges
and fees as compared with $29,000 recorded during the nine months ended
September 30, 1997. The significant increase in service charges from the nine
months ended September 30, 1997 to the nine months ended September 30, 1998
was driven by the significant increase in both the loan and deposit
portfolios.
Noninterest Expenses - Noninterest expenses decreased 21% or $820,000 for the
nine months ended September 30, 1998 as compared with the nine months ended
September 30, 1997. The primary component of the decrease during the nine
months ended September 30, 1998 was a $1.4 million decrease in the
amortization of the service contract with affiliate as the service contract
was fully amortized during the second quarter of 1997. In addition, salaries
and benefits decreased $1.0 million as certain services were outsourced by
the Company and $450,000 of bonuses were paid to the employees of the Company
upon completion of the Offering in July 1997. These decreases were partially
offset by increases in marketing, outside services, data processing,
occupancy, and other expenses as the Company moved to its new offices and
began soliciting and serving new deposit customers.
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. Previously, the Plan limited the total number
of shares that could be awarded to 397,500. Effective with shareholder
approval on April 23, 1998, the Plan was amended to increase the total number
of shares reserved for the Plan to 600,000.
During the nine months ended September 30, 1998, the Company awarded 23,000
incentive stock options at an exercise price of $11.25 per share on January
12, 1998, 3,000 incentive stock options at an exercise price of $16.75 per
share on February 12, 1998 and 64,000 incentive stock options at an exercise
price of $15.75 per share on August 31, 1998. Grant prices approximated fair
value of the stock at the grant date. Also, during the nine months ended
September 30, 1998, 2,075 stock options were exercised at a price of $3.62
and 16,856 options were terminated.
New Accounting Standards.
In June 1997, Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131") was issued. SFAS 131 establishes annual and interim reporting standards
for an enterprise's business segments and related disclosures about its
products, services, geographic areas and major customers. The Company will
adopt SFAS 131 in its financial statements for the year ending December 31,
1998, and is not expected to impact the Company's financial statements.
17
<PAGE>
In February 1998, Statement of Financial Accounting Standards No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits"
("SFAS 132") was issued. SFAS 132 standardizes the disclosure requirements
for pensions and other postretirement benefits to the extent practicable,
requires additional information on changes in the benefit obligations and
fair values of plan assets that will facilitate financial analysis, and
eliminates certain disclosures that are no longer useful. The Company will
adopt SFAS 132 in its financial statements for the year ending December 31,
1998. SFAS 132 is not expected to have an effect on the Company's financial
statements.
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133")
was issued. SFAS 133 establishes standards for derivative instruments and
hedging activities and requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. SFAS 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. SFAS 133 is not
expected to have an effect on the Company's financial statements.
Year 2000
The Company is working to resolve the potential impact of the Year 2000 on
the ability of the computerized information systems it uses to accurately
process information that may be date sensitive. Any of the programs it uses
that recognize a date using "00" as the year 1900 rather than the Year 2000
could result in errors or system failures that could ultimately cause
Net.B@nk or its service providers to become unable to process customer
transactions and could thereby require Net.B@nk to cease operations pending
resolution of the problem. Such an eventuality would materially adversely
affect the Company's business, financial condition, and results of
operations. Accordingly, management is devoting significant attention to
identifying Year-2000 issues and testing its in-house and external systems
for Year-2000 compliance. To date, the Company has incurred Year 2000
remediation costs of approximately $13,000 and has budgeted approximately
$25,000 for total remediation costs. The Company has been utilizing working
capital to fund its Year-2000 compliance program and anticipates that it will
continue to do so.
The Company began testing its in-house information technology ("IT") systems
during the second quarter of 1998 and is continuing such testing during the
third and fourth quarters of 1998, with an OTS-mandated completion date of
December 31, 1998. Management has not identified, and does not anticipate,
any significant risks or issues relating to non-IT systems.
The Company is also assessing the Year-2000 compliance of its outside vendors
and service providers, who include but are not limited to BISYS and
CheckFree. Because the Company primarily contracts with outside vendors for
its computer application programs, management believes the Company's
principal risk relating to Year-2000 issues lies in the potential inability
of those vendors to process date sensitive information involving the Year
2000. The Company expects to begin testing the systems provided by these
vendors for Year-2000 compliance beginning in the fourth quarter of 1998,
with an OTS-mandated completion date of June 30, 1999. In addition,
management is contacting each of the Company's vendors to obtain a commitment
that they are or will timely be Year-2000 complaint. If such assurances are
not forthcoming, or if management believes for any reason that any of its
vendors will not be Year-2000 compliant when required, management plans to
contract with other vendors that would be able to provide similar services at
similar costs. Although no assurances can be given, management believes that
such vendors are and will be available. Alternatively, the Company could
bring the outsourced services in-house by licensing the applicable software
and converting it to run on
18
<PAGE>
the Company's platforms or form a correspondent relationship with an
unaffiliated Year-2000 compliant bank that could service Net.B@nk's customers
and accounts until the Company could provide such services on a Year-2000
compliant basis. Management believes that the Company could implement any of
the forgoing contingency plans without a material interruption in its
business and without a material adverse effect on the Company's results of
operations.
19
<PAGE>
Exhibits and Reports on Form 8-K
(a) Exhibits
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.
20
<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 12, 1998
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 71,274
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 9,596,790
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 41,350,339
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 203,844,242
<ALLOWANCE> 3,706,152
<TOTAL-ASSETS> 283,428,514
<DEPOSITS> 241,324,818
<SHORT-TERM> 0
<LIABILITIES-OTHER> 4,096,786
<LONG-TERM> 0
0
0
<COMMON> 61,476
<OTHER-SE> 37,945,434
<TOTAL-LIABILITIES-AND-EQUITY> 283,428,514
<INTEREST-LOAN> 9,301,741
<INTEREST-INVEST> 2,441,466
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 11,743,207
<INTEREST-DEPOSIT> 6,632,573
<INTEREST-EXPENSE> 7,237,256
<INTEREST-INCOME-NET> 4,505,951
<LOAN-LOSSES> (15,559)
<SECURITIES-GAINS> 10,146
<EXPENSE-OTHER> 3,453,941
<INCOME-PRETAX> 1,046,597
<INCOME-PRE-EXTRAORDINARY> 1,046,597
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,730,661
<EPS-PRIMARY> 0.61
<EPS-DILUTED> 0.58
<YIELD-ACTUAL> 1.981
<LOANS-NON> 0
<LOANS-PAST> 211,779
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 494,603
<ALLOWANCE-OPEN> 453,444
<CHARGE-OFFS> 151,350
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 3,706,152
<ALLOWANCE-DOMESTIC> 3,706,152
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
