<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 March 31, 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 (Zip Code)
executive offices)
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 May 12, 1998
- ---------------------------------- ----------------------------------
Common Stock, par value $.01 6,145,962
<PAGE>
FINANCIAL INFORMATION
Financial Statements
The following financial statements are included in this report:
1. Consolidated condensed balance sheets as of March 31, 1998 and as of
December 31, 1997.
2. Condensed consolidated statements of operations and comprehensive
income (unaudited) for the three months ended March 31, 1998 and 1997.
3. Statements of shareholders' equity (unaudited) from December 31, 1997
to March 31, 1998.
4. Consolidated condensed statements of cash flows (unaudited) for the
three months ended March 31, 1998 and 1997.
5. Notes to condensed consolidated financial statements as of December
31, 1997 and the three months ended March 31, 1998 and 1997
(unaudited).
2
<PAGE>
NET.B@NK, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS:
Cash $ 1,447,858 $ 250,535
Federal Funds Sold 8,647,074 28,853,057
------------ -----------
Total cash and cash equivalents 10,094,932 29,103,592
SECURITIES AVAILABLE FOR SALE -
At fair value (amortized cost of
$46,304,903 and $18,137,209) 46,332,787 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 $457,105 and $453,444 104,811,497 44,479,963
ACCRUED INTEREST RECEIVABLE 898,303 372,237
FURNITURE AND EQUIPMENT - Net 530,845 388,508
BANK CHARTER 340,667 344,167
OTHER ASSETS 202,900 252,196
------------ -----------
$163,463,431 $93,219,809
------------ -----------
------------ -----------
LIABILITIES AND SHAREHOLDERS'
EQUITY (DEFICIT)
LIABILITIES:
Deposits $128,681,669 $58,726,763
Other payables and accrued liabilities 681,301 375,649
------------ -----------
129,362,970 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, 6,145,562 shares
issued and outstanding) 61,456 61,456
Additional paid-in capital 43,631,314 43,631,314
Unamortized stock plan expense (52,125) (75,689)
Accumulated deficit (9,568,068) (9,416,621)
Accumulated other comprehensive income
(loss) 27,884 (83,063)
------------ -----------
Total liabilities and shareholders' equity 34,100,461 34,117,397
------------ -----------
$163,463,431 $93,219,809
------------ -----------
------------ -----------
</TABLE>
See notes to financial statements.
-3-
<PAGE>
NET.B@NK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1997
-------------------
<S> <C> <C>
INTEREST INCOME:
Short-term investments $ 395,003 $ 5,775
Investment securities 453,376
Loans 1,358,235
---------- ------------
Total interest income 2,206,614 5,775
INTEREST EXPENSE - Deposits 1,303,628 102,525
---------- ------------
NET INTEREST INCOME (LOSS) 902,986 (96,750)
PROVISION FOR LOAN LOSSES 3,661
---------- ------------
NET INTEREST INCOME (LOSS) AFTER
PROVISION FOR LOAN LOSSES 899,325 (96,750)
NON-INTEREST INCOME - Service charges and fees 122,495
NON-INTEREST EXPENSES:
Salaries and benefits 434,353 524,971
Marketing 240,018 60,495
Depreciation and amortization 40,037 6,879
Outside services 191,661 21,277
Other 86,872 119,993
Data processing 91,226 71,506
Occupancy 26,093 29,750
Office expenses 47,566
Travel and entertainment 15,441 4,404
Amortization of service contract
with affiliate 864,000
---------- ------------
Total non-interest expenses 1,173,267 1,703,275
---------- ------------
NET LOSS $(151,447) $(1,800,025)
---------- ------------
---------- ------------
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $(0.02) $(1.44)
---------- ------------
---------- ------------
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 6,143,562 1,249,342
---------- ------------
---------- ------------
NET LOSS $ (151,447) $ (1,800,025)
OTHER COMPRHENSIVE INCOME:
Unrealized holding gains arising during period 159,073
Less reclassification adjustment for gains
included in net loss (48,126)
Total other comprehensive income 110,947 -
---------- ------------
COMPREHENSIVE LOSS $(40,500) $(1,800,025)
---------- ------------
---------- ------------
</TABLE>
See notes to financial statements.
-4-
<PAGE>
NET.B@NK, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
PREFERRED COMMON ADDITIONAL UNAMORTIZED COMPREHENSIVE
STOCK COMMON STOCK PAID-IN STOCK PLAN ACCUMULATED INCOME
(NO PAR) SHARES ($.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
Net loss for the three
months ended March 31, 1998 (151,447) (151,447)
Other comprehensive income:
Unrealized holding gains
arising during the period
ended March 31, 1998 159,073 159,073
Less reclassification
adjustment for gains included
in net loss (48,126) (48,126)
Amortization of stock plan
expense 23,564 23,564
----- --------- ------- ----------- -------- ----------- --------- -----------
BALANCE - March 31, 1998
(unaudited) $ - 6,145,562 $61,456 $43,631,314 $(52,125) $(9,568,068) $ 27,884 $34,100,461
----- --------- ------- ----------- -------- ----------- --------- -----------
----- --------- ------- ----------- -------- ----------- --------- -----------
</TABLE>
See notes to financial statements.
-5-
<PAGE>
NET.B@NK, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------
1998 1997
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (151,447) $(1,800,025)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 36,537 6,879
Amortization of service contract 864,000
Amortization of stock plan expense 23,564 40,677
Amortization of premiums on investment
securities and loans 73,062
Amortization of premiums on
purchased loans 152,038
Amortization of Bank Charter 3,500
Provision for loan losses 3,661
Changes in assets and liabilities which
provide (use) cash:
Accrued interest receivable (526,066)
Other assets 49,296 (128,413)
License agreements - noncurrent 16,060
Payables and accrued liabilities 305,652 111,150
------------ -----------
Net cash used in operating activities (30,203) (899,672)
INVESTING ACTIVITIES:
Purchases of securities available for sale (30,443,211)
Purchase of Federal Home Loan Bank stock (26,500)
Principal repayments on mortgage backed
securities 2,202,455
Purchase of loans (70,683,033)
Principal payments on loans 10,195,800
Capital expenditures (178,874) (8,255)
Proceeds from return of equipment 17,738
------------ -----------
Net cash provided by (used in)
investing activities (88,933,363) 9,483
FINANCING ACTIVITIES:
Increase in deposits 69,954,906
Advances from affiliate 313,401
Net proceeds from the sale of
common stock 2,790
------------ -----------
Net cash provided by financing
activities 69,954,906 316,191
------------ -----------
NET DECREASE IN CASH AND CASH
EQUIVALENTS (19,008,660) (573,998)
CASH AND CASH EQUIVALENTS:
Beginning of period 29,103,592 768,666
------------ -----------
End of period $ 10,094,932 $ 194,668
------------ -----------
------------ -----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION - Cash paid during the
year for interest $ 808,000 $ -
------------ -----------
------------ -----------
</TABLE>
See notes to financial statements.
-6-
<PAGE>
NET.B@NK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND THE THREE MONTHS ENDED
MARCH 31, 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 Atlanta Internet bank ("AIB"), a federally
chartered savings and loan. The Company was incorporated February 20, 1996
for the primary purpose of forming and, ultimately, operating AIB. 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 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, 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.
-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 Form 10-K
filed with the SEC on March 27, 1998. The Company has followed those
policies in preparing this report. In addition, the following accounting
policies were adopted during the three-month period March 31, 1998:
COMPREHENSIVE INCOME - As of January 1, 1998, the Company adopted Statement
of Financial Accounting Standards ("SFAS") 130, "Reporting Comprehensive
Income." SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components; however, the adoption of the
Statement had no impact on the Company's net loss or shareholders' equity.
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.
3. PURCHASE OF LOANS
During the three month period ended March 31, 1998, the Company purchased
approximately $71 million in first and second mortgages, home equity lines
of credit, and construction loans from various banks and lending
institutions. The purchases included premiums totaling approximately $4.8
million. The respective sellers are servicing $41 million of these loans
for fees ranging from .05% to 1.25%. The remaining $30 million in loans is
being serviced temporarily by the seller and the Company is pursuing a
servicing agreement with a 3rd party. Interest rates range from 6% to 16%
on these loans.
4. NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE
In February 1997, SFAS 128, "Earnings Per Share" 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, net loss per share is computed based on the weighted average
number of common shares outstanding during the period. All previously
reported per share amounts have been restated to conform to SFAS 128.
Basic and diluted net loss per share are the same since the inclusion of
common stock equivalent shares of 392,456, outstanding stock options are
antidilutive.
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. Previously, the Plan limited the total
number of shares which could be awarded to 397,500. Effective after
shareholder approval, which was received at the annual shareholders'
meeting on April 23, 1998, the Plan was amended to increase the total
number of shares which may be awarded to 600,000. These shares have been
reserved for the Plan.
During the three-month period ended March 31, 1998, the Company awarded
23,000 incentive stock options at an exercise price of $11.25 per share on
January 12, 1998 and 3,000 incentive stock options at an exercise price of
$16.75 per share on February 12, 1998. Grant prices approximated fair
value of the stock at the grant date.
-8-
<PAGE>
6. IMPACT OF NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
131, "Disclosures about Segments of an Enterprise and Related Information,"
which establishes annual and interim reporting standards for an
enterprise's business segments and related disclosures about its products,
services, geographic areas and major customers. Adoption of this statement
will not impact the Company's consolidated financial position, results of
operations or cash flows. The Company will adopt this statement in its
financial statements for the year ending December 31, 1998.
In February 1998, the FASB issued SFAS 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which 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. SFAS 132 is effective for fiscal years beginning after December
15, 1997. The Statement is not expected to have an effect on the Company's
financial statements.
-9-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL - The Company is a holding company that wholly owns Atlanta
Internet Bank ("AIB"), 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 AIB 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
AIB, a federal savings bank, became a wholly owned subsidiary of the
Company. As of March 31, 1998, the Company had 8,416 accounts and
approximately $129 million in deposits.
FINANCIAL CONDITION - The Company's assets amounted to $163.5 million at
March 31, 1998, compared to $93.2 million at December 31, 1997, an increase
of $70.3 million. This increase in total assets was due to the receipt of
approximately $70 million in cash related to customer deposits. The cash
was used to purchase $23.2 million in home equity lines of credit, $32.1
million in second mortgages, $12.4 million in construction loans, and a $3
million bank participation loan. Approximately $30 million in cash was
used to purchase collateralized mortgage obligations.
Total liabilities increased $70.3 million due to the receipt of
approximately $70 million in customer deposits as a result of marketing
programs introduced by the Company in the fourth quarter of 1997 and
continued through March 31, 1998.
Total shareholders' equity decreased approximately $17,000 from December
31, 1997 to March 31, 1998. The decrease resulted from the net of
approximately $152,000 in net operating losses for the three months ended
March 31, 1998, $111,000 in other comprehensive income, and a reduction of
$24,000 in unamortized stock plan expense.
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
-10-
<PAGE>
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. Additionally, AIB must maintain minimum Tier I,
core, and risk-based capital ratios of at least 6%, 5%, and 10%,
respectively. AIB exceeded such requirements with tangible, core, total
capital, and Tier I of 14.87%, 14.87%, 22.05%, and 20.79% respectively, at
March 31, 1998.
MARKET RISK
ASSET AND LIABILITY MANAGEMENT - The Company's principal business is the
making of loans, funded 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.
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.
-11-
<PAGE>
INTEREST RATE SENSITIVITY - The table below shows the interest rate
sensitivity of the Company's assets and liabilities as of March 31, 1998:
<TABLE>
<CAPTION>
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 $ 1,390,575 $ 57,283 $ 1,447,858
Federal fund sold 8,647,074 8,647,074
Investment securities 3,399,864 $ 4,470,445 38,462,478 46,332,787
Stock of Federal Home
Loan Bank of Atlanta 251,500 251,500
Loans receivable 45,310,055 11,120,629 $ 14,214,019 34,166,794 104,811,497
----------- ----------- ------------ ----------- ------------
Total interest
earning assets 58,747,568 15,591,074 14,214,019 72,938,055 161,490,716
Noninterest earning assets 1,972,715 1,972,715
----------- ----------- ------------ ----------- ------------
Total assets $58,747,568 $15,591,074 $ 14,214,019 $74,910,770 $163,463,431
----------- ----------- ------------ ----------- ------------
----------- ----------- ------------ ----------- ------------
Interest Bearing Liabilities -
Interest-bearing deposits $42,006,031 $82,100,505 $ 3,221,186 $127,327,722
Interest free deposits $ 1,353,947 1,353,947
Other interest free
liabilities and equity 34,781,762 34,781,762
----------- ----------- ------------ ----------- ------------
Total liabilities
and equity $42,006,031 $82,100,505 $ 3,221,186 $36,135,709 $163,463,431
----------- ----------- ------------ ----------- ------------
----------- ----------- ------------ ----------- ------------
Net Interest Rate
Sensitivity Gap $16,741,537 $(66,509,431) $ 10,992,833 $38,775,061
Cumulative Gap 16,741,537 (49,767,894) (38,775,061) -
Net Interest Rate
Sensitivity Gap as a
Percent of Interest
Earning Assets 28.5% (426.6)% (77.3)% 51.8%
Cumulative Gap as a
Percent of Cumulative
Interest Earning Assets 28.5% (66.9)% (43.8)% -
</TABLE>
-12-
<PAGE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
GENERAL - Net losses for the three months ended March 31, 1998 amounted to
$151,000, a decrease of $1.6 million when compared to the $1.8 million loss
for the quarter ended March 31, 1997. The statement of operations for the
quarter ended March 31, 1997 reflects the Company's operations before the
acquisition of the bank charter. As the charter was not acquired until
July 31, 1997, the Company had no earning assets.
INTEREST INCOME - Interest income for the three months ended March 31, 1998
was $2.2 million . No significant amount of interest income was recorded
for the three months ended March 31, 1997 as the Company had no
significant investments or loans at that time.
INTEREST EXPENSE - For the quarter ended March 31, 1998, $1.3 million in
interest expense was recorded as a result of the Company's increase in
customer deposits. As the Company did not maintain its own deposit
accounts until July 31, 1997, $103,000 in interest expense was recorded for
the quarter ended March 31, 1997 related to the CFB servicing agreement.
This interest expense 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 $903,000 for the
three months ended March 31, 1998. As the Company did not have any
significant investments, loans, or customer deposits during the three
months ended March 31, 1997, no significant amount of net interest income
was recorded.
PROVISION FOR LOAN LOSSES - The Company recorded a $4,000 provision for
loan loss for the three months ended March 31, 1998. In connection with a
loan purchase of $71 million, the Company assessed the inherent loss in
such portfolio and determined the embedded loss at purchase date was
approximately $2 million. Such loans have been recorded net of the
allowance. As the Company had no loans for the three months ended
March 31, 1997, a provision was not recorded. 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.
NON-INTEREST INCOME - For the three month period ended March 31, 1998 the
Company recorded approximately $123,000 in loan and deposit service charges
and fees. As the Company did not have any loans, or customer deposits
during the three months ended March 31, 1997, no such service fees were
recorded. No amount of non-interest income was recorded for the three
month period ended March 31, 1997.
NON-INTEREST EXPENSES - Non-interest expenses decreased approximately
$500,000 from $1.7 million to $1.2 million for the three months ended March
31, 1998 as compared with the three months ended March 31, 1997. The
primary component of the decrease during the three months ended March 31,
1998 was a $864,000 decrease in the amortization of service contract with
affiliate as the service contract was fully amortized during the second
quarter of 1997. The decrease was offset by a $180,000 increase in
marketing expense related to the Company's marketing campaign initiated in
the fourth quarter of 1997.
-13-
<PAGE>
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 after shareholder approval, which was received at the annual
shareholders' meeting on April 23, 1998, the Plan was amended to increase
the total number of shares which may be awarded to 600,000. These shares
have been reserved for the Plan.
During the three-month period ended March 31, 1998, the Company awarded
23,000 incentive stock options at an exercise price of $11.25 per share on
January 12, 1998 and 3,000 incentive stock options at an exercise price of
$16.75 per share on February 12, 1998. Grant prices approximated fair
value of the stock at the grant date.
NEW ACCOUNTING PRONOUNCEMENTS - In June 1997, the FASB issued SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information,"
which establishes annual and interim reporting standards for an
enterprise's business segments and related disclosures about its products,
services, geographic areas and major customers. Adoption of this statement
will not impact the Company's consolidated financial position, results of
operations or cash flows. The Company will adopt this statement in its
financial statements for the year ending December 31, 1998.
In February 1998, the FASB issued SFAS 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which 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. SFAS 132 is effective for fiscal years beginning after December
15, 1997. The Statement is not expected to have an effect on the Company's
financial statements.
-14-
<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.
-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: May 14, 1997
-16-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,447,858
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8,647,074
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 46,332,787
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 105,268,602
<ALLOWANCE> (459,105)
<TOTAL-ASSETS> 163,463,431
<DEPOSITS> 128,681,669
<SHORT-TERM> 0
<LIABILITIES-OTHER> 681,301
<LONG-TERM> 0
0
0
<COMMON> 61,456
<OTHER-SE> 34,039,005
<TOTAL-LIABILITIES-AND-EQUITY> 163,463,431
<INTEREST-LOAN> 1,358,235
<INTEREST-INVEST> 453,376
<INTEREST-OTHER> 395,003
<INTEREST-TOTAL> 2,206,614
<INTEREST-DEPOSIT> 1,303,628
<INTEREST-EXPENSE> 1,303,628
<INTEREST-INCOME-NET> 902,986
<LOAN-LOSSES> 3,661
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,173,267
<INCOME-PRETAX> (151,447)
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (151,447)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
<YIELD-ACTUAL> 2.85
<LOANS-NON> 0
<LOANS-PAST> 8
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 453,444
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 457,105
<ALLOWANCE-DOMESTIC> 457,105
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
