<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 15, 1999
REGISTRATION NO. 333-69587
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
NET.B@NK, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
GEORGIA 58-2224352
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
--------------------------
950 NORTH POINT PARKWAY
ALPHARETTA, GEORGIA 30005
(770) 343-6006
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
------------------------------
D. R. GRIMES
CHIEF EXECUTIVE OFFICER
NET.B@NK, INC.
950 NORTH POINT PARKWAY
SUITE 350
ALPHARETTA, GEORGIA 30005
(770) 343-6006
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------------
COPIES OF COMMUNICATIONS TO:
<TABLE>
<S> <C>
WALTER G. MOELING IV, ESQ. ALLEN L. WEINGARTEN, ESQ.
POWELL, GOLDSTEIN, FRAZER & MURPHY, LLP MORRISON & FOERSTER LLP
SIXTEENTH FLOOR 1290 AVENUE OF THE AMERICAS
191 PEACHTREE STREET, N.E. NEW YORK, NEW YORK 10104
ATLANTA, GEORGIA 30303 (212) 468-8000
(404) 572-6600
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED JANUARY 15, 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE
SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME
THIS PROSPECTUS IS DELIVERED IN FINAL FORM. THIS PROSPECTUS IS NOT AN OFFER TO
SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES
IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS
2,370,000 SHARES
NET.B@NK, INC.
COMMON STOCK
------------------
This is an offering of 2,370,000 shares of Common Stock of Net.B@nk, Inc. Of
these shares, 2,000,000 are being offered by the Company and 370,000 are being
offered by Carolina First Corporation, the Selling Shareholder. The Company will
not receive any of the proceeds from the sale of shares of Common Stock by the
Selling Shareholder. Of the 2,370,000 shares being offered by this Prospectus,
up to will be purchased by an underwriter that is a foreign broker-dealer
for sales outside of the United States.
The last reported sale price of the Common Stock, which is listed on the Nasdaq
SmallCap Market under the symbol "NTBK," was $31.375 per share on January 14,
1999. The Common Stock will be listed on the Nasdaq National Market upon
completion of this offering.
SEE "RISK FACTORS" BEGINNING ON PAGE 8 TO READ ABOUT CERTAIN RISKS THAT YOU
SHOULD CONSIDER BEFORE BUYING SHARES OF THE COMMON STOCK.
THE SHARES OF COMMON STOCK OFFERED ARE NOT DEPOSITS, SAVINGS ACCOUNTS OR OTHER
OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND ARE NOT INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS
APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
<TABLE>
<CAPTION>
PER
SHARE TOTAL
--------------- ---------------
<S> <C> <C>
Public offering price..................................... $ $
Underwriting discounts and commissions.................... $ $
Proceeds, before expenses, to us.......................... $ $
Proceeds to the Selling Shareholder....................... $ $
</TABLE>
------------------------
The underwriters may, under certain circumstances, purchase up to an additional
355,500 shares of Common Stock from the Company at the public offering price
less the underwriting discount.
The underwriters are severally underwriting the shares being offered. The
underwriters expect to deliver the shares against payment in New York, New York
on , 1999.
------------------------
BEAR, STEARNS & CO. INC.
MORGAN KEEGAN & COMPANY, INC.
RAYMOND JAMES & ASSOCIATES, INC.
KELTON INTERNATIONAL LTD.
The date of this Prospectus is , 1999.
<PAGE>
[INSIDE FRONT COVER]
[Graphics appear here, with title "Banking for the 21st Century" and
photographs of computer screens displaying the Bank's home page and its banking,
investment, lending, interest checking, electronic bill payment and account
statement pages]
<PAGE>
CERTAIN INTRODUCTORY MATTERS
Unless otherwise stated, all of the information in this Prospectus assumes
that the Underwriters do not exercise their over-allotment option. References to
"we," "our" and the "Company" generally refer to Net.B@nk, Inc. and its sole
subsidiary on a consolidated basis and references to the "Bank" refer to the
Company's wholly owned bank subsidiary, Net.B@nk. References to the "Web" are to
the World Wide Web.
Information regarding historical and projected growth in use of the Internet
and electronic commerce or relating to the demographic profile of Internet users
is derived from reports issued by Jupiter Communications and International Data
Corporation. Net.B@nk's demographic profile of its customer base is derived from
data provided by John H. Harland Company, an independent firm retained by the
Company. Other statistical data relating to the banking industry is provided by
FDIC Institution Directory.
Net.B@nk-TM- is a trademark of the Company. Visa(-Registered Trademark-) and
MasterCard(-Registered Trademark-) are registered trademarks of Visa
International Service Association and MasterCard International, respectively.
Other trademarks referenced herein are trademarks of their respective legal
owners.
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS
Some of the statements in this Prospectus are forward-looking statements.
These forward-looking statements include statements in the "Business--Industry
Background," and "--The Net.B@nk Solution" sections of this Prospectus relating
to trends in Internet use and electronic commerce. These forward-looking
statements also include statements relating to the Company's performance in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Use of Proceeds" and "Business" sections of this Prospectus. In
addition, we may make forward-looking statements in future filings with the
Securities and Exchange Commission and in written material, press releases and
oral statements issued by us or on our behalf. Forward-looking statements
include statements regarding the intent, belief or current expectations of the
Company or its officers (including statements preceded by, followed by or
including forward-looking terminology such as "may," "will," "should,"
"believe," "expect," "anticipate," "estimate," "continue" or similar expressions
or comparable terminology) with respect to various matters.
It is important to note that our actual results could differ materially from
those anticipated from the forward-looking statements depending on various
important factors. These important factors include a possible decline in asset
quality, the evolving nature of the market for Internet banking, the possible
adverse effects of unexpected changes in the interest rate environment,
increasing competition and regulatory changes. See "Risk Factors" beginning on
page 8 for more information on these and other risks we face.
All forward-looking statements in this Prospectus are based on information
available to us on the date of this Prospectus. We do not undertake to update
any forward-looking statements that may be made by us or on our behalf in this
Prospectus or otherwise. In addition, please note that matters set forth under
the caption "Risk Factors" constitute cautionary statements identifying
important factors with respect to the forward-looking statements, including
certain risks and uncertainties, that could cause actual results to differ
materially from those in such forward-looking statements.
3
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
THIS SUMMARY IS NOT COMPLETE AND DOES NOT CONTAIN ALL OF THE INFORMATION YOU
SHOULD CONSIDER BEFORE INVESTING IN THE COMMON STOCK. YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY.
THE COMPANY
Net.B@nk, the Company's sole subsidiary, is the largest federally-insured
bank operating exclusively on the Internet. The Company's mission is to
profitably provide a broad range of banking and financial services to the
growing number of Internet users. Our low-cost branchless business model has
allowed us to attain profitability within a year of acquiring our bank charter
(the "Charter") while continuing to pass along our operating cost savings to
customers in the form of attractive interest rates and low fees. Our unique,
Internet-based operating strategy has allowed us to experience rapid growth.
During the 12 months ended September 30, 1998, the Bank's customer accounts grew
from 3,264 to 14,634, deposits grew from $46.0 million to $241.3 million and
total assets grew from $81.1 million to $283.1 million.
The following charts demonstrate the growth in the Bank's customer accounts,
deposits and assets:
<TABLE>
<CAPTION>
EDGAR REPRESENTATION OF DATA POINTS USED IN
PRINTED GRAPHIC
NUMBER OF ACCOUNTS
<S> <C>
9/30/97 TO 9/30/98 GROWTH: 348%
9/1/97 3,264
12/1/97 4,755
3/1/98 8,416
6/1/98 11,823
9/1/98 14,634
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
DEPOSITS
<S> <C>
(IN MILLIONS)
9/30/97 TO 9/30/98 GROWTH: 424%
9/1/97 $46
12/1/97 $59
3/1/98 $129
6/1/98 $187
9/1/98 $241
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
TOTAL ASSETS
<S> <C>
(IN MILLIONS)
9/30/97 TO 9/30/98 GROWTH: 249%
9/1/97 $81
12/1/97 $93
3/1/98 $164
6/1/98 $247
9/1/98 $283
</TABLE>
The Bank offers a broad array of products and services that customers would
typically expect from a traditional bank. The Bank's products and services
include checking and money market accounts,
4
<PAGE>
certificates of deposit, electronic bill paying, debit cards, credit cards,
mortgage loans, business equipment leases and securities brokerage services. We
intend to develop additional products and services such as insurance,
consolidated account statements, home equity loans and home equity lines of
credit.
By offering a broad array of financial services via the Internet, the Bank
is positioned to capitalize on the Internet's rapid growth. According to
International Data Corporation, the number of worldwide Internet users is
projected to grow from an estimated 97.3 million in 1998 to an estimated 319.8
million by 2002. Consumers are increasingly using the Internet for electronic
commerce. International Data Corporation forecasts that total worldwide Internet
commerce will grow from an estimated $32.4 billion in 1998 to $425.7 billion in
2002. The Internet is also emerging rapidly as a means of providing financial
services. According to Jupiter Communications, the number of on-line banking
households in the United States is projected to grow from an estimated 4.5
million in 1997 to an estimated 17.1 million in 2002. Jupiter Communications
further indicates that the percentage of these on-line banking households
utilizing Internet banking is projected to rise from an estimated 8% in 1996 to
an estimated 80% in 2000. A demographic study by Jupiter Communications
indicates that Internet users tend to be young, mobile professionals with
relatively high incomes. We believe these demographics suggest a growing market
for the convenience, attractive interest rates and low fees that characterize
Internet banking.
As the first federally-insured bank to operate solely on the Internet, the
Bank has a competitive advantage relative to on-line banks with a less
established operating history. In addition, the Bank has a competitive cost
advantage over traditional banks. Net.B@nk is ideally positioned to participate
in the rapid growth of the Internet and on-line banking based on its:
- Attractive interest rates and low fees, which the Bank is able to offer by
leveraging its low-cost, branchless business model.
- Convenient services that are accessible regardless of where the customer
is located or the time of day.
- Broad selection of products and services, which attracts and retains
customers valuing "one-stop shopping" for their financial needs.
- High-quality customer service.
- Advanced security designed to prevent fraud and promote consumer
confidence.
Our objective is to become the leading provider of a full range of on-line
financial services. To accomplish this objective, we intend to:
- Build national brand awareness through increased marketing efforts.
- Offer attractive interest rates and low fees to expand our customer base.
- Develop new products and services.
- Generate noninterest income through cross-marketing initiatives.
- Employ a conservative lending and investment strategy to maintain high
asset quality.
- Outsource operational functions to provide scalability and flexibility.
------------------------
The Company was incorporated as a Georgia corporation on February 20, 1996.
The Bank commenced operations in October 1996 as a service of Carolina First
Bank ("CFB"), a wholly owned subsidiary of Carolina First Corporation ("Carolina
First"), under the trade name "Atlanta Internet Bank" until the Company
completed its initial public offering (the "IPO") on July 31, 1997. The Bank
changed its name to Net.B@nk in the third quarter of 1998. Our principal
executive offices are located
5
<PAGE>
at 950 North Point Parkway, Suite 350, Alpharetta, Georgia 30005, telephone
(770) 343-6006. The Bank's Web site is located at www.netbank.com.
6
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.......... 2,000,000 shares
Common Stock offered by the Selling
Shareholder................................ 370,000 shares
Common Stock to be outstanding after the
offering................................... 8,156,758 shares (1)
Use of proceeds.............................. We plan to use the net proceeds from the
offering to launch new marketing initiatives
and to provide the additional capital
required to support asset growth. See "Use of
Proceeds."
Nasdaq SmallCap and proposed Nasdaq National
Market Symbol.............................. NTBK
</TABLE>
- ------------------------
(1) Based on shares outstanding at January 14, 1999. Excludes 531,356 shares of
Common Stock subject to options granted under the Company's 1996 Stock
Incentive Plan, 283,022 of which are currently exercisable at a weighted
average exercise price of $7.15 per share. If the underwriters exercise
their over-allotment option in full, an additional 355,500 shares of Common
Stock would be offered by the Company, and 8,512,258 shares of Common Stock
would be outstanding after the offering. See the notes to the Company's
consolidated financial statements included elsewhere in this Prospectus.
RISK FACTORS
For a discussion of certain risks that you should consider before buying
shares of the Common Stock, see "Risk Factors" on page 8.
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The summary historical financial information presented below is derived from
the Company's audited consolidated financial statements as of December 31, 1996
and 1997 and September 30, 1998 and for the period from February 20, 1996 to
December 31, 1996, the year ended December 31, 1997 and the nine months ended
September 30, 1998 and the Company's unaudited consolidated financial statements
for the nine months ended September 30, 1997. The summary historical financial
information should be read in conjunction with the Company's consolidated
financial statements and related notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 20,
1996 (DATE OF NINE MONTHS ENDED
INCORPORATION) YEAR ENDED SEPTEMBER 30,
TO DECEMBER 31, DECEMBER 31, --------------------------
1996 1997 1997 1998
--------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income................................... $ 7,709 $2,223,165 $ 908,140 $ 11,743,207
Interest expense.................................. -- 1,259,743 604,544 7,237,256
--------------- ------------ ------------ ------------
Net interest income............................. 7,709 963,422 303,596 4,505,951
Provision for loan losses......................... -- 471,706 391,707 15,559
--------------- ------------ ------------ ------------
Net interest income after provision for loan
losses........................................ 7,709 491,716 (88,111) 4,490,392
Noninterest income................................ 60,000 62,607 28,793 415,844
Noninterest expense............................... 3,906,891 6,131,762 4,679,176 3,859,639
--------------- ------------ ------------ ------------
Net income (loss) before income taxes........... (3,839,182) (5,577,439) (4,738,494) 1,046,597
Income tax benefit................................ -- -- -- 2,684,064
--------------- ------------ ------------ ------------
Net income (loss)............................... $ (3,839,182) $(5,577,439) $ (4,738,494) $ 3,730,661
--------------- ------------ ------------ ------------
--------------- ------------ ------------ ------------
Net income (loss) per common share--basic....... $ (4.33) $ (1.66) $ (1.96) $ 0.61(1)
--------------- ------------ ------------ ------------
--------------- ------------ ------------ ------------
Net income (loss) per common and potential
common share--diluted......................... $ (4.33) $ (1.66) $ (1.96) $ 0.58(1)
--------------- ------------ ------------ ------------
--------------- ------------ ------------ ------------
Weighted average shares outstanding--basic........ 886,000 3,354,000 2,413,000 6,146,000
Weighted average shares outstanding--diluted...... 886,000 3,354,000 2,413,000 6,416,000
BALANCE SHEET DATA--AT PERIOD END:
Total assets...................................... $ 1,246,449 $93,219,809 $ 81,104,248 $283,069,392
Total deposits.................................... -- 58,726,763 46,031,211 241,324,818
Shareholders' equity (deficit).................... (386,073) 34,117,397 34,963,516 38,006,910
Book value per share.............................. (0.31) 5.55 5.69 6.18
FINANCIAL RATIOS:
Return on average total assets (ROA).............. N/M (11.81)% (11.51)% 1.98%(2)
Return on average shareholders' equity (ROE)...... N/M (33.07)% (27.41)% 10.35%(2)
Percentage of nonperforming loans to total
loans........................................... -- -- -- 0.11%
Percentage of allowance for loan losses to total
loans........................................... -- 1.01% 1.14% 1.82%
Percentage of charge-offs during the period to
average loans................................... -- 0.08% -- 0.12%
Percentage of allowance for loan losses to
nonperforming loans............................. -- -- -- 1,677.57%
Percentage of average shareholders' equity
(deficit) to average total assets............... (30.97)% (35.71)% 41.99% 19.17%
</TABLE>
- --------------------------
(1) Pro forma net income per common and potential common share for the nine
months ended September 30, 1998 would be $0.11 per share (basic and diluted)
assuming a statutory income tax rate of 34% for the period.
(2) Pro forma return on average total assets and average shareholders' equity
for the nine months ended September 30, 1998 would be 0.37% and 2.00%,
respectively, assuming a statutory income tax rate of 34% for the period.
7
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE COMPANY INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CAREFULLY CONSIDER THE SPECIFIC FACTORS LISTED BELOW, TOGETHER WITH THE
CAUTIONARY STATEMENT ON THE INSIDE FRONT COVER OF THIS PROSPECTUS AND THE OTHER
INFORMATION INCLUDED IN THIS PROSPECTUS BEFORE PURCHASING THE COMMON STOCK.
THE SHARES OF COMMON STOCK OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS
OR OTHER OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION (THE "FDIC") OR ANY OTHER GOVERNMENTAL
AGENCY.
WE COULD SUSTAIN LOSSES IF OUR ASSET QUALITY DETERIORATES
A significant portion of our net income is derived from the Bank's loan
portfolio. If an economic downturn occurs either generally or in the Western or
Southeastern United States, the regions collectively representing the greatest
concentration of loans in the Company's loan portfolio, borrowers will be less
likely to repay their loans as scheduled. We could also sustain losses if we
incorrectly assess the creditworthiness of our borrowers. This could cause our
interest income and net interest margin to decrease and our loan loss provision
to increase, which could materially adversely affect our business, financial
condition, results of operations and cash flows.
OUR SUCCESS DEPENDS ON THE CONTINUED GROWTH IN USE AND COMMERCIAL VIABILITY OF
THE INTERNET
Our future success depends substantially on continued growth in use of the
Internet. The Internet is, however, a relatively new commercial marketplace and
may not continue to grow. If Internet use does not continue to grow, our
business, financial condition, results of operations and cash flows could be
materially adversely affected.
Additionally, if the number of Internet users and the level of use continues
to grow, the Internet's technical infrastructure may become unable to support
the demands placed upon it. Furthermore, third party vendors might not be able
to timely and adequately develop the necessary technical infrastructure for
significant increases in electronic commerce, such as a reliable network
backbone, or introduce performance improvements, such as high-speed modems, in a
timely fashion. The Internet could also lose its viability due to delays in the
development or adoption of new standards and protocols required to handle
increased levels of activity or due to increased governmental regulation.
Changes in or insufficient availability of telecommunications services could
produce slower response times and adversely affect use of the Internet.
Furthermore, the general public's security concerns regarding the transmittal of
confidential information, such as credit card numbers, over the Internet might
persist or even worsen. Issues like these could lead to resistance against
acceptance of the Internet as a viable commercial marketplace. To the extent the
Internet's technical infrastructure or security concerns adversely affect its
potential growth, our business, financial condition, results of operations and
cash flows could be materially adversely affected.
NETWORK AND COMPUTER SYSTEMS COULD FAIL OR EXPERIENCE A SECURITY BREACH
Our computer systems and network infrastructure could be vulnerable to
unforeseen problems. Because we conduct our business over the Internet and
outsource several critical functions to third parties, our operations depend on
our ability, as well as that of our third-party service providers, to protect
our computer systems and network infrastructure against damage from fire, power
loss, telecommunications failure, physical break-ins or similar catastrophic
events. Any damage or failure that causes interruptions in our operations could
materially adversely affect our business, financial condition, results of
operations and cash flows.
In addition, a significant barrier to on-line financial transactions is the
secure transmission of confidential information over public networks. We rely on
encryption and authentication technology to
8
<PAGE>
provide the security and authentication necessary to effect secure transmission
of confidential information. Advances in computer capabilities, new discoveries
in the field of cryptography or other developments could result in a compromise
or breach of the algorithms the Bank and its third-party service providers used
to protect customer transaction data. If any such compromise of the Bank's
security were to occur, it could have a material adverse effect on the Bank's
business, financial condition, results of operations and cash flows. See
"Business--Security."
The Bank is part of a rapidly evolving electronic commerce market. Market
acceptance of Internet banking depends substantially on widespread adoption of
the Internet for general commercial and financial services transactions. If
another provider of commercial services through the Internet were to suffer
damage from a physical break-in, security breach or other disruptive problem
caused by the Internet or other users, the growth and public acceptance of the
Internet for commercial transactions could suffer. Such an event could deter
potential customers of the Bank or cause customers to leave the Bank and thereby
materially adversely affect our business, financial condition, results of
operations and cash flows.
THE BANKING INDUSTRY IS HIGHLY COMPETITIVE
The banking industry is highly competitive in general, and the market for
Internet banking in particular has experienced a recent surge in new entrants.
Most of our principal competitors--traditional banks and thrifts, other Internet
banks and other financial service providers such as brokerage and insurance
companies--have greater financial and other resources than we do. In addition,
brokerage, insurance companies and other financial service providers may not be
subject to the same degree of regulation as we are. We believe our ability to
compete successfully depends on a number of factors, including market presence;
customer service and satisfaction; the capacity, reliability and security of our
network infrastructure; ease of access to and navigation of the Internet; our
competitors' interest rates and service fees; the scope of our products and
services and the rate at which we and our competitors introduce them; and
industry and general economic trends. If we experience difficulty in any of
these areas, our business, financial condition, results of operations and cash
flows could be materially adversely affected. See "Business--Competition."
WE MAY NOT SUCCEED IN IMPLEMENTING OUR BUSINESS STRATEGY
Our success depends on our ability to execute our marketing plan, leverage
our low cost structure, offer a broad array of products and services, provide
convenient, high quality customer service and employ other elements of our
business strategy. We may not be able to manage effectively the expansion of our
operations or achieve the rapid execution necessary to exploit fully the market
for the Bank's services. We may not succeed in implementing our business
strategies and, even if we do succeed, our strategy may not have the favorable
impact on operations that we anticipate. If we are unable to manage growth
effectively, or to otherwise implement our business strategy, our business,
financial condition, results of operations and cash flows could be materially
adversely affected. See "Business--Growth Strategy."
WE MAY NOT INTRODUCE NEW PRODUCTS AND SERVICES SUCCESSFULLY
Our success depends in part upon our ability to offer new products and
services that meet changing customer requirements. The Bank presently offers
checking and money market accounts, certificates of deposit, electronic bill
paying, debit cards, credit cards, mortgage loans, business equipment leases and
securities brokerage services. If we are unable to develop and bring additional
products and services to market in a timely manner, we could lose market share
to competitors who are able to offer these services, which could materially
adversely affect our business, financial condition, results of operations and
cash flows. See "Business--Industry Background," "--The Net.B@nk Solution" and
"--Products and Services."
9
<PAGE>
INTERNET BANKING MAY NOT BECOME WIDELY ACCEPTED
The market for Internet banking services is rapidly evolving and the
ultimate demand for and market acceptance of Internet banking remains uncertain.
Market acceptance of Internet banking depends on consumer willingness to use the
Internet for general commercial and financial services transactions. Other
critical issues concerning the commercial use of the Internet (including
reliability, cost, ease of use and access and quality of service) may also
impact the growth of Internet use. Consequently, Internet banking may not become
as widely accepted as traditional forms of banking. Our business, financial
condition, results of operations and cash flows could be materially adversely
affected if the Internet banking market does not continue to develop. See
"Business--Industry Background" and "--The Net.B@nk Solution."
OUR COMPETITIVE POSITION DEPENDS ON OUR ABILITY TO ATTRACT AND RETAIN KEY
PERSONNEL
Our success depends upon the continued service of our senior management team
and key technical personnel and upon our ability to attract and retain qualified
personnel. Our employees do not have employment agreements and may voluntarily
terminate their employment at any time, and competition for qualified employees,
particularly in technical fields, is intense. In our experience, it can take a
significant period of time to identify and hire personnel with the combination
of skills and attributes required to carry out our strategy. We do not carry key
person life insurance on any of our executives. If we lose the services of our
key personnel, or are unable to attract additional qualified personnel, our
business, financial condition, results of operations and cash flows could be
materially adversely affected. See "Management."
WE COULD BE ADVERSELY AFFECTED BY CHANGES IN INTEREST RATES
Like most depository institutions, the Bank's earnings are affected by
changes in market interest rates and other economic factors beyond its control.
The Bank's operations depend substantially on its net interest income, which is
the difference between the interest income earned on its interest-earning
assets, such as loans and investments, and the interest expense paid on its
interest-bearing liabilities, such as deposits and other borrowings. The
difference between the amount of interest-earning assets and interest-bearing
liabilities that mature within a given period of time, or the interest rate
sensitivity "gap," indicates 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. In a rising interest rate environment, an institution
with a positive gap would be in a better position than an institution with a
negative gap to invest in higher yielding assets or have its asset yields
adjusted upward, which would result in the yield on its assets increasing at a
faster pace than the cost of its interest-bearing liabilities. During a period
of falling interest rates, however, an institution with a positive gap would
tend to have its assets maturing at a faster rate than one with a negative gap,
which would tend to reduce or restrain the growth of its net interest income. If
we are unsuccessful in managing interest rate fluctuations, our business,
financial condition, results of operations and cash flows could be materially
adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Market Risk."
WE RELY EXTENSIVELY ON THIRD-PARTY SERVICE PROVIDERS
We depend, and will continue to depend, significantly on a number of
relationships with third-party service providers. Specifically, we receive
essential Web hosting, electronic bill payment and core systems processing
services on an outsourced basis from NCR Corporation ("NCR"), CheckFree
Corporation ("CheckFree") and BISYS Group, Inc. ("BISYS"), respectively. If NCR,
CheckFree or BISYS experience difficulties or terminate their services and we
are unable to replace them with another service provider, the Bank's operations
could be interrupted. If such interruption were to continue for a
10
<PAGE>
significant period of time, our business, financial condition, results of
operations and cash flows could be materially adversely affected. See
"Business--Operations."
OUR COMPUTER SYSTEMS, AND THOSE OF OTHERS ON WHOM WE RELY, MAY NOT ACHIEVE YEAR
2000 READINESS
We are working to resolve the potential impact of the year 2000 on the
ability of the computerized information systems we use to accurately process
information that may be date-sensitive. Any of the programs we or our service
providers use 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
the Bank or its service providers to become unable to process customer
transactions. This would require the Bank to cease operations pending resolution
of the problem. We believe our principal risk lies in the potential inability of
our outside vendors and service providers to process date-sensitive information
involving the year 2000. We also face risks relating to the potential year 2000
noncompliance of other institutions that service our loans, merchants receiving
electronic transfers of funds for our customers, the FedWire system governing
electronic funds transfers, the ATM networks with which the Bank is affiliated
and the Federal Reserve system itself. Furthermore, if we are unable to achieve
year 2000 readiness, the Bank's regulators could suspend the Bank's operations.
If we or any of these service providers or other entities cannot achieve year
2000 readiness, our business, financial condition, results of operations and
cash flows could be materially adversely affected. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Year 2000."
THE MARKET PRICE OF THE COMMON STOCK WILL FLUCTUATE, AND COULD FLUCTUATE
SIGNIFICANTLY
The market price of the Common Stock has been highly volatile since our IPO,
with closing prices ranging from a low of $8.75 per share to a high of $36.37
per share. The market price of the Common Stock will continue to fluctuate, and
could fluctuate significantly, in response to various factors and events,
including the liquidity of the market for the Common Stock, differences between
the Company's actual financial or operating results and those expected by
investors and analysts, changes in analysts' recommendations or projections, new
statutes or regulations or changes in the interpretation of existing statutes
and regulations affecting the Bank's business, changes in general economic or
market conditions and broad market fluctuations. See "Price Range of Common
Stock."
WE COULD BE ADVERSELY AFFECTED BY GOVERNMENT REGULATION
BANK REGULATION. The Company is regulated by the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board") and the Georgia Department
of Banking and Finance (the "Georgia Department"), and the Bank is regulated by
the Office of Thrift Supervision (the "OTS") and the FDIC. The Bank is also
subject to various laws and regulations relating to commercial and consumer
transactions generally, such as the Uniform Commercial Code, as well as the
electronic funds transfer rules embodied in Regulation E, promulgated by the
Federal Reserve Board. Any of these agencies, or other governmental or
regulatory authorities, could revise existing regulations or adopt new
regulations at any time. Certain revisions could subject the Bank to more
demanding regulatory compliance requirements and could thereby adversely affect
its ability to conduct, or the cost of conducting, business. Legislation and
regulatory initiatives containing wide-ranging proposals for altering the
structure, regulation and competitive relationships of financial institutions
are introduced regularly. We cannot predict whether or what form of proposed
statute or regulation will be adopted or the extent to which such adoption will
affect our business. Furthermore, given the rapid expansion of the electronic
commerce market, many regulatory bodies are adopting measures to ensure that
their regulations are keeping pace. For example, Congress has held hearings on
whether to regulate the electronic commerce market, while numerous states are
considering adopting their own laws to regulate Internet banking. Furthermore,
bank regulators are considering proposing new laws relating to customer privacy.
If enacted, any such laws, rules and regulations could force us to comply with
more complex and perhaps
11
<PAGE>
more burdensome regulatory requirements, which could materially adversely affect
our business, financial condition, results of operations and cash flows. See
"Business--Supervision and Regulation."
INTERNET REGULATION. In addition, a number of legislative and regulatory
proposals currently under consideration by federal, state, local and foreign
governmental organizations may lead to laws or regulations concerning various
other aspects of the Internet, including, but not limited to, on-line content,
user privacy, taxation, access charges, liability or third-party activities and
jurisdiction. Moreover, it is uncertain how existing laws relating to these
issues will be applied to the Internet. The adoption of new laws or the
application of existing laws could decrease the growth in the use of the
Internet, which could in turn decrease the demand for our products and services,
increase our cost of doing business or otherwise have a material adverse effect
on our business, financial condition, results of operations and cash flows.
Furthermore, government restrictions on Internet content could slow the growth
of Internet use and decrease acceptance of the Internet as a communications and
commercial medium, and thereby have a material adverse effect on our business,
financial condition and results of operations.
Certain local telephone carriers have asserted that the growing popularity
and use of the Internet has burdened the existing telecommunications
infrastructure and caused interruptions in telephone service in areas with high
Internet use. These carriers have petitioned the Federal Communications
Commission (the "FCC") to impose access fees on Internet service providers and
commercial on-line service providers. If the FCC imposes such access fees, the
costs of transacting business on the Internet could increase substantially,
potentially slowing the growth in use of the Internet, which could in turn
decrease demand for our services or increase our cost of doing business, and
thus have a material adverse effect on our business, financial condition,
results of operations and cash flows.
INTERNET PRIVACY. Internet user privacy has become an issue both in the
United States and abroad. The Federal Trade Commission (the "FTC") has proposed
model legislation that would force companies to comply with certain specified
core information practices. It is possible that Congress could either adopt
legislation similar to that proposed by the FTC or additional privacy
legislation that could affect in a materially adverse manner the way in which
the Company is allowed to conduct its business, especially those aspects that
involve the collection or use of personal information. At the international
level, the European Union (the "EU") has already adopted a directive (the
"Directive") that permits EU member countries to impose restrictions on the
collection and use of personal data. The Directive could, among other things,
affect United States companies that collect information over the Internet from
individuals in EU member countries, and may impose restrictions that are more
stringent than current Internet privacy standards in the United States. In
response to the Directive, on November 4, 1998, the United States Department of
Commerce published for comment a set of safe harbor principles regarding privacy
protection for personally identifiable data.
THE FDIC COULD ASSESS THE BANK FOR A COMMONLY CONTROLLED BANK'S LOSSES
Under the Federal Deposit Insurance Act (the "FDIA"), a depository
institution insured by the FDIC can be held liable for any loss incurred by, or
reasonably expected to be incurred by, the FDIC in connection with: (i) the
default of a commonly controlled FDIC-insured depository institution or (ii) any
assistance provided by the FDIC to any commonly controlled FDIC-insured
depository institution in danger of default. Because Carolina First is currently
deemed by the Federal Reserve Board to control the Company as a result of its
19.1% ownership of the Company's outstanding Common Stock prior to this
offering, Carolina First's subsidiary bank, CFB, and the Bank have been subject
to these cross-guarantee provisions. This means that any loss suffered by the
FDIC with respect to CFB could be assessed against the Bank and, conversely, any
loss suffered by the FDIC with respect to the Bank could be assessed against
CFB. If the Bank were assessed for a loss suffered by the FDIC with respect to
CFB, the Company's business, financial condition, results of operations and cash
flows could be materially adversely affected.
On January 13, 1999, the Federal Reserve Board informed Carolina First that
it had determined that it would no longer regard the Company as a subsidiary of
Carolina First if Carolina First reduces
12
<PAGE>
its investment in the Company to less than ten percent of its outstanding voting
stock, if two of the directors initially nominated by Carolina First resign from
the Company's Board of Directors and if Carolina First complies with certain
commitments made to the Federal Reserve Board. Once Carolina First is no longer
deemed to control the Company, the FDIC's cross-guarantee provisions will no
longer apply, and neither the Bank nor CFB will bear the risk of assessment for
the other's losses (although each would remain liable for losses incurred prior
to the release from the cross-guarantee provisions). Other circumstances could
arise, however, that could cause the Federal Reserve Board to conclude that a
control relationship continues to exist. In that case, the FDIC cross-guarantee
provisions would remain in effect. To reduce its investment in the Company to
less than ten percent of its outstanding voting stock, Carolina First is selling
370,000 shares of Common Stock in this offering, which will decrease its
ownership to 805,000 shares, or 9.9%, of the Company's outstanding Common Stock.
In addition, two of the four directors initially designated by Carolina First
have agreed to resign as directors upon completion of this offering as a
condition to Carolina First's participation in this offering.
After this offering, Carolina First will continue to own more than five
percent of the Company's outstanding Common Stock. As a result, Carolina First
will continue to be subject to certain Federal Reserve Board regulations
regarding its relationship with the Company. The Company has therefore agreed
with Carolina First that, until the earlier of the date that Carolina First owns
five percent or less of the Company's outstanding Common Stock or July 28, 2000,
the Company will not engage in any activities that are not permissible banking
or non-banking activities under applicable Federal Reserve Board regulations.
These regulations limit the activities of bank holding companies and their
affiliates to those that are determined by the Federal Reserve Board to be
closely related to banking or to the management or control of banks. See
"Relationship with Carolina First Corporation."
OUR DIRECTORS AND EXECUTIVE OFFICERS OWN A SIGNIFICANT PORTION OF OUR
OUTSTANDING COMMON STOCK
After this offering, our directors and executive officers will beneficially
own 1,777,970 shares, representing 20.9%, of the outstanding Common Stock of the
Company. As a result, our directors and executive officers could exercise
significant control over matters requiring shareholder approval, including the
election of directors or a change in control of the Company. See "Management"
and "Principal Shareholders."
PROVISIONS OF OUR ARTICLES OF INCORPORATION AND BYLAWS HAVE CERTAIN ANTITAKEOVER
EFFECTS
Certain provisions of the Company's Amended and Restated Articles of
Incorporation (the "Articles") and Amended and Restated Bylaws (the "Bylaws")
may delay, deter or prevent a change in control of the Company that is not
approved by the Company's Board of Directors. These provisions include the
Board's ability to issue shares of preferred stock in one or more series without
further authorization of the Company's shareholders, a supermajority shareholder
approval requirement for certain transactions and provisions requiring a
classified Board of Directors.
The Company's Articles permit the Board to issue "blank check" preferred
stock with dividend, liquidation, conversion, voting or other rights that could
adversely affect the voting power or other rights of the holders of Common
Stock. Under certain circumstances, the holders of preferred stock could
discourage, delay or prevent a change in control of the Company.
The Articles require that the holders of two-thirds of the Company's voting
stock approve certain mergers, share exchanges and dispositions of the assets of
the Company unless at least two-thirds of the Company's directors approve the
proposed transaction. If two-thirds of the directors approve the transaction,
shareholder approval requires only a majority of the outstanding shares entitled
to vote. This provision may discourage attempts to acquire the Company in a
hostile takeover. It may also permit a minority of third party directors and
shareholders to prevent a business combination regardless of the terms of the
proposed transaction.
The Articles divide the Board of Directors into three classes serving
staggered three-year terms and provide that a director may only be removed by
the vote of two-thirds of the outstanding shares
13
<PAGE>
entitled to vote in an election of directors or by the vote of at least
two-thirds of the directors then in office. These provisions could enable a
minority of the Company's shareholders to prevent the removal of a director
sought to be removed by a majority of the shareholders. These provisions could
also tend to enhance management's ability to retain control over the Company's
affairs and to preserve a director's position on the Board.
WE DO NOT INTEND TO PAY DIVIDENDS
We do not intend to pay cash dividends in the foreseeable future, as we
expect to apply any earnings to developing and expanding the Bank's business.
See "Dividend Policy."
THE MARKET PRICE OF THE COMMON STOCK MAY DECLINE DUE TO SHARES ELIGIBLE FOR
FUTURE SALE
Future sales of substantial amounts of Common Stock in the public market or
the perception that such sales could occur could adversely affect the market
price of the Common Stock. As of January 14, 1999, the Company had outstanding
6,156,758 shares of Common Stock. Of these shares, the 3,500,000 shares of
Common Stock sold in the IPO and 11,196 shares issued upon the exercise of stock
options are, and the shares sold in this offering will be, freely tradable
without restriction or further registration under the Securities Act of 1933, as
amended (the "Securities Act"), except for any shares owned by an "affiliate" of
the Company, which will be subject to the limitations of Rule 144 under the
Securities Act ("Rule 144"). The remaining 2,645,562 shares of Common Stock
constitute "restricted securities" under the Securities Act. Of these shares,
372,655 shares are freely tradable because they have been held by non-affiliates
of the Company for more than two years, and 41,406 shares held by non-affiliates
of the Company will become freely tradable on August 1, 1999, when the two-year
Rule 144 holding period expires. Certain directors and executive officers of the
Company, who collectively hold 2,231,501 restricted shares of Common Stock, are
precluded under OTS requirements from selling any of these shares of Common
Stock without prior OTS approval until July 28, 2000. At that time, those shares
will be eligible for sale in the public market under Rule 144. The Company and
its directors and executive officers have also agreed, for a period of 180 days
after the date of this Prospectus, not to sell or otherwise dispose of any of
their shares of Common Stock (regardless of whether they are restricted
securities or could otherwise be sold under Rule 144) without the prior consent
of Bear, Stearns & Co. Inc. Consequently, 41,406 and 2,231,500 shares of Common
Stock will become eligible for sale in the public market (subject, in the case
of affiliates of the Company, to the volume and other limitations of Rule 144)
on August 1, 1999 and July 28, 2000, respectively. If all of these shares are
sold when they first become eligible for resale, the increase in the number of
shares available for sale could adversely affect the market price of the Common
Stock.
THE BOOK VALUE OF THE SHARES YOU PURCHASE IN THIS OFFERING WILL BE DILUTED
SUBSTANTIALLY
As of September 30, 1998, the net tangible book value of the Common Stock
was $6.13 per share (the book value per share less the book value per share of
the Charter). The pro forma adjusted net tangible book value of the Common Stock
as of September 30, 1998 will be $11.83 per share (assuming a public offering
price of $31.375 per share). As a result, if you purchase shares of Common Stock
in this offering, the net tangible book value per share of the Common Stock you
purchase (assuming a public offering price of $31.375 per share) will be diluted
by an amount equal to $19.55 per share upon the completion of this offering. You
will experience further dilution as holders of options to purchase Common Stock
exercise their options.
14
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds to the Company from its sale of 2,000,000
shares of Common Stock in this offering (assuming a public offering price of
$31.375 per share and after payment of underwriting discounts and commissions
and estimated expenses of the offering) will be $58,698,750 ($69,239,103 if the
underwriters exercise their over-allotment option in full). We intend to use the
net proceeds to launch new marketing initiatives and to provide the additional
capital required to support asset growth. In particular, the Company has
budgeted approximately $3.6 million for marketing expenses in 1999.
CAPITALIZATION
The following table sets forth the Company's consolidated capitalization at
September 30, 1998 and the pro forma consolidated capitalization as adjusted to
give effect to the consummation of the offering. See "Selected Consolidated
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's consolidated financial statements
and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-----------------------------
<S> <C> <C>
AS ADJUSTED
ACTUAL (1)
------------- --------------
Shareholders' Equity:
Preferred Stock, no par value, 10,000,000 shares authorized; no shares
outstanding..................................................................... $ -- $ --
Common Stock, $0.01 par value, 100,000,000 shares authorized; 6,147,637 shares
outstanding and 8,147,637 shares outstanding, as adjusted(1).................... 61,476 81,476
Additional paid-in capital........................................................ 43,638,804 102,317,554
Unamortized stock plan expense.................................................... (34,988) (34,988)
Accumulated deficit............................................................... (5,685,960) (5,685,960)
Accumulated other comprehensive income, net of tax................................ 27,578 27,578
------------- --------------
Total shareholders' equity...................................................... $ 38,006,910 $ 96,705,660
------------- --------------
------------- --------------
</TABLE>
- ------------------------
(1) Assumes that the Company sells 2,000,000 shares of Common Stock at an
assumed public offering price of $31.375 per share in the offering and that
the net proceeds, after deducting the estimated underwriting discount and
offering expenses payable by the Company, are $58,698,750. If the
underwriters exercise their over-allotment option in full, 2,355,500 shares
of Common Stock would be sold by the Company, resulting in net proceeds of
$69,239,103.
15
<PAGE>
PRICE RANGE OF COMMON STOCK
The Common Stock has been listed on the Nasdaq SmallCap Market under the
symbol "NTBK" since July 28, 1997. The following table sets forth for the
periods indicated the high and low bid prices per share of Common Stock as
reported on the Nasdaq SmallCap Market.
<TABLE>
<CAPTION>
HIGH LOW
---------- ----------
<S> <C> <C>
1997
Third quarter (commencing July 28, 1997)............................ $ 13.25 $ 8.63
Fourth quarter...................................................... $ 12.38 $ 9.13
1998
First quarter....................................................... $ 25.25 $ 11.25
Second quarter...................................................... $ 31.63 $ 22.00
Third quarter....................................................... $ 36.38 $ 15.75
Fourth quarter...................................................... $ 35.44 $ 10.75
1999
First quarter (through January 14, 1999)............................ $ 37.00 $ 26.00
</TABLE>
On January 14, 1999, there were approximately 3,500 holders of record of
Common Stock. On January 14, 1999, the last closing price of the Common Stock on
the Nasdaq SmallCap Market was $31.375 per share.
DIVIDENDS
We have not declared or paid any cash or other dividends on the Common
Stock. For the foreseeable future, we intend to retain earnings to grow our
business and strengthen our capital base. In addition, the OTS regulates the
dividends that the Bank can pay to the Company. See "Supervision and
Regulation--Capital Distributions."
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data set forth below as of December 31, 1996 and 1997
and September 30, 1998 and with respect to the period from February 20, 1996 to
December 31, 1996, the year ended December 31, 1997 and the nine months ended
September 30, 1998 is derived from the audited consolidated financial statements
of the Company included elsewhere in this Prospectus. The selected financial
data set forth below for the nine months ended September 30, 1997 is derived
from the unaudited consolidated financial statements of the Company included
elsewhere in this Prospectus. The unaudited financial statements have been
prepared on substantially the same basis as the audited financial statements
and, in the opinion of management, include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the results
of operations for such period. The operating results for the nine months ended
September 30, 1998 set forth below are not intended to be indicative of the
Company's results of operations that may be expected for the entire year. The
following selected historical financial information should be read in
conjunction with the Company's consolidated financial statements and the related
notes thereto included elsewhere in this Prospectus and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 20,
1996 (DATE OF NINE MONTHS ENDED
INCORPORATION) YEAR ENDED SEPTEMBER 30,
TO DECEMBER 31, DECEMBER 31, -------------------------
1996 1997 1997 1998
--------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income....................................... $ 7,709 $2,223,165 $ 908,140 $ 11,743,207
Interest expense...................................... -- 1,259,743 604,544 7,237,256
--------------- ------------ ----------- ------------
Net interest income................................. 7,709 963,422 303,596 4,505,951
Provision for loan losses............................. -- 471,706 391,707 15,559
--------------- ------------ ----------- ------------
Net interest income after provision for loan
losses............................................ 7,709 491,716 (88,111) 4,490,392
Noninterest income.................................... 60,000 62,607 28,793 415,844
Noninterest expense................................... 3,906,891 6,131,762 4,679,176 3,859,639
--------------- ------------ ----------- ------------
Net income (loss) before income taxes............... (3,839,182) (5,577,439) (4,738,494) 1,046,597
Income tax benefit.................................... -- -- -- 2,684,064
--------------- ------------ ----------- ------------
Net income (loss)................................... $ (3,839,182) $(5,577,439) $(4,738,494) $ 3,730,661
--------------- ------------ ----------- ------------
--------------- ------------ ----------- ------------
Net income (loss) per common share--basic........... $ (4.33) $ (1.66) $ (1.96) $ 0.61(1)
--------------- ------------ ----------- ------------
--------------- ------------ ----------- ------------
Net income (loss) per common and potential common
share--diluted.................................... $ (4.33) $ (1.66) $ (1.96) $ 0.58(1)
--------------- ------------ ----------- ------------
--------------- ------------ ----------- ------------
Weighted average shares outstanding--basic............ 886,000 3,354,000 2,413,000 6,146,000
Weighted average shares outstanding--diluted.......... 886,000 3,354,000 2,413,000 6,416,000
BALANCE SHEET DATA--AT PERIOD END:
Total assets.......................................... $ 1,246,449 $93,219,809 $81,104,248 $283,069,392
Total deposits........................................ -- 58,726,763 46,031,211 241,324,818
Shareholders' equity (deficit)........................ (386,073) 34,117,397 34,963,516 38,006,910
Book value per share.................................. (0.31) 5.55 5.69 6.18
FINANCIAL RATIOS:
Return on average total assets (ROA).................. N/M (11.81)% (11.51)% 1.98%(2)
Return on average shareholders' equity (deficit)
(ROE)............................................... N/M (33.07)% (27.41)% 10.35%(2)
Percentage of nonperforming loans to total loans...... -- -- -- 0.11%
Percentage of allowance for loan losses to total
loans............................................... -- 1.01% 1.14% 1.82%
Percentage of charge-offs during the period to average
loans............................................... -- 0.08% -- 0.12%
Percentage of allowance for loan losses to
nonperforming loans................................. -- -- -- 1,677.57%
Percentage of average shareholders' equity (deficit)
to average total assets............................. (30.97)% 35.71% 41.99% 19.17%
</TABLE>
- ------------------------------
(1) Pro forma net income per common and potential common share for the nine
months ended September 30, 1998 would be $0.11 per share (basic and diluted)
assuming a statutory income tax rate of 34% for the period.
(2) Pro forma return on to average total assets and average shareholders' equity
for the nine months ended September 30, 1998 would be 0.37% and 2.00%,
respectively, assuming a statutory income tax rate of 34% for the period.
17
<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 federal savings bank. 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. During the
period from February 20, 1996 to July 31, 1997, pending regulatory approval and
the acquisition of a bank charter, the Company was operating as a development
stage enterprise under an agreement with CFB, a wholly owned subsidiary of
Carolina First, whereby CFB agreed to hold and service the deposit accounts
generated by the Company in exchange for 1,325,000 shares of the Common Stock
valued at $3.8 million. In addition, during the period from February 20, 1996 to
July 31, 1997, the Company was a party to an agreement with First
Alliance/Premier Bancshares, Inc. ("First Alliance") pursuant to which the
Company agreed to purchase the charter of First Alliance's subsidiary, Premier
Bank, $5.0 million in loans, $5.0 million in certificates of deposit and $2.0
million in unimpaired capital in exchange for $2.2 million in cash, 41,406
shares of the 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 Company received final regulatory approval from the
OTS to purchase the Charter from First Alliance. On July 28, 1997, the Company
sold 3,500,000 shares of its Common Stock to the public in the IPO. On July 31,
1997, the Company received approximately $38.4 million in net proceeds from the
IPO and consummated its agreements with both First Alliance and CFB. As a
result, Net.B@nk became a wholly owned subsidiary of the Company. As of
September 30, 1998, the Company had 14,634 accounts and approximately $241.3
million in deposits.
FINANCIAL CONDITION
The Company's assets were $283.1 million at September 30, 1998, compared to
$93.2 million and $1.2 million at December 31, 1997 and December 31, 1996,
respectively. The increase of $189.9 million from December 31, 1997 to September
30, 1998 was primarily due to growth in the Company's loan portfolio resulting
from its purchase of approximately $180.3 million in home equity loans, first
and second mortgages, construction loans and other participation loans during
the nine months ended September 30, 1998. In addition, the Company recorded a
$2.7 million deferred tax asset related primarily to previous net operating loss
carryforwards which it expects to realize for tax purposes. Because 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. A
loan sale proceeds receivable of $20.3 million related to loan origination
agreements with third parties has also been recorded.
The increase in total assets of $92.0 million from December 31, 1996 to
December 31, 1997 was due to the receipt of approximately $38.4 million in net
proceeds from the IPO and approximately $47.8 million in cash related to
customer deposits transferred to the Company from CFB and First Alliance upon
consummation of the servicing agreement and purchase of the Charter in July
1997. In addition, cash of $12.7 million was received from new deposits
originated during the fourth quarter of 1997. As of December 31, 1997, proceeds
of $18.1 million had been invested in collateralized mortgage obligations and
government backed securities. Approximately $44.5 million of the proceeds had
been used to purchase first and second mortgage loans, auto leases and loans and
unsecured loans from CFB and other third parties. In addition, approximately
$28.9 million of the proceeds were invested in overnight federal funds. The
remaining net proceeds of the IPO were used for the Charter stock purchase ($2.3
million), reimbursement of CFB expenses ($2.1 million), bonus payments to
employees ($450,000) and general corporate purposes.
18
<PAGE>
Total liabilities increased $186.0 million from $59.1 million at December
31, 1997 to $245.1 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. Total liabilities
increased $57.5 million from $1.6 million at December 31, 1996 to $59.1 million
at December 31, 1997 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 in July 1997.
In addition, deposits increased by $12.7 million in the fourth quarter of 1997
due to new marketing programs introduced by the Company.
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. Total shareholders' equity (deficit) increased $34.5 million
from a deficit of approximately $386,000 as of December 31, 1996 to equity of
$34.1 million as of December 31, 1997 due primarily to the receipt of
approximately $38.4 million in net proceeds from the issuance of Common Stock,
including shares issued in the IPO and shares issued for the purchase of the
Charter. The increase resulting from the issuance of Common Stock was offset by
$83,000 in other comprehensive loss, an increase in unamortized stock plan
expense of approximately $47,000 and the net loss for the year ended December
31, 1997 of $5.7 million.
AVERAGE BALANCES, NET INTEREST INCOME AND YIELDS EARNED AND RATES PAID. The
following table sets forth, for the period subsequent to the formation of
Net.B@nk, information regarding the Company's average balance sheet. The average
yields and rates represent the annualized rates. Information is based on average
monthly balances during the five months ended December 31, 1997 and the nine
months ended September 30, 1998.
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------
<S> <C> <C> <C>
INTEREST AVERAGE
AVERAGE EARNED/ YIELD/
BALANCE PAID RATE
-------------- ------------ -----------
Interest-Earning Assets:
Short-term investments.................................................. $ 43,800,000 $ 944,743 5.34%
Investment securities(1)................................................ 8,900,000 183,184 7.06%
Loans receivable(2)..................................................... 30,200,000 1,095,238 8.70%
-------------- ------------
Total interest-earning assets......................................... 82,900,000 2,223,165 6.44%
Noninterest-earning assets................................................ 2,000,000
--------------
Total assets.......................................................... $ 84,900,000
--------------
--------------
Interest-Bearing Liabilities--Deposits:................................... $ 48,700,000 1,259,743 5.17%
Noninterest-bearing liabilities........................................... 1,000,000
--------------
Total liabilities..................................................... 49,700,000
Equity.................................................................... 35,200,000
-------------- ------------
Total liabilities and equity.......................................... $ 84,900,000
--------------
--------------
Net interest earnings..................................................... $ 963,422 1.27%
------------ ---
------------ ---
Net yield on interest-earning assets(3)................................... 2.79%
---
---
</TABLE>
- ------------------------
(1) Based on amortized cost; changes in fair value are not considered.
(2) No separate treatment has been made for non-accrual loans.
(3) Net interest income divided by average interest-earning assets.
19
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-----------------------------------------
<S> <C> <C> <C>
INTEREST AVERAGE
AVERAGE EARNED/ YIELD/
BALANCE PAID RATE
-------------- ------------ -----------
Interest-Earning Assets:
Short-term investments.................................................. $ 13,000,000 $ 559,925 5.74%
Investment securities(1)................................................ 43,958,000 1,881,541 5.71%
Loans receivable(2)..................................................... 146,307,000 9,301,741 8.48%
-------------- ------------ ---
Total interest-earning assets......................................... 203,265,000 11,743,207 7.70%
Noninterest-earning assets................................................ 779,000
--------------
Total assets.......................................................... $ 204,044,000
--------------
--------------
Interest-Bearing Liabilities--Deposits:................................... $ 152,050,000 6,632,573 5.82%
Other interest-bearing liabilities--short-term borrowings................. 13,287,000 604,683 6.07%
-------------- ------------ ---
Total interest-bearing liabilities.................................... 165,337,000 7,237,256 5.84%
Noninterest-bearing liabilities........................................... 3,289,000
--------------
Total liabilities..................................................... 168,626,000
Equity.................................................................... 35,418,000
-------------- ------------
Total liabilities and equity.......................................... $ 204,044,000
--------------
--------------
Net interest earnings..................................................... $ 4,505,951 1.86%
------------ ---
------------ ---
Net yield on interest-earning assets(3)................................... 2.96%
---
---
</TABLE>
- ------------------------
(1) Based on amortized cost; changes in fair value are not considered.
(2) No separate treatment has been made for non-accrual loans.
(3) Net interest income divided by average interest-earning assets.
The following table sets forth a summary of the changes in interest income
and interest expense resulting from changes in volume and rates for the periods
indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
AS COMPARED TO THE YEAR ENDED
DECEMBER 31, 1997
-----------------------------------------
<S> <C> <C> <C>
INCREASE (DECREASE)
NET DUE TO
INCREASE --------------------------
(DECREASE) RATE(1) VOLUME(1)
------------- ----------- -------------
Interest-Bearing Assets:
Short-term investments.............................................. $ (384,818) $ (54,099) $ (330,719)
Investment securities............................................... 1,698,357 56,871 1,641,486
Loans, gross........................................................ 8,206,503 (80,880) 8,287,383
------------- ----------- -------------
Total interest income............................................. 9,520,042 (78,108) 9,598,150
Interest-Bearing Liabilities:
NOW accounts........................................................ 21,557 (2,124) 23,681
Money market........................................................ (9,368) (71,243) 61,875
Certificates of deposit............................................. 5,360,641 (54,879) 5,415,520
Short-term and other borrowings..................................... 604,683 -- 604,683
------------- ----------- -------------
Total interest expense............................................ 5,977,513 (128,246) 6,105,759
------------- ----------- -------------
Net interest income............................................... $ 3,542,529 $ 50,138 $ 3,492,391
------------- ----------- -------------
------------- ----------- -------------
</TABLE>
- ------------------------
(1) The changes in interest income and/or expense not due solely to rate or
volume have been allocated to the rate component.
20
<PAGE>
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
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 Charter. Because it did
not acquire the Charter 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 $2.7 million in tax
benefits. The benefits resulted from the reversal of a valuation allowance of
$3.3 million previously associated with the Company's deferred tax assets offset
by income tax expense for the nine months ended September 30, 1998. 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 Charter. The Company recognized
interest income on loans purchased from CFB and on investment securities
purchased with proceeds from the IPO during that quarter. The increase in
interest income for the nine months ended September 30, 1998 as compared to the
same period in 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 relative to all loans except for those with a specific
reserve already established. The Company recorded a $16,000 provision for loan
losses for the nine months ended September 30, 1998 as compared with $392,000
recorded during the nine months ended September 30, 1997. The allowance for loan
losses is maintained at a level estimated to be adequate to provide for probable
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
21
<PAGE>
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 $820,000 for the nine
months ended September 30, 1998 as compared to 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 CFB 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 IPO 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.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE PERIOD FROM FEBRUARY 20, 1996 TO
DECEMBER 31, 1996
GENERAL. The Company did not have any earning assets until July 31, 1997,
when it acquired the Charter. The net loss for the year ended December 31, 1997
was $5.6 million, an increase of $1.7 million when compared to the period from
February 20, 1996 to December 31, 1996. The statement of operations for the
period from February 20, 1996 to December 31, 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 with CFB, 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 year ended December 31, 1997 was
$2.2 million. The Company did not record a significant amount of interest income
for the period from February 20, 1996 to December 31, 1996 because the Company
had no investments or loans at that time. On July 31, 1997, the Company received
the net proceeds from the IPO and customer deposits held by CFB and invested
those funds in federal funds, mortgage-backed securities and loans purchased
from CFB and an independent third party.
INTEREST EXPENSE. Because the Company did not begin soliciting deposit
accounts until October 1996, it did not record any interest expense for the
period from February 20, 1996 to December 31, 1996. On July 31, 1997, based on
the terms of the servicing agreement with CFB and the Charter purchase
agreement, CFB and First Alliance transferred approximately $47.8 million in
customer deposits and related assets to the Company. The Company recorded
approximately $1.3 million of interest expense during the year ended December
31, 1997. This amount includes $163,479 of net interest expense, which
represents the difference between interest expense paid to customers and
interest income paid to the Company by CFB at contractual rates (as set forth in
the servicing agreement) prior to July 31, 1997.
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 $963,000 for the year ended December 31,
1997. Because the Company did not receive the Charter until July 31, 1997, the
Company was not allowed to hold investments, loans or customer deposits during
the period from February 20, 1996 to December 31, 1996 and, therefore, no
significant amount of net interest income was recorded for the period from
February 20, 1996 to December 31, 1996.
PROVISION FOR LOAN LOSSES. The Company purchased its first loans during the
period from July 31, 1997 to December 31, 1997. During such period, the Company
recorded a provision for loan losses of
22
<PAGE>
$472,000. 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 period from July 31, 1997 to December 31, 1997,
the Company recorded approximately $63,000 in loan and deposit service charges
and fees. Only miscellaneous management fees received of $60,000 were recorded
during the period from February 20, 1996 to December 31, 1996.
NONINTEREST EXPENSES. Noninterest expenses increased $2.2 million from $3.9
million during the period from February 20, 1996 to December 31, 1996 to $6.1
million for the year ended December 31, 1997. The primary components of the
increase during the year ended December 31, 1997 were an increase of $1.6
million in salaries and benefits, which reflects the payment of approximately
$450,000 in bonuses to employees; the amortization of approximately $343,000 in
stock plan expense; increases of $305,000, $391,000, and $236,000 in customer
service, data processing and marketing, respectively, reflecting the growth of
the Company's deposit base and related support functions; and an increase of
approximately $260,000 in other operating expenses consisting primarily of legal
and accounting fees. The above increases were offset by a $960,000 decrease in
the amortization of the service contract with CFB as the service contract was
fully amortized during the second quarter of 1997. The expenses for the period
from February 20, 1996 to December 31, 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.
STOCK OPTIONS
The Company has a 1996 Stock Incentive Plan (the "Plan"), which authorizes
the grant to key employees, officers, directors, and consultants of the Company
of nonqualified and incentive stock options to purchase shares of Common Stock,
derivative securities related to the value of the Common Stock or cash awards.
Initially, the Plan limited the total number of shares that eligible
participants could receive to 397,500. Effective with shareholder approval on
April 23, 1998, the Board of Directors amended the Plan to increase the total
number of shares reserved for the Plan to 600,000. Generally, the options expire
ten years from the date of the grant.
A summary of the status of options granted under the Plan as of December 31,
1996 and 1997 and September 30, 1998 and the activity during such periods
follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
DECEMBER 31, EXERCISE DECEMBER 31, EXERCISE SEPTEMBER 30, EXERCISE
1996 PRICE 1997 PRICE 1998 PRICE
------------- ----------- ------------ ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period............ -- $ -- 16,562 $ 1.21 366,456 $ 5.98
Granted....................................... 16,562 1.21 352,875 5.82 90,000 14.63
Exercised..................................... -- -- -- -- (2,075) 3.62
Terminated.................................... -- -- (2,981) 3.62 (13,875) 6.75
------ ------------ -------------
Outstanding at end of period.................. 16,562 $ 1.21 366,456 $ 5.98 440,506 $ 7.74
------ ------------ -------------
------ ------------ -------------
</TABLE>
In connection with the issuance of some of the options issued during the
year ended December 31, 1997, $390,484 of compensation expense will be
recognized over the vesting period. Certain of those options vested immediately
on July 28, 1997 upon completion of the IPO, and $319,704 of unamortized
compensation expense was recognized. The other 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. Of the vested options, 236,141 cannot be exercised and sold until July
28, 2000 in accordance with an agreement signed with the OTS. As such, of the
440,506 options outstanding as of September 30, 1998, 261,609 are exercisable.
23
<PAGE>
MARKET RISK
ASSET AND LIABILITY MANAGEMENT. The Company's principal business is the
generation of customer deposits in order to purchase loans. Consequently, a
significant portion of the Company's assets and liabilities are monetary in
nature and fluctuations in interest rates, specifically the prime rate, 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 following table sets forth the interest rate risk of the Company's
assets and liabilities as of September 30, 1998:
<TABLE>
<CAPTION>
TERM TO MATURITY
---------------------------------------------------------------------------------
YEAR OVER FIVE
-------------------------------------------------------------------- YEARS AND
ONE TWO THREE FOUR FIVE INSENSITIVE TOTAL FAIR VALUE
------------ ------------ ------------ ------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-Earning
Assets:
Cash and cash
equivalents...... $ 71,274 $ 71,274 $ 71,274
Federal funds
sold............. 9,596,790 9,596,790 9,596,790
Investment
securities....... $41,350,339 41,350,339 41,350,339
Stock of Federal
Home Loan Bank of
Atlanta.......... 251,500 251,500 251,500
Loan sale proceeds
receivable....... 20,347,536 20,347,536 20,347,536
Loans receivable... 32,110,756 $ 3,486,280 $ 3,538,011 $ 2,251,462 162,457,733 203,844,242 203,407,078
------------ ------------ ------------ ------------ ----------- ----------- -----------
Total interest-
earning
assets......... 62,126,356 3,486,280 3,538,011 2,251,462 204,059,572 275,461,681 275,024,517
Noninterest-earning
assets............. 7,607,711 7,607,711 7,607,711
------------ ------------ ------------ ------------ ------------ ----------- ----------- -----------
Total assets......... $ 62,126,356 $ 3,486,280 $ 3,538,011 $ 2,251,462 $ -- $211,667,283 $283,069,392 $282,632,228
------------ ------------ ------------ ------------ ------------ ----------- ----------- -----------
------------ ------------ ------------ ------------ ------------ ----------- ----------- -----------
Interest-Bearing
Liabilities:
Interest-bearing
deposits......... $229,513,336 $ 2,351,623 $ 4,513,141 $236,378,100 $241,501,312
Interest-free
deposits......... $ 4,946,718 4,946,718 4,936,251
Other interest-free
liabilities and
equity........... 41,744,574 41,744,574 41,744,574
------------ ------------ ------------ ------------ ------------ ----------- ----------- -----------
Total liabilities
and equity..... $229,513,336 $ 2,351,623 $ 4,513,141 $ -- $ -- $46,691,292 $283,069,392 $288,182,137
------------ ------------ ------------ ------------ ------------ ----------- ----------- -----------
------------ ------------ ------------ ------------ ------------ ----------- ----------- -----------
Net interest rate
sensitivity gap.... $(167,386,980) $ 1,134,657 $ (975,130) $ 2,251,462 $164,975,991
Cumulative gap....... (167,386,980) (166,252,323) (167,227,453) (164,975,991) (164,975,991)
Net interest rate
sensitivity gap as
a percent of
interest-earning
assets............. (269.43)% (32.55)% (27.56)% 100.00% 80.85%
Cumulative gap as a
percent of
cumulative
interest-earning
assets............. (269.43)% (253.38)% (241.83)% (231.05)% (231.05)%
<CAPTION>
WEIGHTED
AVERAGE
INTEREST
RATE
-------------
<S> <C>
Interest-Earning
Assets:
Cash and cash
equivalents......
Federal funds
sold............. 5.02%
Investment
securities....... 7.50%
Stock of Federal
Home Loan Bank of
Atlanta..........
Loan sale proceeds
receivable....... 6.70%
Loans receivable... 8.09%
Total interest-
earning
assets.........
Noninterest-earning
assets.............
Total assets.........
Interest-Bearing
Liabilities:
Interest-bearing
deposits......... 5.82%
Interest-free
deposits.........
Other interest-free
liabilities and
equity...........
Total liabilities
and equity.....
Net interest rate
sensitivity gap....
Cumulative gap.......
Net interest rate
sensitivity gap as
a percent of
interest-earning
assets.............
Cumulative gap as a
percent of
cumulative
interest-earning
assets.............
</TABLE>
24
<PAGE>
The Company measures interest rate sensitivity as the difference between
amounts of interest-earning assets and interest-bearing liabilities that mature
within a given period of time. The difference, or the interest rate sensitivity
"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. In a rising interest rate environment, an institution with a
positive gap would be in a better position than an institution with a negative
gap to invest in higher yielding assets or have its asset yields adjusted
upward, which would result in the yield on its assets increasing at a faster
pace than the cost of its interest-bearing liabilities. During a period of
falling interest rates, however, an institution with a positive gap would tend
to have its assets maturing at a faster rate than one with a negative gap, which
would tend to reduce or restrain the growth of its net interest income.
LENDING ACTIVITIES
GENERAL. At December 31, 1997 and September 30, 1998, the Company's loans
receivable portfolio totaled $44.9 million and $203.8 million, or 48.2% and
72.0% of total assets, respectively. The majority of the Company's loans were
purchased from CFB and other originating institutions. The Company has
concentrated its purchasing activities on one- and three-year adjustable rate
mortgage loans, home equity lines of credit, fixed residential mortgages and
construction loans.
LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition
of the Company's loan portfolio by type of loan as of December 31, 1997 and
September 30, 1998:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 SEPTEMBER 30, 1998
------------------------ -------------------------
<S> <C> <C> <C> <C>
AMOUNT % AMOUNT %
------------- --------- -------------- ---------
Residential mortgages............................................ $ 9,879,537 22.0% $ 62,399,665 30.6%
Construction..................................................... 5,399,624 12.0 22,599,475 11.1
Commercial....................................................... -- -- 5,500,000 2.7
Equipment leases................................................. 4,478,053 10.0 1,492,119 0.7
Equity lines..................................................... 4,412,013 9.8 97,602,387 47.9
Auto............................................................. 14,623,745 32.6 9,279,699 4.6
Home improvement................................................. 4,073,964 9.0 2,455,681 1.2
Personal......................................................... 1,165,750 2.6 2,091,343 1.0
Other............................................................ 900,721 2.0 423,873 0.2
------------- --------- -------------- ---------
Total loans receivable....................................... $ 44,933,407 100.0% $ 203,844,242 100.0%
------------- --------- -------------- ---------
------------- --------- -------------- ---------
</TABLE>
CONTRACTUAL PRINCIPAL REPAYMENTS. The following table sets forth certain
information at September 30, 1998 regarding the dollar amount of loans maturing
in the Company's total loan portfolio, based on the contractual terms to
maturity. Loans having no stated schedule of repayments and no stated maturity
are reported as due in one year or less.
<TABLE>
<CAPTION>
DUE 1 WEIGHTED
YEAR OR DUE 1-5 AFTER 5 AVERAGE
LESS YEARS YEARS TOTAL YIELD
------------- ------------ -------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Residential mortgages................... $ -- $ -- $ 62,399,665 $ 62,399,665 7.25%
Construction............................ 22,599,475 -- -- 22,599,475 8.25%
Equipment leases........................ 1,492,119 -- -- 1,492,119 9.50%
Commercial.............................. 5,500,000 -- -- 5,500,000 8.25%
Other consumer.......................... 2,519,162 9,275,753 100,058,068 111,852,983 8.50%
------------- ------------ -------------- --------------
Total............................... $ 32,110,756 $ 9,275,753 $ 162,457,733 $ 203,844,242 8.09%
------------- ------------ -------------- --------------
------------- ------------ -------------- --------------
</TABLE>
25
<PAGE>
The following table sets forth the dollar amount of total loans due after
one year from September 30, 1998, as shown in the preceding table, which have
fixed interest rates or which have floating or adjustable interest rates.
<TABLE>
<CAPTION>
ADJUSTABLE
FIXED RATE RATE TOTAL
------------- -------------- --------------
<S> <C> <C> <C>
Residential mortgages............................................ $ 33,405,962 $ 28,993,703 $ 62,399,665
Other consumer................................................... 11,731,434 97,602,387 109,333,821
------------- -------------- --------------
Total........................................................ $ 45,137,396 $ 126,596,090 $ 171,733,486
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
A savings institution generally may not make loans to one borrower and its
related entities in an amount which exceeds 15% of its unimpaired capital and
surplus, although loans in an amount equal to an additional 10% of unimpaired
capital and surplus may be made to a borrower and its related entities if the
loans are fully secured by readily marketable securities. At September 30, 1998,
the Company's limit on loans to one borrower was approximately $5.7 million (15%
unimpaired capital and surplus). At September 30, 1998, the Company had not made
any loans to any one borrower, including persons or entities related to the
borrower, exceeding the limitation.
ASSET QUALITY AND NONPERFORMING ASSETS. During the year ended December 31,
1997 and during the nine months ended September 30, 1998, the Company did not
have any significant loans on nonaccrual status, significant loans past due 90
days or more or restructured loans.
CONCENTRATIONS OF CREDIT RISK. At December 31, 1997, all of the Company's
loans were with customers residing in the Southeastern United States. At
September 30, 1998, a majority of the Company's loans were with customers
residing in the Western and Southeastern United States.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is maintained at a
level management considers adequate to provide for probable losses in the loan
portfolio. As the majority of the Company's portfolio is purchased, an estimate
of the loss inherent in the purchased portfolio is made and an allowance for
loan losses is recorded by adjusting the premium associated with the purchased
loans. 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 management deems uncollectible are charged to the allowance. Provisions
for loan losses and recoveries on loans previously charged off are added to the
allowance.
Although management uses the best information available to make
determinations with respect to the provisions for loan losses, additional
provisions for loan losses may be necessary in the future should economic or
other conditions change substantially. In addition, the OTS, as an integral part
of the examination process, periodically reviews the Company's allowance for
loan losses. The agency may require the Company to recognize additions to such
allowance based on their judgments about the information available to them at
the time of their examination.
26
<PAGE>
The following table sets forth an analysis of the Company's allowance for
loan losses during the year ended December 31, 1997 and the nine months ended
September 30, 1998:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
Balance--Beginning of period........................................................ $ -- $ 453,444
------------ -------------
Allowance recorded in connection with the purchase of loan pools.................. -- 3,388,499
Provision for loan losses......................................................... 471,706 15,559
------------ -------------
Loans charged off:
Equipment leases................................................................ (8,477) (24,449)
Auto............................................................................ -- (113,343)
Personal........................................................................ -- (13,558)
Other........................................................................... (9,785) --
------------ -------------
Total loans charged off....................................................... (18,262) (151,350)
------------ -------------
Balance--End of period.............................................................. $ 453,444 $ 3,706,152
------------ -------------
------------ -------------
Allowance for loan losses as a percent of total loans outstanding................... 1.01% 1.82%
------------ -------------
------------ -------------
</TABLE>
The following table sets forth information concerning the allocation of the
Company's allowance for loan losses by loan category at December 31, 1997 and
September 30, 1998:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 SEPTEMBER 30, 1998
--------------------------- -----------------------------
<S> <C> <C> <C> <C>
PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH
CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
---------- --------------- ------------ ---------------
Residential mortgages................................... $ 24,231 22.0% $ 1,889,099 30.6%
Construction............................................ 52,400 12.0 112,996 11.1
Equipment leases........................................ 112,887 10.0 40,539 0.7
Commercial.............................................. -- -- 13,750 2.7
Home improvement........................................ 22,194 9.0 24,045 1.2
Equity lines............................................ 48,951 9.8 1,311,630 47.9
Auto.................................................... 179,984 32.6 273,851 4.6
Personal and other...................................... 12,797 4.6 40,242 1.2
---------- ----- ------------ -----
$ 453,444 100.0% $ 3,706,152 100.0%
---------- ----- ------------ -----
---------- ----- ------------ -----
</TABLE>
INVESTMENT SECURITIES. The investment policy of the Company, as established
by the Board of Directors, is designed primarily to provide and maintain
liquidity and to generate a favorable return on investments without incurring
undue interest rate risk, credit risk and investment portfolio asset
concentrations. The Company's investment policy is currently implemented by the
investment committee within the parameters set by the Board of Directors.
The Company is authorized to invest in obligations issued or fully
guaranteed by the United States government, certain federal agency obligations,
certain time deposits, negotiable certificates of deposit issued by commercial
banks and other insured financial institutions, investment grade corporate debt
securities and other specified investments.
Securities classified as available for sale are reported at fair value, with
unrealized gains and losses excluded from earnings and reported in other
comprehensive income (loss), net of tax. At December 31, 1997 and September 30,
1998, all of the Company's investment securities were classified as available
for sale. At December 31, 1997 and September 30, 1998, investments in the debt
and/or equity securities of any one issuer did not exceed more than 10% of the
Company's shareholders' equity.
27
<PAGE>
The following table sets forth certain information relating to the Company's
available for sale securities at December 31, 1997 and September 30, 1998:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------------------
<S> <C> <C> <C> <C>
GROSS
--------------------------------------- ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------- ----------- ----------- -------------
Collateralized mortgage obligations........................ $ 8,127,863 $ -- $ -- $ 8,127,863
United States government agencies obligations.............. 10,009,346 -- 83,063 9,926,283
------------- ----------- ----------- -------------
$ 18,137,209 $ -- $ 83,063 $ 18,054,146
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
------------------------------------------------------
<S> <C> <C> <C> <C>
GROSS
--------------------------------------- ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------- ----------- ----------- -------------
Collateralized mortgage obligations........................ $ 40,012,748 $ -- $ 4,348 $ 40,008,400
United States government agencies obligations.............. 1,294,500 47,439 -- 1,341,939
------------- ----------- ----------- -------------
$ 41,307,248 $ 47,439 $ 4,348 $ 41,350,339
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
The following table sets forth the amount of the Company's investment
securities that mature during each of the periods indicated and the weighted
average yields for each range of maturities at September 30, 1998. The actual
maturity of the Company's investment securities may differ from contractual
maturity as certain of the Company's investment securities are subject to call
provisions which allow the issuer to accelerate the maturity date of the
security:
<TABLE>
<CAPTION>
CONTRACTUALLY MATURING
-----------------------------------------------------
<S> <C> <C> <C> <C>
WEIGHTED GREATER WEIGHTED
5-10 AVERAGE THAN AVERAGE
YEARS YIELD 10 YEARS YIELD
------------ ----------- ------------- -----------
Collateralized mortgage obligations................................ $ 6,386,261 7.00% $ 33,622,139 7.50%
United States government agencies obligations...................... -- -- 1,341,939 7.58
------------ --- ------------- ---
$ 6,386,261 7.00% $ 34,964,078 7.50%
------------ --- ------------- ---
------------ --- ------------- ---
</TABLE>
SOURCES OF FUNDS
GENERAL. 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
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 has two line of credit agreements
totaling $100 million. See "--Capital Resources" and Note 8 of the notes to the
Company's consolidated financial statements.
DEPOSITS. The Company's deposit products include a broad selection of
deposit instruments, including commercial checking accounts, negotiable order of
withdrawal accounts ("NOW accounts"), money market accounts and term certificate
accounts. Deposit account terms vary, with the principal
28
<PAGE>
differences being the minimum balance required, the time periods the funds must
remain on deposit and the interest rate.
The Company utilizes nontraditional marketing methods to attract new
customers and savings deposits. The Company's target market includes Internet
users, on-line shoppers and special niche customers. The Company markets its
products and services by placing banner advertisements on portals and Web sites
that it believes will attract the Bank's target customers. The Bank also derives
a marketing benefit from media coverage. Additionally, the Company continually
seeks to form product and marketing alliances with other financial services
providers to broaden our product and service offerings and appeal to a broader
customer base.
The Company has been competitive in the types of accounts and range of
interest rates it has offered on its deposit products. Deposit levels have
increased during the year ended December 31, 1997 and the nine months ended
September 30, 1998 primarily as a result of competitive rates offered by the
Company and Internet advertising. The weighted average interest rate paid during
the year ended December 31, 1997 and the nine months ended September 30, 1998
was 5.17% and 5.82%, respectively. Although market demand generally dictates
which deposit maturities and rates will be accepted by the public, the Company
intends to continue to promote checking and NOW accounts as well as longer-term
certificates of deposit to the extent possible and consistent with asset and
liability management goals.
The following table sets forth the dollar amount of deposits and weighted
average interest rates in the various types of deposit programs offered by the
Company at December 31, 1997 and September 30, 1998:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 SEPTEMBER 30, 1998
--------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INTEREST INTEREST
AMOUNT PERCENTAGE RATE AMOUNT PERCENTAGE RATE
------------- ----------- ----------- -------------- ----------- -----------
Demand checking accounts..................... $ 293,054 0.5% N/A $ 4,946,718 2.0% N/A
Interest-bearing:
NOW accounts................................. 1,573,283 2.7 3.28% 4,185,874 1.7 3.10%
Money market................................. 36,534,967 62.2 5.51% 55,688,986 23.1 5.25%
Certificates of deposit under $100,000....... 16,662,365 28.4 6.22% 171,476,042 71.1 5.86%
Certificates of deposit over $100,000........ 3,663,094 6.2 6.22% 5,027,198 2.1 5.86%
------------- ----- -------------- -----------
Total deposits............................... $ 58,726,763 100.0% $ 241,324,818 100.0%
------------- ----- -------------- -----------
------------- ----- -------------- -----------
</TABLE>
The following table presents the average balance of each deposit type and
the average rate paid on each deposit type for the year ended December 31, 1997
and the nine months ended September 30, 1998:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
-------------------------- ---------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE PAID BALANCE RATE PAID
------------- ----------- -------------- -----------
<S> <C> <C> <C> <C>
Demand checking accounts................................... $ 300,000 N/A $ 1,570,000 N/A
Interest-bearing:
NOW accounts............................................... 1,728,571 3.28% 5,410,000 1.62%
Money market............................................... 33,328,571 5.51% 40,950,000 5.71%
Certificates of deposit under $100,000..................... 11,433,435 6.22% 102,400,638 6.10%
Certificates of deposit over $100,000...................... 2,209,423 6.22% 3,289,362 6.10%
</TABLE>
29
<PAGE>
The following table shows maturity information for the Company's
certificates of deposit at September 30, 1998:
<TABLE>
<CAPTION>
MATURITY
--------------------------------------------
<S> <C> <C> <C> <C>
ONE YEAR 1 TO 2 2 TO 3
OR LESS YEARS YEARS TOTAL
-------------- -------------- ------------ --------------
4.01--6.00%....................................... $ 169,638,476 $ -- $ -- $169,638,476...
6.01--8.00%....................................... -- 2,351,623 4,513,141 6,864,764
-------------- -------------- ------------ --------------
Total........................................... $ 169,638,476 $ 2,351,623 $ 4,513,141 $ 176,503,240
-------------- -------------- ------------ --------------
-------------- -------------- ------------ --------------
</TABLE>
The following table sets forth the maturities of the Company's certificates
of deposit having principal amounts of $100,000 or more at September 30, 1998:
<TABLE>
<S> <C>
Within three months............................................................. $ 300,095
Over three months through six months............................................ 3,011,148
Over six months through one year................................................ 1,501,058
Over one year................................................................... 214,897
---------
Total certificates of deposit with balances of $100,000 or more............... $5,027,198
---------
---------
</TABLE>
CAPITAL RESOURCES. Net.B@nk is subject to various regulatory capital
requirements administered by the federal banking agencies. Failure of Net.B@nk
to meet minimum capital requirements can result in certain mandatory and
possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Company's consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, Net.B@nk must meet specific capital guidelines that
involve quantitative measures of Net.B@nk's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices.
Net.B@nk's capital amounts and classifications are also subject to qualitative
judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require Net.B@nk to maintain the minimum capital amounts and ratios set forth in
the table below. Net.B@nk's regulatory agency, the OTS, requires Net.B@nk to
maintain minimum ratios of tangible capital to tangible assets of 1.5%, core
capital to tangible assets of 3.0% and total risk-based capital to risk-weighted
assets of 8.0%. Management believes that, as of September 30, 1998, Net.B@nk met
all the capital adequacy requirements to which it was subject.
As of September 30, 1998, the most recent notification from the OTS
categorized Net.B@nk as well capitalized under the regulatory framework for
prompt corrective action. To be well capitalized, Net.B@nk must maintain minimum
Tier I, core and risk-based capital ratios of at least 6.0%, 5.0% and 10.0%,
respectively. No conditions or events have occurred since that date that
management believes would change the institution's category.
To maintain its status as a well capitalized financial institution under the
regulatory framework for prompt corrective action and to continue to grow
Net.B@nk, the Company projects the need for additional capital by June 1999.
30
<PAGE>
Net.B@nk's actual capital amounts and ratios at December 31, 1997 and
September 30, 1998 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
TO BE
CATEGORIZED AS
FOR CAPITAL "WELL CAPITALIZED"
ACTUAL ADEQUACY PURPOSES BY THE OTS
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- --------- --------- --------- --------- ---------
DECEMBER 31, 1997:
Total capital (to risk-weighted assets)........... $ 23,652 47.8% $ 3,956 8.0% $ 4,948 10.0%
Core capital (to tangible assets)................. $ 23,735 28.3% $ 2,517 3.0% $ 4,196 5.0%
Tangible capital (to tangible assets)............. $ 23,735 28.3% $ 1,259 1.5% N/A N/A
Tier I capital (to risk-weighted assets).......... $ 23,735 48.0% N/A N/A $ 2,969 6%
SEPTEMBER 30, 1998:
Total capital (to risk-weighted assets)........... $ 37,642 16.7% $ 18,071 8.0% $ 22,589 10.0%
Core capital (to tangible assets)................. $ 35,292 12.6% $ 8,421 3.0% $ 14,035 5.0%
Tangible capital (to tangible assets)............. $ 35,292 12.6% $ 4,210 1.5% N/A N/A
Tier I capital (to risk-weighted assets).......... $ 35,292 15.6% N/A N/A $ 13,553 6.0%
</TABLE>
Under current OTS regulations, the Company may make capital distributions in
any calendar year up to 100% of its net income to date during the calendar year
plus the amount that would reduce by one-half its "surplus capital ratio" (i.e.,
the percentage by which the Company's capital-to-assets ratio exceeds the ratio
of its fully phased-in capital requirement to its assets) at the beginning of
the calendar year. No regulatory approval of the capital distribution is
required, but prior notice must be given to the OTS.
During the nine months ended September 30, 1998, the Company and Net.B@nk
each entered into line of credit agreements with The Bankers Bank. The Company
is a party to one such agreement and the Bank is a party to two such agreements.
Under the terms of the Company's agreement, the Company may borrow 50% of the
Bank's tangible equity, up to $17.0 million, using the stock of the Bank as
collateral. Any amounts borrowed under the lines bear interest at a fixed rate
of 8.00% per annum. During the nine months ended September 30, 1998, the Company
borrowed and repaid $12.0 million under the line. Under the terms of its
agreements, the Bank may borrow $5.0 million under an unsecured general purpose
line and 99.0% of the value of its investment securities under another line.
During the nine months ended September 30, 1998, the Bank borrowed and repaid
$45.0 million under the investment securities line of credit. Both of the lines
bear interest at 25 basis points above the Fed Funds rate, or 5.25% at September
30, 1998. There were no amounts outstanding under the lines of credit at
September 30, 1998.
NEW ACCOUNTING PRONOUNCEMENTS
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards 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.
As of April 1, 1998, the Company adopted Statement of Position 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 SOP
98-1 have been met. As of September 30, 1998, approximately $342,000 of these
related costs had been capitalized.
31
<PAGE>
In June 1997, Statement of Financial Accounting Standards 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. SFAS 131 will
not have an effect on the Company's financial statements because it relates only
to disclosure.
In February 1998, Statement of Financial Accounting Standards 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 will not
have an effect on the Company's financial statements because it relates only to
disclosure.
In June 1998, Statement of Financial Accounting Standards 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 we or our
service providers use 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. This would require the Bank to cease operations pending
resolution of the problem. We believe our principal risk lies in the potential
inability of our outside vendors and service providers to process date-sensitive
information involving the year 2000. We also face risks relating to the
potential year 2000 noncompliance of other institutions that service our loans,
merchants receiving electronic transfers of funds for our customers, the FedWire
system governing electronic funds transfers, the ATM networks with which the
Bank is affiliated and the Federal Reserve system itself. If we or any of these
service providers or other entities cannot achieve year 2000 readiness, our
business, financial condition, results of operations and cash flows could be
materially adversely affected. 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 completed such testing during the third
quarter of 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. 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 began testing the systems provided by these vendors for
year 2000 compliance in the third 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
32
<PAGE>
2000 compliant. 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 comparable services at similar costs. Although we cannot offer
any assurances, we believe such alternate 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 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 financial condition, results of operations and cash
flows.
33
<PAGE>
QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for the period from February 20, 1996 to December
31, 1996, the year ended December 31, 1997 and the nine months ended September
30, 1998 is summarized as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Interest income..................................................... $ -- $ -- $ -- $ 8
Interest expense.................................................... -- -- -- --
--------- --------- --------- ---------
Net interest income............................................... -- -- -- 8
Provision for loan losses........................................... -- -- -- --
--------- --------- --------- ---------
Net interest income after provision for loan losses............... -- -- -- 8
Noninterest income.................................................. 40 20 -- --
Noninterest expense................................................. 15 56 1,217 2,619
--------- --------- --------- ---------
Net income (loss)................................................. $ 25 $ (36) $ (1,217) $ (2,611)
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic and diluted net income (loss) per common and potential common
share outstanding................................................. $ 0.03 $ (0.04) $ (1.22) $ (2.09)
--------- --------- --------- ---------
--------- --------- --------- ---------
DECEMBER 31, 1997
Interest income..................................................... $ 6 $ -- $ 902 $ 1,315
Interest expense.................................................... 103 37 465 655
--------- --------- --------- ---------
Net interest income (loss)........................................ (97) (37) 437 660
Provision for loan losses........................................... -- -- 392 80
--------- --------- --------- ---------
Net interest income (loss) after provision for loan losses........ (97) (37) 45 580
Noninterest income.................................................. -- -- 30 33
Noninterest expense................................................. 1,703 1,383 1,593 1,452
--------- --------- --------- ---------
Net loss.......................................................... $ (1,800) $ (1,420) $ (1,518) $ (839)
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic and diluted net loss per common and potential common share
outstanding....................................................... $ (1.44) $ (1.11) $ (0.32) $ (0.14)
--------- --------- --------- ---------
--------- --------- --------- ---------
SEPTEMBER 30, 1998
Interest income..................................................... $ 2,207 $ 4,253 $ 5,284
Interest expense.................................................... 1,304 2,714 3,220
--------- --------- ---------
Net interest income............................................... 903 1,539 2,064
Provision for loan losses........................................... 4 6 6
--------- --------- ---------
Net interest income after provision for loan losses............... 899 1,533 2,058
Noninterest income.................................................. 123 104 190
Noninterest expense................................................. 1,173 1,397 1,290
--------- --------- ---------
Income (loss) before income taxes................................. (151) 240 958
Income tax benefit (expense)........................................ -- 3,029 (345)
--------- --------- ---------
Net income (loss)................................................. $ (151) $ 3,269 $ 613
--------- --------- ---------
--------- --------- ---------
Basic net income (loss) per common share............................ $ (0.02) $ 0.53(1) $ 0.10
--------- --------- ---------
--------- --------- ---------
Diluted net income (loss) per common and potential common share..... $ (0.02) $ 0.51(1) $ 0.10
--------- --------- ---------
--------- --------- ---------
</TABLE>
- ------------------------
(1) Pro forma net income per common and potential common share for the three
months ended June 30, 1998 would be $0.03 per share (basic) and $0.02 per
share (diluted) assuming a statutory income tax rate of 34% for the period.
34
<PAGE>
Basic and diluted net income (loss) per common and potential common share
has been calculated based on the weighted average number of shares outstanding
during the quarter in accordance with SFAS 128. Potential common shares have not
been included in the calculation related to those quarters with a net loss since
they were antidilutive. There were no potential common shares outstanding for
the period from February 20, 1996 to March 31, 1996. All previously reported per
share amounts have been restated to conform to SFAS 128. The total for the
quarters differs from the net loss per share as shown on the statement of
operations because of the issuance of shares previously recorded as stock
subscriptions receivable during the years of 1997 and 1996.
35
<PAGE>
BUSINESS
OVERVIEW
Net.B@nk, the Company's sole subsidiary, is the largest federally-insured
bank operating exclusively on the Internet. The Company's mission is to
profitably provide a broad range of banking and financial services to the
growing number of Internet users. Our low-cost branchless business model has
allowed us to attain profitability within a year of acquiring the Charter while
continuing to pass along our operating cost savings to customers in the form of
attractive interest rates and low fees. The Bank strives to maintain high asset
quality by employing conservative credit policies. We plan to attract new
accounts through national awareness of the "Net.B@nk" brand name and to
capitalize on increasing consumer use of the Internet.
During the 12 months ended September 30, 1998, the Bank's customer accounts
grew from 3,264 to 14,634, deposits grew from $46.0 million to $241.3 million
and total assets grew from $81.1 million to $283.1 million. We believe our
growth is attributable to increasing consumer use of the Internet and our
ability to offer a broad array of convenient, cost-effective, secure banking
services to this growing customer base.
The following charts demonstrate the growth in the Bank's customer accounts,
deposits and assets:
<TABLE>
<CAPTION>
EDGAR REPRESENTATION OF DATA POINTS USED IN
PRINTED GRAPHIC
NUMBER OF ACCOUNTS
<S> <C>
9/30/97 TO 9/30/98 GROWTH: 348%
9/1/97 3,264
12/1/97 4,755
3/1/98 8,416
6/1/98 11,823
9/1/98 14,634
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
DEPOSITS
<S> <C>
(IN MILLIONS)
9/30/97 TO 9/30/98 GROWTH: 424%
9/1/97 $46
12/1/97 $59
3/1/98 $129
6/1/98 $187
9/1/98 $241
</TABLE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
TOTAL ASSETS
<S> <C>
(IN MILLIONS)
9/30/97 TO 9/30/98 GROWTH: 249%
9/1/97 $81
12/1/97 $93
3/1/98 $164
6/1/98 $247
9/1/98 $283
</TABLE>
36
<PAGE>
INDUSTRY BACKGROUND
THE INTERNET
The Internet enables millions of people worldwide to access news and
information, communicate with each other and conduct business electronically.
According to International Data Corporation, the number of worldwide Internet
users is projected to grow from an estimated 97.3 million in 1998 to an
estimated 319.8 million by 2002. Additionally, Jupiter Communications estimates
that 27.4 million United States households were on-line (I.E.,had access to the
Web, used a consumer on-line service or sent e-mail) in 1997 and that an
estimated 61.4 million households are expected to be on-line in 2002.
The Internet has become a significant marketplace for buying and selling
goods and services. International Data Corporation forecasts that total
worldwide commerce on the Internet will grow from an estimated $32.4 billion in
1997 to an estimated $425.7 billion in 2002. With the emergence of the Internet
as a globally accessible, fully interactive medium, many companies that have
traditionally conducted business in person, through the mail or over the
telephone are increasingly using electronic commerce. Many consumers are showing
strong preferences for transacting certain types of business, such as paying
bills, booking airline tickets, trading securities and purchasing consumer
products, electronically rather than in person or over the telephone.
Individuals can now conduct these transactions virtually anywhere at any time.
Many consumers have accepted and even welcomed self-directed on-line
transactions because such transactions can be faster, less expensive and more
convenient than transactions conducted through a human intermediary.
In addition to its use as a general commercial medium, the Internet has
rapidly emerged as a means of providing financial services. Many companies are
increasingly offering a variety of financial services, including credit cards,
brokerage services, insurance products and banking services, via the Internet,
and finance-related Web sites continue to grow in popularity.
ELECTRONIC BANKING
The increasing levels of commerce transacted on the Internet has prompted
the development of electronic banking delivery systems. These forms of
electronic delivery systems provide convenience for customers and allow
financial institutions to lower their overhead costs. The two types of
electronic banking currently available, PC-based home banking and Internet
banking, are very different. The characteristics of each are as follows:
- PC-BASED HOME BANKING. PC-based home banking requires PC-based financial
services software products such as Intuit's QUICKEN, Microsoft's MONEY or
a bank's proprietary software. Each product carries its own set of
instructions that the customer must learn before commencing any banking
transactions. The software resides on the customer's PC along with his or
her account data and requires a dial-up modem and manual downloading.
Consequently, customers must conduct PC-based home banking from the PC
containing the customer's software and account data. Customers generally
must back up their account data at frequent intervals to counteract the
risk of losing data. Because the customer must connect with the financial
institution via modem and download his or her account data, real-time
transactions are not generally possible.
- INTERNET BANKING. Unlike PC-based home banking, Internet banking requires
only a secure Web browser for access to the Internet and the financial
institution. Internet banking requires no particular software and does not
restrict the customer's operations to the location of his or her PC.
Instead, the customer accesses the financial institution through the
Internet and deposits or transfers funds, pays bills or transacts other
business on a real-time basis. Account data remains stored on the Bank's
secure server at all times, protected by technology designed specifically
to safeguard such information. No downloading or back-up is required, as
the Bank's server backs
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up all data and transactions on a continuous basis. With Internet banking,
the information presented to the customer remains current at all times.
The use of electronic banking delivery systems, and particularly Internet
banking, is growing as consumers find that electronic banking is both convenient
and cost-effective. According to Jupiter Communications, the number of on-line
banking households in the United States is projected to grow from an estimated
4.5 million in 1997 to an estimated 17.1 million in 2002. Jupiter Communications
further indicates that the percentage of these on-line banking households
utilizing Internet banking is projected to rise from an estimated 8% in 1996 to
an estimated 80% in 2000.
Demographic surveys indicate that Internet users represent an ideal target
market for Internet banking. Recent studies by Jupiter Communications revealed
that, in the United States, approximately 49% of Internet users are college
graduates and that approximately 30% are engaged in professional or managerial
occupations. The survey also indicated that the median age of Internet users is
33, that approximately 61% of Internet users are under the age of 45 and that
the average annual income of an Internet user is over $60,000. The attractive
demographics of Internet users facilitate the growth of Internet banking.
Internet users tend to be young and mobile and thus comfortable with and
receptive to the convenience of on-line commercial transactions. We believe that
as Internet users enter their prime earnings and savings years, there will be an
increased demand for high-yielding savings products. Additionally, Internet
users tend to be professionals with limited amounts of discretionary time and
are attracted to the convenience of "one-stop shopping" for a full range of
financial services.
THE NET.B@NK SOLUTION
As the first federally-insured bank to operate solely on the Internet, the
Bank believes it has a competitive advantage relative to on-line banks with a
less established operating history. In addition, the Bank believes it has a
competitive cost advantage over traditional banks. We also believe our
established position in the marketplace provides us with a competitive advantage
in view of the lead time required for potential competitors to start an Internet
bank. We intend to continue to capitalize on this advantage by aggressively
seeking new customers in order to further build market share.
Net.B@nk's customer demographics parallel those of the general Internet
population and illustrate the Bank's appeal to households with relatively high
incomes. According to John H. Harland Company, as of September 1998, Net.B@nk's
customers had an average age of 44 and a median annual household income in
excess of $50,000. Net.B@nk is ideally positioned to participate in the rapid
growth of the Internet and on-line banking based on its:
- ATTRACTIVE INTEREST RATES AND LOW FEES. The Bank's operating costs are
generally lower than those of traditional "bricks and mortar" banks
because it does not require a traditional branch network to generate
deposits and conduct operations. The Bank passes its savings in operating
costs on to customers by offering attractive interest rates and low fees
in order to generate deposits without sacrificing profit margins. We
believe the Bank's unique business model differentiates it from
traditional banks offering Internet banking services because they
frequently offset the incremental expense of their Internet banking
services by charging additional fees.
- CONVENIENCE AND EASE OF ACCESS. We believe the Bank provides customers
with a higher level of convenience than can be achieved in a traditional
bank branch or through PC-based home banking. The Internet allows our
customers to conduct banking activities on a real-time, 7-day-a-week,
24-hour-a-day basis from any PC, wherever located, using a secure Web
browser. In addition, the Bank's Web site and electronic banking software
are designed to be user-friendly and to expedite customer transactions
with the Bank.
- BROAD SELECTION OF PRODUCTS AND SERVICES. The Bank offers a broad array of
products and services that customers would typically expect from a
traditional bank. These products and services
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include checking and money market accounts, certificates of deposit,
electronic bill paying, debit cards, credit cards, mortgage loans,
business equipment leases and securities brokerage services. We intend to
continue to develop additional products and services such as insurance
products, consolidated account statements, home equity loans and home
equity lines of credit.
- HIGH-QUALITY SERVICE AND CUSTOMER SATISFACTION. We continually seek ways
to enhance customer satisfaction. For example, unlike many other banks, we
offer services such as electronic bill payment and ATM cards without
service charges. We also emphasize responsive, courteous customer service
and employ a staff of approximately 14 customer service representatives
(representing approximately 50% of our employees) who respond to inquiries
from existing and potential customers and process new accounts. Customers
can access account data and information regarding products and services 24
hours a day and can currently reach our customer service representatives
18 hours a day by telephone or e-mail. At present, we are reviewing plans
to expand our customer service hours. We strive for the highest level of
customer satisfaction and believe the significant growth in our customer
base illustrates our ability to meet our customers' needs.
- ADVANCED SECURITY. A significant barrier to on-line financial transactions
has been the secure transmission of confidential information over public
networks. The Bank uses sophisticated technology to provide what we
believe to be among the most advanced security measures currently
available in the Internet banking industry. All banking transactions are
encrypted and all transactions are routed from the Internet server through
a "firewall" that limits access to the Bank server. The Bank's systems
automatically detect attempts by third parties to access other users'
accounts and feature a high degree of physical security, secure modem
access, service continuity and transaction monitoring. See "--Security."
GROWTH STRATEGY
The Company's objective is to become the leading provider of a full range of
on-line financial services. We intend to accomplish this objective by
implementing the following strategies:
- BUILD NATIONAL BRAND AWARENESS THROUGH INCREASED MARKETING EFFORTS. We
plan to significantly expand our marketing program and are working with
nationally known advertising and public relations agencies to build
national awareness of the "Net.B@nk" name through a variety of marketing
initiatives. These initiatives include expanding our advertising media to
include print and direct mail campaigns; continued advertisement on
targeted portals such as Yahoo!, Infoseek and Excite and Web sites such as
Bank Rate Monitor, Motley Fool and Money.com; and continued pursuit of
strategic alliances with other Internet financial services providers. To
fund these initiatives, the Company has increased its marketing budget
from approximately $650,000 for 1998 to approximately $3.6 million for
1999. Even with limited marketing expenditures of approximately $564,000
in the first nine months of 1998, we were able to add 9,879 net additional
customer accounts and grow deposits by approximately $182.6 million during
the period. By increasing our marketing efforts, we believe that we can
expand brand awareness of the Bank on a national scale and significantly
increase our customer base. See "--Marketing."
- LEVERAGE LOW COST STRUCTURE. The Bank's operating costs are generally
lower than those of traditional "bricks and mortar" banks because it does
not require a traditional branch network to generate deposits and conduct
operations. This is demonstrated by the Bank's low ratio of annualized
third quarter 1998 noninterest expense to average earning assets of 2.0%
as compared to 4.4% for commercial banks with $300 million to $500 million
in assets (based on data provided by FDIC Institution Directory).
Additionally, the Bank's ratio of total assets per
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employee was $10.1 million as of September 30, 1998 as compared to $2.4
million for commercial banks with $300 million to $500 million in assets
(based on data provided by FDIC Institution Directory). The Bank passes
its operating cost savings on to customers by offering more attractive
interest rates on deposit accounts and lower fees than those offered
generally by traditional banks. We believe this strategy attracts deposits
without sacrificing profit margins. We intend to continue to leverage the
fixed-cost aspect of our branchless business model to enhance
profitability.
- OFFER A BROAD ARRAY OF PRODUCTS AND SERVICES. Our objective is to attract
customers seeking to combine the convenience of Internet banking with the
broad array of products and services typically offered by traditional
banks. Toward this end, the Bank's product and service offerings include
checking and money market accounts, certificates of deposit, electronic
bill paying, debit cards, credit cards, mortgage loans, business equipment
leases and securities brokerage services. We intend to continue to develop
additional products and services such as insurance products, consolidated
account statements, home equity loans and home equity lines of credit. See
"--Products and Services."
- GENERATE NONINTEREST INCOME THROUGH CROSS-MARKETING INITIATIVES. To
generate additional noninterest income and enhance customer loyalty, the
Bank cross-markets a variety of non-deposit products. We offer credit
cards, mortgage loans, business equipment leases, securities brokerage
services and other noninterest income-generating products to existing and
potential depositors through various marketing techniques, such as our Web
site, e-mail, on-line advertising and telemarketing. This strategy enables
the Bank to generate additional earning assets and fee income from a
growing customer base.
- MAINTAIN HIGH ASSET QUALITY. The Bank's loan portfolio strategy is to
maintain a conservative loan mix consisting of home mortgage, home equity,
consumer and construction loans with an emphasis on high credit quality.
At the Bank's current stage of development, it is more cost-effective for
the Bank to purchase most of its loans or act as a participating lender
with other banks rather than originating its own loans. This decreases the
Bank's expenses and allows the Bank to reduce its loan loss exposure by
diversifying its portfolio. The Bank also emphasizes a conservative
securities investment strategy by investing in fixed income securities
such as United States Treasury obligations, collateralized mortgage
obligations and mortgage-backed securities issued by agencies such as
Fannie Mae and Freddie Mac. See "--Lending and Investment Activities."
- OUTSOURCE OPERATIONAL FUNCTIONS. To enhance the flexibility and
scalability of its operations, the Bank outsources its principal
operational functions to leading service providers such as NCR, BISYS and
CheckFree. NCR provides a secure server for the electronic banking
software licensed to the Bank by Edify Corporation ("Edify"). CheckFree
provides electronic bill paying systems for the Bank and BISYS processes
the Bank's transactions and interfaces with NCR's secure server. In each
of these relationships, the Bank benefits from the service provider's
expertise and economies of scale while retaining the flexibility to take
advantage of changes in available technology without affecting customer
service. The Bank can also respond easily to growth because these
third-party service providers have the capacity to process a high volume
of transactions. See "--Operations--Service Providers."
PRODUCTS AND SERVICES
DEPOSIT PRODUCTS AND SERVICES. The Bank offers a variety of deposit
products at attractive interest rates in order to build its customer base. The
Bank is able to offer attractive interest rates as a result of its low operating
costs. It also attracts customers by offering convenient services such as free
electronic bill payment, overdraft protection and ATM cards. The Bank's deposit
products and services include:
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- DEPOSIT PRODUCTS. The Bank offers two types of interest-bearing checking
accounts, a money market account and 6-, 12- and 30-month certificates of
deposit. The Bank has consistently offered interest rates on its deposit
accounts that are higher than the national average.
- BILL PAYMENT SERVICE. Through services provided by CheckFree, customers
can pay their bills on-line through electronic funds transfer or a written
draft prepared and sent to the creditor. The Bank does not charge a fee
for this service.
- OVERDRAFT PROTECTION. Overdraft protection is available to all interest
checking customers who qualify. Customers with interest checking accounts
may apply for overdraft protection on-line for amounts up to $5,000. If a
customer has both a money market and an interest checking account, the
Bank automatically establishes overdraft protection between those
accounts.
- ATM CARDS. Each customer automatically receives an ATM card when he or she
opens an account. Customers can access their accounts at ATMs affiliated
with the Cirrus, Honor and Avail networks. The Bank does not charge its
own fee for ATM usage, but fees are generally imposed by the operator of
the ATM.
LENDING PROGRAMS. To generate fee income and provide a convenient service
to its customers, the Bank offers on-line loans and credit cards as described
below.
- MORTGAGE LOANS. The Bank's Web site enables customers to obtain interest
rate quotes and apply for mortgage loans on-line. The Bank has an
agreement with First Mortgage Network ("FMN"), whereby the Bank acts as a
loan originator on behalf of FMN. The Bank has similar agreements with
E-loan, Inc. ("E-loan") and Fidelity Mortgage Services, Inc. ("Fidelity")
pursuant to which they forward mortgage applications to the Bank.
Applications received directly through the Bank's Web site are processed
and closed by FMN. Applications received indirectly from either FMN,
E-loan, or Fidelity are processed by such lender, which receives funding
from us and closes the loans. The Bank funds each loan that meets its
underwriting criteria and sells the loans received directly through the
Bank's Web site to FMN or, in the case of loans received indirectly, to
the lender from which it was received, in each case with the servicing
released. The loans are presold to the same sources at the time of closing
so that the Bank does not bear any material risk of loss. The Bank
generally carries loans receivable on its books for an average of
approximately 30 days while it is awaiting receipt of sale proceeds.
During this time, the Bank receives interest on the outstanding balance at
the rate stated in the mortgage note. The Bank receives a portion of the
loan origination fee for providing these funding services. We plan to
expand the Bank's loan offerings to include home equity loans, home equity
lines of credit and automobile loans. We also offer home mortgage loans
that the Bank originates and retains for its own portfolio. See "--Lending
and Investment Activities."
- CREDIT CARDS. The Bank offers its customers Visa and MasterCard credit
cards issued by The Bankers Bank for no annual fee. The Bankers Bank
carries the credit card loans on its books and the Bank has an
income-sharing arrangement with The Bankers Bank. Customers can apply for
these credit cards on-line. The cards prominently display the "Net.B@nk"
logo with the Visa or MasterCard emblem appearing in the lower right
corner of the card.
NON-BANKING FINANCIAL SERVICES. To serve as a single convenient source for
the financial services needs of Internet users and to generate additional
noninterest income, the Bank offers a full range of non-banking financial
services designed to attract and retain customers. These services currently
include securities brokerage and business equipment leasing services and in the
future will include several new services such as insurance products.
- SECURITIES BROKERAGE SERVICES. The Bank has contracted with UVEST
Investment Services ("UVEST"), a discount brokerage service, to provide
its customers with access to a full line of financial services and
investment products. The Bank has a fee-sharing agreement with UVEST.
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Customers can purchase securities without writing checks to their brokers,
as trading fees are automatically deducted from their checking or money
market accounts with the Bank. Investment proceeds are automatically
deposited into the customer's deposit account with the Bank. Customers
enjoy 24-hour on-line access, real-time quotes, low commissions and a
professional brokerage staff.
- BUSINESS EQUIPMENT LEASING. In October 1998, the Bank entered into an
agreement with Republic Leasing Company ("Republic") that allows the
Bank's customers, many of whom are independent business owners or
managers, to lease small business equipment through Republic. The Company
has a fee sharing agreement with Republic. Leases range in amounts from
$5,000 to $500,000 and cover virtually all types of business equipment.
Republic provides advice, comparison quotes and immediate equipment lease
financing and holds and services all of its leases.
FUTURE PRODUCTS AND SERVICES. To generate additional interest and fee
income and enhance customer convenience, the Bank plans to introduce in the
future a variety of new products and services. These products and services may
include insurance products, home equity loans, home equity lines of credit, a
proprietary credit card, consolidated account statements, financial planning and
asset allocation services and a system that will allow customers to download
their personal financial account data directly into commercial financial
services software.
LENDING AND INVESTMENT ACTIVITIES
The Bank's loan portfolio strategy is to maintain a conservative loan mix
consisting of home mortgage, home equity, consumer and construction loans with
an emphasis on high credit quality. At the Bank's current stage of development,
it is more cost-effective for the Bank to purchase most of its loans or act as a
participating lender with other banks rather than originating its own loans.
This decreases the Bank's expenses and allows the Bank to reduce its loan loss
exposure by diversifying its portfolio. As it grows, the Bank will continue to
develop its portfolio through purchases, participations and originations.
The Bank builds its loan portfolio in the following ways:
- PURCHASES. The Bank acquires most of its loans by purchasing packages of
specific types of loans, such as mortgage, home equity and consumer loans,
with each package consisting of loans with similar principal amounts,
interest rates and asset quality. The Bank also purchases portions of
commercial loan pools, with the seller retaining a portion of the loans to
decrease the Bank's risk. As of September 30, 1998, purchased loans
accounted for approximately $173.5 million, or 85.1%, of the Bank's loan
portfolio.
- PARTICIPATIONS. The Bank acts as a participating lender in commercial and
large construction loans with varying banks in the Southeast, including
The Bankers Bank. We anticipate expanding our participations in
construction loans to include loans originated nationwide in order to take
advantage of lower prices for these loans in less competitive geographic
areas. As of September 30, 1998, participations accounted for
approximately $28.1 million, or 13.8%, of the Bank's loan portfolio.
- DIRECT ORIGINATION. The Bank originates a small number of loans directly
with its customers. As of September 30, 1998, these loans accounted for
approximately $2.2 million, or 1.1%, of the Bank's loan portfolio.
In addition, as described in "--Products and Services--Lending
Programs--Mortgage Loans," the Bank has an agreement with FMN whereby the Bank
acts as a loan originator on behalf of FMN and has similar agreements with
E-loan and Fidelity. From May 1996, when the Bank began providing services under
these agreements, to September 30, 1998, the Bank funded $75.2 million of loans
for
third parties. As of September 30, 1998, the Bank had $20.3 million in loan sale
proceeds receivable
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relating to these agreements. In the future, the Bank may retain a portion of
such loans for its own portfolio.
The Bank's loan committee establishes underwriting standards and criteria
for the Bank's loan portfolio and monitors the portfolio on an ongoing basis.
The loan committee applies the same underwriting standards to all of the Bank's
loans, regardless of how they are originated. The Bank has also retained an
outside consulting firm to assist the loan committee in its review of the loan
portfolio and to conduct due diligence on purchased loans.
In addition to loans, the Bank invests deposit funds in various fixed income
securities. Our philosophy of high credit quality also guides our investment
decisions. The Bank's fixed income securities portfolio is comprised primarily
of United States Treasury obligations, collateralized mortgage obligations and
mortgage-backed securities issued by agencies such as Fannie Mae and Freddie
Mac.
MARKETING
Our marketing strategy is aimed at making Net.B@nk the leading brand in the
Internet financial services market. Our marketing strategy is designed to grow
our customer base and includes targeted advertising on the Internet and other
media, developing strategic partnerships that will enhance our product and
service offerings and fostering public relations. We currently market the Bank's
products and services by placing banner ads on portals such as Yahoo!, Infoseek
and Excite and Web sites such as Bank Rate Monitor, Motley Fool and Money.com
that we believe will attract the Bank's target customers. The Bank also derives
a marketing benefit from media coverage that the Bank generates through its
public relations campaign. We believe such coverage increases the general
public's awareness of the Bank and attracts new customers. In addition to these
advertising and public relations activities, we continually seek to form product
and marketing alliances with other Internet financial services providers such as
E-loan, Republic and UVEST to broaden our product and service offerings and
appeal to a broader customer base.
We are currently expanding our marketing strategies to extend beyond our
current on-line advertising and public relations campaigns. New initiatives will
include print advertisements in publications aimed at our target customers and
potential strategic partners, direct mail marketing, co-branded credit cards and
other strategic partnerships with Internet financial services providers. We plan
to allocate the majority of our advertising budget to on-line advertising
because we believe it is a rapidly growing medium that best reaches our target
audience. We also plan to increase our cross-marketing initiatives to existing
customers.
We realize that our new marketing strategy will require a significant
investment of resources and a commitment to pursue new marketing relationships.
Toward this end, we have increased our marketing budget from approximately
$650,000 for 1998 to approximately $3.6 million for 1999. Even with limited
marketing expenditures of approximately $564,000 in the first nine months of
1998, we were able to add 9,879 net additional customer accounts and grow
deposits by approximately $182.6 million during the period. We plan to hire
additional marketing support staff and believe that a significant increase in
our investment in marketing initiatives will enable the Bank to increase its
name recognition and grow its customer and deposit base on a national scale.
COMPETITION
We believe that the principal competitive factors in the banking industry
are market presence, customer service, convenience, interest rates and product
offerings. While the banking industry is highly competitive, we believe we
compete effectively with our principal competitors, which are traditional banks,
Internet banks and other financial services providers. We believe the Bank's low
cost structure, which allows it to offer attractive interest rates and low fees,
gives it a competitive advantage over traditional banks, which must support a
physical branch structure. We also believe the Bank's operating
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history and name recognition give it an advantage over other independent
Internet banks, which are still in the early stages of operation. Furthermore,
the Bank is able to offer a broader array of products and services than many
non-bank financial services providers. However, most of the Bank's competitors
have larger customer bases, greater name recognition and brand awareness,
greater financial and other resources and longer operating histories than the
Bank. Additionally, new competitors and competitive factors are likely to
emerge, particularly in view of the rapid development of Internet commerce. See
"Risk Factors--The Banking Industry Is Highly Competitive."
OPERATIONS
ACCOUNT ACTIVITY. Customers can access the Bank through any Internet
service provider by means of an acceptable secure Web browser. When customers
access the Bank's service menu, they can open a new account, review the status
of an existing account or engage in a transaction. To open a new account, the
customer completes the on-line enrollment form on the Bank's Web site, prints
the signature card, signs it and mails it to the Bank. Customers can make
deposits into an open account at the Bank via direct deposit programs, by
transferring funds between accounts at the Bank, by wire transfer, by mail or in
person at the Bank's principal executive offices. No teller line is maintained,
however, and the Bank does not have or intend to establish a physical branch
system. Customers can also make withdrawals and have access to their accounts at
ATMs that are affiliated with the Cirrus, Honor and Avail networks, which
provides added customer convenience. Customers can apply for loans, review
account activity, enter transactions into an on-line account register, pay bills
electronically, conduct brokerage transactions, receive statements by mail and
print bank statement reports from any PC with a secure Web browser, regardless
of its location.
SERVICE PROVIDERS. We have negotiated relationships with a select group of
service providers who not only provide the Bank with significant quality,
security, reliability, performance and marketing capabilities, but also play an
integral role in implementing the Bank's full financial services strategy.
Because it outsources its principal operational functions to experienced
third-party service providers that have the capacity to process a high volume of
transactions, the Bank can respond easily to growth. Moreover, we have preserved
a degree of flexibility that enables us to assess and evaluate our product
offerings and delivery structure on an ongoing basis and to incorporate other
alliance opportunities as they present themselves. Should any of these
relationships terminate, however, we believe we could secure the required
services from an alternative source without material interruption of the Bank's
operations. Our principal service providers are described below:
- NCR. NCR provides operational support for the Bank's Internet banking and
bill payment applications. Specifically, NCR provides a secure Web site,
software that performs services relating to the Bank's infrastructure and
other electronic banking services. NCR also hosts Edify's electronic
banking software on its secure server and provides the interface necessary
to link the Bank's servers with those used by BISYS and CheckFree.
- BISYS. The Bank receives core systems processing services, such as deposit
account, loan and year-end processing services, from BISYS. The BISYS
server interfaces with NCR's secure server and verifies customer passwords
and identification. BISYS also operates the Bank's ATM and debit card
systems.
- EDIFY. Edify licenses its Electronic Banking System and Electronic
Workforce software, a suite of Internet banking applications, to the Bank.
Edify also maintains the software and provides consulting services as
needed.
- CHECKFREE. CheckFree provides electronic bill paying services to the
Bank's customers. Customers can pay their bills on-line through electronic
funds transfer or a written draft prepared and sent to the creditor.
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- UVEST. UVEST provides discount brokerage services to the Bank's customers.
UVEST executes the trades and receives a commission that is automatically
deducted from the customer's deposit account. The Bank also charges
customers an account fee and an additional fee for each stock trade.
- FIRST MORTGAGE NETWORK. FMN processes mortgage loan applications submitted
through the Bank's Web site. It reviews the application, contacts the
customer and closes the loan for the Bank.
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SECURITY
The Bank's ability to provide its customers with secure financial services
over the Internet is of paramount importance. Management continually evaluates
the Internet systems, services and software used in the Bank's operations to
ensure that they meet the highest standards of security. The following are among
the security measures that are in place:
ENCRYPTED TRANSACTIONS. All banking transactions and Internet
communications are encrypted so that sensitive information is not transmitted
over the Internet in a form that can be read or easily deciphered. Encryption of
Internet communications is accomplished through the use of the Netscape Secure
Sockets Layer ("SSL") technology. SSL is the standard for encryption on the
Internet and is currently used by Netscape's NAVIGATOR (Version 2.0 or higher)
and Microsoft's INTERNET EXPLORER (Version 3.0 or higher). Messages between the
Bank server and BISYS are encrypted using DES encryption, which is described in
"--Isolated Bank Server" below.
SECURE LOGON. To eliminate the possibility that a third party may download
the Bank's or a customer's password file, user identification and passwords are
not stored on the Internet or the Web server. Furthermore, passwords are strings
of six to eight alpha-numeric characters, which makes the chance that a password
can be randomly guessed less than one in one trillion.
ISOLATED BANK SERVER. The computer used to provide the Bank's services
cannot be accessed directly through the Internet. It is on a private connection,
or intranet, that provides two-way communication between the isolated bank
server and the NCR Internet Server. Consequently, an Internet user cannot
directly access the computer that actually provides the Bank's services.
All banking services are routed from the NCR server through a firewall. The
firewall is a combined software and hardware product that precisely defines,
controls and limits the access to "internal" computers from "outside" computers
across a network. Use of this firewall means that only authenticated bank
customers or administrators may send or receive transactions through it, and the
firewall itself is immune to penetration from the network. In other words, the
firewall is a mechanism used to protect the Bank server from the freely
accessible Internet.
Furthermore, all messages sent or received between the NCR server and the
Bank server are encrypted using DES encryption. This is a symmetric key
algorithm and is highly secure because it is not susceptible to standard
ciphertext attacks. Thus, even if a perpetrator were able to route a message to
the Bank server through the firewall, the message could not be encrypted in a
way that would be considered valid by the server. As a result, the Bank server
would reject the message.
AUTHENTICATED SESSION INTEGRITY. An authenticated user is any user who
signs onto the Bank site with a valid user ID and password. Although the vast
majority of authenticated users are legitimate bank customers, the Bank server
is programmed to limit exposure to an authenticated user who is attempting to
defraud the Bank. If the authenticated user alters the URL (the command or
request that is sent from the browser to the server) in any way in an attempt to
gain access to other users' accounts, the Bank server immediately detects that
the session integrity variables have been violated. The Bank server will
immediately stop the session and record the attempt in a log so that the Bank's
staff can investigate.
PHYSICAL SECURITY. All servers and network computers reside in secure NCR
facilities. Currently, computer operations supporting the Bank's Internet access
are based in Columbia, Maryland with backup facilities in Dayton, Ohio. Only
employees with proper photographic identification may enter the primary
building. The computer operations are located in a secure area, with admission
only by key card. Access to the bank server console requires further password
identification.
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SECURE MODEM ACCESS. The Bank server and BISYS are connected by a private
line that is not accessible from the public network. The Bank server is
connected to CheckFree by a similar private connection. A dial-up maintenance
port also permits access to the Bank server. The modem that provides the only
access to this port is specially protected and is only enabled on an as-needed
basis.
SERVICE CONTINUITY. NCR and BISYS each provide a fully redundant network
with no single point of failure. The Bank server will also be "mirrored" so that
hardware failures or software bugs should cause no more than a few minutes of
service outage. "Mirroring" means that the Bank server is backed up continuously
so that all data is stored in two physical locations. This network and server
redundancy ensures that access to the Bank will be reliable. However, if
customers are not able to access the Bank over the Internet, customers will
retain access to their funds through several means, including paper checks, ATM
cards, customer service and an automated telephone response system.
MONITORING. All customer transactions on the Bank server in BISYS and in
CheckFree produce one or more entries into transactional logs. NCR and the Bank
recognize that it is critical to monitor these logs for unusual or fraudulent
activity. As mentioned previously, any attempt by an authenticated user to
modify the command or request that is sent from the browser to the server will
be logged. Additionally, all financial transactions will be logged. Bank
personnel review these logs regularly, and any abnormal or unusual activity will
be noted and appropriate action will be taken either by the Bank, NCR or both.
Ultimately, vigilant monitoring is the best defense against fraud.
The preceding security measures are designed to ensure that the Bank is set
up in a secure manner. However, over the long term, the security of the Bank
depends upon the procedures and standards used for administration of the
Internet site. Both NCR and BISYS are required to obtain SAS 70 certification
from a national accounting firm. This is a certification by independent auditors
that the NCR and BISYS computer systems are being managed and operated in a
manner consistent with accepted practices. BISYS has received this
certification, and NCR's auditors have completed their audit and have indicated
that written certification will be issued by the end of 1998.
We believe the risk of fraud presented by Internet banking is not materially
different from the risk of fraud inherent in any banking relationship. We
believe the three principal reasons for a breach in bank security are: (i)
misappropriation from the user of the user's account number or password, (ii)
penetration of the bank's server by an outside "hacker" and (iii) fraud
committed by an employee of the bank or one of its service providers. Both
traditional banks and Internet banks are vulnerable to these types of fraud. By
establishing the security measures described above, we believe the Bank has
reduced its vulnerability to the first two types of fraud. To counteract fraud
by employees, associates and consultants, we have established internal
procedures and policies designed to ensure that, as in any bank, proper control
and supervision is exercised over employees, associates and consultants. We also
counteract all types of fraud through daily examination of the Bank's
transactional logs.
SUPERVISION AND REGULATION
BACKGROUND
In connection with its approval of the Company's acquisition of the Charter
on July 31, 1997, the OTS required the Company to make certain commitments with
respect to its ongoing operations. These commitments included: (i) to receive
prior OTS approval of any proposed change of senior management or directors for
a period of three years, (ii) to operate within the parameters of the Company's
business plan as submitted to the OTS, (iii) to obtain from an independent
computer security specialist an independent review of, and written report
regarding, the Internet banking security measures employed by the Company, (iv)
to comply with the OTS policy statement regarding on-line banking, (v) to ensure
that the Company's directors and certain executive officers and shareholders
refrain from disposing of their restricted shares of Common Stock without the
prior consent of the OTS until July 28, 2000, (vi) to obtain the approval of the
Regional Director of the OTS with respect to any
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changes in the Company's stock benefit plans effected on or before July 28,
2000, (vii) to comply with OTS directives, if any, to require the exercise or
forfeiture of participants' rights under the Company's stock benefit plans in
the event the Bank's capital falls below minimum OTS requirements and (viii) to
submit to the OTS a structured project plan describing the steps and timing
required to replace the Web hosting services that were previously provided by
AT&T Corp. and are now provided by NCR. The Company and its directors, executive
officers and shareholders have complied with these conditions to date. On
January 8, 1999, the OTS granted Carolina First permission to sell a portion of
its shares of Common Stock in this offering. As a condition to its approval, the
OTS has required that two of the four directors initially nominated by Carolina
First resign upon completion of this offering and that those directors be
replaced with two outside directors within six months of such resignations. The
OTS also requires Carolina First's continued compliance with the condition
described in clause (v) above with respect to its remaining shares of Common
Stock. We do not believe that these commitments materially affect the Bank's
operations.
Carolina First currently owns more than 10% of the Company's outstanding
Common Stock and initially designated four of the Company's directors (Messrs.
Clegg, Moore, Solomon and Whittle) pursuant to a one-time nomination right. As a
result, as determined by the Federal Reserve Board, Carolina First is deemed to
"control" the Company. Consequently, the Company is subject to regulation under
the Bank Holding Company Act of 1956, as amended, and the Georgia Bank Holding
Company Act and to examinations by the Federal Reserve Board. On January 13,
1999, however, the Federal Reserve Board informed the Company that it had
determined that it would no longer regard the Company as a subsidiary of
Carolina First if Carolina First reduces its investment in the Company to less
than ten percent of its outstanding voting stock, if two of the directors
initially nominated by Carolina First resign from the Company's Board of
Directors and if Carolina First complies with certain commitments made to the
Federal Reserve Board. At that point, the Company will be a unitary thrift
holding company and will be subject to regulations applicable to thrift holding
companies discussed below. However, because Carolina First will continue to own
over five percent of the Company's outstanding Common Stock after this offering,
Carolina First will continue to be subject to certain Federal Reserve Board
regulations regarding its relationship with the Company. The Company has
therefore agreed that, until the earlier of the date that Carolina First owns
less than five percent of the Company's outstanding Common Stock or July 28,
2000, the Company will not engage in any activities that are not permissible
under applicable Federal Reserve Board regulations. See "Relationship with
Carolina First Corporation."
Under the FDIA, a depository institution insured by the FDIC can be held
liable for any loss incurred by, or reasonably expected to be incurred by, the
FDIC in connection with: (i) the default of a commonly controlled FDIC-insured
institution or (ii) any assistance provided by the FDIC to any commonly
controlled FDIC-insured institution in danger of default. Because Carolina First
is currently deemed to control the Company, Carolina First's subsidiary bank,
CFB, and the Bank are subject to these cross-guarantee provisions. This means
that any loss suffered by the FDIC with respect to CFB could be assessed against
the Bank and, conversely, any loss suffered by the FDIC with respect to the Bank
could be assessed against CFB. Once Carolina First no longer is considered to be
a depositary holding company with respect to the Bank, the FDIC's
cross-guarantee provisions will no longer apply, and neither the Bank nor CFB
will bear the risk of assessment for the other's losses (although each would
remain liable for losses incurred prior to the release from the cross-guarantee
provisions). Other circumstances could arise, however, that could cause the
Federal Reserve Board to conclude that a control relationship continues to
exist. In that case, the FDIC cross-guarantee provisions would remain in effect.
Savings and loan holding companies and federal savings banks are extensively
regulated under both federal and state law. The following is a brief summary of
certain statutes and rules and regulations that affect or will affect the
Company and the Bank. This summary is qualified in its entirety by
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reference to the particular statute and regulatory provision referred to below
and is not intended to be an exhaustive description of the statutes or
regulations applicable to the business of the Company and the Bank. Supervision,
regulation and examination of the Company and the Bank by the regulatory
agencies are intended primarily for the protection of depositors of the Bank
rather than shareholders of the Company. The terms bank, savings institution,
savings association, federal savings bank and thrift are used interchangeably in
this section and other sections of this Prospectus to refer to savings
associations such as the Bank that are subject to supervision and regulation by
the OTS.
SAVINGS AND LOAN HOLDING COMPANY REGULATION
As is indicated above, upon consummation of this offering the Company will
register as a holding company under both the Savings and Loan Holding Company
Act (the "SLHCA") set forth in Section 10 of the Home Owners Loan Act ("HOLA")
and the Financial Institutions Code of Georgia ("FICG") and will no longer be
subject to regulation by the Federal Reserve Board except as otherwise agreed
upon. The Company is currently regulated under such acts by the OTS and by the
Georgia Department, respectively. As a savings and loan holding company, the
Company will be required to file with the OTS an annual report and such
additional information as the OTS may require pursuant to the SLHCA. The OTS
also has authority to conduct, and in fact conducts, examinations of the Company
and each of its subsidiaries.
Savings and loan holding companies and their subsidiaries are prohibited
from engaging in any activity or rendering any services for or on behalf of
their savings institution subsidiaries for the purpose or with the effect of
evading any law or regulation applicable to the institution. This restriction is
designed to prevent the use of holding company affiliates to evade requirements
of the SLHCA that were enacted to protect the holding company's savings
institution subsidiaries. A unitary thrift holding company, that is, a holding
company that owns only one insured institution whose subsidiary institution
satisfies the qualified thrift lender test (discussed below), is not restricted
to any statutorily prescribed list of permissible activities, and the SLHCA and
the FICG impose no limits on direct or indirect non-savings institution
subsidiary operations.
The SLHCA and the FICG make it unlawful for any savings and loan holding
company, directly or indirectly, or through one or more subsidiaries or one or
more transactions, to acquire control of another savings association or another
savings and loan holding company without prior approval from the OTS and the
Georgia Department, respectively. An acquisition by merger, consolidation or
purchase of assets of such an institution or holding company or of substantially
all of the assets of such an institution or holding company is also prohibited
without prior OTS or Georgia Department approval. When considering an
application for such an acquisition, the OTS and the Georgia Department take
into consideration the financial and managerial resources and future prospects
of the prospective acquiring company and the institution involved. This includes
consideration of the competence, experience and integrity of the officers,
directors and principal shareholders of the acquiring company and savings
institution. In addition, the OTS and the Georgia Department consider the effect
of the acquisition on the institution, the insurance risk to the Savings
Association Insurance Fund ("SAIF") and the convenience and needs of the
community to be served.
The OTS may not approve an acquisition that would result in the formation of
certain types of interstate banking networks. The OTS is precluded from
approving an acquisition that would result in the formation of a holding company
controlling savings institutions in more than one state unless the acquiring
company or one of its savings institution subsidiaries is authorized to acquire
control of an institution or to operate an office in the additional state
pursuant to a supervisory acquisition authorized under Section 13(k) of the FDIA
or unless the statutes of the state in which the institution to be acquired is
located permits such an acquisition.
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Savings and loan holding companies are generally allowed to acquire or to
retain as much as 5% of the voting shares of a savings institution or savings
and loan holding company without regulatory approval.
BANK REGULATION
GENERAL. The Bank is a federal savings bank organized under the laws of the
United States and subject to examination by the OTS. The OTS regulates all areas
of the Bank's banking operations including reserves, lending, mergers, payment
of dividends, interest rates, establishment of branches and other aspects of
operations. OTS regulations generally provide that federal savings banks must be
examined no less frequently than every 12 months, unless the federal savings
bank (i) has assets of less than $250 million, (ii) is well capitalized, (iii)
was found to be well managed and its composite condition was found to be
outstanding (or good, if the bank had total assets of not more than $100
million) during its last examination, (iv) is not subject to a formal
enforcement proceeding or an order from the FDIC or another banking agency and
(v) has not undergone a change of control during the previous 12-month period.
Federal savings banks must be examined no less frequently than every 18 months.
The Bank also is subject to assessments by the OTS to cover the costs of such
examinations.
The Bank is also insured and regulated by the FDIC. The major functions of
the FDIC with respect to insured federal savings banks include paying certain
depositors in an amount limited by law in the event an insured bank is closed
without adequately providing for payment of certain claims of depositors and
preventing the continuance or development of unsound and unsafe banking
practices.
Subsidiary institutions of a savings and loan holding company, such as the
Bank, are subject to certain restrictions imposed by the Federal Reserve Act,
and are implemented by HOLA and OTS regulations, on any extension of credit to
the holding company or any of its subsidiaries, on investment in the stock or
other securities thereof and on the taking of such stock or securities as
collateral for loans to any borrower. Such restrictions and regulations are
discussed more fully below. In addition, a holding company and its subsidiaries
are prohibited from engaging in certain tying arrangements in connection with
any extension of credit or provision of any property or services.
CAPITAL REQUIREMENTS. OTS regulations require that federal savings banks
maintain (i) "tangible capital" in an amount of not less than 1.5% of adjusted
total assets, (ii) "core capital" in an amount not less than 3.0% of adjusted
total assets and (iii) a level of risk-based capital equal to 8.0% of
risk-weighted assets. Under OTS regulations, the term "core capital" generally
includes common stockholders' equity, noncumulative perpetual preferred stock
and related surplus, and minority interests in the equity accounts of
consolidated subsidiaries less unidentifiable intangible assets (other than
certain amounts of supervisory goodwill) and certain investments in certain
subsidiaries plus 90% of the fair market value of readily marketable purchased
mortgage servicing rights ("PMSRs") and purchased credit card relationships
(subject to certain conditions). "Tangible capital" generally is defined as core
capital minus intangible assets and investments in certain subsidiaries and does
not include PMSRs. Most banks are required to maintain a "minimum-leverage"
ratio related to core capital of at least 4.0% to 5.0% of adjusted total assets.
In determining total risk-weighted assets for purposes of the risk-based
requirement, (i) each off-balance sheet asset must be converted to its
on-balance sheet credit equivalent amount by multiplying the face amount of each
such item by a credit conversion factor ranging from 0% to 100% (depending upon
the nature of the asset), (ii) the credit equivalent amount of each off-balance
sheet asset and each on-balance sheet asset must be multiplied by a risk factor
ranging from 0% to 200% (again depending upon the nature of the asset) and (iii)
the resulting amounts are added together and constitute total risk-weighted
assets. "Total capital," for purposes of the risk-based capital requirement
equals the sum of core capital plus supplementary capital (which, as defined,
includes the sum of, among other items, perpetual preferred stock not counted as
core capital, limited life preferred stock,
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subordinated debt and general loan and lease loss allowances up to 1.25% of
risk-weighted assets) less certain deductions. The amount of supplementary
capital that may be counted towards satisfaction of the total capital
requirement may not exceed 100% of core capital, and OTS regulations require the
maintenance of a minimum ratio of core capital to total risk-weighted assets of
4.0%.
OTS regulations have been amended to include an interest-rate risk component
to the risk-based capital requirement. Under this regulation, an institution is
considered to have excess interest rate risk if, based upon a 200 basis point
change in market interest rates, the market value of an institution's capital
changes by more than 2.0%. This new requirement is not expected to have any
material effect on the ability of the Bank to meet the risk-based capital
requirement. The OTS also revised its risk-based capital standards to ensure
that its standards provide adequately for concentration of credit risk, risk
from nontraditional activities and actual performance and expected risk of loss
on multi-family mortgages.
Capital requirements higher than the generally applicable minimum
requirement may be established for a particular savings association if the OTS
determines that the institution's capital was or may become inadequate in view
of its particular circumstances.
Additionally, the Georgia Department requires that savings and loan holding
companies, such as the Company, must maintain a 5.0% Tier 1 capital ratio on a
consolidated basis. As of September 30, 1998, the Company's Tier 1 capital ratio
was 15.6%.
PROMPT CORRECTIVE ACTION. The Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") imposes a regulatory matrix which requires
the federal banking agencies, which include the OTS, the FDIC, the Office of the
Comptroller of Currency (the "OCC") and the Federal Reserve Board, to take
prompt corrective action to deal with depository institutions that fail to meet
their minimum capital requirements or are otherwise in a troubled condition. The
prompt corrective action provisions require undercapitalized institutions to
become subject to an increasingly stringent array of restrictions, requirements
and prohibitions, as their capital levels deteriorate and supervisory problems
mount. Should these corrective measures prove unsuccessful in recapitalizing the
institution and correcting its problems, FDICIA mandates that the institution be
placed in receivership.
Pursuant to regulations promulgated under FDICIA, the corrective actions
that the banking agencies either must or may take are tied primarily to an
institution's capital levels. In accordance with the framework adopted by
FDICIA, the banking agencies have developed a classification system, pursuant to
which all banks and thrifts will be placed into one of five categories: well
capitalized institutions, adequately capitalized institutions, undercapitalized
institutions, significantly undercapitalized institutions and critically
undercapitalized institutions. The capital thresholds established for each of
the categories are as follows:
<TABLE>
<CAPTION>
TIER 1
RISK-BASED RISK-BASED
CAPITAL CATEGORY LEVERAGE RATIO CAPITAL CAPITAL OTHER
- ------------------------- ------------------------- ----------------- ---------------- -------------------------
<S> <C> <C> <C> <C>
Well Capitalized 5.0% or more 10.0% or more 6.0% or more Not subject to a capital
directive
Adequately Capitalized 4.0% or more 8.0% or more 4.0% or more --
Undercapitalized less than 4.0% Less than 8.0% less than 4.0% --
Significantly less than 3.0% Less than 6.0% less than 3.0% --
Undercapitalized
Critically 2.0% or less tangible -- -- --
Undercapitalized equity
</TABLE>
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The undercapitalized, significantly undercapitalized and critically
undercapitalized categories are successively inclusive; therefore, a critically
undercapitalized institution would also be an undercapitalized institution and a
significantly undercapitalized institution. This overlap ensures that the
remedies and restrictions prescribed for undercapitalized institutions will also
apply to institutions in the lowest two categories.
The downgrading of an institution's category is automatic in two situations:
(i) whenever an otherwise well capitalized institution is subject to any written
capital order or directive and (ii) where an undercapitalized institution fails
to submit or implement a capital restoration plan or has its plan disapproved.
The federal banking agencies may treat institutions with applicable ratios in
the well capitalized, adequately capitalized and undercapitalized categories as
if they were in the next lower capital level based on safety and soundness
considerations relating to factors other than capital levels.
FDICIA prohibits all insured institutions regardless of their level of
capitalization from paying any dividend or making any other kind of capital
distribution or paying any management fee to any controlling person if following
the payment or distribution, the institution would be undercapitalized. While
the prompt corrective action provisions of FDICIA contain no requirements or
restrictions aimed specifically at adequately capitalized institutions, other
provisions of FDICIA and the agencies' regulations relating to deposit insurance
assessments, brokered deposits and interbank liabilities treat adequately
capitalized institutions less favorably than those that are well capitalized.
For example, a depository institution that is not well capitalized is prohibited
from accepting deposits through a deposit broker. However, an adequately
capitalized institution can apply for a waiver to accept brokered deposits.
Institutions that receive a waiver are subject to limits on the rates of
interest they may pay on brokered deposits.
CAPITAL DISTRIBUTIONS. An OTS rule imposes limitations on all capital
distributions by savings associations (including dividends, stock repurchases
and cash-out mergers). Under the current rule, a savings association is
classified based on its level of regulatory capital both before and after giving
effect to a proposed capital distribution. Under a proposed rule, the OTS would
conform its three classifications to the five capital classifications set forth
under the prompt corrective action regulations. Under the proposal, institutions
that are at least adequately capitalized would still be required to provide
prior notice. Well capitalized institutions could make capital distributions
without prior regulatory approval in specified amounts in any calendar year.
Under current OTS regulations, a savings association that both before and
after a proposed capital distribution has net capital equal to or in excess of
its capital requirements may, subject to any otherwise applicable statutory or
regulatory requirements or agreements entered into with the regulators, make
capital distributions in any calendar year up to 100% of its net income to date
during the calendar year plus the amount that would reduce by one-half its
"surplus capital ratio" (i.e., the percentage by which the association's
capital-to-assets ratio exceeds the ratio of its fully phased-in capital
requirement to its assets) at the beginning of the calendar year. No regulatory
approval of the capital distribution is required, but prior notice must be given
to the OTS.
An institution that either before or after a proposed capital distribution
fails to meet its then applicable minimum capital requirement or that has been
notified that it needs more than normal supervision may not make any capital
distributions without the prior written approval of the OTS. In addition, the
OTS may prohibit a proposed capital distribution, which would otherwise be
permitted by OTS regulations, if the OTS determines that such distribution would
constitute an unsafe or unsound practice.
LIQUIDITY. Under OTS regulations, savings associations must maintain an
average daily balance of liquid assets (including cash, certain time deposits,
certain bankers' acceptances, certain corporate debt securities and highly rated
commercial paper, securities of certain mutual funds and specified United States
government, state or federal agency obligations) in each calendar quarter of not
less than 4% of:
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(i) the amount of its liquidity base at the end of the preceding calendar
quarter or (ii) the average daily balance of its liquidity base during the
preceding quarter. The average daily balance of either liquid assets or
liquidity base in a quarter is calculated by adding the respective balance as of
the close of each business day in a quarter and, for any non-business day, as of
the close of the nearest preceding business day, and dividing the total by the
number of days in the quarter. The OTS may, to the extent and under conditions
it may prescribe, permit a savings association to reduce its liquid assets below
the minimum amount to meet withdrawals or pay obligations. In addition, the OTS
may suspend part or all of the minimum liquidity requirements whenever it
determines that conditions of national emergency or unusual economic stress
exist. Any such suspension, unless sooner terminated by its terms or by the OTS,
shall terminate after 90 days, but the OTS may again suspend part or all of such
requirement at any time. Savings institutions also are required to maintain
short-term liquid assets to satisfy Federal Reserve Board requirements.
EQUITY INVESTMENTS. The OTS has revised its risk-based capital regulation
to modify the treatment of certain equity investments and to clarify the
treatment of other equity investments. Equity investments that are permissible
for both savings banks and national banks will no longer be deducted from
savings associations' calculations of total capital over a five-year period.
Instead, permissible equity investments will be placed in the 100% risk-weight
category, mirroring the capital treatment prescribed for those investments when
made by national banks under the regulations of the OCC. Equity investments held
by savings associations that are not permissible for national banks must still
be deducted from assets and total capital.
QUALIFIED THRIFT LENDER REQUIREMENT. A federal savings bank is deemed to be
a "qualified thrift lender" ("QTL") if: (i) the savings association qualifies as
a domestic building and loan association, as such term is defined in section
7701(a)(19) of the Internal Revenue Code of 1986, as amended or (ii) the savings
association's qualified thrift investments equal or exceed 65% of its "portfolio
assets" on a monthly average basis in nine out of every 12 months. Qualified
thrift investments generally consist of (i) various housing related loans and
investments (such as residential construction and mortgage loans, home
improvement loans, mobile home loans, home equity loans and mortgage-backed
securities), (ii) certain obligations of the FDIC and (iii) shares of stock
issued by any FHLB, the Federal Home Loan Mortgage Corporation or the Federal
National Mortgage Association. In addition, the following assets may be
categorized as qualified thrift investments in an amount not to exceed 20% in
the aggregate of portfolio assets: (i) 50% of the dollar amount of residential
mortgage loans originated and sold within 90 days of origination, (ii)
investments in securities of a service corporation that derives at least 80% of
its income from residential housing finance, (iii) 200% of loans and investments
made to acquire, develop or construct starter homes or homes in credit needy
areas (subject to certain conditions), (iv) loans for the purchase or
construction of churches, schools, nursing homes and hospitals and (v) consumer
loans. For purposes of the QTL test, the term "portfolio assets" means the
savings institution's total assets minus goodwill and other intangible assets,
the value of property used by the savings institution to conduct its business
and liquid assets held by the savings institution in an amount up to 20% of its
total assets.
OTS regulations provide that any savings association that fails to meet the
definition of a QTL must either convert to a national bank charter or limit its
future investments and activities (including branching and payments of
dividends) to those permitted for both savings associations and national banks.
Further, within one year of the loss of QTL status, a holding company of a
savings association that does not convert to a bank charter must register as a
bank holding company and will be subject to all statutes applicable to bank
holding companies. In order to exercise the powers granted to federally
chartered savings associations and maintain full access to FHLB advances, the
Bank must meet the definition of a QTL.
LOANS TO ONE BORROWER LIMITATIONS. HOLA generally requires savings
associations to comply with the loans to one borrower limitations applicable to
national banks. National banks generally may make
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loans to a single borrower in amounts up to 15% of their unimpaired capital and
surplus, plus an additional 10% of capital and surplus for loans secured by
readily marketable collateral. HOLA provides exceptions under which a savings
association may make loans to one borrower in excess of the generally applicable
national bank limits. A savings association may make loans to one borrower in
excess of such limits under the following circumstances: (i) for any purpose, in
any amount not to exceed $500,000 or (ii) to develop domestic residential
housing units, in an amount not to exceed the lesser of $30 million or 30% of
the savings association's unimpaired capital and unimpaired surplus, provided
other conditions are satisfied. The Federal Institutions Reform, Recovery, and
Enforcement Act of 1989 provided that a savings association could make loans to
one borrower to finance the sale of real property acquired in satisfaction of
debts previously contracted in good faith in amounts up to 50% of the savings
association's unimpaired capital and unimpaired surplus. The OTS, however, has
modified this standard by limiting loans to one borrower to finance the sale of
real property acquired in satisfaction of debts to 15% of unimpaired capital and
surplus. That rule provides, however, that purchase money mortgages received by
a savings association to finance the sale of such real property do not
constitute "loans" (provided no new funds are advanced and the savings
association is not placed in a more detrimental position holding the note than
holding the real estate) and, therefore, are not subject to the loans to one
borrower limitations.
COMMERCIAL REAL PROPERTY LOANS. HOLA limits the aggregate amount of
commercial real estate loans that a federal savings association may make to an
amount not in excess of 20% of the savings association's assets, and amounts in
excess of 10% of such total assets must be devoted to small business real
property loans.
COMMUNITY REINVESTMENT. Under the Community Reinvestment Act (the "CRA")
and the implementing OTS regulations, federal savings banks have a continuing
and affirmative obligation to help meet the credit needs of its local community,
including low and moderate-income neighborhoods, consistent with the safe and
sound operation of the institution. The CRA requires the board of directors of
financial institutions, such as the Bank, to adopt a CRA statement for each
assessment area that, among other things, describes its efforts to help meet
community credit needs and the specific types of credit that the institution is
willing to extend. The regulations promulgated pursuant to CRA contain three
evaluation tests: (i) a lending test which will compare the institution's market
share of loans in low- and moderate-income areas to its market share of loans in
its entire service area and the percentage of a bank's outstanding loans to low-
and moderate-income areas or individuals, (ii) a services test which will
evaluate the provision of services that promote the availability of credit to
low- and moderate-income areas and (iii) an investment test, which will evaluate
an institution's record of investments in organizations designed to foster
community development, small- and minority-owned businesses and affordable
housing lending, including state and local government housing or revenue bonds.
FAIR LENDING. Congress and various federal agencies (including, in addition
to the bank regulatory agencies, the Department of Housing and Urban
Development, the FTC and the Department of Justice) (collectively the "Federal
Agencies") responsible for implementing the nation's fair lending laws have been
increasingly concerned that prospective home buyers and other borrowers are
experiencing discrimination in their efforts to obtain loans. In recent years,
the Department of Justice has filed suit against financial institutions that it
determined had discriminated, seeking fines and restitution for borrowers who
allegedly suffered from discriminatory practices. Most, if not all, of these
suits have been settled (some for substantial sums) without a full adjudication
on the merits.
On March 8, 1994, the Federal Agencies, in an effort to clarify what
constitutes lending discrimination and to specify the factors the agencies will
consider in determining if lending discrimination exists, announced a joint
policy statement detailing specific discriminatory practices prohibited under
the Equal Credit Opportunity Act and the Fair Housing Act. In the policy
statement, three methods of
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proving lending discrimination were identified: (i) overt evidence of
discrimination, when a lender blatantly discriminates on a prohibited basis,
(ii) evidence of disparate treatment, when a lender treats applicants
differently based on a prohibited factor even where there is no showing that the
treatment was motivated by prejudice or a conscious intention to discriminate
against a person and (iii) evidence of disparate impact, when a lender applies a
practice uniformly to all applicants, but the practice has a discriminatory
effect, even where such practices are neutral on their face and are applied
equally, unless the practice can be justified on the basis of business
necessity.
FDIC INSURANCE ASSESSMENTS. Federal deposit insurance is required for all
federally chartered savings associations. Deposits at the Bank are insured to a
maximum of $100,000 for each depositor by the SAIF. As a SAIF-insured
institution, the Bank is subject to regulation and supervision by the FDIC, to
the extent deemed necessary by the FDIC to ensure the safety and soundness of
the SAIF. The FDIC is entitled to have access to reports of examination of the
Bank made by the OTS and all reports of condition filed by the Bank with the
OTS. The FDIC also may require the Bank to file such additional reports as it
determines to be advisable for insurance purposes. Additionally, the FDIC may
determine by regulation or order that any specific activity poses a serious
threat to the SAIF and that no SAIF member may engage in the activity directly.
Insurance premiums are paid in semiannual assessments. Under a risk-based
assessment system, the FDIC is required to calculate on a semi-annual basis a
savings association's semiannual assessment based on (i) the probability that
the insurance fund will incur a loss with respect to the institution (taking
into account the institution's asset and liability concentration), (ii) the
potential magnitude of any such loss and (iii) the revenue and reserve needs of
the insurance fund. The semiannual assessment imposed on the Bank may increase
depending on the SAIF revenue and expense levels, and the risk classification
applied to the Bank.
The deposit insurance assessment rate charged to each institution depends on
the assessment risk classification assigned to each institution. Under the
risk-classification system, each SAIF member is assigned to one of three capital
groups: "well capitalized,""adequately capitalized" or "less than adequately
capitalized," as such terms are defined under the OTS's prompt corrective action
regulation (discussed above), except that "less than adequately capitalized"
includes any institution that is not well capitalized or adequately capitalized.
Within each capital group, institutions are assigned to one of three supervisory
subgroups--"healthy" (institutions that are financially sound with only a few
minor weaknesses), "supervisory concern" (institutions with weaknesses which, if
not corrected could result in significant deterioration of the institution and
increased risk to the SAIF) or "substantial supervisory concern" (institutions
that pose a substantial probability of loss to the SAIF unless corrective action
is taken). The FDIC will place each institution into one of nine assessment risk
classifications based on the institution's capital group and supervisory
subgroup classification.
Historically, SAIF premiums had been equivalent to deposit insurance
premiums paid by banks on deposits to the Bank Insurance Fund ("BIF"). Deposit
insurance premiums were set to facilitate each fund achieving its designated
reserve ratios. As each fund achieves its designated reserve ratio, however, the
FDIC has the authority to lower the premium assessments for that fund to a rate
that would be sufficient to maintain the designated reserve ratio. In August
1995, the FDIC determined that the BIF had achieved its designated reserve ratio
and approved lower BIF premium rates for deposit insurance by the BIF for all
but the riskiest institutions. On November 14, 1995, the FDIC determined that
BIF deposit insurance premiums for well capitalized banks would be further
reduced to the then-statutory minimum of $2,000 per institution per year,
effective January 1, 1996. Because the SAIF remained significantly below its
designated reserve ratio, insurance premiums for assessable SAIF deposits were
not reduced in either FDIC action.
The financial condition of the SAIF resulted in the adoption of the Deposit
Insurance Funds Act of 1996 ("DIFA"), which was enacted on September 30, 1996 as
part of the Omnibus Consolidated
54
<PAGE>
Appropriations Act. Under DIFA, a special one-time assessment of 65.7 cents per
$100 of assessable SAIF deposits was collected on November 27, 1996 and applied
retroactively to SAIF deposits as of March 31, 1995. DIFA provides that special
assessments are deductible under Section 162 of the Internal Revenue Code in the
year in which the assessment is paid. After collection of the special
assessment, the SAIF achieved its designated reserve ratio and SAIF premium
rates became the same as BIF rates. DIFA further provides that BIF and SAIF are
to be merged, creating the "Deposit Insurance Fund," on January 1, 1999,
provided that bank and savings association charters are combined by that date.
The Treasury Department has submitted a report to Congress on the development of
a common charter for all insured depository institutions. See "--Elimination of
Federal Savings Association Charter."
DIFA further assesses premiums for Financing Corporation Bond debt service
("FICO"). Beginning January 1, 1997, FICO premiums for BIF and SAIF became 1.3
and 6.4 basis points, respectively. Full pro rata sharing of FICO will begin no
later than January 1, 2000.
Effective January 1, 1997, SAIF members had the same risk-based assessment
schedule as BIF members, which is 0 to 27 cents per $100 of deposits. FICO
assessments of 1.3 cents for BIF deposits and 6.4 cents per $100 of deposits for
SAIF deposits will be added to the BIF-assessable base and SAIF assessable base,
respectively, until December 31, 1999. Thereafter, approximately 2.4 cents per
$100 of deposits would be added to each regular assessment for all insured
depositors, thereby achieving full pro rata FICO sharing.
Insurance of deposits may be terminated by the FDIC, after notice and
hearing, upon a finding by the FDIC that the savings association has engaged in
unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, rule, regulation, order or
condition imposed by, or written agreement with, the FDIC. Additionally, if
insurance termination proceedings are initiated against a savings association,
the FDIC may temporarily suspend insurance on new deposits received by an
institution under certain circumstances.
FEDERAL HOME LOAN BANK SYSTEM. The FHLB System consists of 12 regional
FHLBs, each subject to supervision and regulation by the Federal Housing Finance
Board (the "FHFB"). The FHLBs provide a central credit facility for member
savings associations. Collateral is required. The maximum amount that the FHLB
of Atlanta will advance fluctuates from time to time in accordance with changes
in policies of the FHFB and the FHLB of Atlanta, and the maximum amount
generally is reduced by borrowings from any other source. In addition, the
amount of FHLB advances that a savings association may obtain will be restricted
in the event the institution fails to constitute a QTL.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board has adopted regulations
that require savings associations to maintain non-earning reserves against their
transaction accounts (primarily NOW and regular checking accounts). These
reserves may be used to satisfy liquidity requirements imposed by the OTS.
Because required reserves must be maintained in the form of cash or a
non-interest-bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce the amount of the Bank's interest-earning
assets.
Savings institutions also have the authority to borrow from the Federal
Reserve "discount window." Collateral is required. Federal Reserve Board
regulations, however, require savings associations to exhaust all FHLB sources
before borrowing from a Federal Reserve Bank.
TRANSACTIONS WITH AFFILIATES RESTRICTIONS. Transactions engaged in by a
savings association or one of its subsidiaries with affiliates of the savings
association generally are subject to the affiliate transaction restrictions
contained in Sections 23A and 23B of the Federal Reserve Act in the same manner
and to the same extent as such restrictions apply to transactions engaged in by
a member bank or one of its subsidiaries with affiliates of the member bank.
Section 23A of the Federal Reserve Act imposes both quantitative and qualitative
restrictions on transactions engaged in by a member bank or one of its
55
<PAGE>
subsidiaries with an affiliate, while Section 23B of the Federal Reserve Act
requires, among other things that all transactions with affiliates be on terms
substantially the same, and at least as favorable to the member bank or its
subsidiary, as the terms that would apply to, or would be offered in, a
comparable transaction with an unaffiliated party. Exemptions from, and waivers
of, the provisions of Sections 23A and 23B of the Federal Reserve Act may be
granted only by the Federal Reserve Board. The HOLA and OTS regulations
promulgated thereunder contain other restrictions on loans and extension of
credit to affiliates, and the OTS is authorized to impose additional
restrictions on transactions with affiliates if it determines such restrictions
are necessary to ensure the safety and soundness of any savings association.
Current OTS regulations are similar to Sections 23A and 23B of the Federal
Reserve Act.
FUTURE REQUIREMENTS. Statutes and regulations are regularly introduced
which contain wide-ranging proposals for altering the structures, regulations
and competitive relationships of financial institutions. It cannot be predicted
whether or what form any proposed statute or regulation will be adopted or the
extent to which the business of the Company and the Bank may be affected by such
statute or regulation.
ELIMINATION OF FEDERAL SAVINGS ASSOCIATION CHARTER
In recent years, the Congress has considered legislation that would
eliminate the federal savings association charter. If such legislation is
enacted, the Bank likely would be required to convert its federal savings bank
charter to either a national bank charter or to a state depository institution
charter and the Company would again become a bank holding company subject to
regulation by the Federal Reserve Board and the Georgia Department. Congress has
also considered various legislative proposals that would result in the
restructuring of federal regulatory oversight, including, for example,
consolidation of the OTS into another agency, or creation of a new Federal
banking agency to replace the various such agencies which presently exist. The
Bank is unable to predict whether such legislation will be enacted or, if
enacted, whether the federal savings bank charter will be eliminated.
PROPERTIES
The Company leases 7,480 square feet of office space for its headquarters
and those of the Bank at 950 North Point Parkway, Suite 350, Alpharetta, Georgia
30005. The office space is subject to a lease that expires on January 31, 2005.
EMPLOYEES
As of January 14, 1999, the Company employed 27 persons on a full-time basis
and one person on a part-time basis. None of our employees is covered by a
collective bargaining agreement. We believe our relations with our employees are
excellent.
LEGAL PROCEEDINGS
Neither the Company nor the Bank is a party to any material legal
proceeding. None of our properties is subject to a material legal proceeding,
and we are not aware of any material proceeding involving the Company or the
Bank that may be contemplated by any governmental authority. We are also unaware
of any pending or contemplated material proceeding in which any director,
officer or affiliate or any principal shareholder of the Company or the Bank is
a party or has a direct or indirect interest adverse to the Company or the Bank.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning each of our
executive officers and directors:
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES HELD
- ------------------------------------------------ --- ---------------------------------------------------------
<S> <C> <C>
Robert E. Bowers................................ 42 Chief Financial Officer and Director
Thomas L. Cable................................. 42 Chief Technology Officer
Ward H. Clegg................................... 47 Director
D. R. Grimes.................................... 51 Vice Chairman, Chief Executive Officer and Director
J. Stephen Heard................................ 56 Director
T. Stephen Johnson.............................. 49 Chairman of the Board
Robin C. Kelton................................. 64 Director
John T. Moore................................... 49 Director
Thomas H. Muller, Jr............................ 57 Director
Donald S. Shapleigh, Jr......................... 50 President, Chief Operating Officer and Director
H. Bryce Solomon, Jr............................ 45 Director
W. James Stokes................................. 40 Director
Catherine Storey................................ 49 Operations Manager
Mack I. Whittle, Jr............................. 50 Director
</TABLE>
ROBERT E. BOWERS has served as Chief Financial Officer of the Company since
February 1997. Prior to joining the Company, Mr. Bowers, a certified public
accountant, was the Chief Financial Officer of CheckFree Corporation, which
provides electronic bill payment processing for the financial services industry,
from January 1996 through August 1996. From September 1984 until January 1996,
he served as the Chief Financial Officer and a director of Servantis Systems,
Inc. ("SSI"), which provides electronic funds transfer and home banking software
to the financial services industry. His experience includes initial public
offerings, strategic business planning and investor relations.
THOMAS L. CABLE has served as Chief Technology Officer of the Company and
Bank since May 1997. From May 1996 to May 1997, he served as Vice President,
Retail Financial Services, of CheckFree Corporation, and from February 1996 to
May 1996, he was responsible for CheckFree's Retail Direct Bank Product. From
1985 to February 1996, Mr. Cable served in various capacities with SSI,
including Senior Vice President and Business Unit Manager for Home Banking
Products and Services, Vice President and Product Manager for Delivery Systems
and Associate and Product Manager for its licensed bill payment software
product. From 1978 to 1985, he was employed by First National Bank, Louisville,
Kentucky as a Programmer and Programming Team Leader responsible for the
implementation and support of SSI's bill payment product and other bank
application systems.
WARD H. CLEGG has served as a director of Resource BancShares Corporation
("Resource Bancshares") since September 1986 and has also worked with the
Company on a consulting basis. From May 1996 to December 1997, he served as a
consultant to Carolina First. Resource Bancshares was acquired by Resource
Bancshares Mortgage in December 1997. Mr. Clegg also served as Executive Vice
President of Bankers Trust of South Carolina, where he was responsible for
approximately $1.2 billion in securities processing assets as well as Advanced
Systems.
D. R. GRIMES has served as Vice Chairman and Chief Executive Officer of the
Company since January 1997. From March 1996 to January 1997, he was an
independent management consultant, and from 1978 to March 1996, he served in
various capacities with SSI, including Executive Vice President of Technology
and Chief Information Officer (1995-1996); Executive Vice President of
Technology and Marketing (1993-1995); President, Treasury Products Division
(1994); and President, Financial Productions Division (1988-1993).
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<PAGE>
J. STEPHEN HEARD has served as area Vice President, Hartford Computer Group,
Inc. since August 1998. From October 1997 to August 1998, he served as Product
Sales Executive of Vanstar Corporation, a technology services company and
value-added reseller of computer products to Fortune 1,000 companies. He has
also served as President of Heard Systems, Inc., which provides information
systems consulting services and ATM Services to the retail industry, since
January 1, 1994. In 1995 he retired from IBM after a 30-year career in
marketing, sales and systems engineering.
T. STEPHEN JOHNSON is President of T. Stephen Johnson & Associates
("TSJ&A"), a bank consulting firm located in Roswell, Georgia. The firm
specializes in mergers, acquisitions and regulatory consulting. TSJ&A has served
as advisor and consultant in the formation of approximately 70 banks in the
southeastern United States. Mr. Johnson served in a management capacity for two
large Atlanta banks before forming TSJ&A in 1987. Mr. Johnson also serves as
Chairman and Founder of the Southeast Bank Fund, Inc., a privately held
corporation that invests in the stock of banks located in the Southeast
("Southeast Bank Fund"), and as Vice Chairman of Florida Banks, Inc., a bank
holding company. In addition, he is principal owner of Bank Assets Inc., a
provider of benefit programs for directors and officers of banks.
ROBIN C. KELTON is Chairman of Kelton International Ltd., an investment
banking firm formed in January 1996 specializing in the banking and insurance
industries. Mr. Kelton is a founder and former Chairman and Chief Executive
Officer of Fox-Pitt, Kelton Ltd. and the Fox-Pitt, Kelton Group, and President
of Fox-Pitt, Kelton, Inc. These companies were formed in 1970 and comprise an
international investment banking and brokerage group based in London and New
York.
JOHN T. MOORE has practiced law in Columbia, South Carolina since 1975 and
has been a partner in the law firm of Nelson Mullins Riley & Scarborough, LLP
since 1982. His practice is concentrated in the area of debtor and creditor
rights and creditor regulatory compliance issues.
THOMAS H. MULLER, JR. has served as the Chief Financial Officer of SpectRx,
Inc., a medical device company, since December 1996. Mr. Muller has also served
as President of Muller & Associates, a firm providing financial management
services to entrepreneurial enterprises, since 1992, and Chief Financial Officer
of Nurse On Call, Inc., a healthcare software company, from 1993 to 1996. From
1993 to 1995, Mr. Muller also served as Chief Financial Officer of Amstel, Inc.,
a beverage manufacturing and marketing company. From 1984 to 1992, Mr. Muller
served as Chief Financial Officer of HBO & Company, a leading healthcare
information systems company.
DONALD S. SHAPLEIGH, JR. has served as President of the Company and the Bank
since January 1996. He has also served as a director of the Company since its
incorporation. Mr. Shapleigh has been involved in banking since 1971, having
spent 23 years in various senior positions with Bank South, N.A. and SouthTrust
Bank. From November 1994 to December 1995, Mr. Shapleigh served as Director of
Sales for Creative Solutions Group/A BISYS Company, an Atlanta-based company
that sells its patented automated voice response technology to retail financial
service companies.
H. BRYCE SOLOMON, JR. has served as a director of the Company since December
1997 and has served as Executive Vice President of CFB, Consumer Division Head
since 1989 and as President of Blue Ridge Finance, an automotive finance
subsidiary of Carolina First, since 1996. Mr. Solomon has served in several
credit lending positions for financial and credit institutions since 1976.
W. JAMES STOKES has served as Senior Vice President of TSJ&A since 1987. He
served as Head of Analysis, with a focus on mergers and acquisitions, stock
valuations, fairness opinions and regulatory assistance. Mr. Stokes also serves
as the Managing Director for the Southeast Bank Fund.
CATHERINE STOREY has served as Operations Manager of the Company and the
Bank since July 1998. From September 1997 until July 1998, she served as a Vice
President and Manager of Bank of Gwinnett County and was responsible for
managing the day-to-day operations and lending functions of the main office of
the bank. From June 1995 until September 1997, she served as a Senior Vice
President
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<PAGE>
of First Realty Mortgage Company and was responsible for the operational
functions of such company. From 1987 until 1995, she served in various
capacities with Bank South, including Vice President of Retail Operations
(1990-1995), Vice President and Regional Manager of an 18-branch network
(1988-1990) and Assistant Vice President and main office Operations Manager
(1987-1988).
MACK I. WHITTLE, JR. has served as President and Chief Executive Officer of
Carolina First since 1986. Mr. Whittle is also a director of Carolina First and
of CFB. Mr. Whittle began his banking career in 1969 with Bankers Trust of South
Carolina. From 1969 to 1986, he served in several capacities including Trust
Officer, Vice President of Commercial Business Development, City Executive for
Myrtle Beach, and Senior Vice President and Regional Officer. In January 1986,
Bankers Trust of South Carolina merged with NCNB Corp. Mr. Whittle resigned from
NCNB Corp. in May 1986 to form Carolina First.
The Board of Directors is divided into three classes with four directors in
each class. One class of directors is elected each year for a three-year term
and until their successors are selected and qualified or until their earlier
resignation or removal. Messrs. Bowers, Clegg, Heard and Stokes will serve until
our 1999 Annual Meeting of Shareholders; Messrs. Kelton, Moore, Muller and
Shapleigh will serve until our 2000 Annual Meeting of Shareholders, and Messrs.
Grimes, Johnson, Whittle and Solomon will serve until our 2001 Annual Meeting of
Shareholders.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established a Compensation Committee, which
establishes remuneration levels for officers of the Company, reviews management
organization and development, reviews significant employee benefit programs and
establishes and administers executive compensation programs. The Compensation
Committee consists of Messrs. Johnson, Heard and Moore.
The Board of Directors has also established an Audit Committee, which
recommends to the Board of Directors the independent public accountants to be
selected to audit the Company's annual financial statements and approves any
special assignments given to such accountants. The Audit Committee also reviews
the planned scope of the annual audit, any changes in accounting principles and
the effectiveness and efficiency of the Company's internal accounting staff. The
Audit Committee currently consists of Messrs. Muller, Stokes and Clegg.
The Board of Directors may from time to time establish certain other
committees to facilitate the management of the Company.
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<PAGE>
RELATIONSHIP WITH CAROLINA FIRST CORPORATION
Carolina First currently owns 1,175,000 shares, or approximately 19.1%, of
the Company's outstanding Common Stock. It also initially designated four of the
Company's directors (Messrs. Clegg, Moore, Solomon and Whittle) pursuant to a
one-time nomination right. As a result, the Federal Reserve Board has determined
that Carolina First currently "controls" the Company.
Under the FDIA, a depository institution insured by the FDIC can be held
liable for any loss incurred by, or reasonably expected to be incurred by, the
FDIC in connection with: (i) the default of a commonly controlled FDIC-insured
depository institution or (ii) any assistance provided by the FDIC to any
commonly controlled FDIC-insured depository institution in danger of default.
Because Carolina First is deemed to control the Company, Carolina First's
subsidiary bank, CFB, and the Bank are subject to these cross-guarantee
provisions. This means that any loss suffered by the FDIC with respect to CFB
could be assessed against the Bank, and, conversely, any loss suffered by the
FDIC with respect to the Bank could be assessed against CFB.
On January 13, 1999, the Federal Reserve Board informed Carolina First that
it had determined that it would no longer regard the Company as a subsidiary of
Carolina First if Carolina First reduces its investment in the Company to less
than ten percent of its outstanding voting stock, if two of the directors
initially nominated by Carolina First resign from the Company's Board of
Directors and if Carolina First complies with certain commitments made to the
Federal Reserve Board. Once Carolina First no longer controls the Company, the
FDIC's cross-guarantee provisions will no longer apply, and neither the Bank nor
CFB will bear the risk of assessment for the other's losses. Other circumstances
could arise, however, that could cause the Federal Reserve Board to conclude
that a control relationship continues to exist. In that case, the FDIC
cross-guarantee provisions would remain in effect. To reduce its investment in
the Company to less than ten percent of its outstanding voting stock, Carolina
First is selling 370,000 shares of Common Stock in this offering. This will
decrease its ownership to 805,000 shares, or 9.9%, of the Company's outstanding
Common Stock. In addition, two of the four directors initially designated by
Carolina First will resign as directors upon completion of this offering. The
Company intends to fill the resulting vacancies with outside directors whose
business experience and relationships are consistent with the Company's
Internet-based growth strategy.
After this offering, Carolina First will continue to own more than five
percent of the Company's outstanding Common Stock. As a result, Carolina First
will continue to be subject to certain Federal Reserve Board regulations
regarding its relationship with the Company. The Company has therefore agreed
with Carolina First that until the earlier of the date that Carolina First owns
less than five percent of the Company's outstanding Common Stock or July 28,
2000, the Company will not engage in any activities that are not permissible
banking or non-banking activities under applicable Federal Reserve Board
regulations. These regulations limit the activities of bank holding companies
and their affiliates to those that are determined to be closely related to
banking or to the management or control of banks. We do not believe that these
limitations will impose any material constraints on our activities.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock as of January 1, 1999 by: (i) each
shareholder known by the Company to own beneficially 5% or more of the
outstanding shares of Common Stock, (ii) each director of the Company, (iii)
each executive officer of the Company and (iv) all executive officers and
directors of the Company as a group. Unless otherwise indicated, the address for
each person listed is c/o Net.B@nk, Inc., 950 North Point Parkway, Suite 350,
Alpharetta, Georgia 30005.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO THE OFFERING SHARES BEING AFTER THE OFFERING
------------------------- SOLD IN -------------------------
NAME OF BENEFICIAL OWNER PERCENTAGE THE OFFERING NUMBER(1) PERCENTAGE
- ---------------------------------------------------- ------------- ------------ ---------- -------------
NUMBER(1)
----------
<C> <S> <C> <C> <C> <C> <C>
(i) Non-Directors,
5% Beneficial Owners:
Carolina First(2)........................ 1,175,000 19.1% 370,000 805,000 9.9%
(ii) Directors:
Robert E. Bowers(3)...................... 115,938 1.8% 0 86,954 1.4%
Ward H. Clegg............................ 50,688 1.0% 0 50,688 *
D.R. Grimes(3)........................... 179,062 2.8% 0 115,343 2.1%
J. Stephen Heard......................... 10,938 * 0 10,938 *
T. Stephen Johnson....................... 293,593(4) 4.8% 0 293,593 3.6%
Robin C. Kelton.......................... 143,438 2.3% 0 143,438 1.8%
John T. Moore............................ 10,938 * 0 10,938 *
Thomas H. Muller, Jr..................... 10,938 * 0 10,938 *
Donald S. Shapleigh, Jr.(3).............. 115,937 1.9% 0 91,094 1.4%
H. Bryce Solomon, Jr..................... 1,000 * 0 1,000 *
W. James Stokes.......................... 34,500 * 0 34,500 *
Mack I. Whittle, Jr...................... 1,176,000(5) 19.1% 370,000(5) 806,000(5) 9.9%
(iii) Executive Officers
Who Are Not Directors:
Thomas L. Cable.......................... 5,000 * 0 5,000 *
Catherine Storey......................... 0 0.0% 0 0 0.0%
(iv) All current Executive Officers and
Directors as a Group (14 persons):....... 2,147,970(6) 33.0% 370,000 1,777,970 20.9%
</TABLE>
- ------------------------
* Indicates less than one percent of the shares of Common Stock outstanding as
of January 1, 1999.
(1) Includes the following number of shares subject to options exercisable
before March 1, 1999 for the indicated reporting person:
<TABLE>
<S> <C>
Mr. Bowers................... 115,938
Mr. Clegg.................... 1,000
Mr. Grimes................... 179,062
Mr. Heard.................... 1,000
Mr. Johnson.................. 1,000
Mr. Kelton................... 1,000
Mr. Moore.................... 1,000
Mr. Muller................... 1,000
Mr. Shapleigh................ 49,687
Mr. Solomon.................. 1,000
Mr. Stokes................... 1,000
Mr. Whittle.................. 1,000
Mr. Cable.................... 5,000
</TABLE>
(2) Carolina First is located at 102 South Main Street, Greenville, South
Carolina 29601. Prior to completion of the offering, Carolina First intends
to transfer a portion of the 370,000 shares to be sold in the offering to an
affiliated charitable foundation, and, pending regulatory approval, to a
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<PAGE>
wholly owned subsidiary of Carolina First. Assuming these transfers are
made, these entities will also become selling shareholders.
(3) Mr. Bowers, Mr. Grimes and Mr. Shapleigh are also executive officers of the
Company.
(4) Includes 146,280 shares owned of record by Mr. Johnson's spouse, Mary E.
Johnson.
(5) Mr. Whittle serves as Chairman of the Board of Carolina First. As a result,
he may be deemed to beneficially own any shares owned by Carolina First.
(6) Includes 358,687 shares subject to options exercisable before March 1, 1999.
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 100,000,000 shares of
Common Stock, $.01 par value, and 10,000,000 shares of preferred stock, no par
value (the "Preferred Stock"). The following summary is qualified by reference
to the Articles and Bylaws of the Company, which are incorporated by reference
as exhibits to the Registration Statement of which this Prospectus is a part.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share in the election
of directors and on all other matters submitted to a vote of the holders of
Common Stock and do not have cumulative voting rights. The holders of Common
Stock are entitled to receive dividends, if any, as may be declared from time to
time by the Board of Directors out of legally available funds, and in the event
of liquidation, dissolution or winding-up of the Company, to share ratably in
all assets available for distribution.
PREFERRED STOCK
The authorized Preferred Stock may be issued from time to time in one or
more designated series or classes. The Board of Directors, without approval of
the shareholders, is authorized to establish the voting, dividend, redemption,
conversion, liquidation and other relative provisions as may be provided in a
particular series or class. The issuance of Preferred Stock, while providing
flexibility in connection with possible acquisitions and other corporate
purposes, could, among other things, adversely affect the voting power of the
holders of Common Stock and, under certain circumstances, make it more difficult
for a third party to acquire, or discourage a third party from acquiring, a
majority of the outstanding voting stock of the Company. The Company has no
present intention to issue any series or class of Preferred Stock.
SPECIAL MEETINGS OF SHAREHOLDERS
The Bylaws of the Company provide that special meetings of the shareholders
may be called at any time for any purpose by the Chief Executive Officer or by
the presiding officer of the Board of Directors. Either the Chief Executive
Officer or the Secretary of the Company is required to call a special meeting
when (i) requested in writing by any two or more of the directors or (ii)
requested in writing by shareholders owning shares representing at least
twenty-five percent (25%) of all the votes entitled to be cast on any issue
proposed to be considered at such meeting.
SUPERMAJORITY APPROVAL OF CERTAIN TRANSACTIONS
The Articles require the affirmative vote of the holders of two-thirds of
the voting stock to approve certain mergers, share exchanges and dispositions of
the assets of the Company unless at least two-thirds of the members of the Board
of Directors approve the proposed transaction. If such approval by the Board of
Directors is obtained, approval by the vote of a majority of the outstanding
shares entitled to vote is required. This provision may tend to discourage
attempts by third parties to
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<PAGE>
acquire the Company in a hostile takeover effort. It may also permit a minority
of directors and shareholders to prevent a business combination regardless of
the terms of the proposed transaction.
CLASSIFIED BOARD AND REMOVAL OF DIRECTORS
The Articles also provide that the Board of Directors will be divided into
three classes serving staggered three-year terms and that a director may only be
removed by the vote of two-thirds of the outstanding shares entitled to vote in
an election of directors. These provisions could enable a minority of the
Company's shareholders to prevent the removal of a director sought to be removed
by a majority of the shareholders and may tend to enhance management's ability
to retain control over the Company's affairs and to preserve the director's
present position on the Board.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Bylaws of the Company contain certain indemnification provisions
providing that directors, officers and employees or agents of the Company will
be indemnified against expenses actually and reasonably incurred by them if they
are successful on the merits of a claim or proceeding.
When a case or dispute is not ultimately determined on its merits (i.e., it
is settled), the indemnification provisions provide that the Company will
indemnify directors when they meet the applicable standard of conduct. The
applicable standard of conduct is met if the director acted in good faith and in
a manner he or she reasonably believed to be in or not opposed to the best
interests of the Company, and with respect to an employee benefit plan, for a
purpose the director believed in good faith to be in the interests of the
participants and beneficiaries of the plan. The standard of conduct with respect
to any criminal action or proceeding is met if the director had no reasonable
cause to believe his or her conduct was unlawful. Whether the applicable
standard of conduct has been met is determined by the Board of Directors, the
shareholders or independent legal counsel in each specific case.
The Company can also provide for greater indemnification than that set forth
in the Bylaws if it chooses to do so, subject to approval by the Company's
shareholders. The Company may not, however, indemnify a director for liability
arising out of circumstances which constitute exceptions to limitation of a
director's liability for monetary damages. See "--Limitation of Liability."
The indemnification provisions of the Bylaws specifically provide that the
Company may purchase and maintain insurance on behalf of any director against
any liability asserted against such person and incurred by him or her in any
such capacity, whether or not the Company would have had the power to indemnify
against such liability.
Management is not aware of any pending or threatened action, suit or
proceeding involving any of its directors or officers for which indemnification
from the Company may be sought.
LIMITATION OF LIABILITY
Article X of the Company's Articles, subject to certain exceptions,
eliminates the potential personal liability of a director for monetary damages
to the Company and to the shareholders of the Company for breach of a duty as a
director. There is no elimination of liability for: (i) a breach of duty
involving appropriation of a business opportunity of the Company, (ii) an act or
omission not in good faith or involving intentional misconduct or a knowing
violation of law, (iii) a transaction from which the director derives an
improper material tangible personal benefit or (iv) as to any payment of a
dividend or approval of a stock repurchase that is illegal under the Georgia
Business Corporation Code. The Articles do not eliminate or limit the right of
the Company or its shareholders to seek injunctive or other equitable relief not
involving monetary damages.
63
<PAGE>
Article X was adopted by the Company pursuant to the Georgia Business
Corporation Code which allows Georgia corporations, with the approval of their
shareholders, to include in their Articles of Incorporation a provision
eliminating or limiting the liability of directors, except in the circumstances
described above. Article X was included in the Company's Articles to encourage
qualified individuals to serve and remain as directors of the Company. Article X
was also included to enhance the Company's ability to secure liability insurance
for its directors at a reasonable cost. The Company maintains liability
insurance covering actions taken by its directors in their capacities as
directors. The Board of Directors believes that Article X will enable the
Company to secure such insurance on terms more favorable than if such a
provision were not included in the Articles.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is SunTrust Bank,
N.A., 58 Edgewood Avenue, Atlanta, Georgia 30303.
64
<PAGE>
UNDERWRITING
Subject to the terms and conditions of an Underwriting Agreement, dated
, 1999 (the "Underwriting Agreement"), the underwriters named below
(the "Underwriters"), who are represented by Bear, Stearns & Co. Inc., Morgan
Keegan & Company, Inc., Raymond James & Associates, Inc. and Kelton
International Ltd. (the "Representatives"), have severally agreed to purchase
from the Company and the Selling Shareholder the respective number of shares of
Common Stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF SHARES
NAME OF UNDERWRITER OF COMMON STOCK
- --------------------------------------------------------------------------- -----------------
<S> <C>
Bear, Stearns & Co. Inc....................................................
Morgan Keegan & Company, Inc...............................................
Raymond James & Associates, Inc............................................
Kelton International Ltd...................................................
-----------------
Total.................................................................. 2,370,000
-----------------
-----------------
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Stock
offered hereby are subject to approval by their counsel of certain legal matters
and to certain other conditions. The Underwriters are obligated to purchase and
accept delivery of all the shares of Common Stock offered hereby (other than
those shares covered by the over-allotment option described below) if any are
purchased.
The Underwriters propose to offer the shares of Common Stock in part to the
public at the offering price set forth on the cover page of this Prospectus and
in part to certain dealers (including the Underwriters) at such price less a
concession of not more than $ per share, of which $ may be reallowed
to other dealers. After the consummation of this offering, the offering price
and other selling terms may, from time to time, be changed by the
Representatives. No such change shall alter the amount of proceeds to be
received by the Company or the Selling Shareholder as set forth on the cover
page of this Prospectus. The Underwriters do not intend to confirm sales to any
accounts over which they exercise discretionary authority.
The Company has granted the Underwriters an option, exercisable within 30
days after the date of this Prospectus, to purchase, from time to time, in whole
or in part, up to an aggregate of additional shares of Common Stock. The
Underwriters may exercise such option solely to cover over-allotments, if any,
made in connection with this offering. To the extent that the Underwriters
exercise such option, each Underwriter will become obligated, subject to certain
conditions, to purchase its pro rata portion of such additional shares based on
such Underwriter's percentage underwriting commitment in the offering as
indicated in the preceding table. If purchased, such additional shares will be
sold by the Underwriters on the same terms as those on which they are selling
the shares.
The Company and the Selling Shareholder have agreed to indemnify the
Underwriters against certain liabilities, including certain liabilities under
the Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
Other than in the United States, no action has been taken by the Company,
the Selling Shareholder or the Underwriters that would permit a public offering
of the shares of Common Stock offered hereby in any jurisdiction which requires
action for that purpose. The shares of Common Stock offered hereby may not be
offered or sold, directly or indirectly, nor may this Prospectus or any other
offering material or advertisements in connection with the offer and sale of any
such shares of Common Stock be distributed or published in any jurisdiction,
except under circumstances that will ensure compliance
65
<PAGE>
with the applicable rules and regulations of such jurisdiction. Persons into
whose possession this Prospectus comes are advised to inform themselves about
and to observe any restrictions relating to this offering and the distribution
of this Prospectus. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any shares of Common Stock offered hereby in any
jurisdiction in which such an offer or a solicitation is unlawful.
The Company and certain of its officers, directors and existing shareholders
(including the Selling Shareholder) have agreed that, subject to certain
exceptions, during the period beginning from the date of this Prospectus and
continuing to and including the date 180 days after the date of the Prospectus,
they will not, directly or indirectly, issue, sell, offer or agree to sell,
grant any option for the sale of, pledge, make any short sale, establish an open
"put equivalent position" within the meaning of Rule 16a-1(h) under the Exchange
Act or otherwise dispose of any shares of Common Stock (or securities which are
convertible into, exercisable for or exchangeable for Common Stock) of the
Company or any of its subsidiaries, without the prior written consent of Bear,
Stearns & Co. Inc.
Certain person participating in this offering may engage in passive market
making transactions in the Common Stock in accordance with Rule 103 of
Regulation M under the Exchange Act. Rule 103 permits, upon the satisfaction of
certain conditions, underwriting and selling group members participating in a
distribution that are also registered Nasdaq market makers in the security being
distributed (or a related security) to engage in limited passive market making
transactions during the period when Regulation M would otherwise prohibit such
activity. In general, a passive market maker may not bid for or purchase a
security at a price that exceeds the highest independent bid for those
securities by a person that is not participating in the distribution and must
identify its passive market making bids on the Nasdaq electronic inter-dealer
reporting system. In addition, the net daily purchases made by a passive market
maker generally may not exceed 30% of such market maker's average daily trading
volume in the security for the two full consecutive calendar months (or any 60
consecutive days ending within 10 days) immediately preceding the date of filing
of the Registration Statement of which this Prospectus forms a part.
In addition, certain persons participating in this offering may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock during and after this offering. For instance, the Underwriters may
over-allot or otherwise create a short position in the Common Stock for their
own account by selling more shares of Common Stock than have been sold to them
by the Company and the Selling Shareholder. The Underwriters may then elect to
cover any such short position by purchasing shares of Common Stock in the open
market or by exercising the over-allotment options granted to the Underwriters.
In addition, such persons may stabilize or maintain the price of the Common
Stock by bidding for or purchasing shares of Common Stock in the open market and
may impose penalty bids, under which selling concessions allowed to syndicate
members or other broker-dealers participating in this offering are reclaimed if
shares previously distributed in this offering are repurchased in connection
with stabilization transactions or otherwise. The effect of these transactions
may be to stabilize or maintain the market price of the Common Stock at a level
above that which might otherwise prevail in the open market. The imposition of a
penalty bid may also affect the price of the Common Stock to the extent that it
discourages resales thereof. No representation is made as to the magnitude or
effect of any such stabilization or other transactions. Such transactions, if
commenced, may be discontinued at any time.
Each Underwriter has represented and agreed that (i) it has not offered or
sold, and for up to six months following the consummation of this offering, will
not offer or sell, any shares of Common Stock in the United Kingdom except to
persons whose ordinary activities involve them in acquiring, holding, managing
or disposing of investments (as principal or agent) for the purposes of their
businesses or otherwise in circumstances which do not constitute an offer to the
public in the United Kingdom for the purposes of the Public Offers of Securities
Regulations 1995, (ii) it has complied and will comply with all applicable
provisions of the Financial Services Act 1986 with respect to anything done by
it in
66
<PAGE>
relation to the Common Stock in, from or otherwise involving the United Kingdom
and (iii) it has only issued or passed on and will only issue or pass on, in the
United Kingdom, any document received by it in connection with the issue or sale
of the Common Stock to a person who is of a kind described in Article 11(3) of
the Financial Services Act 1986 (Investment Advertisements)(Exemptions) Order
1996 or to a person to whom the document may otherwise lawfully be issued or
passed on.
Kelton International Ltd., one of the Representatives, (i) is a foreign
broker-dealer with a principal place of business in the United Kingdom, (ii) is
not registered with the Securities and Exchange Commission (the "SEC") as a
broker-dealer, (iii) is not a member of the National Association of Securities
Dealers, Inc. ("NASD"), (iv) has agreed not to sell any of the shares of Common
Stock offered hereby within the United States, its territories or possessions or
to nationals or residents of the United States, other than certain underwriting
syndicate sales and (v) has agreed to comply with certain rules of NASD
Regulation, Inc. as if it were a member of the NASD.
Certain of the Underwriters may from time to time perform investment banking
and other financial services for the Company for which they may receive advisory
or transaction fees, as applicable, plus out-of-pocket expenses, of the nature
and in amounts customary in the industry for such services.
67
<PAGE>
LEGAL MATTERS
Certain legal matters in connection with the shares of Common Stock offered
hereby will be passed upon for the Company by Powell, Goldstein, Frazer &
Murphy, LLP, Atlanta, Georgia. Certain legal matters in connection with the
offering will be passed upon by Morrison & Foerster LLP, counsel to the
Underwriters.
EXPERTS
The Consolidated Financial Statements as of December 31, 1996 and 1997 and
for the year ended December 31, 1997 and from the period February 20, 1996 (date
of incorporation) to December 31, 1996 included and incorporated by reference in
this Prospectus, and the Consolidated Financial Statements as of and for the
nine months ended September 30, 1998 included in this Prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports, which are included and incorporated by reference herein, and have been
so included and incorporated in reliance upon the reports of such firm given
upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION ABOUT THE COMPANY
The Company files annual, quarterly and special reports, proxy statements
and other information with the SEC. You can receive copies of such reports,
proxy and information statements, and other information, at prescribed rates,
from the SEC by addressing written requests to the Public Reference Section of
the SEC at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549. In
addition, you can read such reports, proxy and information statements, and other
information at the public reference facilities and at the regional offices of
the SEC, Washington, D.C., New York, New York and Chicago, Illinois. Please call
the SEC at 1-800-SEC-0330 for further information on the public reference rooms.
The SEC also maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants such as the Company that
file electronically with the SEC. The address of the SEC Web site is
http://www.sec.gov.
The Company has filed with the SEC a Registration Statement on Form S-3 to
register the shares that the Company will issue in this offering. This document
is a part of the Registration Statement. This Prospectus does not include all of
the information contained in the Registration Statement. For further information
about the Company and the securities offered in this Prospectus, you should
review the Registration Statement. You can inspect or copy the Registration
Statement, at prescribed rates, at the SEC's public reference facilities at the
addresses listed above.
The SEC allows the Company to "incorporate by reference" information into
the Prospectus, which means that the Company can disclose important information
to you by referring you to another document filed separately with the SEC. The
information incorporated by reference is considered part of this Prospectus,
except for any information superseded by information contained directly in this
Prospectus or in later filed documents incorporated by reference in this
Prospectus.
This Prospectus incorporates by reference the documents listed below that
the Company previously filed with the SEC. These documents contain important
information about the Company and its finances.
(a) Annual Report on Form 10-K for the fiscal year ended December 31, 1997
(Commission No. 0-22361);
(b) Quarterly Reports on Form 10-Q for the quarters ended March 31, 1998,
June 30, 1998 and September 30, 1998 (Commission No. 0-22361); and
(c) Registration Statement on Form 8-A filed April 18, 1997 (Commission No.
0-22361).
68
<PAGE>
The Company also incorporates by reference additional documents that it may
file with the SEC between the date of this Prospectus and the completion of the
offering. These additional documents include periodic reports, such as Annual
Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form
8-K, as well as proxy statements.
You can obtain documents incorporated by reference in this Prospectus by
requesting them from:
Net.B@nk, Inc.
950 North Point Parkway
Suite 350
Alpharetta, Georgia 30005
Telephone: (770) 343-6066
www.netbank.com
Attn: Investor Relations
69
<PAGE>
NET.B@NK, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report............................................................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 and September 30, 1998........................ F-3
Consolidated Statements of Operations and Comprehensive Income (Loss) for the period from February 20, 1996
(date of incorporation) to December 31, 1996, the year ended December 31, 1997, and the nine-month periods
ended September 30, 1997 (unaudited) and 1998.............................................................. F-4
Consolidated Statements of Shareholders' Equity (Deficit) for the period from February 20, 1996 (date of
incorporation) to December 31, 1996, the year ended December 31, 1997, and the nine-month periods ended
September 30, 1997 (unaudited) and 1998.................................................................... F-6
Consolidated Statements of Cash Flows for the period from February 20, 1996 (date of incorporation) to
December 31, 1996, the year ended December 31, 1997, and the nine-month periods ended September 30, 1997
(unaudited) and 1998. ..................................................................................... F-7
Notes to Consolidated Financial Statements as of December 31, 1996 and 1997 and September 30, 1998 and for
the period from February 20, 1996 (date of incorporation) to December 31, 1996, the year ended December 31,
1997, and the nine-month periods ended September 30, 1997 (unaudited) and 1998............................. F-8
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Net.B@nk, Inc.
We have audited the consolidated balance sheets of Net.B@nk, Inc. and its
subsidiary (the "Company") as of December 31, 1996 and 1997 and September 30,
1998, and the related consolidated statements of operations and comprehensive
income (loss), shareholders' equity (deficit) and cash flows for the period from
February 20, 1996 (date of incorporation) to December 31, 1996, the year ended
December 31, 1997, and the nine-month period ended September 30, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1996 and 1997 and September 30, 1998, and the results of its operations and its
cash flows for the period from February 20, 1996 (date of incorporation) to
December 31, 1996, the year ended December 31, 1997, and the nine-month period
ended September 30, 1998, in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
December 16, 1998
F-2
<PAGE>
NET.B@NK, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- SEPTEMBER 30,
1996 1997 1998
------------ ------------- --------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents:
Cash.................................................................. $ 768,666 $ 250,535 $ 71,274
Federal funds sold.................................................... -- 28,853,057 9,596,790
------------ ------------- --------------
Total cash and cash equivalents..................................... 768,666 29,103,592 9,668,064
Securities available for sale--At fair value
(amortized cost of $0, $18,137,209 and $41,307,248, respectively)..... -- 18,054,146 41,350,339
Stock of Federal Home Loan Bank of Atlanta--At cost..................... -- 225,000 251,500
Loans receivable--Net of allowance for loan losses
of $0, $453,444 and $3,706,152, respectively.......................... -- 44,479,963 200,138,090
Accrued interest receivable............................................. -- 372,237 1,917,644
Furniture and equipment--Net............................................ 367,950 388,508 1,052,456
Bank charter............................................................ -- 344,167 333,667
Deferred income taxes................................................... -- -- 2,667,354
Loan sale proceeds receivable........................................... -- -- 20,347,536
Other assets............................................................ 109,833 252,196 5,342,742
------------ ------------- --------------
$ 1,246,449 $ 93,219,809 $ 283,069,392
------------ ------------- --------------
------------ ------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Liabilities:
Deposits.............................................................. $ -- $ 58,726,763 $ 241,324,818
Amounts payable to affiliate.......................................... 883,606 -- --
Other payables and accrued liabilities................................ 748,916 375,649 3,737,664
------------ ------------- --------------
1,632,522 59,102,412 245,062,482
Commitments and contingencies (Note 18)
Shareholders' equity (deficit):
Preferred stock, no par (10,000,000 shares authorized, none
outstanding)
Common stock, $.01 par (100,000,000 shares authorized,
1,249,342, 6,145,562 and 6,147,637 shares issued
and outstanding, respectively)...................................... 12,493 61,456 61,476
Additional paid-in capital............................................ 1,069,088 43,631,314 43,638,804
Common stock subscribed (1,354,814 shares December 31, 1996).......... 3,844,185 -- --
Stock subscriptions receivable (29,814 shares December 31, 1996)...... (4,185) -- --
Unamortized affiliate service contract expense........................ (1,440,000) -- --
Unamortized stock plan expense........................................ (28,472) (75,689) (34,988)
Accumulated deficit................................................... (3,839,182) (9,416,621) (5,685,960)
Accumulated other comprehensive income (loss), net of tax............. -- (83,063) 27,578
------------ ------------- --------------
Total shareholders' equity (deficit)................................ (386,073) 34,117,397 38,006,910
------------ ------------- --------------
$ 1,246,449 $ 93,219,809 $ 283,069,392
------------ ------------- --------------
------------ ------------- --------------
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
NET.B@NK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 20,
1996
(DATE OF NINE MONTH PERIOD ENDED
INCORPORATION) YEAR ENDED SEPTEMBER 30,
TO DECEMBER 31, DECEMBER 31, -------------------------
1996 1997 1997 1998
--------------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Interest Income:
Loans................................................ $ -- $1,095,238 $ 434,064 $ 9,301,741
Short-term investments 7,709 944,743 427,609 559,925
Investment securities................................ -- 183,184 46,467 1,881,541
--------------- ------------ ----------- ------------
Total interest income.............................. 7,709 2,223,165 908,140 11,743,207
Interest Expense:
Deposits............................................. -- 1,259,743 604,544 6,632,573
Short-term borrowings................................ -- -- -- 604,683
--------------- ------------ ----------- ------------
Total interest expense............................. -- 1,259,743 604,544 7,237,256
--------------- ------------ ----------- ------------
Net interest income.................................... 7,709 963,422 303,596 4,505,951
Provision for loan losses.............................. -- 471,706 391,707 15,559
--------------- ------------ ----------- ------------
Net interest income (loss) after provision for loan
losses............................................... 7,709 491,716 (88,111) 4,490,392
--------------- ------------ ----------- ------------
Noninterest Income:
Service charges and fees............................. -- 62,607 28,793 415,844
Management fees...................................... 60,000 -- -- --
--------------- ------------ ----------- ------------
Total noninterest income........................... 60,000 62,607 28,793 415,844
--------------- ------------ ----------- ------------
Noninterest expenses:
Salaries and benefits................................ 836,427 2,396,347 2,073,906 1,033,783
Amortization of service contract with affiliate...... 2,400,000 1,440,000 1,440,000 --
Data processing...................................... 148,159 539,013 266,052 316,719
Marketing............................................ 288,584 524,494 204,409 564,029
Customer services.................................... 4,951 310,285 152,553 887,598
Depreciation and amortization........................ 18,934 217,440 141,539 177,714
Office expenses...................................... 56,765 177,054 126,868 125,040
Occupancy............................................ 19,330 107,304 77,290 107,848
Travel and entertainment............................. 38,794 64,759 40,117 51,234
Other................................................ 94,947 355,066 156,442 595,674
--------------- ------------ ----------- ------------
Total noninterest expenses......................... 3,906,891 6,131,762 4,679,176 3,859,639
--------------- ------------ ----------- ------------
</TABLE>
(Continued)
F-4
<PAGE>
NET.B@NK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 20,
1996
(DATE OF NINE-MONTH PERIOD ENDED
INCORPORATION) YEAR ENDED SEPTEMBER 30,
TO DECEMBER 31, DECEMBER 31, ---------------------------
1996 1997 1997 1998
--------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Net income (loss) before income tax benefit.......... (3,839,182) (5,577,439) (4,738,494) 1,046,597
Income tax benefit................................... -- -- -- 2,684,064
--------------- ------------- ------------- ------------
Net income (loss).................................... (3,839,182) (5,577,439) (4,738,494) 3,730,661
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities
arising during period net of taxes of $0,
($42,790) ($26,909), and $60,466, respectively... -- (83,063) (52,326) 117,337
Less reclassification adjustment for gains included
in net income, net of taxes of $3,450 for the
nine-month period ended September 30, 1998....... -- -- -- (6,696)
--------------- ------------- ------------- ------------
Total other comprehensive income (loss)........ -- (83,063) (52,326) 110,641
--------------- ------------- ------------- ------------
Comprehensive income (loss).......................... $ (3,839,182) $ (5,660,502) $ (4,790,820) $ 3,841,302
--------------- ------------- ------------- ------------
--------------- ------------- ------------- ------------
Net income (loss) per common share and potential
common share:
Basic............................................ $ (4.33) $ (1.66) $ (1.96) $ 0.61
Diluted.......................................... $ (4.33) $ (1.66) $ (1.96) $ 0.58
Weighted average common and potential common shares
outstanding:
Basic............................................ 886,000 3,354,000 2,413,000 6,146,000
Diluted.......................................... 886,000 3,354,000 2,413,000 6,416,000
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
NET.B@NK, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNAMORTIZED
AFFILIATE UNAMORTIZED
COMMON ADDITIONAL COMMON STOCK SERVICE STOCK
COMMON STOCK PAID-IN STOCK SUBSCRIPTIONS CONTRACT PLAN
SHARES ($.01 PAR) CAPITAL SUBSCRIBED RECEIVABLE EXPENSE EXPENSE
--------- ----------- ---------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance-February 19, 1996 $ -- $ -- $ -- $ -- $ -- $ -- $ --
Proceeds from issuance of common
stock:
Incorporation, February 20,
1996.......................... 759,094 7,591 (7,362) -- -- -- --
March 31, 1996.................. 49,688 497 (482) -- -- -- --
April 1, 1996................... 142,438 1,424 18,571 -- -- -- --
September 17, 1996.............. 298,122 2,981 997,129 -- -- -- --
Contribution of services from
affiliate....................... -- -- 31,232 -- -- -- --
Issuance of 1,354,814 shares of
common stock subscriptions...... -- -- -- 3,844,185 (4,185) (3,840,000) --
Issuance of 16,562 compensatory
stock options................... -- -- 30,000 -- -- -- (30,000)
Amortization of stock plan
expense......................... -- -- -- -- -- -- 1,528
Net loss, including amortization
of service contract, for the
period from February 20, 1996
(date of incorporation) to
December 31, 1996............... -- -- -- -- -- 2,400,000 --
--------- ----------- ---------- ---------- ------------ ------------ ------------
Balance--December 31, 1996........ 1,249,342 12,493 1,069,088 3,844,185 (4,185) (1,440,000) (28,472)
Proceeds from issuance of common
stock:
March 31, 1997.................. 19,876 199 2,591 (2,790) 2,790 -- --
April 2, 1997................... 9,938 100 1,295 (1,395) 1,395 -- --
July 28, 1997................... 3,500,000 35,000 38,216,520 -- -- -- --
July 31, 1997................... 1,366,406 13,664 3,951,336 (3,840,000) -- -- --
Issuance of 163,970 compensatory
stock options................... -- -- 390,484 -- -- -- (390,484)
Amortization of service
contract........................ -- -- -- -- -- 1,440,000 --
Amortization of stock plan
expense......................... -- -- -- -- -- -- 343,267
Other comprehensive loss.......... -- -- -- -- -- -- --
Net loss for the year ended
December 31, 1997............... -- -- -- -- -- -- --
--------- ----------- ---------- ---------- ------------ ------------ ------------
Balance--December 31, 1997 6,145,562 61,456 43,631,314 -- -- -- (75,689)
Exercised stock options........... 2,075 20 7,490 -- -- -- --
Other comprehensive income........ -- -- -- -- -- -- --
Amortization of stock plan
expense......................... -- -- -- -- -- -- 40,701
Net income for the nine-month
period ended September 30,
1998............................ -- -- -- -- -- -- --
--------- ----------- ---------- ---------- ------------ ------------ ------------
Balance--September 30, 1998....... 6,147,637 $ 61,476 $43,638,804 $ -- $ -- $ -- $ (34,988)
--------- ----------- ---------- ---------- ------------ ------------ ------------
--------- ----------- ---------- ---------- ------------ ------------ ------------
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
ACCUMULATED INCOME
DEFICIT (LOSS) TOTAL
------------ -------------- ----------
<S> <C> <C> <C>
Balance-February 19, 1996 $ -- $ -- $ --
Proceeds from issuance of common
stock:
Incorporation, February 20,
1996.......................... -- -- 229
March 31, 1996.................. -- -- 15
April 1, 1996................... -- -- 19,995
September 17, 1996.............. -- -- 1,000,110
Contribution of services from
affiliate....................... -- -- 31,232
Issuance of 1,354,814 shares of
common stock subscriptions...... -- -- --
Issuance of 16,562 compensatory
stock options................... -- -- --
Amortization of stock plan
expense......................... -- -- 1,528
Net loss, including amortization
of service contract, for the
period from February 20, 1996
(date of incorporation) to
December 31, 1996............... (3,839,182) -- (1,439,182)
------------ -------------- ----------
Balance--December 31, 1996........ (3,839,182) -- (386,073)
Proceeds from issuance of common
stock:
March 31, 1997.................. -- -- 2,790
April 2, 1997................... -- -- 1,395
July 28, 1997................... -- -- 38,251,520
July 31, 1997................... -- -- 125,000
Issuance of 163,970 compensatory
stock options................... -- -- --
Amortization of service
contract........................ -- -- 1,440,000
Amortization of stock plan
expense......................... -- -- 343,267
Other comprehensive loss.......... -- (83,063) (83,063)
Net loss for the year ended
December 31, 1997............... (5,577,439) -- (5,577,439)
------------ -------------- ----------
Balance--December 31, 1997 (9,416,621) (83,063) 34,117,397
Exercised stock options........... -- -- 7,510
Other comprehensive income........ -- 110,641 110,641
Amortization of stock plan
expense......................... -- -- 40,701
Net income for the nine-month
period ended September 30,
1998............................ 3,730,661 -- 3,730,661
------------ -------------- ----------
Balance--September 30, 1998....... $(5,685,960) $ 27,578 $38,006,910
------------ -------------- ----------
------------ -------------- ----------
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
NET.B@NK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 20,
1996
(DATE OF NINE-MONTH PERIOD ENDED
INCORPORATION) YEAR ENDED SEPTEMBER 30,
TO DECEMBER DECEMBER 31, ---------------------------
1996 1997 1997 1998
--------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
(UNAUDITED)
OPERATING ACTIVITIES:
Net income (loss).................................................. $ (3,839,182) $ (5,577,439) $(4,738,494) $ 3,730,661
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation..................................................... 17,406 211,607 139,205 166,819
Amortization of service contract................................. 2,400,000 1,440,000 1,440,000 --
Amortization of stock plan expense............................... 1,528 343,267 319,704 40,701
Amortization of premiums on investment securities................ -- 49,331 15,795 207,510
Amortization of premiums on purchased loans...................... -- 116,509 48,247 1,524,177
Amortization of Bank Charter..................................... -- 5,833 2,334 10,500
Amortization of start-up costs................................... -- 2,280 -- --
Provision for loan losses........................................ -- 471,706 391,707 15,559
Contribution of services from affiliate.......................... 31,232 -- -- --
Changes in assets and liabilities which provide (use) cash:
Increase in accrued interest receivable........................ -- (372,237) (229,941) (1,545,408)
Increase in other assets....................................... (311,799) (142,363) (121,620) (5,090,546)
Increase in loan proceeds receivable........................... -- -- -- (20,347,536)
Increase (decrease) in payables and accrued
liabilities.................................................. 748,916 (373,267) (639,395) 3,362,015
Increase in deferred tax asset................................. -- -- -- (2,667,354)
--------------- ------------- ------------ -------------
Net cash used in operating activities........................ (951,899) (3,824,773) (3,372,458) (20,592,902)
INVESTING ACTIVITIES:
Purchases of securities available for sale....................... -- (19,347,623) (11,219,760) (32,834,865)
Purchase of Federal Home Loan Bank stock......................... -- (225,000) (225,000) (26,500)
Principal repayments on mortgage backed securities............... -- 1,161,085 427,284 9,457,316
Purchase of loans and premiums................................... -- (52,909,291) (32,687,877) (234,636,497)
Principal payments on loans...................................... -- 7,838,834 3,234,586 77,423,122
Purchase of Premier Bank charter................................. -- (350,000) (350,000) --
Capital expenditures............................................. (183,390) (249,906) (54,948) (488,365)
Captitalized software costs...................................... -- -- -- (342,402)
Proceeds from return of equipment................................ -- 17,738 17,738 --
--------------- ------------- ------------ -------------
Net cash used in investing activities........................ (183,390) (64,064,163) (40,857,977) (181,448,191)
FINANCING ACTIVITIES:
Assumption of Premier deposits................................... -- 5,000,000 -- --
Transfer of deposits from affiliate.............................. -- 42,977,650 42,977,650 --
Short-term borrowing, net of repayments
Increase (decrease) in deposits.................................. -- 10,749,113 (1,946,439) 182,598,055
Advances from (repayments to) affiliate.......................... 883,606 (883,606) (883,606) --
Net proceeds from the sale of stock.............................. 1,020,349 38,380,705 38,380,705 7,510
--------------- ------------- ------------ -------------
Net cash provided by financing activities.................... 1,903,955 96,223,862 78,528,310 182,605,565
--------------- ------------- ------------ -------------
Net increase (decrease) in cash
and cash equivalents............................................. 768,666 28,334,926 34,297,875 (19,435,528)
Cash and cash equivalents:
Beginning of period.............................................. -- 768,666 768,666 29,103,592
--------------- ------------- ------------ -------------
End of period.................................................... $ 768,666 $ 29,103,592 $35,066,541 $ 9,668,064
--------------- ------------- ------------ -------------
--------------- ------------- ------------ -------------
Supplemental disclosures of
cash flow information--Cash paid during the period for interest.. $ -- $ 1,184,549 $ 576,566 $ 3,764,244
--------------- ------------- ------------ -------------
--------------- ------------- ------------ -------------
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
NET.B@NK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1997 AND SEPTEMBER 30, 1998
AND FOR THE PERIOD FROM FEBRUARY 20, 1996 (DATE OF INCORPORATION)
TO DECEMBER 31, 1996, YEAR ENDED DECEMBER 31, 1997, AND
THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 (UNAUDITED) AND 1998
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 federal
savings bank. The Company was incorporated as a Georgia corporation on February
20, 1996 for the primary purpose of forming and, ultimately, operating Net.B@nk.
During the period from February 20, 1996 to July 31, 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"), a wholly owned subsidiary of Carolina First Corporation ("CFC"),
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, during the period
from February 20, 1996 to July 31, 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 ("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
"IPO"). On July 31, 1997, the Company received approximately $38.4 million in
net proceeds from the IPO 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.
2. ACCOUNTING POLICIES
The accounting and reporting policies of the Company conform with generally
accepted accounting principles and with general practice within the banking
industry. The following is a summary of the more significant policies:
CONSOLIDATION--The consolidated financial statements of the Company include
the financial statements of Net.B@nk, the Company's wholly owned subsidiary. All
intercompany balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS--The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
INTEREST RATE RISK--The Company's assets and liabilities are generally
monetary in nature, and interest rate changes have an impact on the Company's
performance. The Company decreases the effect of interest rate changes on its
performance by striving to match maturities and interest sensitivity between
loans, investment securities, deposits, and other borrowings. However, a
significant change in interest rates, specifically the prime rate, could have a
material effect on the Company's results of operations.
F-8
<PAGE>
2. ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS--For purposes of reporting cash flows, cash and
cash equivalents include cash on hand, demand deposits due from banks, and
federal funds sold to banks.
INVESTMENT SECURITIES AVAILABLE FOR SALE--Investment securities classified
as available for sale are carried at fair value. The related unrealized gain or
loss is included as a separate component of shareholders' equity, net of tax.
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. Any decreases in investment value other than temporary
declines would be recognized in operations.
ALLOWANCE FOR LOAN LOSSES--The allowance for loan losses is maintained at a
level estimated to be adequate to provide for probable losses in the loan
portfolio. As the majority of the Company's portfolio is purchased, an estimate
of the loss inherent in the purchased portfolio is made and an allowance for
loan losses is recorded by adjusting the premium associated with the purchased
loans. 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.
FURNITURE AND EQUIPMENT--Furniture and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using the straight-line
method over the estimated useful life of each asset. The Company evaluates the
estimated useful lives of assets on a periodic basis to determine whether events
or circumstances warrant revised estimated useful lives or whether any
impairment exists. Management believes no impairment existed at September 30,
1998.
BANK CHARTER--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 of Net.B@nk. 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. Management believes
that no impairment of the bank charter existed at September 30, 1998.
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 average life of the loans as an
adjustment to yield. Such premiums are classified with the loan balances to
which they relate for financial reporting purposes.
INCOME TAXES--Provisions for income taxes are based upon amounts reported in
the statements of income and include deferred taxes for net operating loss
carryforwards and temporary differences between financial statement and tax
bases of assets and liabilities using enacted tax rates for the year in which
the temporary differences are expected to reverse. The Company records a
valuation allowance when management believes it is more likely than not that
deferred tax assets will not be realized.
NET INCOME (LOSS) PER SHARE--In February 1997, Statement of Financial
Accounting Standards 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 per share is computed based on the weighted average
number of common shares outstanding during the period. Diluted net income per
share is computed based on the weighted average number of common and potential
dilutive common shares outstanding during the period. All previously reported
per share amounts have been restated to conform to SFAS 128.
F-9
<PAGE>
2. ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS--Certain reclassifications have been made to the 1996 and
1997 financial statements to conform to the 1998 presentation.
NEW ACCOUNTING PRONOUNCEMENTS--As of January 1, 1998, the Company adopted
Statement of Financial Accounting Standards 130, "Reporting Comprehensive
Income" ("SFAS 130"), and restated prior periods to conform to the presentation
required by 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.
As of April 1, 1998, the Company adopted Statement of Position 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 had been capitalized.
In June 1997, Statement of Financial Accounting Standards 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. SFAS 131 will
not have an effect on the Company's financial statements because it relates only
to disclosure.
In February 1998, Statement of Financial Accounting Standards 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 will not
have an effect on the Company's financial statements because it relates only to
disclosure.
In June 1998, Statement of Financial Accounting Standards 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.
UNAUDITED INTERIM FINANCIAL STATEMENTS--The financial statements for the
nine-month period ended September 30, 1997 were prepared on the same basis as
the audited consolidated financial statements and, in the opinion of management,
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the results of operations for this period.
Operating results for the nine-month period ended September 30, 1998 included
herein are not necessarily indicative of the results that may be expected for
the entire year.
3. ACQUISITION
Effective July 31, 1997, the Company acquired all of the outstanding stock
of Premier Bank, FSB 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. The acquisition was accounted for as a
purchase and the bank charter was recorded at $350,000 as an intangible asset.
This amount is being amortized over 25 years. Revenues, net loss and basic and
diluted net loss per common share and potential common share for the Company for
the period from February 20, 1996 to December 31, 1996
F-10
<PAGE>
3. ACQUISITION (CONTINUED)
and the year ended December 31, 1997 would not have been materially affected
assuming the transaction had occurred on February 20, 1996 and January 1, 1997,
respectively.
4. INVESTMENT SECURITIES AVAILABLE FOR SALE
The amortized cost, estimated fair value and gross unrealized gains and
losses of investment securities available for sale are as follows:
<TABLE>
<CAPTION>
GROSS
--------------------------------------- ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
AT DECEMBER 31, 1997
Collateralized mortgage obligations........................ $ 8,127,863 $ -- $ -- $ 8,127,863
United States government agencies.......................... 10,009,346 -- 83,063 9,926,283
------------- ----------- ----------- -------------
$ 18,137,209 $ -- $ 83,063 $ 18,054,146
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
AT SEPTEMBER 30, 1998
Collateralized mortgage obligations........................ $ 40,012,748 $ -- $ 4,348 $ 40,008,400
United States government agencies.......................... 1,294,500 47,439 -- 1,341,939
------------- ----------- ----------- -------------
$ 41,307,248 $ 47,439 $ 4,348 $ 41,350,339
------------- ----------- ----------- -------------
------------- ----------- ----------- -------------
</TABLE>
The amortized cost and estimated fair value of these securities at September
30, 1998, by contractual maturity, are shown below. Actual maturities may differ
from contractual maturities because the borrower may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST FAIR VALUE
------------- -------------
<S> <C> <C>
AT SEPTEMBER 30, 1998
Due after five years through ten years............................................. $ 6,364,311 $ 6,386,261
Due after ten years................................................................ 34,942,937 34,964,078
------------- -------------
$ 41,307,248 $ 41,350,339
------------- -------------
------------- -------------
</TABLE>
There were no significant sales or calls of securities for the period from
February 20, 1996 (date of incorporation) to December 31, 1996, the year ended
December 31, 1997, or during the nine-month periods ended September 30, 1997
(unaudited) and 1998.
5. LOANS
The Company's primary loan strategy is to purchase high credit quality
packages of loans and loan participations from other financial institutions. The
servicing on all loan purchases is retained by the selling institution. As of
September 30, 1998, fees paid for servicing range from 0.25% to 3.25%. A
F-11
<PAGE>
5. LOANS (CONTINUED)
summary of loans purchased during the year ended December 31, 1997 and the
nine-month period ended September 30, 1998 follows:
<TABLE>
<CAPTION>
TYPES OF LOANS PRINCIPAL PREMIUM RANGE OF STATED
PURCHASED AMOUNT AMOUNT INTEREST RATES
---------------------------------------- -------------- ------------- ---------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
First and second mortgages, auto
and unsecured loans $ 36,804,000 $ 808,832 6.0 - 12.0%
Automobile leases 6,100,000 -- 11.5%
Construction loans 5,400,000 -- 9.0%
-------------- -------------
$ 48,304,000 $ 808,832
-------------- -------------
-------------- -------------
SEPTEMBER 30, 1998
First mortgages and equity lines of
credit $ 29,300,000 $ 500,000 6.5 - 8.3%
Home equity loans, first
and second mortgages and
home equity loans 80,000,000 5,000,000 7.5 - 13.5%
Construction loans 71,000,000 4,800,000 6.0 - 16.0%
-------------- -------------
$ 180,300,000 $ 10,300,000
-------------- -------------
-------------- -------------
</TABLE>
There were no loans purchased during the year ended December 31, 1996.
Loans are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------- --------------
<S> <C> <C>
Residential mortgages......................................... $ 9,879,537 $ 62,399,665
Construction.................................................. 5,399,624 22,599,476
Equipment leases.............................................. 4,478,053 1,492,119
Commercial.................................................... -- 5,500,000
Home improvement.............................................. 4,073,964 2,455,681
Equity lines.................................................. 4,412,013 97,602,387
Auto.......................................................... 14,623,745 9,279,699
Personal...................................................... 1,165,750 2,091,343
Other......................................................... 900,721 423,872
------------- --------------
44,933,407 203,844,242
Less allowance for loan losses................................ 453,444 3,706,152
------------- --------------
Total......................................................... $ 44,479,963 $ 200,138,090
------------- --------------
------------- --------------
</TABLE>
The Company provides lines of credit and overdraft protection to its banking
customers on a nationwide basis. At December 31, 1997 and September 30, 1998,
borrowings under lines of credit totaled $29,000 and $86,000, respectively, and
unused commitments totaled $353,000 and $908,000, respectively. At December 31,
1997, all of the Company's loans were with customers residing in the
Southeastern United States. At September 30, 1998, a majority of the Company's
loans were with customers residing in the Western and Southeastern United
States.
The Company had unearned income of $351,202 and $79,279 at December 31, 1997
and September 30, 1998, respectively.
F-12
<PAGE>
6. ALLOWANCE FOR LOAN LOSS
An analysis of the allowance for loan losses for the year ended December 31,
1997 and the nine-month period ended September 30, 1998 follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
Balance--Beginning of period $ -- $ 453,444
------------ -------------
Allowance recorded in connection
with the purchase of loan pools................................................... -- 3,388,499
Provision for loan losses........................................................... 471,706 15,559
------------ -------------
Loans charged off:
Equipment leases.................................................................. (8,477) (24,449)
Auto.............................................................................. -- (113,343)
Personal.......................................................................... -- (13,558)
Other............................................................................. (9,785) --
------------ -------------
Total loans charged off......................................................... (18,262) (151,350)
------------ -------------
Balance--End of period.............................................................. $ 453,444 $ 3,706,152
------------ -------------
------------ -------------
</TABLE>
The Company considers a loan to be impaired when it is probable that it will
be unable to collect all amounts due according to the original terms of the loan
agreement. The Company measures impairment of a loan on a loan by loan basis.
Amounts of impaired loans that are not probable of collection are charged off
immediately. During the year ended December 31, 1997 and the nine-month period
ended September 30, 1998, the Company had no significant amount of impaired
loans or nonaccrual loans. The amount of impaired loans written off during the
year ended December 31, 1997 and the nine-month period ended September 30, 1998
was $18,262 and $151,350, respectively. The Company had no restructured loans as
of December 31, 1997 and September 30, 1998.
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of its lending activities to meet the financing needs of
its customers. These financial instruments include commitments to extend credit
and lines of credit. The Company's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit and standby letters of credit is represented by the contractual
amount of those instruments. The Company uses the same credit policies in making
these commitments as it does for on-balance-sheet instruments and evaluates each
customer's creditworthiness on a case-by-case basis. At December 31, 1997 and
September 30, 1998, the Company had outstanding loan commitments of $8,332,568
and $66,919,393, respectively.
The amount of collateral obtained by the Company, if deemed necessary, for
these commitments, upon extension of credit, is based on management's credit
evaluation of the customer. Collateral held, if any, varies but may include
inventory, equipment, real estate, or other property. The accounting loss the
Company would incur if the borrower failed completely to perform according to
the terms of the contract and the collateral proved to be of no value is equal
to the face amount of the commitment.
7. 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 is required to purchase all loans,
including the related servicing of these loans, originated by the Company,
unless the Company elects to retain the loans. 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.
F-13
<PAGE>
8. DEPOSITS AND OTHER BORROWINGS
The following table sets forth the dollar amount of deposits in the various
types of deposit programs offered by the Company:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 SEPTEMBER 30, 1998
-------------------------- ---------------------------
<S> <C> <C> <C> <C>
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
------------- ----------- -------------- -----------
Demand checking accounts................................ $ 293,054 0.5% $ 4,946,718 2.0%
Interest bearing:
NOW accounts.......................................... 1,573,283 2.7 4,185,874 1.7
Money markets......................................... 36,534,967 62.2 55,688,986 23.1
Certificates of deposit under $100,000................ 16,662,365 28.4 171,476,042 71.1
Certificates of deposit over $100,000................. 3,663,094 6.2 5,027,198 2.1
------------- ----------- -------------- -----------
Total deposits...................................... $ 58,726,763 100.0% $ 241,324,818 100.0%
------------- ----------- -------------- -----------
------------- ----------- -------------- -----------
</TABLE>
At September 30, 1998, the scheduled maturities of certificates of deposit
were as follows:
<TABLE>
<S> <C>
Within three months........................................................... $29,953,066
Over three months through six months.......................................... 72,941,552
Over six months through one year.............................................. 66,743,858
Over one year................................................................. 6,864,764
-----------
Total......................................................................... $176,503,240
-----------
-----------
</TABLE>
During the nine-month period ended September 30, 1998, the Company and
Net.B@nk entered into line of credit agreements with The Bankers Bank. The
Company is a party to one such agreement and Net.B@nk is a party to two such
agreements. 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. Any amounts borrowed under 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. Under the
terms of Net.B@nk's agreements, Net.B@nk may borrow $5 million under an
unsecured general purpose line and 99% of the value of its investment securities
under another line. 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 at 25 basis points above the Fed Funds
rate (5.25% at September 30, 1998). There were no amounts outstanding under the
lines of credit at September 30, 1998.
9. FURNITURE AND EQUIPMENT
Furniture and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1997 1998
------------- ------------ -------------
<S> <C> <C> <C>
Furniture and fixtures............................................... $ 40,741 $ 56,145 $ 208,711
Equipment............................................................ 402,028 618,789 1,296,989
------------- ------------ -------------
Total.............................................................. 442,769 674,934 1,505,700
Less accumulated depreciation........................................ 74,819 286,426 453,244
------------- ------------ -------------
Furniture and equipment, net..................................... $ 367,950 $ 388,508 $ 1,052,456
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
F-14
<PAGE>
10. LEASES
The Company leases its facilities and certain other equipment under
operating lease agreements. Future minimum payments as of September 30, 1998
under these leases follow:
<TABLE>
<S> <C>
1998.............................................................. $ 31,323
1999.............................................................. 128,028
2000.............................................................. 130,872
2001.............................................................. 133,788
2002.............................................................. 136,788
2003 and beyond................................................... 295,156
</TABLE>
Rent expense for the period from February 20, 1996 (date of incorporation)
to December 31, 1996, the year ended December 31, 1997, and for the nine month
periods ended September 30, 1997 (unaudited) and 1998 was $17,850, $91,868,
$69,734, and $78,689, respectively.
11. INCOME TAXES
The Company provides deferred income taxes for net operating loss
carryforwards and for temporary differences between financial statement and tax
bases of assets and liabilities using enacted tax rates in effect for the year
in which the temporary differences are expected to reverse. As of September 30,
1998, the Company had state and federal net operating loss carryforwards of
$7,088,486 which will expire in 2012 and 2011, if not utilized.
The Company did not incur any income taxes for periods prior to December 31,
1997. For the nine-month period ended September 30, 1998, the Company's income
tax benefit results from the reversal of the valuation allowance as of December
31, 1997 relating to net operating loss carryforwards offset by taxable income
for the period. 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
SFAS 109, "Accounting for Income Taxes."
The Company had deferred tax assets and deferred tax liabilities as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1997 1998
------------ ------------ -------------
<S> <C> <C> <C>
Net operating loss carryforwards..................................... $ 318,285 $2,962,303 $ 2,410,085
Service contract expense............................................. 912,000 -- --
Allowance for loan losses............................................ -- 165,369 47,561
Start-up costs....................................................... 216,297 170,761 122,229
Loan premium amortization............................................ -- -- 186,366
Other, net........................................................... 12,308 (38,402) (98,887)
------------ ------------ -------------
1,458,890 3,260,031 2,667,354
Less valuation allowance............................................. 1,458,890 3,260,031 --
------------ ------------ -------------
Net deferred tax asset............................................. $ -- $ -- $ 2,667,354
------------ ------------ -------------
------------ ------------ -------------
</TABLE>
F-15
<PAGE>
11. INCOME TAXES (CONTINUED)
The Company's income tax benefit consists of current and deferred income tax
benefit as follows:
<TABLE>
<CAPTION>
NINE-MONTH
PERIOD ENDED
SEPTEMBER 30,
1998
-------------
<S> <C>
Current............................................................................................ $ (2,504)
Deferred........................................................................................... (2,681,560)
-------------
Income tax benefit............................................................................... $(2,684,064)
-------------
-------------
</TABLE>
The benefit for income taxes is less than that computed by applying the
federal statutory rate of 34% to income before income taxes as indicated by the
following:
<TABLE>
<CAPTION>
NINE-MONTH
PERIOD ENDED
SEPTEMBER 30,
1998
-------------
<S> <C>
Income tax at statutory rate....................................................................... $ 355,843
Reversal of valuation allowance.................................................................... (3,260,031)
Other.............................................................................................. 220,124
-------------
Income tax benefit............................................................................... $(2,684,064)
-------------
-------------
</TABLE>
12. OTHER EXPENSE
Items comprising other expense follow:
<TABLE>
<CAPTION>
NINE-MONTH PERIOD ENDED
FEBRUARY 20,
1996 TO YEAR ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, -----------------------
1996 1997 1997 1998
------------ ------------ ----------- ----------
<S> <C> <C> <C> <C>
(UNAUDITED)
Accounting, legal and professional services................ $ 84,183 $ 238,650 $ 102,024 $ 350,123
Consultants................................................ -- 52,739 23,417 --
Annual report.............................................. -- -- -- 93,395
Investor relations......................................... -- 6,946 2,709 38,370
Other...................................................... 10,764 56,731 28,292 113,786
------------ ------------ ----------- ----------
$ 94,947 $ 355,066 $ 156,442 $ 595,674
------------ ------------ ----------- ----------
------------ ------------ ----------- ----------
</TABLE>
13. EMPLOYEE BENEFIT PLAN
Effective December 31, 1997, the Company adopted a 401(k) plan (the "Plan")
which covers substantially all of its employees. The Company, at its discretion,
matches 25% of employee contributions to the Plan, up to a maximum Company
contribution of 1% of an employee's compensation. The Company contributed $8,800
to the plan during the nine-month period ended September 30, 1998. To date, no
other contributions have been made under the Plan.
F-16
<PAGE>
14. SHAREHOLDERS' EQUITY
On March 17, 1997, the Company declared a 33.125 for 1 stock split of its
common stock effected in the form of a stock dividend payable on the effective
date of the initial public offering. All references to share and per share
amounts reflect the split. Also, additional paid-in capital has been charged and
common stock has been credited retroactively with $12,116 to reflect the stock
split.
Under current OTS regulations, the Company may make capital distributions in
any calendar year up to 100% of its net income to date during the calendar year
plus the amount that would reduce by one-half its "surplus capital ratio" (i.e.,
the percentage by which the Company's capital-to-assets ratio exceeds the ratio
of its fully phased-in capital requirement to its assets) at the beginning of
the calendar year. No regulatory approval of the capital distribution is
required, but prior notice must be given to the OTS.
15. 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. Generally, the options expire ten years from the date
of the grant.
A summary of the status of the Plan and the activity follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
DECEMBER 31, EXERCISE DECEMBER 31, EXERCISE SEPTEMBER 30, EXERCISE
1996 PRICE 1997 PRICE 1998 PRICE
------------- ----------- ------------ ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period... -- $ -- 16,562 $ 1.21 366,456 $ 5.98
Granted.............................. 16,562 1.21 352,875 5.82 90,000 14.63
Exercised............................ -- -- -- -- (2,075) 3.62
Terminated........................... -- -- (2,981) 3.62 (13,875) 6.75
------ ------------ -------------
Outstanding at end of period......... 16,562 $ 1.21 366,456 5.98 440,506 $ 7.74
------ ------------ -------------
------ ------------ -------------
</TABLE>
In connection with the issuance of some of the options issued during the
year ended December 31, 1997, $390,484 of compensation expense will be
recognized over the vesting period. Certain of those options vested immediately
on July 28, 1997 upon completion of the Offering, and $319,704 of unamortized
compensation expense was recognized. The other 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. Of the vested options, 236,141 cannot be exercised and sold until July
28, 2000 in accordance with an agreement signed with the OTS. As such, of the
440,506 outstanding as of September 30, 1998, 261,609 are exercisable.
F-17
<PAGE>
15. STOCK OPTIONS (CONTINUED)
The following table summarizes information about stock options outstanding
at September 30, 1998:
<TABLE>
<CAPTION>
NUMBER WEIGHTED
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE
AT REMAINING AVERAGE AT
EXERCISE SEPTEMBER 30, CONTRACTUAL EXERCISE SEPTEMBER 30,
PRICES 1998 LIFE PRICES 1998
- ----------- ------------- --------------- ----------- -------------
<S> <C> <C> <C> <C>
$ 1.21 140,781 8.3 $ 1.21 140,781
3.62 25,319 8.5 3.62 19,878
10.00 173,906 8.5 10.00 86,950
11.00 15,000 8.9 11.00 5,000
11.25 20,000 9.3 11.25 --
16.75 3,000 9.3 16.75 --
15.75 62,500 9.9 15.75 9,000
</TABLE>
The Company accounts for its stock-based compensation plan under Accounting
Principles Board 25. The Company has adopted SFAS 123 "Accounting for
Stock-Based Compensation" ("SFAS 123") for disclosure purposes. For SFAS 123
purposes, the fair value of each option granted under the Company's stock option
plan during the period from February 20, 1996 to December 31, 1996, the year
ended December 31, 1997, and the nine-month period ended September 30, 1998 was
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions used:
<TABLE>
<CAPTION>
OPTIONS OPTIONS
GRANTED GRANTED
FEBRUARY 20, AS OF NINE-MONTH
1996 TO JULY 30, PERIOD ENDED
JULY 29, 1997 SEPTEMBER 30,
1997 (IPO DATE) 1998
------------- ------------- ---------------
<S> <C> <C> <C>
Fair value.............................................................. $ 0.97 $ 7.54 $ 9.36
Expected life (years)................................................... 5 5 5
Risk-free interest rate................................................. 6.2% 5.95% 5.01%
Dividend rate........................................................... 0.0% 0.0% 0.0%
Expected volatility..................................................... 0.0% 75.0% 70.0%
Forfeiture rate......................................................... 0.0% 1.0% 1.0%
</TABLE>
Had compensation cost for the Company's stock options granted been
determined based on the fair value at the grant dates for awards under the plan
consistent with a method prescribed in SFAS 123 utilizing the assumptions
described above, the Company's net income (loss) and net income (loss) per
common share and potential common share for the period from February 20, 1996 to
F-18
<PAGE>
15. STOCK OPTIONS (CONTINUED)
December 31, 1996, the year ended December 31, 1997, and the nine-month periods
ended September 30, 1997 (unaudited) and 1998 would have changed to the proforma
amounts indicated below:
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 20,
1996 NINE-MONTH PERIOD ENDED
TO YEAR ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, ----------------------------
1996 1997 1997 1998
---------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Net income (loss):
As reported...................................... $ (3,839,182) $ (5,577,439) $ (4,738,494) $ 3,730,661
---------------- ------------ ------------- -------------
---------------- ------------ ------------- -------------
Proforma......................................... $ (4,012,534) $ (5,504,245) $ (4,640,359) $ 3,610,139
---------------- ------------ ------------- -------------
---------------- ------------ ------------- -------------
Net income (loss) per share:
As reported:
Basic.......................................... $ (4.33) $ (1.66) $ (1.96) $ 0.61
---------------- ------------ ------------- -------------
---------------- ------------ ------------- -------------
Diluted........................................ $ (4.33) $ (1.66) $ (1.96) $ 0.58
---------------- ------------ ------------- -------------
---------------- ------------ ------------- -------------
Proforma:
Basic.......................................... $ (4.53) $ (1.64) $ (1.92) $ 0.59
---------------- ------------ ------------- -------------
---------------- ------------ ------------- -------------
Diluted........................................ $ (4.53) $ (1.64) $ (1.92) $ 0.56
---------------- ------------ ------------- -------------
---------------- ------------ ------------- -------------
</TABLE>
16. EARNINGS PER SHARE
Basic and diluted net income (loss) per common and potential common share
has been calculated based on the weighted average number of shares outstanding
in accordance with SFAS 128. In accordance with SFAS 128, the following schedule
reconciles the numerators and denominators of the basic and diluted net income
per common and potential common share. The only periods presented relate to
those with net income as potential common shares would be anti-dilutive to
periods with net loss.
<TABLE>
<CAPTION>
FOR THE NINE-MONTH PERIOD ENDED
SEPTEMBER 30, 1998
----------------------------------------
<S> <C> <C> <C>
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- -----------
Net income............................................................... $ 3,730,661
Basic EPS................................................................ 3,730,661 6,146,312 $ 0.61
-----
-----
Effect of Dilutive Securities--
Options to purchase common shares...................................... 270,114
------------ -------------
Diluted EPS.............................................................. $ 3,730,661 6,416,426 $ 0.58
------------ ------------- -----
------------ ------------- -----
</TABLE>
F-19
<PAGE>
17. CAPITAL ADEQUACY
Net.B@nk is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure of Net.B@nk to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, Net.B@nk must meet specific capital guidelines that involve quantitative
measures of Net.B@nk's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. Net.B@nk's capital amounts
and classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors. In addition, under
regulatory guidelines, Net.B@nk may not pay a dividend to the Company if doing
so would cause Net.B@nk to be less than adequately capitalized, as defined
below.
Quantitative measures established by regulation to ensure capital adequacy
require Net.B@nk to maintain minimum capital amounts and ratios set forth in the
table below. Net.B@nk's regulatory agency, the OTS, requires Net.B@nk to
maintain minimum ratios of tangible capital to tangible assets of 1.5%, core
capital to tangible assets of 3.0%, and total risk-based capital to
risk-weighted assets of 8.0%. Management believes that as of September 30, 1998,
as defined in the regulations, Net.B@nk met all the capital adequacy
requirements to which it is subject.
As of September 30, 1998, the most recent notification from the OTS
categorized Net.B@nk as well capitalized under the regulatory framework for
prompt corrective action. To be well capitalized Net.B@nk must maintain minimum
Tier I, core, and risk-based capital ratios of at least 6.0%, 5.0%, and 10.0%,
respectively. There are no conditions or events since that date that management
believes would have changed the institution's category.
Net.B@nk's actual capital amounts and ratios as of December 30, 1997 and
September 30, 1998 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
TO BE CATEGORIZED
AS WELL
CAPITALIZED
FOR CAPITAL UNDER PROMPT
ADEQUACY PURPOSES CORRECTIVE
ACTUAL ACTION PLAN
---------------------- -------------------- --------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- ----- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1997
Total capital (to risk-weighted assets)................... $ 23,652 47.8% $ 3,956 8.0% $ 4,948 10.0%
Core capital (to tangible assets)......................... $ 23,735 28.3% $ 2,517 3.0% $ 4,196 5.0%
Tangible capital (to tangible assets)..................... $ 23,735 28.3% $ 1,259 1.5% N/A N/A
Tier I capital (to risk-weighted assets).................. $ 23,735 48.0% N/A N/A $ 2,969 6.0%
SEPTEMBER 30, 1998
Total capital (to risk-weighted assets)................... $ 37,642 16.7% $ 18,071 8.0% $ 22,589 10.0%
Core capital (to tangible assets)......................... $ 35,292 12.6% $ 8,421 3.0% $ 14,035 5.0%
Tangible capital (to tangible assets)..................... $ 35,292 12.6% $ 4,210 1.5% N/A N/A
Tier I capital (to risk-weighted assets).................. $ 35,292 15.6% N/A N/A $ 13,553 6.0%
</TABLE>
18. COMMITMENTS AND CONTINGENCY
As of September 30, 1998, the Company was a party to an agreement with BISYS
Corporation ("BISYS") which provides Net.B@nk with core bank processing
services. The Company also receives professional programming services from Edify
Corporation, item processing services from Intercept
F-20
<PAGE>
18. COMMITMENTS AND CONTINGENCY (CONTINUED)
(formerly NOVA Financial Corporation), and electronic bill payment processing
services from CheckFree Corporation. Under the terms of the agreements, the
Company pays ongoing monthly payments for customer support and processing
services.
For regulatory purposes, the Company is deemed to be controlled by CFC. As a
result, CFB and Net.B@nk are subject to the cross-guarantee provisions of the
Federal Deposit Insurance Act. Accordingly, any loss suffered by the Federal
Deposit Insurance Corporation (FDIC) with respect to CFB could be assessed
against Net.Bank, and conversely, any loss suffered by the FDIC with respect to
Net.B@nk could be assessed against CFB.
19. RELATED PARTY TRANSACTIONS
TRANSACTIONS WITH CFB--Certain of the Company's cash accounts and time
deposits were on deposit with CFB until July 31, 1997. The Company received
$7,709 and $0 in interest income related to these accounts during the period
from February 20, 1996 to December 31, 1996, and the year ended December 31,
1997, respectively. For the period from February 20, 1996 to December 31, 1996,
the Company received $60,000 in management fees from CFB. The Company expensed
$883,606, $1,217,459, $1,217,459 and $0 for the period from February 20, 1996 to
December 31, 1996, the year ended December 31, 1997, and the nine month periods
ended September 30, 1997 (unaudited) and 1998, respectively, for fees paid to
CFB for various advisory, consulting, custodial services, and net interest
expense. The Company recorded $31,232 in consulting expense and contributed
capital for consulting services contributed by CFB during the period from
February 20, 1996 to December 31, 1996. In addition, during the year ended
December 31, 1997, the Company purchased $36.8 million in loans from CFB. The
purchase price included a premium of $808,832. CFB continues to service these
loans for a fee ranging from .375% to 2% of the loan balance.
OTHER TRANSACTIONS--The Company paid $67,032, $104,958, $78,719 and $45,000
for the period from February 20, 1996 to December 31, 1996, the year ended
December 31, 1997, and the nine month periods ended September 30, 1997
(unaudited) and 1998, respectively, in consulting fees to a director. In
addition, the Company expensed $278,418 and $246,265 for amounts paid to a
company owned by the Chairman of the Board of the Company for accounting and
management services provided to the Company during the period from February 20,
1996 to December 31, 1996 and the year ended December 31, 1997, respectively.
F-21
<PAGE>
20. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS 107,
"Disclosures about Fair Value of Financial Instruments." The estimated fair
value amounts have been determined by the Company using available market
information and appropriate valuation methodologies. However, considerable
judgment is necessarily required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------
<S> <C> <C>
CARRYING FAIR
AMOUNT VALUE
-------------- --------------
Assets:
Cash........................................................................... $ 768,666 $ 768,666
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------
<S> <C> <C>
CARRYING FAIR
AMOUNT VALUE
-------------- --------------
Assets:
Cash........................................................................... $ 250,535 $ 250,535
Federal funds sold............................................................. 28,853,057 28,853,057
Securities available for sale.................................................. 18,054,146 18,054,146
Loans.......................................................................... 44,933,407 46,109,296
Liabilities:
Noninterest bearing deposits................................................... 293,054 293,054
Interest bearing deposits--certificates of deposit............................. 20,325,459 20,478,013
Interest bearing deposits--other............................................... 38,108,250 38,108,250
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
------------------------------
<S> <C> <C>
CARRYING FAIR
AMOUNT VALUE
-------------- --------------
Assets:
Cash........................................................................... $ 71,274 $ 71,274
Federal funds sold............................................................. 9,596,790 9,596,790
Securities available for sale.................................................. 41,350,339 41,350,339
Loans.......................................................................... 203,844,242 203,407,078
Loan sale proceeds receivable.................................................. 20,347,536 20,347,536
Liabilities:
Noninterest bearing deposits................................................... 4,946,718 4,946,718
Interest bearing deposits--certificates of deposit............................. 176,503,240 176,670,117
Interest bearing deposits--other............................................... 59,874,860 59,874,860
</TABLE>
The carrying amounts of cash and due from banks and federal funds sold are a
reasonable estimate of their fair value due to the short-term nature of these
financial instruments. The fair value of investment securities and loans is
based on quoted market prices and dealer quotes. The fair value of time deposits
is estimated by discounting the future cash flows using Net.B@nk's current
interest rates for such financial instruments.
F-22
<PAGE>
20. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
As required by SFAS 107, demand deposits are shown at their face value. No
additional value has been ascribed to core deposits, which generally bear a low
rate of or no interest and do not fluctuate in response to changes in interest
rates.
The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 1996, December 31, 1997, and
September 30, 1998. Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such amounts have not
been comprehensively revalued for purposes of these financial statements since
that date and, therefore, current estimates of fair value may differ
significantly from the amounts presented herein.
21. SUBSEQUENT EVENTS
Effective October 16, 1998, the Company borrowed $20 million from the
Federal Home Loan Bank ("FHLB") at a fixed rate of 4.22%. The borrowings are
callable after two years. If not called at the two year date, the borrowings
extend for an additional three years at 4.22%. Also, on October 16, 1998, the
Company borrowed $40 million from The Bankers Bank at 1/4% over the federal
funds rate or 5.25% at October 16, 1998. Both of these borrowings are secured by
the Company's investment securities. In addition, on December 2, 1998, the
Company borrowed $20 million from the FHLB at 1/4% over the federal funds rate
or 5.0% at December 2, 1998. The Company pledged first mortgage loans as
collateral for the borrowings.
22. CONDENSED FINANCIAL STATEMENTS OF THE COMPANY (PARENT ONLY)
As of December 31, 1996, Net.B@nk was not a subsidiary of the Company.
Therefore, the Company's financial statements as of December 31, 1996 include
only parent company amounts.
The condensed balance sheets of the Company (parent only) as of December 31,
1997 and September 30, 1998 follow:
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1997 SEPTEMBER 30, 1998
----------------- ------------------
<S> <C> <C>
Assets:
Cash..................................................................... $ 10,122,666 $ 40,232
Investment in subsidiary................................................. 23,734,818 27,348,890
Other assets............................................................. 269,357 10,617,788
----------------- ------------------
Total assets........................................................... $ 34,126,841 $ 38,006,910
----------------- ------------------
----------------- ------------------
Liabilities--Other......................................................... $ 9,444 $ --
Shareholders' equity:
Common stock............................................................. 61,456 61,476
Additional paid-in capital............................................... 43,631,314 43,638,804
Unamortized stock plan expense........................................... (75,689) (34,988)
Accumulated deficit...................................................... (9,416,621) (5,685,960)
Other comprehensive income (loss)........................................ (83,063) 27,578
----------------- ------------------
Total shareholders' equity............................................. 34,117,397 38,006,910
----------------- ------------------
$ 34,126,841 $ 38,006,910
----------------- ------------------
----------------- ------------------
</TABLE>
F-23
<PAGE>
22. CONDENSED FINANCIAL STATEMENTS OF THE COMPANY (PARENT ONLY) (CONTINUED)
The condensed statements of operations and comprehensive income and cash
flows for the year ended December 31, 1997 and the nine-month periods ended
September 30, 1997 (unaudited) and 1998 follow:
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
NINE-MONTH PERIOD ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ----------------------------
1997 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Net interest income (loss)........................................... $ 87,984 $ (54,456) $ 160,084
Expenses............................................................. (4,150,859) (4,123,188) (43,495)
------------- ------------- -------------
Income (loss) before income (loss) of Bank........................... (4,062,875) (4,177,644) 116,589
Income (loss) of Bank................................................ (1,514,564) (560,850) 3,614,072
------------- ------------- -------------
Net income (loss).................................................... (5,577,439) (4,738,494) 3,730,661
Other comprehensive income........................................... -- -- --
------------- ------------- -------------
Comprehensive income (loss).......................................... $ (5,577,439) $ (4,738,494) $ 3,730,661
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE-MONTH PERIOD ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ----------------------------
1997 1997 1998
-------------- ------------- -------------
<S> <C> <C> <C>
(UNAUDITED)
Operating activities:
Net income (loss)................................................ $ (5,577,439) $ (4,738,494) $ 3,730,661
Adjustments to reconcile net income (loss) to net cash used by
operating activities:
Amortization................................................... 1,783,266 1,759,704 151,342
(Income) loss of subsidiary.................................... 1,514,564 560,850 (3,614,072)
Changes in assets and liabilities:
(Increase) decrease in other assets.......................... 125,363 121,291 (10,348,431)
Decrease in other liabilities................................ (1,623,078) (1,598,250) (9,444)
-------------- ------------- -------------
Net cash used by operating activities...................... (3,777,324) (3,894,899) (10,089,944)
Investing activities--investment in subsidiary..................... (25,249,381) (25,249,381) --
Financing activities--net proceeds from sale of stock.............. 38,380,705 38,380,705 7,510
-------------- ------------- -------------
(Decrease) increase in cash and cash equivalents................... 9,354,000 9,236,425 (10,082,434)
Cash:
Beginning of period.............................................. 768,666 768,666 10,122,666
-------------- ------------- -------------
End of period.................................................... $ 10,122,666 $ 10,005,091 $ 40,232
-------------- ------------- -------------
-------------- ------------- -------------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest....................................................... $ 163,479 $ 163,479 $ 23,111
-------------- ------------- -------------
-------------- ------------- -------------
</TABLE>
F-24
<PAGE>
[INSIDE BACK COVER]
[Captions "Net.B@nk" and "Banking for the 21st Century" appear, followed by the
following quotes:
AT NET.B@NK, LESS STAFF ADDS UP TO HIGH INTEREST "[[email protected]] is
a virtual business; it exists only in cyberspace. It has no branches, no tellers
and no basket of lollipops for the kids . . . Opened in late 1996, the bank is a
kind of a poster company for people who preach the gospel of Internet commerce.
Grimes, a former Baltimore resident, and his lieutenants have proved that
perhaps the most conservative of all industries can make money from the
Internet."
--WASHINGTON BUSINESS JOURNAL, May 28, 1998
NET WORTH "This reputable Internet-only bank offers interest checking, Visa
check cards, free ATM usage and bill-paying options. Low overhead costs --
there's no physical banking facility -- allow [Net.B@nk] to pay higher interest
rates, even on standard checking accounts. And there are no maintenance fees!"
--TIME OUT NEW YORK, April 23, 1998
BANKS THAT WANT YOUR SAVINGS MONEY-MARKET ACCOUNTS PAY PATHETIC RATES -- EXCEPT
THESE -- "The only bank in the bunch that is truly branchless, Net.B@nk
(www.netbank.com), pays a 5.25% yield and requires only a $100 minimum balance.
Net.B@nk . . . does business only on the Internet, and says it passes along the
cost savings of having no bricks-and-mortar branches. The bank, which operates
from Atlanta, is registered with the Office of Thrift Supervision and is
FDIC-insured."
--KIPLINGER'S PERSONAL FINANCE MAGAZINE, January 1999]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROSPECTIVE INVESTORS MAY RELY ONLY ON THE INFORMATION CONTAINED IN THIS
PROSPECTUS. NEITHER NET.B@NK, INC., THE SELLING SHAREHOLDER NOR ANY UNDERWRITER
HAS AUTHORIZED ANYONE TO PROVIDE PROSPECTIVE INVESTORS WITH DIFFERENT OR
ADDITIONAL INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR IS IT
SEEKING AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR
SALE IS NOT PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT
ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF THE DELIVERY
OF THIS PROSPECTUS OR ANY SALE OF THESE SECURITIES.
NO ACTION IS BEING TAKEN IN ANY JURISDICTION OUTSIDE THE UNITED STATES TO PERMIT
A PUBLIC OFFERING OF THE COMMON STOCK OR POSSESSION OR DISTRIBUTION OF THIS
PROSPECTUS IN ANY SUCH JURISDICTION. PERSONS WHO COME INTO POSSESSION OF THIS
PROSPECTUS IN JURISDICTIONS OUTSIDE THE UNITED STATES AND CANADA ARE REQUIRED TO
INFORM THEMSELVES ABOUT AND TO OBSERVE THE RESTRICTIONS OF THAT JURISDICTION
RELATED TO THIS OFFERING AND THE DISTRIBUTION OF THIS PROSPECTUS.
-----------------------
TABLE OF CONTENTS
-----------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Certain Introductory Matters.............................................. 3
Cautionary Statement Regarding
Forward-Looking Statements.............................................. 3
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 8
Use of Proceeds........................................................... 15
Capitalization............................................................ 15
Price Range of Common Stock............................................... 16
Dividends................................................................. 16
Selected Consolidated Financial Data...................................... 17
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 18
Business.................................................................. 36
Management................................................................ 57
Relationship with Carolina First Corporation.............................. 60
Principal Shareholders.................................................... 61
Description of Capital Stock.............................................. 62
Underwriting.............................................................. 65
Legal Matters............................................................. 68
Experts................................................................... 68
Where You Can Find More Information About the Company..................... 68
Index to Consolidated Financial Statements................................ F-1
</TABLE>
2,370,000 SHARES
NET.B@NK, INC.
[LOGO]
COMMON STOCK
--------------
PROSPECTUS
--------------
BEAR, STEARNS & CO. INC.
MORGAN KEEGAN &
COMPANY, INC.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
RAYMOND JAMES &
ASSOCIATES, INC.
KELTON INTERNATIONAL LTD.
, 1999
<PAGE>
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, to be paid in connection with the sale
of the Common Stock being registered, all of which will be paid by the Company.
All amounts are estimates except the registration fee and the NASD and Nasdaq
filing fees.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............... $ 18,066
NASD filing fee................................................... 6,999
Nasdaq National Market listing fee................................ 72,875
Blue Sky fees and expenses........................................ 10,000
Accounting fees and expenses...................................... 120,000
Legal fees and expenses........................................... 150,000
Transfer Agent and Registrar Fees................................. 20,000
Printing expenses................................................. 140,000
Miscellaneous..................................................... 62,060
---------
Total........................................................... $ 600,000
---------
---------
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company's Bylaws contain certain indemnification provisions providing
that directors, officers, and employees or agents of the Company will be
indemnified against expenses actually and reasonably incurred by them if they
are successful on the merits of a claim or proceeding.
When a case or dispute is not ultimately determined on its merits (i.e., it
is settled), the indemnification provisions provide that the Company will
indemnify directors when they meet the applicable standard of conduct. The
applicable standard of conduct is met if the director acted in good faith and in
a manner he or she reasonably believed to be in or not opposed to the best
interests of the Company, and with respect to an employee benefit plan, for a
purpose the director believed in good faith to be in the interests of the
participants and beneficiaries of the plan. The standard of conduct with respect
to any criminal action or proceeding is met if the director had no reasonable
cause to believe his or her conduct was unlawful. Whether the applicable
standard of conduct has been met is determined by the Board of Directors, the
shareholders or independent legal counsel in each specific case.
The Company can also provide for greater indemnification than that set forth
in the Bylaws if it chooses to do so, subject to approval by the Company's
shareholders. The Company may not, however, indemnify a director for liability
arising out of circumstances which constitute exceptions to limitation of a
director's liability for monetary damages.
The indemnification provisions of the Bylaws specifically provide that the
Company may purchase and maintain insurance on behalf of any director against
any liability asserted against such person and incurred by him or her in any
such capacity, whether or not the Company would have had the power to indemnify
against such liability.
In addition, Article IV of the Company's Articles, subject to certain
exceptions, eliminates the potential personal liability of a director for
monetary damages to the Company and to the shareholders of the Company for
breach of a duty as a director. There is no elimination of liability for (a) a
breach
II-1
<PAGE>
of duty involving appropriation of a business opportunity of the Company, (b) an
act or omission not in good faith or involving intentional misconduct or a
knowing violation of law, (c) a transaction from which the director derives an
improper material tangible personal benefit, or (d) as to any payment of a
dividend or approval of a stock repurchase that is illegal under the Georgia
Business Corporation Code. The Articles do not eliminate or limit the right of
the Company or its shareholders to seek injunctive or other equitable relief not
involving monetary damages.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ----------- ------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
4.1 Amended and Restated Articles of Incorporation.(1)
4.2 Bylaws.(1)
4.3 Amendment to the Bylaws adopted April 22, 1997.(1)
5.1 Opinion of Powell, Goldstein, Frazer & Murphy LLP.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Powell, Goldstein, Frazer & Murphy LLP (contained in
Exhibit 5.1).
24.1 Power of Attorney (included on Signature Page).*
</TABLE>
- ------------------------
* Previously filed.
(1) Incorporated by reference to the exhibit of the same number contained in the
Company's Registration Statement on Form S-1 (Regis. No. 333-23717).
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the forgoing provisions described in Item 15 above, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(a) That, for the purposes of determining any liability under the
Securities Act, each filing of the registrant's annual report pursuant to
Section 13(a) or 15(d) of the Exchange Act (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to Section 15(d) of the
II-2
<PAGE>
Exchange Act) that is incorporated by reference in the registration statement
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial BONA FIDE offering thereof.
(b) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(c) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Amendment to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Alpharetta, State of Georgia, on the
13(th) day
of January, 1999.
<TABLE>
<S> <C> <C>
NET.B@NK, INC.
By: /s/ D. R. GRIMES
-----------------------------------------
D. R. Grimes
Chief Executive Officer
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ ------------------------------------ -------------------
<S> <C> <C>
/s/ T. STEPHEN JOHNSON* Chairman of the Board January 13, 1999
-------------------------------------------
T. Stephen Johnson
/s/ D. R. GRIMES* Vice Chairman and Chief Executive January 13, 1999
------------------------------------------- Officer**
D. R. Grimes
/s/ DONALD S. SHAPLEIGH, JR.* President, Chief Operating Officer January 13, 1999
------------------------------------------- and Director
Donald S. Shapleigh, Jr.
/s/ ROBERT E. BOWERS* Chief Financial Officer and January 13, 1999
------------------------------------------- Director***
Robert E. Bowers
/s/ WARD H. CLEGG* Director January 13, 1999
-------------------------------------------
Ward H. Clegg
/s/ J. STEPHEN HEARD* Director January 13, 1999
-------------------------------------------
J. Stephen Heard
/s/ ROBIN C. KELTON* Director January 13, 1999
-------------------------------------------
Robin C. Kelton
/s/ JOHN T. MOORE* Director January 13, 1999
-------------------------------------------
John T. Moore
/s/ THOMAS H. MULLER, JR.* Director January 13, 1999
-------------------------------------------
Thomas H. Muller, Jr.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------------ ------------------------------------ -------------------
<S> <C> <C>
/s/ H. BRYCE SOLOMON, JR.* Director January 13, 1999
-------------------------------------------
H. Bryce Solomon, Jr.
/s/ W. JAMES STOKES* Director January 13, 1999
-------------------------------------------
W. James Stokes
/s/ MACK I. WHITTLE, JR.* Director January 13, 1999
-------------------------------------------
Mack I. Whittle, Jr.
</TABLE>
- ------------------------
* By:/s/ D. R. GRIMES
-------------------------------------------------
D. R. Grimes
Attorney-in-fact
** Principal Executive Officer
*** Principal Accounting and Financial Officer
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ----------- --------------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
4.1 Amended and Restated Articles of Incorporation.(1)
4.2 Bylaws.(1)
4.3 Amendment to the Bylaws adopted April 22, 1997.(1)
5.1 Opinion of Powell, Goldstein, Frazer & Murphy LLP.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Powell, Goldstein, Frazer & Murphy LLP (contained in Exhibit 5.1).
24.1 Power of Attorney (included on Signature Page).*
</TABLE>
- ------------------------
* Previously filed.
(1) Incorporated by reference to the exhibit of the same number contained in the
Registrant's Registration Statement on Form S-1 (Regis. No. 333-23717).
<PAGE>
Exhibit 1.1
2,725,500 Shares of Common Stock
NET.B@NK, INC.
UNDERWRITING AGREEMENT
[_______], 1999
BEAR, STEARNS & CO. INC.
MORGAN KEEGAN & COMPANY, INC.
RAYMOND JAMES & ASSOCIATES, INC.
KELTON INTERNATIONAL LTD.
as Representatives of the
several Underwriters named in
Schedule I attached hereto
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, New York 10167
Ladies and Gentlemen:
Net.B@nk, Inc., a corporation organized and existing under the laws of
the State of Georgia (the "Company"), and Carolina First Bank, a bank organized
under the laws of the State of South Carolina (the "Selling Shareholder"),
propose, subject to the terms and conditions stated herein, to issue and sell to
the several underwriters named in Schedule I hereto (the "Underwriters") an
aggregate of 2,370,000 shares (the "Firm Shares") of common stock, par value
$.01 per share, of the Company (the "Common Stock"), and, for the sole purpose
of covering over-allotments in connection with the sale of the Firm Shares, the
Company proposes to issue and sell to the Underwriters, at the option of the
Underwriters, up to an additional 355,500 shares (the "Additional Shares") of
Common Stock. Of the Firm Shares, 2,000,000 are being offered by the Company and
370,000 are being offered by the Selling Shareholder. The Firm Shares and any
Additional Shares purchased by the Underwriters are referred to herein
collectively as the "Shares". The Shares are more fully described in the
Registration Statement referred to below.
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to, and agrees with, the Underwriters that:
(a) The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement, and may have filed an
amendment or amendments thereto, on Form S-3 (No. 333-[______]), for the
registration of the Shares under the Securities Act of 1933, as amended (the
"Act"). Such registration statement, including the prospectus, financial
statements and schedules, exhibits and all other documents filed as a part
thereof, as amended at the time of effectiveness of the registration statement,
including any information deemed to be a part thereof as of the time of
effectiveness pursuant to paragraph (b) of Rule
<PAGE>
430A or Rule 434 of the Rules and Regulations of the Commission under the Act
(the "Regulations"), is herein called the "Registration Statement". Any
registration statement filed pursuant to Rule 462(b) of the Regulations is
herein called the "462(b) Registration Statement", and after such filing the
term "Registration Statement" shall include the Rule 462(b) Registration
Statement. The prospectus, in the form first filed with the Commission pursuant
to Rule 424(b) of the Regulations or filed as part of the Registration Statement
at the time of effectiveness if no Rule 424(b) or Rule 434 filing is required,
is herein called the "Prospectus". The term "preliminary prospectus" as used
herein means a preliminary prospectus as described in Rule 430 of the
Regulations. Any reference herein to the Registration Statement, any preliminary
prospectus or the Prospectus shall be deemed to refer to and include the
documents incorporated by reference therein pursuant to Item 12 of Form S-3 that
were filed under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), on or before the effective date of the Registration Statement, the date
of such preliminary prospectus or the date of the Prospectus, as the case may
be, and any reference herein to the terms "amend", "amendment" or "supplement"
with respect to the Registration Statement, any preliminary prospectus or the
Prospectus shall be deemed to refer to and include (i) the filing of any
document under the Exchange Act after the effective date of the Registration
Statement, the date of such preliminary prospectus or the date of the
Prospectus, as the case may be, that is incorporated therein by reference and
(ii) any such document so filed. Neither the Commission nor the Blue Sky or
securities authority of any jurisdiction has issued a stop order suspending the
effectiveness of the Registration Statement, preventing or suspending the use of
any preliminary prospectus, the Prospectus, the Registration Statement or any
amendment or supplement thereto, refusing to permit the effectiveness of the
Registration Statement or suspending the registration or qualification of the
Shares, nor, to the Company's knowledge, has any of such authorities instituted
or threatened to institute any proceedings with respect to a stop order.
(b) At the respective time of the effectiveness of the
Registration Statement or any 462(b) Registration Statement or the effectiveness
of any post-effective amendment to the Registration Statement, when the
Prospectus is first filed with the Commission pursuant to Rule 424(b) or Rule
434 of the Regulations, when any supplement to or amendment of the Prospectus is
filed with the Commission, when any document filed under the Exchange Act is
filed and at the Closing Date and the Additional Closing Date, if any (as
hereinafter respectively defined), the Registration Statement, any 462(b)
Registration Statement and the Prospectus and any amendments thereof and
supplements thereto complied or will comply in all material respects with the
applicable provisions of the Act and the Regulations and the Exchange Act and
the respective rules and regulations thereunder and does not or will not contain
an untrue statement of a material fact and does not or will not omit to state
any material fact required to be stated therein or necessary in order to make
2
<PAGE>
the statements therein (i), in the case of the Registration Statement, not
misleading and (ii), in the case of the Prospectus, in the light of the
circumstances under which they were made, not misleading. When any related
preliminary prospectus was first filed with the Commission (whether filed as
part of the Registration Statement or any amendment thereto or pursuant to Rule
424(a) of the Regulations) and when any amendment thereof or supplement thereto
was first filed with the Commission, such preliminary prospectus and any
amendments thereof and supplements thereto complied in all material respects
with the applicable provisions of the Act and the Regulations and the Exchange
Act and the respective rules and regulations thereunder and did not contain an
untrue statement of a material fact and did not omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading. The Prospectus and any preliminary prospectus delivered to the
Underwriters for use in connection with the registration of the Shares was
identical to the electronically transmitted copies thereof filed with the
Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
No representation and warranty is made in this subsection (b), however, with
respect to any information contained in or omitted from the Registration
Statement or the Prospectus or any related preliminary prospectus or any
amendment thereof or supplement thereto in reliance upon and in conformity with
information furnished in writing to the Company by or on behalf of any
Underwriter through Bear, Stearns & Co. Inc. as herein stated expressly for use
in connection with the preparation thereof. If Rule 434 is used, the Company
will comply with the requirements of Rule 434.
(c) Deloitte & Touche LLP, who have certified the financial
statements and supporting schedules included in the Registration Statement, are
independent public accountants, as required by the Act and the Regulations.
(d) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as set forth in
the Registration Statement and the Prospectus, there has been no material
adverse change or any development involving a prospective material adverse
change in the business, prospects, properties, operations, condition (financial
or other), stockholders' equity or results of operations of either the Company
or its sole subsidiary Net.B@nk, a federally-chartered stock savings bank (the
"Bank") (the effect of each such change or development being referred to herein
as a "Material Adverse Effect", whether or not arising from transactions in the
ordinary course of business, and since the date of the latest balance sheet
presented in the Registration Statement and the Prospectus, neither the Company
nor the Bank has incurred or undertaken any liabilities or obligations, direct
or contingent, which are material to the Company or the Bank, respectively,
except for liabilities or obligations which are reflected in the Registration
Statement and the Prospectus.
(e) This Agreement and the transactions contemplated hereby have
been duly and validly authorized by the Company, and this Agreement has been
duly and validly executed and delivered by the Company.
(f) The execution, delivery and performance of this Agreement and
the consummation of the transactions contemplated hereby do not and will not (i)
conflict with or result in a breach of any of the terms and provisions of, or
constitute a default (or an event which with notice or lapse of time, or both,
would constitute a default) under, require approval or consent under, or result
in the creation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or the Bank, respectively, any agreement,
instrument, franchise, license or permit to which either of the Company or the
Bank is a party or by which any of the Company's or the Bank's respective
properties or assets may be bound or (ii) violate or conflict with any provision
of the charter or by-laws of the Company or the Bank, respectively, decree,
order, statute, rule or regulation of any court or any public, governmental or
regulatory agency or body having jurisdiction over either of the Company or the
Bank or any of
3
<PAGE>
their respective properties or assets. No consent, approval, authorization,
order, registration, filing, qualification, license or permit of or with any
court or any public, governmental or regulatory agency or body having
jurisdiction over either of the Company or the Bank or any of their respective
properties or assets is required for the execution, delivery and performance of
this Agreement or the consummation of the transactions contemplated hereby,
including the issuance, sale and delivery of the Shares to be issued, sold and
delivered by the Company hereunder, except the registration under the Act of the
Shares and such consents, approvals, authorizations, orders, registrations,
filings, qualifications, licenses and permits as may be required under state
securities or Blue Sky laws in connection with the purchase and distribution of
the Shares by the Underwriters.
(g) All of the outstanding shares of capital stock of the Company
(including the Shares to be sold by the Selling Shareholder hereunder) are duly
and validly authorized and issued, fully paid and nonassessable, and none of
such shares was issued in violation of or is now subject to any preemptive or
similar rights. The Shares to be issued and sold by the Company hereunder, when
issued, delivered and sold in accordance with this Agreement, will be duly and
validly issued and outstanding, fully paid and nonassessable, and will not have
been issued in violation of or be subject to any preemptive or similar rights.
The Company had, at [__________], 1999, an authorized and outstanding
capitalization as set forth in the Registration Statement and the Prospectus.
The Common Stock, the Firm Shares and the Additional Shares, conform to the
descriptions thereof contained in the Registration Statement and the Prospectus.
Except as disclosed in or specifically contemplated by the Registration
Statement and the Prospectus, there are no outstanding options, warrants or
other rights calling for the issuance of, and no commitments, obligations, plans
or arrangements to issue, any shares of capital stock of the Company or any
security convertible into or exchangeable for capital stock of the Company. The
outstanding stock options relating to the Common Stock have been duly authorized
and validly issued and conform to the descriptions thereof contained in the
Registration Statement and the Prospectus. Other than the Bank, the Company does
not own, directly or indirectly, any capital stock or other equity securities of
any corporation or have any ownership interest in any partnership, joint venture
or other association. All offers and sales of the Company's capital stock prior
to the date hereof were at all relevant times duly registered under the Act or
were exempt from the registration requirements of the Act and were duly
registered or the subject of an available exemption from the registration
requirements of the applicable state securities or Blue Sky laws.
(h) The Company has been duly organized and is validly existing
as a corporation in good standing under the laws of its jurisdiction of
incorporation. The Company is duly qualified and in good standing as a foreign
corporation in each jurisdiction in which the character or location of its
properties (owned, leased or licensed) or the nature or conduct of its business
makes such qualification necessary, except for those failures to be so qualified
or in good standing which will not in the aggregate have a Material Adverse
Effect on the Company and the Bank taken as a whole. The Company is duly
registered under the Savings and Loan Holding Company Act ("SLHCA") and the
Georgia Bank Holding Company Act ("GBHCA"). Neither the Company nor the Bank is
subject to any current formal arrangement or memorandum of understanding with,
or cease and desist order by, any banking or similar agency.
(i) The Bank has been duly organized and is validly existing as a
federally-chartered stock savings bank under the laws of the United States. The
Bank is duly qualified and in good standing as a foreign corporation in each
jurisdiction in which the character or location of its properties (owned, leased
or licensed) or the nature or conduct of its business
4
<PAGE>
makes such qualification necessary, except for those failures to be so qualified
or in good standing which will not in the aggregate have a Material Adverse
Effect on the Bank. The Bank is a member in good standing of the Federal Home
Loan Bank of Atlanta (the "FHLB of Atlanta"), and the Bank's deposit accounts
are insured by the Federal Deposit Insurance Corporation (the "FDIC") and no
proceeding for the termination or revocation of such issuance is pending or
threatened.
(j) Each of the Company and the Bank has all requisite power and
authority, and all necessary consents, approvals, authorizations, orders,
registrations, qualifications, licenses and permits of and from all public,
regulatory or governmental agencies and bodies, to own, lease and operate its
respective properties and conduct its respective business as now being conducted
and as described in the Registration Statement and the Prospectus, and no such
consent, approval, authorization, order, registration, qualification, license or
permit contains a materially burdensome restriction not adequately disclosed in
the Registration Statement and the Prospectus. All of the outstanding shares of
capital stock of the Bank are duly and validly issued, fully paid and
nonassessable and are owned by the Company free and clear of any liens,
mortgages, pledges, charges, security interests, claims, encumbrances or other
defects in title whatsoever.
(k) Neither the Company nor the Bank is in violation of its
charter or by-laws, as the case may be, or in default in the performance or
observance of any material obligation, agreement, covenant or condition
contained in any material bond, debenture, note or other evidence of
indebtedness or in any material contract, indenture, mortgage, deed of trust,
loan or credit agreement, lease, joint venture or other agreement or instrument
to which either of the Company or the Bank is a party or by which any of its
respective properties may be bound, or in violation of any law, order, rule,
regulation, writ, injunction, judgment or decree of any court or governmental
agency or body, the violation of which would have a Material Adverse Effect on
the Company or the Bank.
(l) Except as described in the Prospectus, there is no litigation
or governmental proceeding to which either of the Company or the Bank is a party
or to which any property of the Company or the Bank is subject or which is
pending or, to the knowledge of the Company, contemplated against either the
Company or the Bank.
(m) Neither the Company nor the Bank has taken, nor will take,
directly or indirectly, any action designed to cause or result in, or which
constitutes or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of the shares of Common Stock to
facilitate the sale or resale of the Shares.
(n) The financial statements, including the notes thereto, and
supporting schedules included in the Registration Statement and the Prospectus
present fairly the consolidated financial position of the Company and its
consolidated subsidiaries as of the dates indicated and the results of their
operations for the periods specified; except as otherwise stated in the
Registration Statement, said financial statements have been prepared in
conformity with generally accepted accounting principles ("GAAP") applied on a
consistent basis; and the supporting schedules included in the Registration
Statement present fairly the information required to be stated therein. The
selected financial data and the summary financial information
5
<PAGE>
included in the Registration Statement and the Prospectus present fairly the
information shown therein and have been compiled on a basis consistent with that
of the financial statements included in the Registration Statement and the
Prospectus. No other financial statements are required by Form S-3 or otherwise
to be included in the Registration Statement or the Prospectus other than those
included therein.
(o) Each of the Company and the Bank has filed all federal,
state, local and foreign tax returns that are required to be filed and have paid
all taxes shown thereon and all assessments received by either of them to the
extent that such taxes have become due and are not being contested in good
faith. Except as disclosed in the Registration Statement and the Prospectus,
there is no tax deficiency that has been or might reasonably be expected to be
asserted or threatened against the Company or the Bank.
(p) Each of the Company and the Bank has good and marketable
title in fee simple to all items of real property and good and marketable title
to all personal property owned by it, in each case free and clear of all liens,
encumbrances and defects except such as are described or referred to in the
Prospectus or such as do not materially affect the value of such property and do
not interfere with the use made or proposed to be made of such property by the
Company or the Bank, respectively. Any real property and buildings held under
lease by either of the Company or the Bank is held under valid, existing and
enforceable leases with such exceptions as are not material and do not interfere
with the use made or proposed to be made of such property and buildings by the
Company or the Bank, respectively.
(q) Each of the Company and the Bank owns or possesses adequate
patent rights, licenses, inventions, copyrights, know-how (including trade
secrets and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures), trademarks, service marks, trade names and
other intellectual property (collectively, "Intellectual Property") necessary to
carry on the business it now operates, and neither the Company nor the Bank has
received any notice or is otherwise aware of (i) any claim, action or demand of
any person in the United States or elsewhere or any proceeding in the United
States or elsewhere, pending or threatened, that (A) challenges the ownership
interests of the Company or the Bank in any of the Intellectual Property or (B)
alleges that any product or service of the Company or the Bank infringes or
misappropriates the Intellectual Property rights of others, which claim, action,
demand or proceeding (including, without limitation, infringement,
misappropriation and unfair competition), if the subject of any unfavorable
decision, ruling or finding, or invalidity or inadequacy could reasonably be
expected to have, in the aggregate with all other such claims, actions, demands
and proceedings, a Material Adverse Effect on the Company or the Bank,
respectively or (ii) any facts or circumstances that would render any
Intellectual Property invalid or inadequate to protect the interest of the
Company or the Bank.
(r) No relationship, direct or indirect, exists between or among
the Company or the Bank, on the one hand, and the directors, officers,
shareholders, customers or suppliers of the Company or the Bank, on the other
hand, that is required by the Act to be described in the Registration Statement
and the Prospectus that is not so described.
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(s) The Common Stock currently outstanding is listed on the
Nasdaq SmallCap Market, and application has been made to list the Common Stock
and the Shares on the Nasdaq National Market.
(t) Except as described in the Prospectus, no holder of
securities of the Company has any rights to the registration of securities of
the Company as a result of the filing of the Registration Statement or otherwise
in connection with the sale of the Shares contemplated hereby.
(u) The Company is not, and upon consummation of the transactions
contemplated hereby will not be, subject to registration as an "investment
company" under the Investment Company Act of 1940, as amended.
(v) There are no existing or, to the knowledge of the Company,
threatened labor disputes with any employees of the Company or the Bank that are
likely, in the aggregate, to have a Material Adverse Effect on either the
Company or the Bank.
(w) Each of the Company and the Bank (i) is in compliance with
any and all applicable foreign, federal, state and local laws and regulations
relating to the protection of human health and safety, the environment or
hazardous or toxic substances or wastes, pollutants or contaminants
("Environmental Laws"), (ii) has received all permits, licenses or other
approvals required of it under applicable Environmental Laws to conduct its
respective business and (iii) is in compliance with all terms and conditions of
any such permit, license or approval, except where such noncompliance, failure
to receive required permits, licenses or other approvals or failure to comply
with the terms and conditions of such permits, licenses or approvals will not in
the aggregate have a Material Adverse Effect on either the Company or the Bank.
(x) Each employee benefit plan, within the meaning of Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), that is maintained, administered or contributed to by either of the
Company or the Bank for employees or former employees of the Company or the
Bank, respectively, has been maintained in compliance with its respective terms
and the requirements of any applicable statutes, orders, rules and regulations,
including, but not limited to, ERISA and the Internal Revenue Code of 1986, as
amended, (the "Code"). No prohibited transaction, within the meaning of Section
406 of ERISA or Section 4975 of the Code, has occurred with respect to any such
plan, excluding transactions effected pursuant to a statutory or administrative
exemption. For each such plan that is subject to the funding rules of Section
412 of the Code or Section 302 of ERISA, no "accumulated funding deficiency", as
defined in Section 412 of the Code, has been incurred, whether or not waived,
and the fair market value of the assets of each such plan (excluding for these
purposes accrued but unpaid contributions) exceeded the present value of all
benefits accrued under such plan, as determined using reasonable actuarial
assumptions.
(y) Each of the Company and the Bank maintains a system of
internal accounting controls that, taken as a whole, are sufficient to provide
reasonable assurance that (i) transactions are executed in accordance with
management's general or specific authorizations; (ii) transactions are recorded
as necessary to permit the preparation of financial statements in
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conformity with GAAP and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(z) Each of the Company and the Bank maintains insurance of the
types and in the amounts generally deemed adequate for its respective business,
including, without limitation, insurance covering real and personal property
owned or leased by it against theft, damage, destruction, acts of vandalism and
all other material risks customarily insured against, all of which insurance is
in full force and effect. Neither the Company nor the Bank has any reason to
believe that it will not be able to renew existing insurance coverage as and
when such coverage expires or to obtain similar coverage from similar insurers
as may be necessary to continue its respective business.
(aa) The conditions for use of Form S-3, as set forth in the
General Instructions thereto, have been satisfied.
(bb) The documents incorporated or deemed to be incorporated by
reference in the Registration Statement or the Prospectus, at the time they were
or hereafter are filed with the Commission, complied and will comply in all
material respects with the requirements of the Exchange Act and the rules and
regulations of the Commission under the Exchange Act, and, when read together
with the other information in the Prospectus, at the time the Registration
Statement and any amendments thereto become effective and at the Closing Date
and the Additional Closing Date, if any, will not contain an untrue statement of
a material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
(cc) The descriptions in the Registration Statement and the
Prospectus of the contracts, leases and other legal documents therein described
present fairly the information required to be shown, and there are no contracts,
leases or other documents of a character required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement which are not described or filed as required.
(dd) The Bank is a member in good standing of the FHLB of
Atlanta, and the Bank's deposit accounts are insured by the FDIC to the fullest
extent provided under applicable law. No proceeding for the termination or
revocation of such insurance is pending or, to the knowledge of the Company or
the Bank, threatened.
(ee) The Company will comply with Rule 463 of the Regulations.
2. REPRESENTATIONS AND WARRANTIES OF THE SELLING SHAREHOLDER. The
Selling Shareholder represents and warrants to, and agrees with, the
Underwriters and the Company that:
(a) The Selling Shareholder is the lawful owner of the Shares to
be sold by the Selling Shareholder pursuant to this Agreement and has, and on
the Closing Date will have, good and clear title to such Shares, free of all
restrictions on transfer, liens, encumbrances, security interests and claims
whatsoever.
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(b) Upon delivery of and payment for such Shares pursuant to this
Agreement, good and clear title to such Shares will pass to the Underwriters,
free of all restrictions on transfer, liens, encumbrances, security interests
and claims whatsoever.
(c) The Selling Shareholder has, and on the Closing Date will
have, full legal right, power and authority to enter into this Agreement and the
Custody Agreement between the Selling Shareholder and [______________], as
Custodian (the "Custody Agreement") and to sell, assign, transfer and deliver
such Shares in the manner provided herein and therein, and this Agreement and
the Custody Agreement have been duly authorized, executed and delivered by the
Selling Shareholder and each of this Agreement and the Custody Agreement is a
valid and binding agreement of the Selling Shareholder enforceable in accordance
with its terms, except to the extent which rights to indemnity and contribution
provided hereunder may be limited by applicable law.
(d) The power of attorney signed by the Selling Shareholder
appointing [___________] and [____________], or either one of them, as the
Selling Shareholder's attorney-in-fact, to the extent set forth therein with
regard to the transactions contemplated hereby and by the Registration
Statement, the Prospectus and the Custody Agreement, has been duly authorized,
executed and delivered by or on behalf of the Selling Shareholder and is a valid
and binding instrument of the Selling Shareholder enforceable in accordance with
its terms, and, pursuant to such power of attorney, the Selling Shareholder has
authorized [___________] and [____________], or either one of them, to execute
and deliver, except for this Agreement, any document necessary or desirable in
connection with the transactions contemplated hereby and to deliver the Shares
to be sold by the Selling Shareholder pursuant to this Agreement.
(e) The Selling Shareholder has not taken, and will not take,
directly or indirectly, any action designed to, or which might reasonably be
expected to, cause or result in stabilization or manipulation of the price of
any security of the Company to facilitate the sale or resale of the Shares
pursuant to the distribution contemplated by this Agreement, and other than as
permitted by the Act, the Selling Shareholder has not distributed and will not
distribute any prospectus or other offering material in connection with the
offering and sale of the Shares.
(f) The execution, delivery and performance of this Agreement by
the Selling Shareholder, compliance by the Selling Shareholder with all the
provisions hereof and the consummation of the transactions contemplated hereby
will not require any consent, approval, authorization or other order of any
court, regulatory body, administrative agency or other governmental body (except
as such may be required under the Act, state securities laws or Blue Sky laws)
and will not conflict with or constitute a breach of any of the terms or
provisions of, or a default under, the charter or by-laws of the Selling
Shareholder or any agreement, indenture or other instrument to which the Selling
Shareholder is a party or by which the Selling Shareholder or property of the
Selling Shareholder is bound, or violate or conflict with any laws,
administrative regulation or ruling or court decree applicable to the Selling
Shareholder or property of the Selling Shareholder.
(g) The Registration Statement does not, and will not on the
Closing Date (or the Additional Closing Date, if any), contain any untrue
statement of a material fact or omit to state
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<PAGE>
any material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading.
(h) Neither the Selling Shareholder nor any of the Selling
Shareholder's affiliates directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with,
or had any other association with (within the meaning of Article I of the Bylaws
of the National Association of Securities Dealers, Inc. (the "NASD")), any
member firm of the NASD.
(i) At any time during the period described in Section 5(a)(ii)
hereof, if there is any change in the information referred to in Section 2(g)
above, the Selling Shareholder will immediately notify you of such change.
(j) The Selling Shareholder has been duly organized and is
validly existing as a federally-chartered stock savings bank under the laws of
the United States.
(k) To the best of the Selling Shareholder's knowledge, all of
the Company's representations and warranties set forth in Section 1 above are
true and correct.
3. PURCHASE, SALE AND DELIVERY OF THE SHARES.
(a) On the basis of the representations, warranties, covenants
and agreements herein contained, but subject to the terms and conditions herein
set forth, the Company and the Selling Shareholder agree to issue and sell, as
applicable, to the Underwriters the number of Firm Shares set forth opposite
their respective names in Schedule II hereto, and the Underwriters, severally
and not jointly, agree to purchase from the Company and the Selling Shareholder,
at a purchase price per share of $[_______], the number of Firm Shares set forth
opposite the respective names of the Underwriters in Schedule I hereto, plus any
additional number of Shares which they may individually become obligated to
purchase pursuant to the provisions of Section 10 hereof.
(b) Payment of the purchase price for and delivery of the Firm
Shares shall be made at the offices of [____________], or at such other place as
shall be agreed upon by you, the Company and the Selling Shareholder, at [_____]
A.M., [_________] time, on the third Business Day (as permitted under Rule
15c6-1 under the Exchange Act) (unless postponed in accordance with the
provisions of Section 10 hereof) following the date of the effectiveness of the
Registration Statement (or, if the Company has elected to rely upon Rule 430A of
the Regulations, the third Business Day (as permitted under Rule 15c6-1 under
the Exchange Act) after the determination of the public offering price of the
Shares), or such other time not later than ten Business Days after such date as
shall be agreed upon by you, the Company and the Selling Shareholder (such time
and date of payment and delivery being herein called the "Closing Date"). As
used herein, the term "Business Day" means any day other than a day on which
banks are permitted or required to be closed in New York City. Payment shall be
made by wire transfer in same day funds against delivery to you at the offices
of Bear, Stearns & Co. Inc., 245 Park Avenue, New York, New York 10167 for the
respective accounts of the Underwriters of certificates for the Shares to be
purchased by them. Certificates for the Shares shall be registered in such name
or names and in such authorized denominations as you may request in
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writing at least two full Business Days prior to the Closing Date. The Company
and the Selling Shareholder shall permit you to examine and package such
certificates for delivery at least one full Business Day prior to the Closing
Date.
(c) In addition, the Company hereby grants to the Underwriters
the option to purchase up to 355,500 Additional Shares at the same purchase
price per share to be paid by the Underwriters to the Company and the Selling
Shareholder for the Firm Shares as set forth in this Section 3, for the sole
purpose of covering over-allotments in the sale of Firm Shares by the
Underwriters. This option may be exercised at any time, or from time to time, in
whole or in part, on or before the thirtieth day following the date of the
Prospectus, by written notice by you to the Company. Such notice shall set forth
the aggregate number of Additional Shares as to which the option is being
exercised and the date and time, as reasonably determined by you, when the
Additional Shares are to be delivered (such date and time herein referred to as
the "Additional Closing Date"); PROVIDED, HOWEVER, that an Additional Closing
Date shall not be earlier than the Closing Date or earlier than the second full
Business Day after the date on which the option shall have been exercised nor
later than the eighth full Business Day after the date on which the option shall
have been exercised (unless such time and date are postponed in accordance with
the provisions of Section 10 hereof). Certificates for the Additional Shares
shall be registered in such name or names and in such authorized denominations
as you may request in writing at least two full Business Days prior to the
Additional Closing Date. The Company shall permit you to examine and package
such certificates for delivery at least one full Business Day prior to the
Additional Closing Date.
The number of Additional Shares to be sold to each Underwriter shall be
the number which bears the same ratio to the aggregate number of Additional
Shares being purchased as the number of Firm Shares set forth opposite the name
of such Underwriter in Schedule I hereto (or such number increased as set forth
in Section 10 hereof) bears to [__________], subject, however, to such
adjustments to eliminate any fractional shares as you in your sole discretion
shall make.
Payment of the purchase price for the Additional Shares shall be made
to the Company by wire transfer in same day funds at the offices of [________],
or at such other place as shall be agreed upon by you and the Company, against
delivery to you at the offices of Bear, Stearns & Co. Inc., 245 Park Avenue, New
York, New York 10167 for the respective accounts of the Underwriters of
certificates for the Additional Shares to be purchased by them.
4. OFFERING. Upon your authorization of the release of the Firm Shares,
the Underwriters propose to offer the Shares for sale to the public upon the
terms set forth in the Prospectus.
5. COVENANTS OF THE COMPANY; COVENANTS OF THE SELLING SHAREHOLDER.
(a) The Company covenants and agrees with the Underwriters that:
(i) If the Registration Statement has not yet been declared
effective, the Company will use its best efforts to cause the
Registration Statement and any amendments thereto to become effective
as promptly as possible, and if Rule 430A is
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used or the filing of the Prospectus is otherwise required under Rule
424(b) or Rule 434, the Company will file the Prospectus (properly
completed if Rule 430A has been used) pursuant to Rule 424(b) or Rule
434 within the prescribed time period and will provide evidence
satisfactory to you of such timely filing. If the Company elects to
rely on Rule 434, the Company will prepare and file a term sheet that
complies with the requirements of Rule 434.
The Company will notify you immediately (and, if requested by you, will
confirm such notice in writing) (i) when the Registration Statement and any
amendments thereto become effective, (ii) of any request by the Commission for
any amendment of or supplement to the Registration Statement or the Prospectus
or for any additional information, (iii) of the mailing or the delivery to the
Commission for filing of any amendment of or supplement to the Registration
Statement or the Prospectus, (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or any
post-effective amendment thereto or of the initiation, or the threatening, of
any proceedings therefor, (v) of the receipt of any comments from the
Commission, and (vi) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the Shares for sale in any
jurisdiction or the initiation or threatening of any proceeding for that
purpose. If the Commission shall propose or enter a stop order at any time, the
Company will make every reasonable effort to prevent the issuance of any such
stop order and, if issued, to obtain the lifting of such order as soon as
possible. The Company will not file any amendment to the Registration Statement,
any filing under Rule 462(b) of the Regulations, or any amendment of or
supplement to the Prospectus (including the prospectus required to be filed
pursuant to Rule 424(b) or Rule 434 of the Regulations) that differs from the
prospectus on file at the time of the effectiveness of the Registration
Statement before or after the effective date of the Registration Statement or
file any document under the Exchange Act if such document would be deemed to be
incorporated by reference into the Prospectus to which you shall reasonably
object in writing after being timely furnished in advance a copy thereof.
(ii) If at any time when a prospectus relating to the Shares
is required to be delivered under the Act any event shall have occurred
as a result of which the Prospectus as then amended or supplemented
would, in the judgment of the Underwriters or the Company, include an
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made,
not misleading, or if it shall be necessary at any time to amend or
supplement the Prospectus or Registration Statement to comply with the
Act or the Regulations, or to file under the Exchange Act so as to
comply therewith any document incorporated by reference in the
Registration Statement or the Prospectus or in any amendment thereof or
supplement thereto, the Company will notify you promptly and prepare
and file with the Commission an appropriate amendment or supplement (in
form and substance satisfactory to you) which will correct such
statement or omission or which will effect such compliance and will use
its best efforts to have any amendment to the Registration Statement
declared effective as soon as possible.
(iii) The Company will promptly deliver to you three signed
copies of the Registration Statement, including exhibits and all
documents incorporated by
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reference therein and all amendments thereto, and the Company will
promptly deliver to each of the Underwriters such number of copies of
any preliminary prospectus, the Prospectus, the Registration Statement,
all amendments of and supplements to such documents, if any, and all
documents incorporated by reference in the Registration Statement and
Prospectus or any amendment thereof or supplement thereto, without
exhibits, as you may reasonably request.
(iv) The Company will endeavor in good faith, in cooperation
with you, at or prior to the time of effectiveness of the Registration
Statement, to qualify the Shares for offering and sale under the
securities laws relating to the offering or sale of the Shares of such
jurisdictions as you may designate and to maintain such qualification
in effect for so long as required for the distribution thereof; except
that in no event shall the Company be obligated in connection therewith
to qualify as a foreign corporation or to execute a general consent to
service of process.
(v) The Company will make generally available (within the
meaning of Section 11(a) of the Act) to its security holders and to you
as soon as practicable, but not later than 45 days after the end of its
fiscal quarter in which the first anniversary date of the effective
date of the Registration Statement occurs, an earning statement (in
form complying with the provisions of Rule 158 of the Regulations)
covering a period of at least twelve consecutive months beginning after
the effective date of the Registration Statement.
(vi) During the period of 180 days from the date of the
Prospectus, the Company will not, without the prior written consent of
Bear, Stearns & Co. Inc., directly or indirectly, issue, sell, offer or
agree to sell, except pursuant to any stock option or incentive plan
described in the Prospectus or the sale of Shares hereunder, grant any
option for the sale of, pledge, make any short sale, establish an open
"put equivalent position" within the meaning of Rule 16a-1(h) under the
Exchange Act or otherwise dispose of or transfer, whether directly or
synthetically, any shares of Common Stock or any securities convertible
into, or exchangeable or exercisable for Common Stock, except as
provided in Section 3 of this Agreement, and the Company will obtain
the undertaking of each of its officers and directors who is not a
Selling Shareholder and such of its other shareholders as have been
heretofore designated by you and listed in Schedule III attached hereto
not to engage in any of the aforementioned transactions on their own
behalf.
(vii) During a period of three years from the effective date
of the Registration Statement, the Company will furnish to you copies
of (A) all reports to its shareholders and (B) all reports, financial
statements and proxy or information statements filed by the Company
with the Commission or any national securities exchange.
(viii) The Company will apply the proceeds from the sale of
the Shares as set forth under "Use of Proceeds" in the Prospectus.
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(ix) The Company will use its best efforts to cause the Common
Stock and the Shares to be quoted on the Nasdaq National Market and to
maintain such quotation so long as any of the Common Stock or Shares
are outstanding.
(x) The Company, during the period when the Prospectus is
required to be delivered under the Act or the Exchange Act, will file
all documents required to be filed with the Commission pursuant to
Section 13, 14 or 15 of the Exchange Act within the time periods
required by the Exchange Act and the rules and regulations thereunder.
(xi) The Company is familiar with the Investment Company Act
of 1940, as amended, and the rules and regulations thereunder, and has
in the past conducted its affairs, and will in the future conduct its
affairs, in such a manner so as to ensure that the company was not and
will not be an "investment company" or an entity "controlled" by an
"investment company" within the meaning of the Investment Company Act
of 1940, as amended.
(xii) The Company will not take, prior to the termination of
the underwriting syndicate contemplated by this Agreement, directly or
indirectly, any action designed to cause or result in, or which
constitutes or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of the shares of Common
Stock to facilitate the sale or resale of the Shares.
(xiii) The Company will use its best efforts to do and perform
all things required or necessary to be done and performed under this
Agreement by the Company prior to or after the Closing Date or any
Additional Closing Date, as the case may be, and to satisfy all
conditions precedent to the delivery of the Shares.
(b) The Selling Shareholder covenants and agrees with the
Underwriters that:
(i) During the period of 365 days from the date of the
Prospectus, the Seller Shareholder will not, without the prior written
consent of Bear, Stearns & Co. Inc., directly or indirectly, issue,
sell, offer or agree to sell, except pursuant to any stock option or
incentive plan described in the Prospectus or the sale of Shares
hereunder, grant any option for the sale of, pledge, make any short
sale, establish an open "put equivalent position" within the meaning of
Rule 16a-1(h) under the Exchange Act or otherwise dispose of or
transfer, whether directly or synthetically, any shares of Common Stock
or any securities convertible into, or exchangeable or exercisable for
Common Stock, except as provided in Section 3 of this Agreement.
(ii) The Selling Shareholder will not take, prior to the
termination of the underwriting syndicate contemplated by this
Agreement, directly or indirectly, any action designed to cause or
result in, or which constitutes or which might reasonably be expected
to constitute, the stabilization or manipulation of the price of the
shares of Common Stock to facilitate the sale or resale of the Shares.
6. PAYMENT OF EXPENSES. Whether or not the transactions contemplated by
this Agreement are consummated or this Agreement is terminated, the Company
hereby agrees to pay all costs and expenses incident to the performance of the
obligations of the Company and the
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Selling Shareholder hereunder, including those in connection with (i) preparing,
printing, duplicating, filing and distributing the Registration Statement, as
originally filed and all amendments thereof (including all exhibits thereto),
any preliminary prospectus, the Prospectus and any amendments or supplements
thereto (including, without limitation, fees and expenses of the Company's
accountants and counsel), the underwriting documents (including this Agreement
and the Master Agreement among Underwriters and the Master Selling Agreement)
and all other documents related to the public offering of the Shares (including
those supplied to the Underwriters in quantities as hereinabove stated), (ii)
the issuance, transfer and delivery of the Shares to the Underwriters, including
any transfer or other taxes payable thereon, (iii) the qualification of the
Shares under state or foreign securities or Blue Sky laws, including the costs
of printing and mailing any preliminary or final "Blue Sky Survey" and the fees
of counsel for the Underwriters and such counsel's disbursements in relation
thereto, (iv) quotation of the Shares on the Nasdaq National Market, (v) filing
fees of the Commission and the NASD, (vi) the cost of printing certificates
representing the Shares, (vii) the cost and charges of any transfer agent or
registrar, (viii) the fees and disbursement of the Company's accountants and the
fees and expenses of counsel for the Company and the Selling Shareholder, (ix)
all miscellaneous expenses referred to in Part II of the Registration Statement,
(x) costs related to travel and lodging incurred by the Company and its
representatives relating to meetings with and presentations to prospective
purchasers of the Shares reasonably determined by the Underwriters to be
necessary or desirable to effect the sale of the Shares to the public and (xi)
all other costs and expenses incident to the performance of the Company's and
the Selling Shareholder's obligations hereunder (including costs incurred in
closing the purchase of the Additional Shares, if any) that are not otherwise
specifically provided for in this section
7. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
Underwriters to purchase and pay for the Firm Shares and the Additional Shares,
as provided herein, shall be subject to the accuracy of the representations and
warranties of the Company and the Selling Shareholder herein contained, as of
the date hereof and as of the Closing Date (for purposes of this Section 7,
"Closing Date" shall refer to the Closing Date for the Firm Shares and any
Additional Closing Date, if different, for the Additional Shares), to the
absence from any certificates, opinions, written statements or letters furnished
to you or to Morrison & Foerster LLP ("Underwriters' Counsel") pursuant to this
Section 7 of any misstatement or omission, to the performance by the Company and
the Selling Shareholder of their respective obligations hereunder, and to the
following additional conditions:
(a) The Registration Statement, including any Rule 462(b)
Registration Statement, shall have become effective and all necessary approvals
of the Nasdaq National Market shall have been received not later than, if
pricing pursuant to Rule 430A, 5:30 P.M., New York City time, on the date of
this Agreement, or at such later time and date as shall have been consented to
in writing by you; if the Company shall have elected to rely upon Rule 430A or
Rule 434 of the Regulations, the Prospectus shall have been filed with the
Commission in a timely fashion in accordance with Section 5(a)(i) hereof; and at
or prior to the Closing Date, no stop order suspending the effectiveness of the
Registration Statement or any post-effective amendment thereof shall have been
issued and no proceedings therefor shall have been initiated or threatened by
the Commission.
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(b) All the representations and warranties of the Selling
Shareholder contained in this Agreement shall be true and correct on the Closing
Date with the same force and effect as if made on and as of the Closing Date,
and you shall have received a certificate to such effect, dated the Closing
Date, from the Selling Shareholder.
(c) At the Closing Date, you shall have received the opinion of
Powell, Goldstein, Frazer & Murphy LLP, counsel for the Company, dated the
Closing Date, addressed to the Underwriters and in form and substance
satisfactory to Underwriters' Counsel, to the effect that:
(i) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of its
jurisdiction of incorporation. The Company is duly qualified and in
good standing as a foreign corporation in each jurisdiction in which
the character or location of its properties (owned, leased or licensed)
or the nature or conduct of its business makes such qualification
necessary, except for those failures to be so qualified or in good
standing which will not in the aggregate have a Material Adverse Effect
on the Company and the Bank taken as a whole. The Company is duly
registered under [THE SLHCA AND] the GBHCA. Neither the Company nor the
Bank is subject to any current formal arrangement or memorandum of
understanding with, or cease and desist order by, any banking or
similar agency.
(ii) The Bank has been duly organized and is validly existing
as a federally-chartered stock savings bank under the laws of the
United States. The Bank is duly qualified and in good standing as a
foreign corporation in each jurisdiction in which the character or
location of its properties (owned, leased or licensed) or the nature or
conduct of its business makes such qualification necessary, except for
those failures to be so qualified or in good standing which will not in
the aggregate have a Material Adverse Effect on the Bank. The Bank is a
member in good standing of the FHLB of Atlanta, and the Bank's deposit
accounts are insured by the FDIC and, to such counsel's knowledge, no
proceeding for the termination or revocation of such insurance is
pending or threatened.
(iii) Each of the Company and the Bank has all requisite
corporate authority to own, lease and license its properties and
conduct its business as now being conducted and as described in the
Registration Statement and the Prospectus. All of the outstanding
shares of capital stock of the Bank have been duly and validly issued,
are fully paid and nonassessable and are owned directly or indirectly
by the Company, free and clear of any lien, encumbrance, claim,
security interest, restriction on transfer, shareholders' agreement,
voting trust or other defect of title whatsoever, and none of such
shares was issued in violation of or is now subject to any preemptive
or similar rights.
(iv) The Company had, at [__________], 1999, authorized
capital stock as set forth in the Registration Statement and the
Prospectus. All of the outstanding shares of capital stock of the
Company (including the Shares to be sold by the Selling Shareholder)
are duly and validly authorized and issued, are fully paid and
nonassessable, and none of such shares was issued in violation of or is
now subject to any preemptive or similar rights. The Shares have been
duly and validly authorized and, when delivered by the Company in
accordance with this Agreement, will be duly and validly issued, fully
16
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paid and nonassessable and will not have been issued in violation of or
be subject to any preemptive or similar rights. The Common Stock, the
Firm Shares and the Additional Shares conform to the descriptions
thereof contained in the Registration Statement and the Prospectus.
Other than the Bank, the Company does not own, directly or indirectly,
any capital stock or other equity securities of any corporation or any
ownership interest in any partnership, joint venture or other
association. All offers and sales of the Company's capital stock prior
to the date hereof were at all relevant times duly registered under the
Act or were exempt from the registration requirements of the Act and
were duly registered or the subject of an available exemption from the
registration requirements of the applicable state securities or Blue
Sky laws, provided, however, that such counsel need not express any
option with respect to the registration or availability of an exemption
under applicable state securities or Blue Sky laws for shares of Common
stock issued pursuant to an underwritten public offering.
(v) The Common Stock currently outstanding is listed, and the
Shares to be sold under this Agreement to the Underwriters are duly
authorized for listing, on the Nasdaq National Market.
(vi) This Agreement has been duly and validly authorized,
executed and delivered by the Company and is a valid and binding
agreement of the Company.
(vii) There is no litigation or governmental or other action,
suit, proceeding or investigation before any court or before or by any
public, regulatory or governmental agency or body pending or, to the
best of such counsel's knowledge, threatened against, or involving the
respective properties or businesses of, the Company or the Bank which
is of a character required to be disclosed in the Registration
Statement and the Prospectus which has not been properly disclosed
therein.
(viii) The execution, delivery, and performance of this
Agreement and the consummation of the transactions contemplated hereby
by the Company do not and will not (A) conflict with or result in a
breach of any of the terms and provisions of, or constitute a default
(or an event which with notice or lapse of time, or both, would
constitute a default) under, require approval or consent under, or
result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of either of the Company or the Bank
pursuant to, any agreement, instrument, franchise, license or permit
known to such counsel to which either of the Company or the Bank is a
party or by which any of such persons or its respective properties or
assets may be bound or (B) violate or conflict with any provision of
the charter or by-laws of either of the Company or the Bank, or, to the
best knowledge of such counsel, any judgment, decree, order, statute,
rule or regulation of any court or any public, governmental or
regulatory agency or body having jurisdiction over either of the
Company or the Bank or any of its respective properties or assets. No
consent, approval, authorization, order, registration, filing,
qualification, license or permit of or with any court or any public,
governmental, or regulatory agency or body having jurisdiction over
either of the Company or the Bank, or any of its respective properties
or assets, is required for the execution, delivery and performance of
this Agreement or the consummation of the transactions contemplated
hereby, including the issuance, sale and delivery of the Shares, except
(1) such consents,
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approvals, authorizations, orders, registrations, filings,
qualifications, licenses and permits as may be required under state
securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters (as to which such
counsel need express no opinion) and (2) such as have been made or
obtained under the Act.
(ix) The Company is not, and upon consummation of the
transactions contemplated hereby will not be, subject to registration
as an "investment company" under the Investment Company Act of 1940, as
amended.
(x) The Registration Statement and the Prospectus and any
amendments thereof or supplements thereto (other than the financial
statements and schedules and other financial data included or
incorporated by reference therein, as to which no opinion need be
rendered) comply as to form in all material respects with the
requirements of the Act and the Regulations. The documents filed under
the Exchange Act and incorporated by reference in the Registration
Statement and the Prospectus or any amendment thereof or supplement
thereto (other than the financial statements and schedules and other
financial data included or incorporated by reference therein, as to
which no opinion need be rendered) when they became effective or were
filed with the Commission, as the case may be, complied as to form in
all material respects with the Act or the Exchange Act, as applicable,
and the rules and regulations of the Commission thereunder; and such
counsel has no reason to believe that any of such documents, when such
documents became effective or were so filed, as the case may be,
contained, in the case of a registration statement which became
effective under the Act, an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or, in the case
of other documents which were filed under the Exchange Act with the
Commission, an untrue statement of a material fact or omitted to state
a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made when such
documents were so filed, not misleading.
(xi) The Registration Statement is effective under the Act,
all filings required by Rule 424(b) of the Regulations have been made
and, to the best knowledge of such counsel, no stop order suspending
the effectiveness of the Registration Statement or any post-effective
amendment thereof or supplement thereto has been issued and no
proceedings therefor have been initiated or threatened by the
Commission.
(xii) Except as disclosed in or specifically contemplated by
the Registration Statement and the Prospectus, to such counsel's
knowledge, there are no outstanding options, warrants or other rights
calling for the issuance of, and no commitments, obligations, plans or
arrangements to issue, any shares of capital stock of the Company or
any security convertible into or exchangeable for capital stock of the
Company. The outstanding stock options relating to the Common Stock
have been duly authorized and validly issued and conform to the
descriptions thereof contained in the Registration Statement and the
Prospectus.
(xiii) The statements in the Registration Statement and the
Prospectus under the captions "The Company", "Business-- the Net.B@nk
Solution, -- Lending and
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Investment Activities Security, --Supervision and Regulation, --Legal
Proceedings", "Management", "Relationship with Carolina First
Corporation", "Description of Capital Stock", "Legal Matters" and in
Item 15 of Part II of the Registration Statement, insofar as such
statements constitute a summary of the terms of the Shares, legal
matters, documents or proceedings referred to therein, fairly present
the information called for with respect to such terms, legal matters,
documents or proceedings.
(xiv) The form of certificate used to evidence the Common
Stock complies in all material respects with all applicable statutory
requirements, with any applicable requirements of the certificate of
incorporation and by-laws of the Company and the requirements of the
Nasdaq National Market.
(xv) Each of the Company and the Bank has good and marketable
title in fee simple to all items of personal property owned by it, in
each case free and clear of all liens, encumbrances and defects except
such as are described or referred to in the Registration Statement or
the Prospectus or such as do not materially affect the value of such
property and do not interfere with the use made or proposed to be made
of such property by the Company or the Bank, respectively. Any real
property and buildings held under lease by either of the Company or the
Bank is held under valid, existing and enforceable leases with such
exceptions as are not material and do not interfere with the use made
or proposed to be made of such property and buildings by the Company or
the Bank, respectively.
(xvi) The descriptions in the Registration Statement and the
Prospectus of the contracts, leases and other legal documents therein
described present fairly the information required to be shown and there
are no contracts, leases or other documents known to such counsel of a
character required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration Statement
which are not described or filed as required.
(xvii) Except as described in the Prospectus, no holder of
securities of the Company has any rights to the registration of
securities of the Company as a result of the filing of the Registration
Statement or the Prospectus or otherwise in connection with the sale of
the Shares contemplated hereby.
In addition, such opinion shall also contain a statement that such
counsel has participated in conferences with officers and representatives of the
Company, representatives of the independent public accountants for the Company
and the Underwriters at which the contents of the Registration Statement and the
Prospectus and related matters were discussed and that no facts have come to the
attention of such counsel which would lead such counsel to believe that either
the Registration Statement at the time it became effective (including the
information deemed to be part of the Registration Statement at the time of
effectiveness pursuant to Rule 430A(b) or Rule 434, if applicable), or any
amendment thereof made prior to the Closing Date as of the date of such
amendment, contained an untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus as of its date (or any
amendment thereof or supplement thereto made prior to the Closing Date as of the
date of such amendment or supplement) and as
19
<PAGE>
of the Closing Date contained or contains an untrue statement of a material fact
or omitted or omits to state any material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading (it being understood that such
counsel need express no belief or opinion with respect to the financial
statements and schedules and other financial data included or incorporated by
reference therein).
(d) At the Closing Date, you shall have received the opinion of
Wyche, Burgess, Freeman & Parham,P.A., counsel for the Selling Shareholder,
dated the Closing Date, addressed to the Underwriters and in form and substance
satisfactory to Underwriters' Counsel, to the effect that:
(i) The Selling Shareholder has full legal right, power and
authority, and any approval required by law (other than any approval
imposed by the applicable state securities and Blue Sky laws), to sell,
assign, transfer and deliver the Shares to be sold by the Selling
Shareholder in the manner provided in this Agreement and the Custody
Agreement.
(ii) The Selling Shareholder has good and clear title to the
certificates for the Shares to be sold by the Selling Shareholder, and
upon delivery thereof pursuant hereto and payment therefor, good and
clear title will pass to the Underwriters, severally, free of all
restrictions on transfer, liens, encumbrances, security interests and
claims whatsoever.
(iii) This Agreement has been duly and validly authorized,
executed and delivered by the Selling Shareholder and is a valid and
binding agreement of the Selling Shareholder.
(iv) The Custody Agreement has been duly authorized, executed
and delivered by the Selling Shareholder and is a valid and binding
agreement of the Selling Shareholder enforceable in accordance with its
terms.
(v) The power of attorney signed by the Selling Shareholder
appointing [__________] and [_________], or either of them, as the
Selling Shareholder's attorney-in-fact, to the extent set forth therein
with regard to the transactions contemplated hereby and by the
Registration Statement, has been duly authorized, executed and
delivered by or on behalf of the Selling Shareholder and is the valid
and binding instrument of the Selling Shareholder enforceable in
accordance with its terms, and pursuant to such power of attorney, the
Selling Shareholder has authorized [___________] and [_________], or
either of them, to execute and deliver on the Selling Shareholder's
behalf this Agreement and any other document necessary or desirable in
connection with the transactions contemplated hereby and to deliver the
Shares to be sold by the Selling Shareholder pursuant to this
Agreement.
(vi) The Selling Shareholder has been duly organized and is
validly existing as a federally-chartered stock savings bank under the
laws of the United States.
(vii) The execution, delivery and performance of this
Agreement by the Selling Shareholder, compliance by the Selling
Shareholder with all the provisions hereof
20
<PAGE>
and the consummation of the transactions contemplated hereby will not
require any consent, approval, authorization or other order of any
court, regulatory body, administrative agency or other governmental
body (except as such may be required under the Act, state securities
laws or Blue Sky laws) and will not conflict with or constitute a
breach of any of the terms or provisions of, or a default under, the
charter or by-laws of the Selling Shareholder or any agreement,
indenture or other instrument to which the Selling Shareholder is a
party or by which the Selling Shareholder or property of the Selling
Shareholder is bound, or violate or conflict with any laws,
administrative regulation or ruling or court decree applicable to the
Selling Shareholder or property of the Selling Shareholder.
In rendering each of such opinions, such counsel may rely (A) as to
matters involving the application of laws other than the laws of the United
States and jurisdictions in which they are admitted, to the extent such counsel
deems proper and to the extent specified in such opinion, if at all, upon an
opinion or opinions (in form and substance reasonably satisfactory to
Underwriters' Counsel) of other counsel reasonably acceptable to Underwriters'
Counsel, familiar with the applicable laws; (B) as to matters of fact, to the
extent they deem proper, on certificates of responsible officers of the Company
and certificates or other written statements of officers of departments of
various jurisdictions having custody of documents respecting the corporate
existence or good standing of the Company and the Bank, provided that copies of
any such statements or certificates shall be delivered to Underwriters' Counsel.
The opinion of counsel for the Company shall state that the opinion of any such
other counsel is in form satisfactory to such counsel and, in their opinion, you
and they are justified in relying thereon.
(e) All proceedings taken in connection with the sale of the Firm
Shares and the Additional Shares as hereby contemplated shall be satisfactory in
form and substance to you and to Underwriters' Counsel, and the Underwriters
shall have received from said Underwriters' Counsel a favorable opinion, dated
as of the Closing Date, with respect to the issuance and sale of the Shares, the
Registration Statement and the Prospectus and such other related matters as you
may reasonably require, and the Company and the Selling Shareholder shall have
furnished to Underwriters' Counsel such documents as they request for the
purpose of enabling them to pass upon such matters.
(f) At the Closing Date you shall have received a certificate of
the Chief Executive Officer and Chief Financial Officer of the Company, dated
the Closing Date, to the effect that (i) the condition set forth in subsection
(a) of this Section 7 has been satisfied, (ii) as of the date hereof and as of
the Closing Date, the representations and warranties of the Company set forth in
Section 1 hereof are accurate, (iii) as of the Closing Date, the obligations of
the Company to be performed hereunder on or prior thereto have been duly
performed and (iv) subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, the Company and the Bank
have not sustained any material loss or interference with their respective
businesses or properties from fire, flood, hurricane, accident or other
calamity, whether or not covered by insurance, or from any labor dispute or any
legal or governmental proceeding, and there has not been any prospective
material adverse change, or any development involving a material adverse change,
in the business prospects, properties, operations, condition (financial or
otherwise), or results of operations of the Company and the Bank taken as a
whole, except in each case as described in or contemplated by the Prospectus.
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<PAGE>
(g) At the time this Agreement is executed and at the Closing
Date, you shall have received a letter from Deloitte & Touche LLP, independent
public accountants for the Company, dated, respectively, as of the date of this
Agreement and as of the Closing Date addressed to the Underwriters and in form
and substance satisfactory to you, stating that they are independent certified
public accountants with respect to the Company within the meaning of the Act and
the Regulations and that the answer to Item 10 of the Registration Statement is
correct insofar as it relates to them and that they have performed a review of
the unaudited interim financial information of the Company for the nine-month
period ended September 30, 1998, and as at September 30, 1998, in accordance
with Statements on Auditing Standards No. 71 and stating in effect that:
(i) in their opinion, the audited financial statements and
schedules of the Company included in and incorporated by reference in
the Registration Statement and the Prospectus and covered by their
opinion therein comply as to form in all material respects with the
applicable accounting requirements of the Act and the Exchange Act and
the applicable published rules and regulations of the Commission
thereunder;
(ii) on the basis of procedures consisting of a reading of the
latest available unaudited interim consolidated financial statements of
the Company and the Bank, their limited review (in accordance with
standards established under Statement of Accounting Standards No. 71)
of the unaudited financial information for the nine-month period ended
September 30, 1998 (and as at September 30, 1998), carrying out certain
procedures (but not an examination in accordance with generally
accepted auditing standards) which would not necessarily reveal matters
of significance with respect to the comments set forth in such letter,
a reading of the minutes of meetings and consents of the shareholders
and boards of directors of the Company and the Bank and the committees
of such boards subsequent to December 31, 1997, inquiries of officers
and other employees of the Company and the Bank who have responsibility
for financial and accounting matters of the Company and the Bank with
respect to transactions and events subsequent to December 31, 1997 to a
date not more than five days prior to the date of such letter, nothing
has come to their attention that would cause them to believe that: (A)
the unaudited consolidated financial statements and schedules of the
Company presented in the Registration Statement and the Prospectus do
not comply as to form in all material respects with the applicable
accounting requirements of the Act and, if applicable, the Exchange Act
and the applicable published rules and regulations of the Commission
thereunder or that such unaudited consolidated financial statements are
not fairly presented in conformity with GAAP, except to the extent
certain footnote disclosures have been omitted in accordance with
applicable rules of the Commission under the Exchange Act, applied on a
basis substantially consistent with that of the audited consolidated
financial statements incorporated by reference in the Registration
Statement and the Prospectus; (B) with respect to the period subsequent
to September 30, 1998, there was, as of the date of the most recent
available monthly consolidated financial statements of the Company and
the Bank, and as of a specified date not more than five days prior to
the date of such letter, any increase in deposits of the Company or any
decrease in total assets or shareholders' equity of the Company, in
each case as compared with the amounts shown in the September 30, 1998
balance sheet incorporated by reference in the Registration Statement
and the Prospectus, except for increases or
22
<PAGE>
decreases which the Registration Statement and the Prospectus disclose
have occurred or may occur or which are set forth in such letter; or
(C) that during the period from October 1, 1998 to the date of the most
recent available monthly consolidated financial statements of the
Company and the Bank, and to a specified date not more than five days
prior to the date of such letter, there was any decrease, as compared
with the corresponding period in the prior fiscal year, in net interest
income, non-interest income or net income, except for decreases which
the Registration Statement and the Prospectus disclose have occurred or
may occur or which are set forth in such letter; and
(iii) they have compared specific dollar amounts, numbers of
shares, percentages of revenues and earnings and other financial
information pertaining to the Company and its subsidiary set forth in
the Registration Statement and the Prospectus, which have been
specified by you prior to the date of this Agreement, to the extent
that such amounts, numbers, percentages and information may be derived
from the general accounting and financial records of the Company and
the Bank or from schedules furnished by the Company, and excluding any
questions requiring an interpretation by legal counsel, with the
results obtained from the application of specified readings, inquiries,
and other appropriate procedures specified by you set forth in such
letter, and found them to be in agreement.
(h) Prior to the Closing Date, the Company and the Selling
Shareholder shall have furnished to you such further information, certificates
and documents as you may reasonably request.
(i) You shall have received from each person who is a director or
officer of the Company and such shareholders as have been heretofore designated
by you and listed in Schedule III hereto, an agreement to the effect that such
person will not, without the prior written consent of Bear, Stearns & Co. Inc.,
directly or indirectly, sell, offer or agree to sell, grant any option for the
sale of, pledge, make any short sale, establish an open "put equivalent
position" within the meaning of Rule 16a-1(h) under the Exchange Act or
otherwise dispose of any shares of Common Stock or any securities convertible
into, or exchangeable or exercisable for Common Stock (or securities which are
convertible into, exercisable for or exchangeable for Common Stock) for a period
of 180 days after the date of the Prospectus.
(j) At the Closing Date, the Common Stock and the Shares shall
have been approved for listing on the Nasdaq National Market.
(k) The Bank shall have guaranteed the obligations of the Company
under this agreement, in such form that is reasonably satisfactory to you.
If any of the conditions specified in this Section 7 shall not have
been fulfilled when and as required by this Agreement, or if any of the
certificates, opinions, written statements or letters furnished to you or to
Underwriters' Counsel pursuant to this Section 7 shall not be in all material
respects reasonably satisfactory in form and substance to you and to
Underwriters' Counsel, all obligations of the Underwriters hereunder may be
cancelled by you on, or at any time prior to, the Closing Date and the
obligations of the Underwriters to purchase the Additional Shares may be
cancelled by you on, or at any time prior to, the Additional Closing Date.
Notice
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of such cancellation shall be given to the Company in writing or by telephone,
facsimile, telex or telegraph, confirmed in writing.
8. INDEMNIFICATION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act against
any and all losses, liabilities, claims, damages and expenses whatsoever as
incurred (including but not limited to attorneys' fees and any and all expenses
whatsoever incurred in investigating, preparing or defending against any
litigation, commenced or threatened, or any claim whatsoever, and any and all
amounts paid in settlement of any claim or litigation), joint or several, to
which it may become subject under the Act, the Exchange Act or otherwise,
insofar as such losses, liabilities, claims, damages or expenses (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement, as
originally filed or any amendment thereof, or any related preliminary prospectus
or the Prospectus, or in any supplement thereto or amendment thereof, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading; PROVIDED, HOWEVER, that the Company will not be liable
in any such case to the extent, but only to the extent, that any such loss,
liability, claim, damage or expense arises out of or is based upon any such
untrue statement or alleged untrue statement or omission or alleged omission
made therein in reliance upon and in conformity with written information
furnished to the Company by or on behalf of any Underwriter through Bear,
Stearns & Co. Inc. expressly for use therein. This indemnity agreement will be
in addition to any liability which the Company may otherwise have, including
under this Agreement.
(b) The Selling Shareholder agrees to indemnify and hold harmless
each Underwriter and each person, if any, who controls any Underwriter within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act
against any and all losses, liabilities, claims, damages and expenses whatsoever
as incurred (including but not limited to attorneys' fees and any and all
expenses whatsoever incurred in investigating, preparing or defending against
any litigation, commenced or threatened, or any claim whatsoever, and any and
all amounts paid in settlement of any claim or litigation), joint or several, to
which it may become subject (i) as a result of or based upon any breach of any
warranty or covenant of the Selling Shareholder herein contained or (ii) under
the Act, the Exchange Act or otherwise, insofar as such losses, liabilities,
claims, damages or expenses (or actions in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement, as originally filed or any amendment
thereof, or any related preliminary prospectus or the Prospectus, or in any
supplement thereto or amendment thereof, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading;
PROVIDED, HOWEVER, that with regard to liability under clause (ii) of this
Section, the Selling Shareholder shall only be liable to the extent that any
such loss, liability, claim, damage or expense arises out of or is based upon
any such untrue statement or alleged untrue statement or omission or alleged
omission made therein in reliance upon and in conformity with written
information furnished to the Company by or on behalf of any Underwriter through
Bear, Stearns & Co. Inc. expressly for use therein; PROVIDED, FURTHER, HOWEVER,
that the Selling Shareholder
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<PAGE>
shall be liable hereunder in any case only to the extent of the total net
proceeds from the Underwriters for the Shares sold by the Selling Shareholder.
This indemnity agreement will be in addition to any liability which the Selling
Shareholder may otherwise have, including under this Agreement.
(c) Each Underwriter severally, and not jointly, agrees to
indemnify and hold harmless the Company, each of the directors of the Company,
each of the officers of the Company who shall have signed the Registration
Statement, the Selling Shareholder and each other person, if any, who controls
the Company within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act against any losses, liabilities, claims, damages and expenses
whatsoever as incurred (including but not limited to attorneys' fees and any and
all expenses whatsoever incurred in investigating, preparing or defending
against any litigation, commenced or threatened, or any claim whatsoever, and
any and all amounts paid in settlement of any claim or litigation), joint or
several, to which they or any of them may become subject under the Act, the
Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages
or expenses (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact contained in the
Registration Statement, as originally filed or any amendment thereof, or any
related preliminary prospectus or the Prospectus, or in any amendment thereof or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that any such loss, liability, claim, damage or
expense arises out of or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made therein in reliance upon
and in conformity with written information furnished to the Company by or on
behalf of any Underwriter through Bear, Stearns & Co Inc. expressly for use
therein; PROVIDED, HOWEVER, that in no case shall any Underwriter be liable or
responsible for any amount in excess of the underwriting discount applicable to
the Shares purchased by such Underwriter hereunder. This indemnity will be in
addition to any liability which any Underwriter may otherwise have, including
under this Agreement. The Company acknowledges that the statements set forth in
the last paragraph of the cover page regarding delivery of the Shares and in the
[______] paragraph[s]] under the caption "Underwriting" in the Prospectus
constitute the only information furnished in writing by or on behalf of any
Underwriter expressly for use in the Registration Statement or in any amendment
thereof, any related preliminary prospectus or the Prospectus or in any
amendment thereof or supplement thereto, as the case may be.
(d) Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify each party against whom
indemnification is to be sought in writing of the commencement of such action
(but the failure to so notify an indemnifying party shall not relieve it from
any liability which it may otherwise have under this Section 8). In case any
such action is brought against any indemnified party, and it notifies an
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate therein, and to the extent it may elect by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with counsel
satisfactory to such indemnified party. Notwithstanding the foregoing, the
indemnified party or parties shall have the right to employ its or their own
counsel in any such case, but the fees and expenses of such counsel shall
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be at the expense of such indemnified party or parties unless (i) the employment
of such counsel shall have been authorized in writing by one of the indemnifying
parties in connection with the defense of such action, (ii) the indemnifying
parties shall not have employed counsel to have charge of the defense of such
action within a reasonable time after notice of commencement of the action, or
(iii) such indemnified party or parties shall have reasonably concluded that
there may be defenses available to it or them which are different from or in
addition to those available to one or all of the indemnifying parties (in which
case the indemnifying parties shall not have the right to direct the defense of
such action on behalf of the indemnified party or parties), in any of which
events such fees and expenses shall be borne by the indemnifying parties.
Anything in this subsection to the contrary notwithstanding, an indemnifying
party shall not be liable for any settlement of any claim or action effected
without its written consent; PROVIDED, HOWEVER, that such consent was not
unreasonably withheld.
9. CONTRIBUTION.
(a) In order to provide for contribution in circumstances in
which the indemnification provided for in Section 8 hereof is for any reason
held to be unavailable from any indemnifying party or is insufficient to hold
harmless a party indemnified thereunder, the Company, the Selling Shareholder
and the Underwriters shall contribute to the aggregate losses, claims, damages,
liabilities and expenses of the nature contemplated by such indemnification
provision (including any investigation, legal and other expenses incurred in
connection with, and any amount paid in settlement of, any action, suit or
proceeding or any claims asserted, but after deducting, in the case of losses,
claims, damages, liabilities and expenses suffered by the Company or the Selling
Shareholder, any contribution received by the Company or the Selling Shareholder
from persons, other than the Underwriters, who may also be liable for
contribution, including persons who control the Company within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, officers of the
Company who signed the Registration Statement and directors of the Company) as
incurred to which the Company and the Selling Shareholder and one or more of the
Underwriters may be subject, in such proportions as is appropriate to reflect
the relative benefits received by the Company and the Selling Shareholder on the
one hand and the Underwriters on the other hand from the offering of the Shares
or, if such allocation is not permitted by applicable law, in such proportion as
is appropriate to reflect not only the relative benefits referred to above but
also the relative fault of the Company and the Selling Shareholder on the one
hand and the Underwriters on the other hand in connection with the statements or
omissions which resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The relative
benefits received by the Company and the Selling Shareholder on the one hand and
the Underwriters on the other hand shall be deemed to be in the same proportion
as (x) the total proceeds from the offering (net of underwriting discounts and
commissions but before deducting expenses) received by the Company and the
Selling Shareholder and (y) the underwriting discounts and commissions received
by the Underwriters, respectively, in each case as set forth in the table on the
cover page of the Prospectus. The relative fault of the Company and the Selling
Shareholder on the one hand and of the Underwriters on the other hand shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company, the Selling
Shareholder or the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The Company, the
26
<PAGE>
Selling Shareholder and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 9 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation that does not take account of the
equitable considerations referred to above. Notwithstanding the provisions of
this Section 9, (i) in no case shall any Underwriter be liable or responsible
for any amount in excess of the underwriting discount applicable to the Shares
purchased by such Underwriter hereunder, and (ii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. Notwithstanding the provisions of this Section 9 and the
preceding sentence, no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares underwritten
by it and distributed to the public were offered to the public exceeds the
amount of any damages that such Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission. For purposes of this Section 9, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act shall have the same rights to contribution as such Underwriter,
each person, if any, who controls the Company within the meaning of Section 15
of the Act or Section 20(a) of the Exchange Act, each officer of the Company who
shall have signed the Registration Statement and each director of the Company
shall have the same rights to contribution as the Company, subject in each case
to clauses (i) and (ii) of this Section 9. Any party entitled to contribution
will, promptly after receipt of notice of commencement of any action, suit or
proceeding against such party in respect of which a claim for contribution may
be made against another party or parties, notify each party or parties from whom
contribution may be sought, but the omission to so notify such party or parties
shall not relieve the party or parties from whom contribution may be sought from
any obligation it or they may have under this Section 9 or otherwise. No party
shall be liable for contribution with respect to any action or claim settled
without its consent; PROVIDED, HOWEVER, that such consent was not unreasonably
withheld. Each of the Company and the Selling Shareholder hereby designates CT
Corporation, whose address is 1633 Broadway, New York, New York, as its
authorized agent, upon which process may be served in any action, suit or
proceeding which may be instituted in any state or federal court in the State of
New York by any Underwriter or person controlling an Underwriter asserting a
claim for indemnification or contribution under or pursuant to Section 8 hereof
or this Section 9, and each of the Company and the Selling Shareholder shall
accept the jurisdiction of such court in such action, and waives, to the fullest
extent permitted by applicable law, any defense based upon lack of personal
jurisdiction or venue together with any right to trial by jury. A copy of any
such process shall be sent or given to the Company or the Selling Shareholder at
the address for notices specified in Section 13 hereof.
(b) The obligations of the Company under Sections 8 and 9 herein
shall be in addition to any liability which the Company may otherwise have.
10. DEFAULT BY AN UNDERWRITER.
(a) If any Underwriter or Underwriters shall default in its or
their obligation to purchase Firm Shares or Additional Shares hereunder, and if
the Firm Shares or Additional Shares to which such default relates do not (after
giving effect to arrangements, if any, made by you pursuant to subsection (b)
below) exceed in the aggregate 10% of the total number of Firm
27
<PAGE>
Shares or Additional Shares, as the case may be, the Firm Shares or Additional
Shares to which such default relates shall be purchased by the non-defaulting
Underwriters in proportion to the respective proportions which the numbers of
Firm Shares set forth opposite their respective names in Schedule I hereto bear
to the aggregate number of Firm Shares set forth opposite the names of the
non-defaulting Underwriters.
(b) In the event that such default relates to more than 10% of
the total number of Firm Shares or Additional Shares, as the case may be, you
may in your discretion arrange for yourself or for another party or parties
(including any non-defaulting Underwriter or Underwriters who so agree) to
purchase the Firm Shares or Additional Shares to which such default relates on
the terms contained herein. In the event that within five calendar days after
such default you do not arrange for the purchase of the Firm Shares or
Additional Shares to which such default relates as provided in this Section 10,
this Agreement or, in the case of a default with respect to Additional Shares,
the obligations of the Underwriters to purchase, and of the Company to sell, the
Additional Shares shall thereupon terminate without liability on the part of the
Company, the Selling Shareholder (except, in each case, as provided in Section
6, 8(a) and 9 hereof) or the Underwriters with respect thereto, but nothing in
this Agreement shall relieve a defaulting Underwriter or Underwriters of its or
their liability, if any, to the other Underwriters and the Company and the
Selling Shareholder for damages occasioned by its or their default hereunder.
(c) In the event that the Firm Shares or Additional Shares to
which such default relates are to be purchased by the non-defaulting
Underwriters or are to be purchased by another party or parties as aforesaid,
either you on the one hand or the Company and the Selling Shareholder on the
other hand shall have the right to postpone the Closing Date or Additional
Closing Date, as the case may be, for a period not exceeding five Business Days,
in order to effect whatever changes may thereby be made necessary in the
Registration Statement or the Prospectus or in any other documents and
arrangements, and the Company agrees to file promptly any amendment or
supplement to the Registration Statement or the Prospectus which, in the opinion
of Underwriters' Counsel, may thereby be made necessary or advisable. The term
"Underwriter" as used in this Agreement shall include any party substituted
under this Section 10 with like effect as if it had originally been a party to
this Agreement with respect to such Firm Shares or Additional Shares, as the
case may be.
11. SURVIVAL OF REPRESENTATIONS AND AGREEMENTS. All representations and
warranties, covenants and agreements of the Underwriters, the Company and the
Selling Shareholder contained in this Agreement, including the agreements
contained in Section 6 hereof, the indemnity agreements contained in Section 8
hereof and the contribution agreements contained in Section 9 hereof, shall
remain operative and in full force and effect regardless of any investigation
made by or on behalf of any Underwriter or any controlling person thereof, by or
on behalf of the Company, any of its officers and directors or any controlling
person thereof or by or on behalf of any of the Selling Shareholder, and shall
survive delivery of and payment for the Shares to and by the Underwriters. The
representations contained in Section 1 and Section 2 hereof and the agreements
contained in Sections 6, 8, 9 and 12(d) hereof shall survive the termination of
this Agreement, including termination pursuant to Section 10 or 12 hereof.
12. EFFECTIVE DATE OF AGREEMENT; TERMINATION.
28
<PAGE>
(a) This Agreement shall become effective upon the later of (i)
such time as you and the Company shall have received notification of the
effectiveness of the Registration Statement and (ii) the execution of this
Agreement. If either the public offering price or the purchase price per Share
has not been agreed upon prior to 5:00 P.M., New York City time, on the fifth
full Business Day after the Registration Statement shall have become effective,
this Agreement shall thereupon terminate without liability to the Company or the
Underwriters except as herein expressly provided. Until this Agreement becomes
effective as aforesaid, it may be terminated by the Company by notifying you or
by you notifying the Company. Notwithstanding the foregoing, the provisions of
this Section 12 and of Sections 1, 2, 6, 8 and 9 hereof shall at all times be in
full force and effect.
(b) You shall have the right to terminate this Agreement at any
time prior to the Closing Date or the obligations of the Underwriters to
purchase the Additional Shares at any time prior to the Additional Closing Date,
as the case may be, if (i) any domestic or international event or act or
occurrence has materially disrupted, or in your opinion will in the immediate
future materially disrupt, the market for the Company's securities or securities
in general, (ii) if trading on the New York Stock Exchange, the American Stock
Exchange or the Nasdaq National Market has been suspended, or minimum or maximum
prices for trading have been fixed, or maximum ranges for prices for securities
have been required, on the New York Stock Exchange, the American Stock Exchange
or the Nasdaq National Market by the New York Stock Exchange, the American Stock
Exchange or the Nasdaq Stock Market or by order of the Commission or any other
governmental authority having jurisdiction, (iii) if a banking moratorium has
been declared by a state or federal authority or if any new restriction
materially adversely affecting the distribution of the Firm Shares or the
Additional Shares has become effective, (iv) if any downgrading in the rating of
the Company's debt securities or preferred stock by any "nationally recognized
statistical rating-organization" (as defined for purposes of Rule 436(g) under
the Act has occurred or (v) (A) if the United States becomes engaged in
hostilities or there is an escalation of hostilities involving the United States
or there is a declaration of a national emergency or war by the United States or
(B) if there has been a change in political, financial or economic conditions
and the effect of any such event in (A) or (B), in your judgment, makes it
impracticable or inadvisable to proceed with the offering, sale and delivery of
the Firm Shares or the Additional Shares, as the case may be, on the terms
contemplated by the Prospectus.
(c) Any notice of termination pursuant to this Section 12 shall
be by telephone, facsimile, telex or telegraph, confirmed in writing by letter.
(d) If this Agreement shall be terminated pursuant to any of the
provisions hereof (otherwise than pursuant to (i) notification by you as
provided in Section 12(a) hereof or (ii) Section 10(b) or 12(b) hereof), or if
the sale of the Shares provided for herein is not consummated because any
condition to the obligations of the Underwriters set forth herein is not
satisfied or because of any refusal, inability or failure on the part of the
Company or the Selling Shareholder to perform any agreement herein or comply
with any provision hereof, the Company and the Selling Shareholder, jointly and
severally, agree to reimburse the Underwriters, subject to demand by you, for
all out-of-pocket expenses (including the fees and expenses of their counsel)
incurred by the Underwriters in connection herewith.
29
<PAGE>
13. NOTICE. All communications hereunder, except as may be otherwise
specifically provided herein, shall be in writing and, if sent to any
Underwriter, shall be mailed or delivered, or sent by facsimile, telex or
telegraph and confirmed in writing by letter, to such Underwriter c/o Bear,
Stearns & Co. Inc., 245 Park Avenue, New York, New York 10167, Attention:
[__________], Facsimile No. 212-[__________]; if sent to the Company, shall be
mailed or delivered, or sent by facsimile, telex or telegraph and confirmed in
writing by letter, to the Company, 950 Northpoint Parkway, Suite 350,
Alpharetta, Georgia 30005, Attention: [__________], Facsimile No.
818-[__________]; and if sent to the Selling Shareholder, shall be mailed or
delivered, or sent by facsimile, telex or telegraph and confirmed in writing by
letter, to [Attorney-in-Fact] [address of Attorney-in-Fact], Facsimile No.
[__________].
14. AGREEMENTS OF THE SELLING SHAREHOLDER. The Selling Shareholder
severally covenants and agrees with the Underwriters and the Company:
(a) To pay or to cause to be paid all transfer taxes with respect
to the Shares to be sold by the Selling Shareholder; and
(b) To take all reasonable actions in cooperation with the
Company and the Underwriters to cause the Registration Statement to become
effective at the earliest possible time, to do and perform all things to be done
and performed under this Agreement prior to the Closing Date and to satisfy all
conditions precedent to the delivery of the Shares pursuant to this Agreement.
15. PARTIES. This Agreement shall inure solely to the benefit of, and
shall be binding upon, the Underwriters, the Company and the Selling Shareholder
and the controlling persons, directors, officers, employees and agents referred
to in Sections 8 and 9 hereof, and their respective successors and assigns, and
no other person shall have or be construed to have any legal or equitable right,
remedy or claim under or in respect of or by virtue of this Agreement or any
provision contained herein. The term "successors and assigns" shall not include
a purchaser, in its capacity as such, of Shares from any of the Underwriters.
16. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, but without regard to
principles of conflicts of law.
17. COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be an original and all of which together shall constitute one and
the same instrument.
30
<PAGE>
If the foregoing correctly sets forth the understanding between you,
the Company and the Selling Shareholder, please so indicate in the space
provided below for that purpose, whereupon this letter shall constitute a
binding agreement among us.
Very truly yours,
NET.B@NK, INC.
By:
Name:
Title:
CAROLINA FIRST CORPORATION
By:
Attorney-in-Fact
31
<PAGE>
Accepted as of the date first above written:
BEAR, STEARNS & CO. INC.
MORGAN KEEGAN & COMPANY, INC.
RAYMOND JAMES & ASSOCIATES, INC.
KELTON INTERNATIONAL LTD.
By: Bear, Stearns & Co. Inc.
By:
Name:
Title:
On behalf of themselves and the other
Underwriters named in Schedule I hereto.
32
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Number of Firm
NAME OF UNDERWRITER SHARES TO BE PURCHASED
- ------------------- ----------------------
<S> <C>
Bear, Stearns & Co. Inc................................................ [_________]
Morgan Keegan & Company, Inc........................................... [_________]
Raymond James & Associates, Inc........................................ [_________]
Kelton International Ltd............................................... [_________]
----------
Total [__________]
</TABLE>
<PAGE>
SCHEDULE II
<TABLE>
<CAPTION>
Number of Firm
NAME SHARES TO BE SOLD
<S> <C>
Company................................................................ [_________]
Carolina First Bank.................................................... [_________]
----------
Total [__________]
</TABLE>
<PAGE>
SCHEDULE III
[Names of shareholders subject to lock-up]
<PAGE>
LOCK-UP AGREEMENT
BEAR, STEARNS & CO. INC.
MORGAN KEEGAN & COMPANY, INC.
RAYMOND JAMES & ASSOCIATES, INC.
KELTON INTERNATIONAL LTD.
As Representatives
of the several Underwriters
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, New York 10167
Ladies and Gentlemen:
In consideration of the agreement of the several Underwriters,
for which Bear, Stearns & Co. Inc., Morgan Keegan & Company, Inc., Raymond James
& Associates, Inc., and Kelton International Ltd. intend to act as
Representatives to underwrite a proposed public offering (the "Offering") of
Common Stock, par value $.01 per share (the "Common Stock"), of Net.B@nk, Inc.,
a corporation organized and existing under the laws of the State of Georgia (the
"Company"), as contemplated by a registration statement filed with the
Securities and Exchange Commission on Form S-3 (No. 333-[_____]) (the
"Registration Statement"), the undersigned hereby agrees that the undersigned
will not, directly or indirectly, during a period of 180 days from the date of
the final prospectus for the Offering, without the prior written consent of
Bear, Stearns & Co. Inc., issue, sell, offer or agree to sell, grant any option
for the sale of, pledge, make any short sale, establish an open "put equivalent
position" within the meaning of Rule 16a-1(h) under the Securities Exchange Act
of 1934, as amended, or otherwise dispose of, any shares of Common Stock (or
securities convertible into, exercisable for or exchangeable for Common Stock)
of the Company or of any of its subsidiaries. The foregoing sentence shall not
apply to (A) the issuance of any shares of Common Stock upon the exercise of an
option or warrant or the conversion of a security outstanding on the date hereof
and referred to in the Registration Statement, (B) transfers of shares of Common
Stock to immediate family members or trusts for the benefit of such family
members, provided such transferee enters into a similar lock-up agreement or (C)
shares of Common Stock issued in connection with a merger, recapitalization or
consolidation of the Company.
Very truly yours,
By:
--------------------
Print Name:
--------------------
Date:
--------------------
<PAGE>
Exhibit 5.1
POWELL, GOLDSTEIN, FRAZER & MURPHY LLP
191 PEACHTREE STREET, N.E.
SIXTEENTH FLOOR
ATLANTA, GEORGIA 30303
(404) 572-6600
January 15, 1999
Net.B@nk, Inc.
950 North Point Parkway
Suite 350
Alpharetta, Georgia 30005
RE: REGISTRATION OF 2,725,500 SHARES OF COMMON STOCK;
REGISTRATION STATEMENT ON FORM S-3
----------------------------------
Ladies and Gentlemen:
We have acted as counsel to Net.B@nk, Inc., a Georgia corporation (the
"Company"), in connection with the registration under the Securities Act of
1933, as amended, pursuant to the Company's Registration Statement on Form S-3
(the "Registration Statement"), of up to 2,725,500 shares of common stock, $.01
par value ("Common Stock"), of the Company (the "Shares").
In this capacity, we have examined the Registration Statement in the
form filed by the Company with the Securities and Exchange Commission (the
"Commission") on December 23, 1998, as amended by Pre-Effective Amendment No. 1
thereto, which is to be filed with the Commission on the date hereof, and the
proposed form of Underwriting Agreement among Bear, Stearns & Co. Inc., Morgan
Keegan & Company, Inc., Raymond James & Associates, Inc. and Kelton
International Ltd. on behalf of themselves and the several underwriters named
therein, the Selling Shareholder named therein and the Company (the
"Underwriting Agreement") to be used in effecting the sale of the Shares, and
originals or copies, certified or otherwise identified to our satisfaction, of
such corporate records, agreements, documents and other instruments of the
Company relating to the authorization and issuance of the Shares and such other
matters as we have deemed relevant and necessary as a basis for the opinion
hereinafter set forth.
In conducting our examination, we have assumed the genuineness of all
signatures, the legal capacity of all natural persons, the authenticity of all
documents submitted to us as originals, the conformity to original documents of
all documents submitted to us as certified or photostatic copies and the
authenticity of the originals of such documents.
Based upon the foregoing, and in reliance thereon, and subject to the
limitations and qualifications set forth herein, we are of the opinion that the
shares of Common Stock to be sold
<PAGE>
Net.B@nk, Inc.
January 15, 1999
Page 2
by the Company, when issued and delivered against payment therefor in accordance
with the terms of the Underwriting Agreement, will be validly issued, fully paid
and non-assessable, and that the shares of Common Stock to be sold by the
Selling Shareholder are validly issued, fully paid and non-assessable.
<PAGE>
Net.B@nk, Inc.
January 15, 1999
Page 3
We hereby consent to the use of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to our firm under the heading "Legal
Matters" in the Prospectus which is a part of the Registration Statement.
Very truly yours,
/s/ POWELL, GOLDSTEIN, FRAZER & MURPHY LLP
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Amendment No. 1 to
Registration Statement No. 333-69587 of Net.B@nk, Inc. on Form S-3 of our report
dated February 5, 1998, included and incorporated by reference in the Annual
Report on Form 10-K of Net.B@nk, Inc. for the year ended December 31, 1997, and
to the use of our report dated December 16, 1998, appearing in the Prospectus,
which is part of this Registration Statement. We also consent to the reference
to us under the heading "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
January 12, 1999
