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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR FISCAL YEAR ENDED DECEMBER 31, 1999 ______________OR______________
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/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-22361
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NET.B@NK, INC.
(Exact Name of Registrant as Specified in Its Charter)
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GEORGIA 58-2224352
(State of incorporation) (IRS Employer Identification No.)
11475 GREAT OAKS WAY 30022
ALPHARETTA, GEORGIA (zip code)
(Address of principal executive offices)
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(770) 343-6006
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE.
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
Aggregate market value of the voting and non-voting common equity held by
non-affiliates of the Registrant, computed by reference to the closing price of
such common equity as of March 24, 2000: $403,231,586.
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Number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 30,007,932 shares of Common Stock at
March 24, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the fiscal
year ended December 31, 1999 are incorporated by reference into Part II.
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Shareholders, scheduled to be held on April 27, 2000, are incorporated by
reference into Part III.
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PART I
ITEM 1. BUSINESS
OVERVIEW
NetBank, our sole subsidiary, is the largest federally-insured bank
operating exclusively on the internet. Our 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 allowed us to attain profitability
within a year of acquiring our bank charter and to continue to maintain
profitability while passing 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 1999, our customer accounts grew from 17,000 to 66,000,
deposits grew from $283.6 million to $653.9 million and total assets grew from
$388.4 million to $1.3 billion. During 1999, we added an average of 4,083 net
customer accounts per month.
We offer a broad array of products and services that customers would
typically expect from a traditional bank. Our products and services include
checking and money market accounts, certificates of deposit, Individual
Retirement Accounts ("IRA's"), electronic bill payment, debit cards, credit
cards, mortgage loans, business equipment leases, securities brokerage services,
home equity lines, and electronic document and image storage in a virtual safe
deposit box. During 2000, we plan to introduce data aggregation and wireless
services. In addition, we intend to continue to develop additional products and
services such as insurance related products, bill presentment services, and
broader brokerage services, as well as various consumer loan products intended
to increase our revenue generating capability.
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 159.3 million in
1998 to an estimated 410.4 million by 2002. Additionally, Jupiter Communications
estimates that 37.6 million United States households were on-line in 1998 and
that an estimated 62.6 million households are expected to be on-line in 2002.
On-line households are those that have access to the Web, use a consumer on-line
service or send e-mail.
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 $50.4 billion in
1998 to an estimated $733.6 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 conducting business electronically. 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 embraced self-directed on-line transactions because such
transactions can be faster, less expensive and more convenient than transactions
conducted through a teller or an ATM.
In addition to its use as a general commercial medium, the internet has
rapidly emerged as an innovative means of providing financial services. As
finance-related Web sites continue to grow in popularity, many companies are
increasingly offering a variety of financial services, including credit cards,
brokerage services, insurance products and banking services, via the internet.
ELECTRONIC BANKING. The growth in internet commerce has prompted the
development of electronic banking delivery systems. These forms of electronic
delivery systems provide convenience for customers
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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. In contrast, account data remains stored on
our secure server at all times, protected by technology designed
specifically to safeguard such information. No downloading or back-up is
required, as our server backs 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
6.6 million in 1998 to an estimated 17.1 million in 2002.
INTERNET DEMOGRAPHICS. 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 47% of on-line
users are college graduates and that approximately 37% are engaged in
professional or managerial occupations. The survey also indicated that the
largest group on-line is adults aged 19 to 34, that approximately 86% of on-line
users are under the age of 50 and that 43% of the on-line audience earns over
$60,000 per year. The attractive demographics of internet users facilitate the
growth of internet banking. Internet users tend to be young and mobile and thus
more inclined to be 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-TM- SOLUTION
As the first federally-insured bank to operate solely on the internet, we
believe we have a first mover advantage relative to on-line banks with less
extensive market presence and less established operating histories. In addition,
we have 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 new competitors to obtain a charter and
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.
Our customer demographics parallel those of the general internet population
and illustrate our appeal to households with relatively high incomes. According
to Acxiom's infobase consumer database, as of January 31, 2000, our customers
had an average age of 41 and a median annual household income in excess
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of $50,000. We are ideally positioned to participate in the rapid growth of the
internet and on-line banking based on our:
- ATTRACTIVE INTEREST RATES AND LOW FEES. Our operating costs are generally
lower than those of traditional "bricks and mortar" banks because we do
not require a traditional branch network to generate deposits and conduct
operations. We pass our 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 our unique
business model differentiates Net.B@nk from traditional banks offering
internet banking services because traditional banks frequently offset the
incremental expense of their internet banking services by charging
additional fees or imposing minimum account balances.
- CONVENIENCE AND EASE OF ACCESS. We believe we provide 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, our Web site is designed to be user-friendly and to expedite
customer transactions with Net.B@nk.
- BROAD SELECTION OF PRODUCTS AND SERVICES. We offer a broad array of
products and services that customers would typically expect from a
traditional bank. These products and services include checking and money
market accounts, certificates of deposit, IRAs, electronic bill payment,
debit cards, credit cards, mortgage loans, business equipment leases,
securities brokerage services, home equity lines, and electronic document
and image storage in a virtual safe deposit box. During 2000, we plan to
introduce data aggregation and wireless services. In addition, we intend
to continue to develop additional products and services such as insurance
related products, bill presentment services, and broader brokerage
services, as well as various consumer loan products intended to increase
our revenue generating capability.
- HIGH-QUALITY SERVICE AND CUSTOMER SATISFACTION. We continually seek ways
to enhance customer satisfaction. In an effort to serve the needs of our
customers, we offer services such as electronic bill payment and ATM cards
without service charges. We also emphasize responsive, courteous customer
service and utilize a fully-trained dedicated staff who respond to
inquiries from existing and potential customers and process new accounts.
Our customers can access account data and information regarding products
and services 24 hours a day and can reach our customer service
representatives by telephone or e-mail. 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. We use 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 Net.B@nk server. Our 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
Our 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
have significantly expanded our marketing program and are working with
nationally known advertising and public
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relations agencies to build national awareness of the Net.B@nk-TM- name
through a variety of marketing initiatives. These initiatives include more
aggressive media relations efforts; expanded online and offline
advertising initiatives; continued advertisement on targeted portals such
as MSN Money Central, Yahoo!, Alta Vista, Infoseek, AOL, and Excite and on
other proven web sites such as Bank Rate Monitor and Motley Fool; and the
pursuit of strategic alliances with other internet financial service
providers. To continue to fund these initiatives, we plan to increase our
marketing expenditures from $7.4 million for 1999 to a budgeted
$20.0 million for 2000. We plan to increase on-line advertising and
continue to pursue additional portal agreements during the course of the
year. Our experience indicates that by expanding our marketing efforts
further, we can heighten brand awareness of Net.B@nk-TM- on a national
scale and significantly increase our customer base. See "Marketing."
- LEVERAGE LOW COST STRUCTURE. Our operating costs are generally lower than
those of traditional "bricks and mortar" banks because we do not require a
traditional branch network to generate deposits and conduct operations.
This is demonstrated by our low ratio of 1999 non-interest expenses to
average earning assets of 2.8% compared to 3.8% for commercial banks with
$1.0 billion to $10.0 billion in assets, as reported by the FDIC
Institution Directory. Excluding marketing costs, our ratio of 1999
non-interest expenses to average earning assets was 1.59%. Additionally,
our ratio of total assets per full-time equivalent employee was
$16.3 million as of December 31, 1999 compared to $3.3 million for
commercial banks with $1.0 billion to $10.0 billion in assets, based on
data provided by the FDIC Institution Directory. We pass our 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, our product and service offerings include checking
and money market accounts, certificates of deposit, IRA's, electronic bill
payment, debit cards, credit cards, mortgage loans, business equipment
leases, securities brokerage services, home equity lines, and electronic
document and image storage in a virtual safe deposit box. During 2000, we
plan to introduce data aggregation and wireless services. In addition, we
intend to continue to develop additional products and services such as
insurance related products, bill presentment services, and broader
brokerage services, as well as various consumer loan products intended to
increase our revenue generating capability. See "Products and Services."
- MAINTAIN HIGH ASSET QUALITY. Our loan portfolio strategy is to maintain a
conservative loan mix consisting of home mortgage, home equity, consumer,
commercial and construction loans with an emphasis on high credit quality.
At our current stage of development, it is more cost-effective for us to
purchase most of our loans or act as a participating lender with other
banks rather than originate our own loans. This strategy decreases our
expenses and allows us to reduce our loan loss exposure by diversifying
our portfolio. We also emphasize a conservative securities investment
strategy by investing in federal funds, U.S. treasury securities, and
other high-quality securities including United States agency obligations,
mortgage-backed securities and investment grade corporate bonds. See
"Lending and Investment Activities."
- OUTSOURCE OPERATIONAL FUNCTIONS. To enhance the flexibility and
scalability of our operations, we outsource certain 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 us by Edify Corporation. CheckFree provides electronic bill payment
systems for us and BISYS processes our transactions and interfaces with
NCR's secure server. In each of these relationships, we benefit from the
service provider's expertise and economies of scale while retaining the
flexibility to take
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advantage of changes in available technology without affecting customer
service. We 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."
- GENERATE NON-INTEREST INCOME THROUGH CROSS-MARKETING INITIATIVES. To
generate additional non-interest income and enhance customer loyalty, we
cross-market a variety of non-deposit products. We offer credit cards,
mortgage loans, business equipment leases, securities brokerage services
and other non-interest income-generating products. We offer these products
to existing and potential depositors through various marketing techniques,
such as our Web site, e-mail, on-line advertising and direct mailings.
This strategy enables us to generate additional earning assets and fee
income from a growing customer base.
PRODUCTS AND SERVICES
DEPOSIT PRODUCTS AND SERVICES. In order to build our customer base, we
offer a variety of deposit products at attractive interest rates. We are able to
offer attractive interest rates as a result of our low operating costs. We also
attract customers by offering convenient services such as free electronic bill
payment, overdraft protection and ATM cards. Our deposit products and services
include:
- DEPOSIT PRODUCTS. We offer two types of interest-bearing checking
accounts, a money market account and 6-, 12- and 30-month certificates of
deposit to taxable and IRA depositors. We have consistently offered
interest rates on our 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. We do 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, we
automatically establish overdraft protection between those accounts.
- ATM CARDS. Each customer automatically receives a free ATM card when he
or she opens an account. Customers can access their accounts at
ATMs affiliated with the Cirrus, STAR, and Armed Forces Financial
networks. We do not charge our own fee for ATM usage, but the operator of
the ATM generally imposes fees.
LENDING PROGRAMS. To generate fee income and provide a convenient service
to our customers, we offer on-line loans and credit cards as described below.
- MORTGAGE LOANS. Our Web site enables customers to obtain interest rate
quotes and apply for mortgage loans on-line. We have agreements with
mortgage.com and E-loan under which we act as a loan originator on their
behalf. Applications received directly through our Web site are processed
and closed by mortgage.com. Applications received indirectly from
mortgage.com and E-loan are processed by the respective lender, which in
turn receives funding from us and closes the loans. We fund each loan that
meets our underwriting criteria and sell the loans received directly
through our Web site to mortgage.com or, in the case of loans received
indirectly, to the lender from which it was received, in each case with
the servicing rights released. The loans are presold to the same sources
at the time of closing so that we do not bear any material risk of loss.
We generally carry loans receivable on our books for an average of
approximately 30 days while we await receipt of sale proceeds. During this
time, we receive interest income on the outstanding balance at the rate
stated in the mortgage note. We also receive a portion of the loan
origination fee for providing these funding services. During 1999, we
expanded our loan offerings to include home equity lines of credit and
fixed second mortgages. These loans are originated through our website and
retained on our books. PNC Bank Corp. ("PNC") performs the back office
processing of these loans using our
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established credit criteria. We also originate and retain a small number
of consumer loans for our own portfolio. See "Lending and Investment
Activities."
- CREDIT CARDS. We offer our customers Visa credit cards issued by First
USA for no annual fee. First USA carries the credit card loans on its
books and we have an income-sharing arrangement with First USA. Customers
can apply for these credit cards on-line. The cards prominently display
the Net.B@nk-TM- logo with the Visa emblem appearing in the lower right
corner of the card.
NON-BANKING FINANCIAL SERVICES. To serve as a sole source for the financial
services needs of internet users and to generate additional non-interest income,
we offer 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. We have contracted with UVEST Investment
Services, a discount broker, to provide our customers with access to a
full line of financial services and investment products. We have a
fee-sharing agreement with UVEST Investment Services. Customers can
purchase securities without writing checks to their brokers, as trading
fees are automatically deducted from their Net.B@nk checking or money
market accounts. Investment proceeds are automatically deposited into the
customer's Net.B@nk deposit account. Customers enjoy 24-hour on-line
access, real-time quotes, low commissions and a professional brokerage
staff.
- BUSINESS EQUIPMENT LEASING. In October 1998, we entered into an agreement
with Republic Leasing Company that allows our customers, many of whom are
independent business owners or managers, to lease small business equipment
through Republic Leasing. We have a fee-sharing agreement with Republic
Leasing. Lease amounts range from $5,000 to $500,000 and cover virtually
all types of business equipment. Republic Leasing provides advice,
comparison quotes and immediate equipment lease financing and holds and
services all of its leases.
- VIRTUAL SAFE DEPOSIT BOX. Our virtual safe deposit box, powered by
safedepositbox.com, provides internet-based, secure storage of important
electronic files and documents. Customers can easily deposit files using a
web browser; no additional software is required. We charge a small monthly
fee for this service, which can be automatically deducted from the
customer's checking or money market account.
FUTURE PRODUCTS AND SERVICES. To generate additional interest and fee
income and enhance customer convenience, we plan to introduce a variety of new
products and services. During 2000, we plan to introduce data aggregation and
wireless services. In addition, we intend to continue to develop additional
products and services such as insurance related products, bill presentment
services, and broader brokerage services, as well as various consumer loan
products intended to increase our revenue generating capability.
LENDING AND INVESTMENT ACTIVITIES
Our 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 our current stage of development, it is
more cost-effective for us to purchase most of our loans or act as a
participating lender with other banks rather than originating our own loans.
This strategy decreases our expenses and allows us to diversify our portfolio.
As we grow, we will continue to develop our portfolio through purchases,
participations and direct originations.
We build our loan portfolio in the following ways:
- PURCHASES. We acquire most of our 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. We also purchase portions of commercial
loan
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pools, with the seller retaining a portion of the loans to decrease our
risk. As of December 31, 1999, purchased loans accounted for approximately
$701.8 million, or 91.5%, of our loan portfolio.
- PARTICIPATIONS. We act as a participating lender in commercial and large
construction loans with varying banks in the Southeast. As of
December 31, 1999, participations accounted for approximately
$59.3 million, or 7.7%, of our loan portfolio.
- DIRECT ORIGINATION. During the year ended December 31, 1999, we entered
into an agreement with PNC to originate home equity lines and second
mortgages through our website. PNC administers the program based on our
established credit criteria and receives a fee for servicing. The program
began in October 1999, and as of December 31, 1999, we had originated
$2.6 million of these loans. We expect this direct origination program to
account for a significant portion of our loan portfolio in the future.
In addition, as described in "Products and Services," "Lending Programs" and
"Mortgage Loans," we have agreements with each of mortgage.com and E-loan that
provide that we act as a loan originator on their behalf. During the year ended
December 31, 1999, we funded $382.3 million of loans for third parties. As of
December 31, 1999, we had $6.2 million in loan sale proceeds receivable relating
to these agreements.
Our loan committee establishes underwriting standards and criteria for our
loan portfolio and monitors the portfolio on an ongoing basis. The loan
committee applies the same underwriting standards to all of our loans,
regardless of how they are originated. We have 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, we invest deposit funds in various investment
securities. Our philosophy of high credit quality also guides our investment
decisions. Our securities portfolio is comprised of federal funds sold,
high-quality securities including United States agency obligations,
mortgage-backed securities and investment grade corporate bonds. In addition, we
are authorized to invest in U.S. Treasury securities.
CUSTOMER SATISFACTION
We continually seek ways to enhance customer satisfaction. Offering our
customers a high level of customer service is a top priority of ours and we
believe that it is critical to our success. In an effort to serve the needs of
our customers, we offer services such as electronic bill payment and ATM cards
without service charges. Our customers can access account data and information
regarding products and services 24 hours a day and can reach our customer
service representatives by telephone and e-mail.
We are committed to investing in customer service. We currently employ 45
individuals, representing 58.4% of our staff, who are dedicated exclusively to
customer service. In addition, we contract with an outside call center to handle
simple customer inquiries and requests. We have also invested in technology and
implemented new procedures to continually improve the quality and responsiveness
of our customer service. In the near term, we expect to introduce a formalized
customer care program which will include multiple points of access for service
and new on-line servicing tools such as on-line chat for service specialists,
24 X 7 service hours, prompt e-mail exchange, and wireless access to aggregated
financial information. In addition, we continually update our user-friendly Web
site with a goal of achieving customer self-support. For example, customers can
find answers to their "frequently asked questions" and intuitively navigate our
Web site.
MARKETING
The goal of our marketing strategy is to make Net.B@nk-TM- the leading brand
in the internet financial services market. Our marketing strategy is designed to
grow our customer base and includes targeted online and offline advertising,
developing strategic partnerships that will enhance our product and service
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offerings, cross-sales marketing initiatives to existing customers and more
aggressive public relations activities.
During the year ended December 31, 1999, we applied approximately
$7.4 million to our marketing program and added 49,000 new accounts. We plan to
increase our on-line advertising and continue to explore additional portal
opportunities during the course of the year. We have recently hired additional
marketing support staff and believe that a significant increase in our marketing
initiatives will enable us to increase our name recognition and grow our
customer and deposit base on a national scale.
ADVERTISING STRATEGIES. We have allocated 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 currently market our products and
services on portals such as MSN Money Central, Yahoo!, Alta Vista, Infoseek, AOL
and Excite as well as proven web sites such as Bank Rate Monitor and Motley Fool
that our experience indicates will attract our target customers. We have
enhanced our ability to monitor the audience that we reach as well as the
results of our on-line advertising campaign. For example, in addition to
tracking on-line click-through and conversion rates, we also track the number of
hits on our Web site that result from a particular advertisement and incorporate
our findings into our subsequent marketing efforts.
We also utilize traditional advertisement media. During 1999, we ran a radio
campaign in twelve large U.S. cities and a national print media campaign aimed
at increasing brand awareness that included a series of advertisements in
national magazines and newspapers such as PC WORLD, YAHOO INTERNET LIFE, MONEY,
AND THE WALL STREET JOURNAL.
STRATEGIC PARTNERSHIPS. We continually seek to form product and marketing
alliances with other internet financial services providers such as Microsoft
Money Central and Yahoo! to broaden our product and service offerings and
attract a broader customer base. We plan to pursue other marketing alliances to
provide our customers an even broader array of products and services such as
IRA's and insurance products and services. We believe these alliances provide us
with the opportunity to cross-market our products and services to the customers
of these financial service providers and to our existing customers.
PUBLIC RELATIONS. We also derive a marketing benefit from media coverage
that we generate through our public relations efforts. We believe continual
press coverage increases the general public's awareness of Net.B@nk-TM- and
attracts new customers.
COMPETITION
We believe that the principal competitive factors in the banking industry
are market presence, customer service, convenience, product offerings and
deposit and loan rates and associated account fees. 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 our low cost structure, which allows us to offer
attractive interest rates and low fees, gives us a competitive advantage over
traditional banks, which must support a physical branch structure. We also
believe our operating history and name recognition give us an advantage over
other independent internet banks, most of which are still in a relatively early
stage of operation. Furthermore, we are able to offer a broader array of
products and services than many non-bank financial services providers. However,
many of our competitors have larger customer bases, greater name recognition and
brand awareness, greater financial and other resources and longer operating
histories. Additionally, new competitors and competitive factors are likely to
emerge, particularly in view of the rapid development of internet commerce. See
"Industry Background".
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OPERATIONS
ACCOUNT ACTIVITY. Customers can access Net.B@nk through any internet
service provider by means of an acceptable secure Web browser. In doing so,
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. To open a new
account, the customer completes the on-line enrollment form on our Web site,
prints the signature card, signs it and mails it to us. Customers can make
deposits into an open account at Net.B@nk via direct deposit programs, by
transferring funds between Net.B@nk accounts, by wire transfer, by mail or in
person at our principal executive offices. No teller line is maintained,
however, and we do not have a physical branch system. Customers can also make
withdrawals and have access to their accounts at ATMs that are affiliated with
the Cirrus, STAR, and Armed Forces Financial networks, which provides added
customer convenience.
SERVICE PROVIDERS. We have negotiated relationships with a select group of
service providers who not only provide us with significant quality, security,
reliability, performance and marketing capabilities, but also play an integral
role in implementing our full financial services strategy. Because we outsource
our principal operational functions to experienced third-party service providers
that have the capacity to process a high volume of transactions, we 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 our operations. Our principal service providers are
described below:
- NCR. NCR provides operational support for our internet banking and bill
payment applications. Specifically, NCR provides a secure Web site,
software that performs services relating to our 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
our servers with those used by BISYS and CheckFree.
- BISYS. We receive 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 our ATM and debit card systems.
- EDIFY. Edify licenses its Electronic Banking System and Electronic
Workforce software, a suite of internet banking applications, to us. Edify
also maintains the software and provides consulting services as needed.
- CHECKFREE. CheckFree provides electronic bill paying services to our
customers. Customers can pay their bills on-line through electronic funds
transfer or a written draft prepared and sent to the creditor.
- UVEST INVESTMENT SERVICES. UVEST Investment Services provides discount
brokerage services to our customers. UVEST Investment Services executes
the trades and receives a commission that is automatically deducted from
our customer's deposit account.
- MORTGAGE.COM. mortgage.com processes mortgage loan applications submitted
through our Web site. It reviews the application, contacts the customer
and closes the loan for us.
- PNC BANK CORP. PNC originates and services home equity lines and second
mortgages through our website using our established credit criteria. These
loans are retained in our portofolio.
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- TELETECH--Teletech provides customer service support. They handle first
level customer inquiries and requests and interface with both our phone
and computer systems in a streamlined manner invisible to the customer.
- INTERCEPT--Intercept provides item processing services and also generates
statements for our customers.
As part of our outsourcing strategy, we will continue to explore the
outsourcing of a variety of our operations, including customer service, new
product offerings and certain lending and portfolio management activities.
SECURITY
Our ability to provide our customers with secure financial services over the
internet is of paramount importance. We continually evaluate the internet
systems, services and software used in our 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 Secure Sockets
Layer technology. This technology 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 our
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
Net.B@nk's or a customer's password file, user identification and passwords are
stored in encrypted format on a separate database server, not 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 our 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 web server. Consequently, an internet user cannot directly
access the computer that actually provides our 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 within the network. In other
words, the firewall is a mechanism used to protect our server from the freely
accessible internet.
Furthermore, all messages sent or received between the NCR server and our
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 our server through
the firewall, the message could not be encrypted in a way that would be
considered valid by the server. As a result, our server would reject the
message.
AUTHENTICATED SESSION INTEGRITY. An authenticated user is any user who
signs onto our Web site with a valid user ID and password. Although the vast
majority of authenticated users are legitimate bank customers, our server is
programmed to limit exposure to an authenticated user who is attempting to
defraud Net.B@nk. If the authenticated user alters the URL, which is 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, our server
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immediately detects that the session integrity variables have been violated. Our
server will immediately stop the session and record the attempt in a log so that
our staff can investigate.
PHYSICAL SECURITY. All servers and network computers reside in secure NCR
facilities. Currently, computer operations supporting our internet access to
financial data 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 our server console requires further
password identification.
SECURE MODEM ACCESS. A private line that is not accessible from the public
network connects our server and BISYS. Our server is connected to CheckFree by a
similar private connection. A dial-up maintenance port also permits access to
our 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. Our server is also "mirrored" so that hardware
failures or software bugs should cause no more than a few minutes of service
outage. "Mirroring" means that our server is backed up continuously so that all
data is stored in two physical locations. This network and server redundancy
ensures that access to Net.B@nk will be reliable. However, if customers are not
able to access Net.B@nk over the internet, customers 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 our server using services provided
by BISYS and CheckFree produce one or more entries into transactional logs. We
and NCR 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 is logged. Additionally, all financial transactions are logged. Bank
personnel review these logs regularly, and we or NCR will note any abnormal or
unusual activity and take appropriate action. Ultimately, vigilant monitoring is
the best defense against fraud.
The preceding security measures are designed to ensure that Net.B@nk is set
up in a secure manner. However, over the long term, our security 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. Both BISYS and NCR have received this certification.
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:
- Misappropriation from the user of the user's account number or password;
- Penetration of our server by an outside "hacker"; and
- Fraud committed by one of our employees or an employee of one of our
service providers.
Both traditional banks and internet banks are vulnerable to these types of
fraud. By establishing the security measures described above, we believe we have
reduced our 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 our transactional
logs.
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INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We regard the form and substance of our name and other intellectual property
we have developed as proprietary and attempt to protect them by relying on
intellectual property laws. We own a federally registered trademark for the
NetBank-TM- name and have applied for federal registrations for stylized and
typographical versions of the mark, Net.B@nk-TM- and variations of that mark. We
take active measures to safeguard our name and other proprietary intellectual
property. Policing unauthorized use of proprietary information is difficult,
however, because of the uncertain and complicated nature of this kind of
litigation. See "Legal Proceedings."
We own the internet domain name "netbank.com." Domain names in the United
States and in foreign countries are regulated, by the laws and regulations
governing the internet are continually evolving. We do actively monitor the use
of potentially infringing names on the internet and take action to protect our
intellectual property rights.
SUPERVISION AND REGULATION
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 may affect Net.B@nk,
Inc. (in this section, the "Company") and Net.B@nk (in this section, the
"Bank"). This summary is qualified in its entirety by 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 rather than shareholders of
the Company. The terms savings association, federal savings bank and thrift are
used interchangeably in this section.
SAVINGS AND LOAN HOLDING COMPANY REGULATION
The Company is a registered 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"). The
Company is regulated under such acts by the Office of Thrift Supervision (the
"OTS") and by the Department of Banking and Finance (the "Georgia Department"),
respectively. As a savings and loan holding company, the Company is 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 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 are designed to protect the holding company's savings
institution subsidiaries. A unitary holding company, that is, a holding company
that owns only one insured institution whose subsidiary institution satisfies
the qualified thrift lender test (discussed below) and which was in existence
prior to May 4, 1999, 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. However, the Financial
Services Modernization Act of 1999 provides that, while existing unitary holding
companies retain these unrestricted powers, if the unitary is then acquired by
another party, its powers are restricted to those permitted for financial
holding companies under the Act.
The SLHCA and the FICG makes 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
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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 holding company networks. The OTS is precluded from
approving an acquisition that would result in the formation of a multiple
holding company controlling 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 Federal Deposit Insurance Act or unless the statutes of the state in which
the institution to be acquired is located permits such an acquisition.
Savings and loan holding companies are allowed to acquire or to retain as
much as 5% of the voting shares of an unaffiliated 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 subject to examination by the OTS. The OTS regulates all areas of
the Bank's banking operations including reserves, loans, 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 Federal Deposit Insurance
Corporation ("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 depositors
to the extent provided by law in the event an insured bank is closed without
adequately providing for payment of the 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 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. 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 total
assets, (ii) "core capital" in an amount not less than 4.0% of total assets, and
(iii) a level of risk-based capital equal to 8% 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
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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, except PMSRs.
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, 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%.
OTS regulations also include an interest-rate risk in 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%.
This requirement does not 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% Tier 1 leverage ratio on a
consolidated basis.
PROMPT CORRECTIVE ACTION. The Federal Deposit Insurance Corporation
Improvement Act of 1991 establishes a system of prompt corrective action to
resolve the problems of undercapitalized financial institutions. Under this
system, the federal banking regulators have established five capital categories
(well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized and critically undercapitalized) in which all institutions are
placed. Federal banking regulators are required to take some mandatory
supervisory actions and are authorized to take other discretionary actions, with
respect to institutions in the three undercapitalized categories. The severity
of the action depends upon the capital category in which the institution is
placed. Generally, subject to a narrow exception, the banking regulator must
appoint a receiver or conservator for an institution that is critically
undercapitalized. The federal banking agencies have specified by regulation the
relevant capital level for each category.
An institution that is categorized as undercapitalized, significantly
undercapitalized, or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking agency. A
holding company must guarantee that a subsidiary depository institution meets
its capital restoration plan, subject to certain limitations. The controlling
holding company's obligation to fund a capital restoration plan is limited to
the lesser of 5% of an undercapitalized subsidiary's assets or the amount
required to meet regulatory capital requirements. An undercapitalized
institution is also generally prohibited from increasing its average total
assets, making acquisitions, establishing any branches or engaging in any new
line of business, except under an accepted capital restoration plan or with
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regulatory approval. An institution may be downgraded to a lower capital
category based on supervisory factors other than capital.
FDIC INSURANCE ASSESSMENTS. The FDIC has adopted a risk-based assessment
system for insured depository institutions that takes into account the risks
attributable to different categories and concentrations of assets and
liabilities. The system assigns an institution to one of three capital
categories: (1) well capitalized; (2) adequately capitalized; and
(3) undercapitalized. These three categories are substantially similar to the
prompt corrective action categories described above, with the "undercapitalized"
category including institutions that are undercapitalized, significantly
undercapitalized, and critically undercapitalized for prompt corrective action
purposes. The FDIC also assigns an institution to one of three supervisory
subgroups within each capital group. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation that the
institution's primary federal regulator provides to the FDIC and information
that the FDIC determines to be relevant to the institution's financial condition
and the risk posed to the deposit insurance funds. The FDIC then determines an
institution's insurance assessment rate based on the institution's capital
category and supervisory category. Under the risk-based assessment system, there
are nine combinations of capital groups and supervisory subgroups to which
different assessment rates are applied. Assessments range from 0 to 27 cents per
$100 of deposits, depending on the institution's capital group and supervisory
subgroup.
In addition, effective January 1, 1997, the FDIC imposed assessments to help
pay off the $780 million in annual interest payments on the $8 billion Financing
Corporation bonds issued in the late 1980s as part of the government rescue of
the thrift industry. The FDIC assessed savings banks at a rate of 6.4 cents per
$100 deposits until December 31, 1999. As of January 1, 2000, the assessment was
decreased to a rate of 3.7 cents per $100 (the same assessment rate that is
imposed on commercial banks).
The FDIC may terminate its insurance of deposits if it finds that the
institution has engaged in unsafe and unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law,
regulation, rule, order, or condition imposed by the FDIC.
COMMUNITY REINVESTMENT ACT. The Community Reinvestment Act requires that,
in connection with examinations of financial institutions within their
respective jurisdictions, the federal banking regulators shall evaluate the
record of each financial institution in meeting the credit needs of its local
community, including low and moderate income neighborhoods. These facts are also
considered in evaluating mergers, acquisitions, and applications to open a
branch or facility. Failure to adequately meet these criteria could impose
additional requirements and limitations on the Bank. The CRA requires that 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 Bank's CRA performance will be
assessed pursuant to the following criteria: (1) the Bank's loan to deposit
ratio, adjusted for seasonal variation and, as appropriate, other related
lending activities such as loan originations for sale to the secondary markets,
community development loans and qualified investments; (2) the percentage of
loans and, as appropriate, other lending related activities located in the
Bank's assessment area; (3) the Bank's record of lending to and, as appropriate,
engaging in other lending related activities for borrowers of different income
levels and businesses and farms of different sizes; (4) the geographic
distribution of the Bank's loans; and (5) the Bank's record of taking action if
warranted in response to written complaints about its performance in helping to
meet credit needs in its assessment area.
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. Well capitalized institutions may
make capital distributions without prior regulatory approval in specified
amounts in any calendar quarter.
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An institution 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 (i) 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 or (ii) 75% of its net income over the most recent
four-quarter period. 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 the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice.
LIQUIDITY. Under applicable federal regulations, savings associations are
required to 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)
equal to a monthly average of not less than a specified percentage of the
average daily balance of the savings association's net withdrawable deposits
plus short-term borrowings. Under HOLA, this liquidity requirement may be
changed from time to time by the OTS to any amount within the range of 4% to 10%
depending upon economic conditions and the deposit flows of member institutions,
and currently is 4%. Savings institutions also are required to maintain an
average daily balance of short-term liquid assets at a specified percentage
(currently 1%) of the total of the average daily balance of its net withdrawable
deposits and short-term borrowings.
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") as long as its "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 FHLMC
or the FNMA. 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 (in an amount up to 20% of
portfolio assets). 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
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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 for the Bank to exercise the
powers granted to federally chartered savings associations and for the Company
to retain the power of a unitary holding company, 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 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 one of
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 400% of the savings association's capital.
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. 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. The Financial Services Modernization Act has
enabled the FHLB to expand the credit window for members by expanding the
purposes for which FHLB's may make secured advances and the types of collateral
eligible to secure these advances, as well as eliminating restrictions on
advances to thrifts not meeting the QTL test.
FEDERAL RESERVE SYSTEM. The Federal Reserve Board has adopted regulations
that require savings associations to maintain nonearning 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." Federal Reserve Board regulations, however, require
savings associations to exhaust all FHLB sources before borrowing from a Federal
Reserve bank.
OTHER REGULATIONS. Interest and other charges collected or contracted for
by the Bank are subject to various laws concerning interest rates and the Bank's
loan operations are also subject to various laws applicable to credit
transactions, such as:
17
<PAGE>
The federal Truth-In-Lending Act, governing disclosures of credit terms
to consumer borrowers;
The Home Mortgage Disclosure Act of 1975, requiring financial
institutions to provide information to enable the public and public
officials to determine whether a financial institution is fulfilling its
obligation to help meet the housing needs of the community it serves;
The Equal Credit Opportunity Act, prohibiting discrimination on the
basis of race, creed or other prohibited factors in extending credit;
The Fair Credit Reporting Act of 1978, governing the use and provision
of information to credit reporting agencies;
The Fair Debt Collection Act, governing the manner in which consumer
debts may be collected by collection agencies; and
The rules and regulations of the various federal agencies charged with
the responsibility of implementing such federal laws.
The deposit operations of the Bank are subject to:
The Right to Financial Privacy Act, which imposes a duty to maintain
confidentiality of consumer financial records and prescribes procedures for
complying with administrative subpoenas of financial records; and
The Electronic Funds transfer Act and Regulation E issued by the Federal
Reserve to implement that act, which governs automatic deposits to and
withdrawals from deposit accounts and customers' rights and liabilities
arising from the use of automated teller machines and other electronic
banking services.
EFFECT OF GOVERNMENTAL MONETARY POLICES
The Company's earnings are affected by domestic economic conditions and the
monetary and fiscal policies of the United States government and its agencies.
The Federal Reserve Bank's monetary policies have had, and are likely to
continue to have, an important impact on the operating results of financial
institutions through its power to implement national monetary policy in order,
among other things, to curb inflation or combat a recession. The monetary
policies of the Federal Reserve Board have major effects upon the levels of bank
loans, investments and deposits through its open market operating in United
States government securities and through its regulation of the discount rate on
borrowings of member banks and the reserve requirements against member bank
deposits. It is not possible to predict the nature or impact of future changes
in monetary and fiscal policies.
TRANSACTIONS WITH AFFILIATES RESTRICTIONS
The Company and the Bank are subject to the provisions of Section 23A of the
Federal Reserve Act. Section 23A places limits on:
The amount of loans or extensions of credit to affiliates;
The amount of investment in affiliates;
The amount of the purchase of assets from affiliates, except for real
and personal property exempted by the Federal Reserve;
The amount of loans or extensions of credit to third parties
collateralized by the securities or obligations of affiliates; and
The amount of any guarantee, acceptance or letter of credit issued on
behalf of an affiliate.
The aggregate of all of the above transactions is limited in amount, as to
any one affiliate, to 10% of a bank's capital and surplus and, as to all
affiliates combined, to 20% of a bank's capital and surplus. In
18
<PAGE>
addition to the limitation on the amount of these transactions, each of the
above transactions must also meet specified collateral requirements. The Company
must also comply with certain provisions designed to avoid the taking of
low-quality assets.
The Company and the Bank are also subject to the provisions of Section 23B
of the Federal Reserve Act which, among other things, prohibits an institution
from engaging in the above transactions with affiliates unless the transactions
are on terms substantially the same, or at least as favorable to the institution
or its subsidiaries, as those prevailing at the time for comparable transactions
with nonaffiliated companies.
The Bank is also subject to restrictions on extensions of credit to its
executive officers, directors, certain principal shareholders and their related
interests. These extensions of credit (1) must be made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with third parties, and (2) must not involve more
than the normal risk of repayment or present other unfavorable features.
RECENT LEGISLATION
On November 12, 1999, President Clinton signed the Gramm-Leach-Bliley Act,
or the Financial Services Modernization Act of 1999, which is intended to
modernize the financial services industry. In addition to the repeal of the
anti-affiliation provisions of the 1933 Glass-Steagall Act to allow affiliations
among banks and securities firms, insurance companies and other financial
services providers, and to the restrictions placed on powers of unitary savings
and loan holding companies (the Company is grandfathered), the Act contains,
among others, provisions regarding Community Reinvestment Act requirements,
consumer privacy and ATM fee disclosures. The following is a brief summary of
these provisions:
COMMUNITY REINVESTMENT ACT. Small banks will receive some regulatory
examination relief. Banks with aggregate assets of not more than $250 million
will be subject to a Community Reinvestment Act examination only once every
60 months if the bank receives an outstanding rating, once every 48 months if it
receives a satisfactory rating and as needed if the rating is less than
satisfactory. Additionally, banks will be required to publicly disclose the
terms of various Community Reinvestment Act-related agreements.
PRIVACY. Financial institutions are required to disclose their policy for
collecting and protecting confidential information. Customers generally may
prevent financial institutions from sharing personal financial information with
nonaffiliated third parties except for third parties that market the
institutions' own products and services. Additionally, financial institutions
generally may not disclose consumer account numbers to any nonaffiliated third
party for use in telemarketing, direct mail marketing or other marketing through
electronic mail to the consumer.
ATM FEES. ATM operators must place a conspicuous notice on the ATM machine
that a fee will be imposed. Additionally, a second notice must appear on the ATM
screen or on a paper notice that a fee will be imposed and the amount of the fee
before the customer is irrevocably committed to the transaction. The requirement
for the second notice will not apply until December 31, 2004 to any ATM that
lacks the technical ability to disclose this notice.
PROPOSED LEGISLATION AND REGULATORY ACTION
New regulations and statutes are regularly proposed that contain
wide-ranging proposals for altering the structures, regulations and competitive
relationships of the nation's financial institutions. The Company cannot be
predict whether or in what form any proposed regulation or statute will be
adopted or the extent to which its business may be affected by any new
regulation or statute. Legislation that would eliminate the federal savings bank
charter is under discussion. If such legislation is enacted, the Bank would be
required to convert its federal savings bank charter to either a national bank
charter or to a state depository institution charter. Various legislative
proposals also may result in the restructuring of federal
19
<PAGE>
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 it will contain
relief as to bad debt deductions previously taken.
ITEM 2. PROPERTIES
We lease 19,615 square feet of office space for our headquarters at 11475
Great Oaks Way, Suite 100, Alpharetta, Georgia 30022. The office space is
subject to a lease that expires on June 30, 2005. In February 2000, we expanded
our leased space to an additional 10,000 square feet located within the same
building as our current headquarters. We are currently subleasing an additional
7,000 square feet on the same floor as our current location and have plans to
expand into it during 2001.
ITEM 3. LEGAL PROCEEDINGS
CAMDEN NATIONAL BANK LITIGATION. Net.B@nk, Inc. and NetBank have filed a
lawsuit against Camden National Bank ("Camden") arising out of Camden's use of
"netbank" on its internet web site and elsewhere to designate Camden's internet
banking services. Camden is located in Rockport, Maine, and owns the web site
www.camdennational.com. The lawsuit, filed on January 21, 2000, is currently
pending in the United States District Court for the Northern District of
Georgia, Atlanta Division. The case style is NET.B@NK, INC. AND NET.B@NK V.
CAMDEN NATIONAL BANK, Civil Action No. 1:00-CV-0170.
We allege that Camden's use of "netbank" is an infringement, under both
federal and state law, of our name, trademarks, service marks, and domain name
(collectively "the Marks"). In April 1998, Net.B@nk acquired the outstanding
trademark registration for "NETBANK-Registered Trademark-" from Software Agents
and subsequently filed seven other federal applications for the "Net.B@nk-TM-"
mark or variations and derivations of the mark. Consequently, we allege that our
use of the Marks has priority over Camden's use of any similar or infringing
marks. We seek a declaration from the Court that we enjoy all rights to the
Marks and seek injunctive relief and damages against Camden for its improper and
infringing use of "netbank".
We are currently attempting to resolve the dispute without further
litigation. We have granted Camden an extension to file a response to the
Complaint while the parties continue their negotiations toward a resolution. If
the matter is not resolved shortly, we intend to vigorously pursue our claims
against Camden.
HARRIS SAVINGS BANK LITIGATION Similar to the litigation with Camden,
Net.B@nk, Inc. and NetBank have filed a lawsuit against Harris Savings Bank
("Harris") arising out of Harris's use of "net.bank" and "net.bank@harris" on
its internet web site and elsewhere in connection with Harris's internet banking
services. Harris is located in Harrisburg, Pennsylvania, and owns the web site
www.harrissavingsbank.com. The lawsuit, also filed on January 21, 2000, is
currently pending in the United States District Court for the Northern District
of Georgia, Atlanta Division. The case style is NET.B@NK, INC. AND NET.B@NK V.
HARRIS SAVINGS BANK, Civil Action No. 1:00-CV-0169.
The grounds and allegations in the lawsuit with Harris are virtually
identical to those in the lawsuit with Camden. We seek a similar declaration
that we enjoy all rights in the Marks and seek injunctive relief and damages
against Harris for its use of "net.bank" and "net.bank@harris."
Although we have filed our complaint with the court, we have not yet served
the lawsuit on Harris. The parties are currently engaged in efforts to resolve
the dispute without further litigation, and we will only serve the complaint if
negotiations fail. If the matter is not resolved shortly, we intend to
vigorously pursue our claims against Harris.
20
<PAGE>
Neither we nor our properties are subject to a material legal proceeding,
and we are not aware of any material proceeding involving Net.B@nk that may be
contemplated by any governmental authority. We are also unaware of any pending
or contemplated material proceeding in which any Net.B@nk director, officer,
affiliate or principal shareholder is a party or has a direct or indirect
interest adverse to Net.B@nk.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Since February 5, 1999, the Common Stock has been traded on the Nasdaq
National Market under the symbol "NTBK." From July 28, 1997 to February 5, 1999,
the stock was traded on the Nasdaq SmallCap Market under the same symbol. The
table below sets forth for the periods indicated the high and low bid prices per
share of Common Stock as reported on the Nasdaq SmallCap Market and Nasdaq
National Market.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
1998
First quarter............................................. $ 8.42 $ 3.75
Second quarter............................................ $10.54 $ 7.33
Third quarter............................................. $12.13 $ 5.25
Fourth quarter............................................ $11.81 $ 3.58
1999
First quarter............................................. $25.00 $ 8.67
Second quarter............................................ $83.00 $22.75
Third quarter............................................. $40.25 $16.50
Fourth quarter............................................ $34.38 $17.00
</TABLE>
On March 13, 2000, there were approximately 32,000 beneficial owners and 250
holders of record of Common Stock.
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 Office of Thrift
Supervision regulates the dividends that the Bank can pay to the Company.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is included in the Company's Annual
Report to Shareholders for the year ended December 31, 1999 under the heading
"Selected Financial Data" and is incorporated herein by reference.
21
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this item is included in the Company's Annual
Report to Shareholders for the year ended December 31, 1999 under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The information required by this item is included in the Company's Annual
Report to Shareholders for the year ended December 31, 1999 under the heading
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Market Risk" and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements listed in Item 14 are included in the Company's
Annual Report to Shareholders for the year ended December 31, 1999 and are
hereby incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is included in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on April 27, 2000
under the headings "Election of Directors," "Executive Officers" and
"Section 16(a) Beneficial Ownership Reporting Compliance" and is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is included in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on April 27, 2000
under the heading "Compensation of Executive Officers" and "Historical
Information Regarding Repricing, Replacement or Cancellation and Regrant of
Options" and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is included in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on April 27, 2000
under the heading "Security Ownership of Principal Shareholders and Management"
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is included in the Company's Proxy
Statement for the Annual Meeting of Shareholders to be held on April 27, 2000
under the headings "Certain Transactions" and "Election of
Directors--Compensation Committee Interlocks and Insider Participation" and is
incorporated herein by reference.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
<TABLE>
<S> <C> <C>
(a) Financial Statements
</TABLE>
22
<PAGE>
<TABLE>
<S> <C> <C>
Consolidated Balance Sheets at December 31, 1999 and 1998
Consolidated Statements of Operations for the Years ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Shareholders' Equity for the
Years ended December 31, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the Years ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
Independent Auditors' Report
Quarterly Financial Data (unaudited)
(b) Reports on Form 8-K:
None
(c) Exhibits
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- --------------------- -------
<S> <C>
3.1 Amended and Restated Articles of Incorporation.(1)
3.1(a ) Amendment to Amended and Restated Articles of
Incorporation.(2)
3.2 Bylaws.(1)
3.3 Amendments to the Bylaws adopted April 22, 1997.(1)
4.1 Form of Common Stock Certificate.(1)
4.2 Rights Agreement dated January 20, 2000 between the
Registrant and SunTrust Bank(3)
10.1* Employment Agreement dated as of January 4, 1999 between the
Company and D.R. Grimes.
10.2 Lease Agreement dated as of March 17, 1999 between the Bank
and Opus South Corporation(4), as amended by the First
Amendment thereto dated May 25, 1999, the Second Amendment
thereto dated September 15, 1999 and the Third Amendment
thereto dated October 26, 1999.
10.3* 1996 Stock Incentive Plan(1), as amended as of March 19,
1998(2) and as of March 23, 1999.(4)
10.4 Order for Services dated as of September 17, 1998 between
the Bank and NCR Corporation.(4)
10.5* Employment Agreement dated as of January 1, 2000 between the
Company and Robert E. Bowers.
10.6* Employment Agreement dated as of February 14, 2000 between
the Company and Michael R. Fitzgerald.
10.7 Services Agreement dated as of August 21, 1996 by and
between the Company and BISYS, Inc., with related
addenda.(1)
10.8 BISYS Standard Services Price List and Special Services
Price List, dated December 1, 1991.(1)
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- --------------------- -------
<S> <C>
10.9 Reserved
10.10++ Services Agreement dated as of October 31, 1997 between the
Company and CheckFree Corporation.(5)
10.13++ Additional Service Agreement dated March 13, 1997 between
the Company and BISYS, Inc. for Total Access Banking and End
User Software License Agreement for Total Access Banking.(5)
13.1 The following portions of the Company's 1999 Annual Report
to Shareholders that have been incorporated by reference
herein:
Selected Financial Data
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Consolidated Financial Statements, the Notes thereto and the
Independent Auditors' Report thereon
Quarterly Financial Data
23.1 Consent of Deloitte & Touche LLP.
27.1 Financial Data Schedule for the fiscal year ended December
31, 1999 (SEC use only).
</TABLE>
- ------------------------
* Indicates a management compensation plan or agreement.
++ Confidential portions have been redacted pursuant to a Confidential
Treatment Request submitted in accordance with regulations promulgated under
the Securities Exchange Act of 1934, as amended.
(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).
(2) Incorporated by reference to Exhibit 99.2 contained in the Registrant's
Registration Statement on Form 8-A (File No. 0-22361).
(3) Incorporated by reference to Exhibit 99.1 contained in the Registrant's
Registration Statement on Form 8-A (File No. 0-22361).
(4) Incorporated by reference in the exhibit of the same number contained in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1998
(File No. 0-22361).
(5) Incorporated by reference to the exhibit of the same number contained in the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1997
(File No. 0-22361).
(d) Financial Statements
The financial statement schedules for which provision is made in the
applicable accounting regulations of the Commission are either not required
under the related instructions or are inapplicable and have therefore been
omitted.
24
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 29, 2000.
<TABLE>
<S> <C> <C>
NET.B@NK, INC.
By: /s/ D.R. GRIMES
-----------------------------------------
D.R. Grimes
VICE CHAIRMAN AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 29, 2000.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S> <C>
/s/ T. STEPHEN JOHNSON Chairman of the Board
-------------------------------------------
T. Stephen Johnson
/s/ D.R. GRIMES Vice Chairman and Chief Executive
------------------------------------------- Officer*
D.R. Grimes
/s/ MICHAEL R. FITZGERALD President, Chief Operating Officer and
------------------------------------------- Director
Michael R. Fitzgerald
/s/ ROBERT E. BOWERS Chief Financial Officer, Corporate
------------------------------------------- Secretary and Director**
Robert E. Bowers
/s/ WARD H. CLEGG Director
-------------------------------------------
Ward H. Clegg
/s/ DONALD S. SHAPLEIGH, JR. Director
-------------------------------------------
Donald S. Shapleigh, Jr.
/s/ STEPHEN HEARD Director
-------------------------------------------
J. Stephen Heard
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S> <C>
/s/ ROBIN C. KELTON Director
-------------------------------------------
Robin C. Kelton
/s/ THOMAS H. MULLER, JR. Director
-------------------------------------------
Thomas H. Muller, Jr.
/s/ J. JOE RICKETTS Director
-------------------------------------------
J. Joe Ricketts
/s/ W. JAMES STOKES Director
-------------------------------------------
W. James Stokes
/s/ MACK I. WHITTLE, JR. Director
-------------------------------------------
Mack I. Whittle, Jr.
/s/ LAURA P. MOON Chief Accounting Officer***
-------------------------------------------
Laura P. Moon
</TABLE>
- ------------------------
* Principal Executive Officer
** Principal Financial Officer
*** Principal Accounting Officer
26
<PAGE>
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made as of the 4th day of January, 1999, between
NET.B@NK, INC. (the "Company"), the parent bank holding company of NET.B@NK, a
federal savings bank (collectively, the "Employer"), and D.R. GRIMES, a resident
of the State of Georgia (the "Executive").
RECITALS:
The Company desires to employ the Executive as the Chief Executive
Officer of the Employer and the Executive desires to accept such employment.
In consideration of the above premises and the mutual agreements
hereinafter set forth, the parties hereby agree as follows:
1. DEFINITIONS. Whenever used in this Agreement, the following terms and their
variant forms shall have the meaning set forth below:
1.1 "AGREEMENT" shall mean this Agreement and any Exhibits incorporated
herein together with any amendments hereto made in the manner described in this
Agreement.
1.2 "AFFILIATE" shall mean any business entity which controls, is
controlled by, or is under common control with, the Employer.
1.3 "AVERAGE MONTHLY COMPENSATION" shall mean the quotient determined (a)
by dividing the sum of the Executive's then-current annual Base Salary (as
defined in Section 4.1), and Incentive Compensation (as set forth in Section
4.2(a)) (b) by twelve (12). For this purpose, Incentive Compensation dependent
on Executive's performance shall be based upon the greater of the Incentive
Compensation earned by Executive in the prior calendar year or the Incentive
Compensation which would be earned by Executive by annualizing the performance
of the Employer based on year-to-date performance.
1.4 "BUSINESS OF THE EMPLOYER" shall mean the business conducted by the
Employer, which is internet-based commercial banking.
1.5 "CAUSE" shall mean:
1.5.1 With respect to termination by the Company:
(a) A material breach of the terms of this Agreement by the
Executive (including, without limitation, failure by the Executive
to perform his duties and responsibilities in the manner and to the
extent required under this Agreement, or a breach of any
representation or warranty of the Executive set forth herein); which
breach remains uncured after the expiration of thirty (30) days
following the delivery of written notice of such breach to the
Executive by the Company;
<PAGE>
(b) Conduct by the Executive that amounts to fraud, dishonesty
or willful misconduct in the performance of his duties and
responsibilities hereunder;
(c) The conviction of the Executive of a felony;
(d) Conduct by the Executive that amounts to gross and willful
insubordination or inattention to his duties and responsibilities
hereunder; or
(e) Conduct by the Executive that results in removal from his
position as an officer or executive of the Employer pursuant to a
written order by any regulatory agency with authority or
jurisdiction over the Executive.
1.5.2 With respect to termination by the Executive, a material
diminution in the powers, responsibilities or duties of Executive
hereunder, or the failure of the Boards of Directors of the Bank and the
Company to elect him as Chief Executive Officer, or a material breach of
the terms of this Agreement by the Company which remains uncured after the
expiration of thirty (30) days following the delivery of written notice of
such breach to the Executive by the Company.
1.6 "CHANGE IN CONTROL" of the Employer shall mean any transaction wherein
fifty percent (50%) of the shares of the Bank or the Company, plus at least one
additional share, are directly or indirectly transferred by sale, gift, merger,
exchange or any other means to new owners other than an Affiliate of such person
or entity transferring such shares or if a majority of the members of the Board
of Directors of the Bank or of the Company are replaced within a twelve (12)
month period.
1.7 "INITIAL TERM" shall mean that period of time commencing on the date
of execution of this Agreement by the Company and the Executive and running
until the earlier of three (3) years thereafter or any termination of employment
of the Executive under this Agreement as provided for in Section 3.
1.8 "PERMANENT DISABILITY" shall mean the total inability of the Executive
to perform his duties under this Agreement for a period of ninety (90)
consecutive days as certified by a physician chosen by the Company and
reasonably acceptable to the Executive; provided, however, if the Executive is
covered by a disability insurance policy, the term "permanent disability" shall
have the meaning set forth in such policy.
1.9 "PROPRIETARY INFORMATION" shall mean:
(a) Information related to the Employer or any Affiliate,
-2-
<PAGE>
(i) Which derives economic value, actual or potential, from not
being generally known to or readily ascertainable by other
persons who can obtain economic value from its disclosure or
use; and
(ii) Which is the subject of efforts that are reasonable under
the circumstances to maintain its secrecy; and
(b) All tangible reproductions or embodiments of such information.
Assuming the criteria in (a)(i) and (a)(ii) above are satisfied, Proprietary
Information includes, but is not limited to, technical and nontechnical data
related to the compilations, programs, methods, techniques, finances, actual or
potential customers and suppliers, existing and future products, and employees
of the Employer or its Affiliates. Proprietary Information also includes
information which has been disclosed to the Employer or its Affiliates by a
third party and which the Employer or any Affiliate is obligated to treat as
confidential.
1.10 "TERM" shall mean the Initial Term and all subsequent renewal
periods. The Term shall be automatically extended on each day for one additional
day, beginning on the first day of the Initial Term, so that the Term shall
remain a three-year term until either party gives written notice to the other
that the automatic extensions shall cease, whereupon the Term shall expire on
the day preceding the Third Anniversary of the date of delivery of the written
notice.
2. DUTIES.
2.1 The Executive is employed initially as the Chief Executive Officer of
the Employer and, subject to the direction of the Boards of Directors of the
Employer, shall perform and discharge well and faithfully the duties which may
be assigned to him from time to time by the Employer in connection with the
conduct of its business. The duties and responsibilities of the Executive are
set forth on EXHIBIT A attached hereto.
2.2 In addition to the duties and responsibilities specifically assigned
to the Executive pursuant to Section 2.1 hereof, the Executive shall: (1) devote
substantially all of his time, energy and skill during regular business hours to
the performance of the duties of his employment (reasonable vacations and
reasonable absences due to illness excepted), and faithfully and industriously
perform such duties; (2) diligently follow and implement all management policies
and decisions communicated to him by the Boards of Directors of the Employer;
and (3) timely prepare and forward to the Board of Directors of the Employer all
reports and accounting as may be requested of the Executive.
2.3 The Executive shall devote substantially his entire business time,
attention and energies to the Business of the Employer and shall not during the
term of this Agreement be engaged (whether or not during normal business hours)
in any other business or professional activity which
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is competitive in nature; or interferes with his ability to perform his
duties fully; or which promotes an activity inconsistent with the nature or
status of the Employer, whether or not such activity is pursued for gain,
profit or other pecuniary advantage; but this shall not be construed as
preventing the Executive from (1) investing his personal assets in businesses
which (subject to item (2) below) are not in competition with the Business of
the Employer and which will not require any services on the part of the
Executive in their operation or affairs and in which his participation is
solely that of an investor, (2) purchasing securities in any corporation
whose securities are regularly traded provided that such purchase shall not
result in his collectively owning beneficially at any time five percent (5%)
or more of the equity securities of any business in competition with the
Business of the Employer, and (3) participating in civic and professional
affairs and organizations and conferences, preparing or publishing papers or
books or teaching so long as such activity does not materially interfere with
the performance of his duties hereunder.
3. TERM AND TERMINATION.
3.1 TERM. This Agreement shall remain in effect for the Term. However,
notwithstanding the provisions of Section 1.8, (i) no extension shall be granted
that would extend the term of this Agreement beyond the last day of the month
during which the Executive attains age 65, and (ii) this Agreement shall
terminate upon the death or Permanent Disability of Executive.
3.2 TERMINATION. During the Term, the employment of the Executive under
this Agreement may be terminated only as follows:
3.2.1 By the Company:
(a) For Cause, with no prior notice except as provided in Section 1.5.1; or
(b) Without Cause at any time, provided that the Company shall
give the Executive thirty (30) days prior written notice of its
intent to terminate.
3.2.2 By the Executive:
(a) For Cause, with no prior notice except as provided in
Section 1.5.2; or
(b) Without Cause, provided that the Executive shall give the
Company thirty (30) days prior written notice of his intent to
terminate.
3.2.3 By the Executive within twelve (12) months following a Change
in Control of the Employer, provided that the Executive shall give
written notice to the Company of his intention to terminate this
Agreement within such period.
3.2.4 At any time upon mutual, written agreement of the parties.
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3.3 EFFECT OF TERMINATION. The effect of termination of the employment of
the Executive pursuant to Section 3.2 shall be as follows:
3.3.1 In the event of termination by the Company:
(a) For Cause, pursuant to Section 3.2.1(a), the Company shall
have no further obligation to the Executive except for the payment
of any amounts due and owing under Section 4 on the effective date
of termination;
(b) Without Cause, pursuant to Section 3.2.1(b), the Company
shall be required to meet its obligations to the Executive under
Section 3.4 below.
3.3.2 In the event of termination by the Executive:
(a) For Cause, pursuant to Section 3.2.2(a), the Company shall
be required to meet its obligations to the Executive under Section
3.4 below.
(b) Without Cause, pursuant to Section 3.2.2(b), the Executive
shall have no further obligation to the Company.
3.3.3 In the event of termination by the Executive in connection
with a Change in Control pursuant to Section 3.2.3, the Company
shall be required to meet its obligations to the Executive under
Section 3.4 below.
3.3.4 In the event of termination upon mutual agreement of the
parties pursuant to Section 3.2.4, the Company shall have no further
obligation to the Executive except for the payment of any amounts
due and owing under Section 4.1 on the effective date of termination
unless otherwise set forth in the written agreement.
3.4 TERMINATION PAYMENTS. In the event Executive's employment is
terminated under this Agreement prior to the expiration of the Term pursuant to
Section 3.3.1(b), Section 3.3.2(a) or Section 3.3.3, the Company shall pay to
the Executive as severance pay and liquidated damages a lump sum amount equal to
the product of the (a) Average Monthly Compensation multiplied by (b) thirty-six
(36). In addition, from the effective date of the termination through the then
unexpired portion of the Term (or, if greater, for a period of twelve months
following the effective date of the termination) (the "Severance Period"), the
Company shall cause the Bank to continue to provide to the Executive, to the
extent practicable, the benefits described in Section 4.3; provided, however,
that in lieu of providing health benefits, the Company shall pay the Executive
an amount equal to the cost of COBRA health continuation coverage that would be
charged by the Bank to a former employee and eligible dependents for the greater
of the Severance Period or the period during which the Executive and his
eligible dependents are entitled to COBRA health continuation coverage from the
Bank. To the extent the Company determines
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that the continuation of any other benefits by the Bank is not practicable,
the Company shall pay the Executive an amount equal to what would have been
the Bank's cost of providing the coverage for such benefits during the
Severance Period to the Executive and his eligible dependents if the coverage
could have been continued.
Notwithstanding any other provision of this Agreement to the contrary, if the
aggregate of the payments provided for in this Agreement and the other payments
and benefits which the Executive has the right to receive from the Employer (the
"Total Payments") would constitute a "parachute payment," as defined in Section
280G(b)(2) of the Internal Revenue Code, as amended (the "Code"), the Executive
shall receive the Total Payments unless the (a) after-tax amount that would be
retained by the Executive (after taking into account all federal, state and
local income taxes payable by the Executive and the amount of any excise taxes
payable by the Executive (the "Excise Taxes")) if the Executive were to receive
the Total Payments has a lesser aggregate value than (b) the after-tax amount
that would be retained by the Executive (after taking into account all federal,
state and local income taxes payable by the Executive) if the Executive were to
receive the Total Payments being subject to Excise Taxes (the "Reduced
Payments"), in which case the Executive shall be entitled only to the Reduced
Payments. If the Executive is to receive the Reduced Payments, the Executive
shall be entitled to determine which of the Total Payments, and the relative
portions of each, are to be reduced.
4. COMPENSATION. The Executive shall receive the following salary and benefits:
4.1 BASE SALARY. During the Initial Term, the Executive shall be
compensated at a base rate of $200,000.00 per annum (the "Base Salary"). The
Executive's salary shall be reviewed by the Board of Directors of the Company
annually, and the Executive shall be entitled to receive annually an increase in
such amount, if any, as may be determined by such Board. Such salary shall be
payable in accordance with the Employer's normal payroll practices.
4.2 INCENTIVE COMPENSATION.
(a) The Executive shall be entitled to an annual incentive
bonus determined in accordance with the criteria set forth in EXHIBIT B
attached hereto (the "Incentive Compensation").
(b) The Executive shall be entitled to participate in such
option, bonus, incentive and other executive compensation programs as
are made available to senior management of the Employer from time to
time.
4.3 BENEFITS.
(a) In addition to the Base Salary and Incentive Compensation,
the Executive shall be entitled to such other benefits as may be
available from time to time for executives of
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the Employer similarly situated to the Executive. All such benefits
shall be awarded and administered in accordance with the Employer's
standard policies and practices. Such benefits may include, by way
of example only, profit sharing plans, retirement or investment
funds, dental, health, life and disability insurance benefits, and
such other benefits as the Employer deems appropriate.
(b) The Company specifically agrees to reimburse the Executive
for reasonable business expenses incurred by him in performance of
his duties hereunder, as approved from time to time by the Board of
Directors of the Company or of the Bank; provided that the Executive
shall, as a condition of reimbursement, submit verification of the
nature and amount of such expenses in accordance with reimbursement
policies from time to time adopted by the Employer and in sufficient
detail to comply with Internal Revenue Service regulations.
(c) On a non-cumulative basis the Executive shall be entitled
to five (5) weeks of vacation in each year of this Agreement, during
which his compensation shall be paid in full. At least two
consecutive weeks each year must be taken by the Executive for
vacation, with other vacation to be taken at the time the Executive
determines appropriate, taking into account the requirements of the
Employer.
(d) The Executive shall be reimbursed for membership in Country
Club of the South, and shall receive a car allowance of $750 per
month.
4.1 WITHHOLDING. The Employer may deduct from each payment of compensation
hereunder all amounts required to be deducted and withheld in accordance with
applicable federal and state income, FICA and other withholding requirements.
5. PROPRIETARY INFORMATION.
5.1 TREATMENT OF PROPRIETARY INFORMATION. As a senior management official
of the Employer, the Executive has access to Proprietary Information. The
Executive agrees to maintain the confidentiality of all Proprietary Information
throughout the Term and for a period of two (2) years after the termination of
this Agreement.
5.2 OBLIGATIONS OF EXECUTIVE. During the period described in Section 5.1,
the Executive will hold the Proprietary Information in trust and strictest
confidence, and will not use, reproduce, distribute, disclose or otherwise
disseminate the Proprietary Information except to the extent necessary to
perform the duties assigned to him by the Employer.
5.3 DELIVERY UPON TERMINATION. Upon termination of his employment with the
Employer, the Executive will promptly deliver to the Employer all property
belonging to the Employer, including, without limitation, all Proprietary
Information then in his possession or control.
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6. NON-COMPETITION. The Executive agrees that during his employment by the
Employer and, in the event of his termination, other than pursuant to Sections
3.3.1(b) or 3.3.2(a), for a period of twelve (12) months thereafter, he will not
(except on behalf of or with the prior written consent of the Company), within
the Atlanta Metropolitan (RMA) Area, either directly or indirectly, on his own
behalf or in the service or on behalf of others, as a principal, partner,
officer, director, manager, supervisor, administrator, consultant, executive
employee, or in any other capacity which involves duties and responsibilities
similar to those undertaken for the Employer, engage in any business which is
the same as or essentially the same as the Business of the Employer.
7. NON-SOLICITATION. The Executive agrees that during his employment by the
Employer and, in the event of his termination, other than pursuant to Sections
3.3.1(b) or 3.3.2(a), for a period of twelve (12) months thereafter, he will not
(except on behalf of or with the prior written consent of the Company), within
the Atlanta Metropolitan (RMA) Area, on his own behalf or in the service or on
behalf of others, solicit, divert or appropriate, or attempt to solicit, divert
or appropriate, directly or by assisting others, any business from any of the
Employer's customers or vendors, including actively-sought prospective customers
or vendors, with whom the Executive has or had material contact during the last
two (2) years of his employment, for purposes of providing products or services
that are competitive with those provided by the Employer.
8. NON-SOLICITATION OF EXECUTIVES. The Executive agrees that during his
employment by the Employer and, in the event of his termination, other than
pursuant to Sections 3.3.1(b) or 3.3.2(a), for a period of twelve (12) months
thereafter, he will not, on his own behalf or in the service or on behalf of
others, solicit, recruit or hire away, or attempt to solicit, recruit or hire
away, directly or by assisting others, any employee of the Employer or its
Affiliates, whether or not such employee is a full-time employee or a temporary
employee of the Employer, and whether or not such employment is pursuant to
written agreement and whether or not such employment is for a determined period
or is at will.
9. REMEDIES. The Executive agrees that the covenants contained in Sections 5
through 8 of this Agreement are of the essence of this Agreement; that each of
the covenants is reasonable and necessary to protect the business, interests and
properties of the Employer; and that irreparable loss and damage will be
suffered by the Employer should he breach any of the covenants. Therefore, the
Executive agrees and consents that, in addition to all the remedies provided by
law or in equity, the Company shall be entitled to a temporary restraining order
and temporary and permanent injunctions to prevent a breach or contemplated
breach of any of the covenants. The Company and the Executive agree that all
remedies available to the Company or the Executive, as applicable, shall be
cumulative.
10. SEVERABILITY. The parties agree that each of the provisions included in this
Agreement is separate, distinct, and severable from the other provisions of this
Agreement, and that the invalidity or unenforceability of any Agreement
provision shall not affect the validity or
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enforceability of any other provision of this Agreement. Further, if any
provision of this Agreement is ruled invalid or unenforceable by a court of
competent jurisdiction because of a conflict between the provision and any
applicable law or public policy, the provision shall be redrawn to make the
provision consistent with and valid and enforceable under the law or public
policy.
11. NOTICE. All notices and other communications required or permitted under
this Agreement shall be in writing and, if mailed by prepaid first-class mail or
certified mail, return receipt requested, shall be deemed to have been received
on the earlier of the date shown on the receipt or three (3) business days after
the postmarked date thereof. In addition, notices hereunder may be delivered by
hand, facsimile transmission or overnight courier, in which event the notice
shall be deemed effective when delivered or transmitted. All notices and other
communications under this Agreement shall be given to the parties hereto at the
following addresses:
(i) If to the Company, to it at:
Net.B@nk, Inc.
950 North Point Parkway
Suite 350
Alpharetta, GA 30005
Attn: Chairman of the Board
(ii) If to the Executive, to him at:
D. R. Grimes
4385 Old Wesleyan Woods
Alpharetta, GA 30022
12. ASSIGNMENT. Neither party hereto may assign or delegate this Agreement or
any of its rights and obligations hereunder without the written consent of the
other party hereto.
13. WAIVER. A waiver by the Company of any breach of this Agreement by the
Executive shall not be effective unless in writing, and no waiver shall operate
or be construed as a waiver of the same or another breach on a subsequent
occasion.
14. ATTORNEYS' FEES. In the event of litigation between the parties concerning
this Agreement, the party prevailing in such litigation shall be entitled to
receive from the other party all reasonable costs and expenses, including
without limitation attorneys' fees, incurred by the prevailing party in
connection with such litigation, and the other party shall pay such costs and
expenses to the prevailing party promptly upon demand by the prevailing party.
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<PAGE>
15. APPLICABLE LAW. This Agreement shall be construed and enforced under and in
accordance with the laws of the state of Georgia.
16. ENTIRE AGREEMENT. This Agreement embodies the entire and final agreement of
the parties on the subject matter stated in the Agreement. No amendment or
modification of this Agreement shall be valid or binding upon the Company or the
Executive unless made in writing and signed by both parties. All prior
understandings and agreements relating to the subject matter of this Agreement
are hereby expressly terminated.
17. RIGHTS OF THIRD PARTIES. Nothing herein expressed is intended to or shall be
construed to confer upon or give to any person, firm or other entity, other than
the parties hereto and their permitted assigns, any rights or remedies under or
by reason of this Agreement.
18. SURVIVAL. The obligations of the Executive pursuant to Sections 5, 6, 7, 8
and 9 shall survive the termination of the employment of the Executive
hereunder.
IN WITNESS WHEREOF, the Company and the Executive have executed and
delivered this Agreement as of the date first shown above.
THE COMPANY:
NET.B@NK, INC.
By: /s/ T. Stephen Johnson
-------------------------------------
Name: T. Stephen Johnson
-------------------------------------
Title: Chairman of the Board
-------------------------------------
THE EXECUTIVE:
/s/ D.R. Grimes
----------------------------------------------
D. R. GRIMES
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EXHIBIT A
Initial Duties of the Executive
The initial duties of the Executive shall include, in addition to any other
duties assigned the Executive by the Boards of Directors of the Employer or its
designee, the following:
- - Foster a corporate culture that promotes ethical practices, encourages
individual integrity, fulfills social responsibility, and is conducive to
attracting, retaining and motivating a diverse group of top-quality
executives at all levels.
- - With the Board of Directors of the Bank, develop a long-term strategy for
the Bank that creates shareholder value.
- - Develop and recommend to the Board of Directors of the Bank annual
business plans and budgets that support the Bank's long-term strategy.
- - Manage the day-to-day operations of the Company appropriately.
- - Use best efforts to achieve the Bank's financial and operating goals and
objectives.
- - Improve the quality and value of the products and services provided by
the Bank.
- - Insure that the Bank maintains a satisfactory competitive position within
its industry.
- - Develop an effective management team and an active plan for its
development and succession, and make recommendations to the Board of
Directors of the Bank regarding hiring, firing and compensation.
- - Implement major corporate policies.
<PAGE>
EXHIBIT B
CEO Bonus Proposal
End 1998 at $0.25 EPS and $280 million in deposits.
Goals are to increase earning per share by at least $0.25 and deposits by
$330 million. This would represent 100% growth in EPS and 118% in deposits.
Levels in Deloitte plan:
20% Base Threshold
40% Base Target
80% Base Outstanding 120% Target
200% Base Superior (also cap for bonus) 140% Target
<PAGE>
EXHIBIT 10.2
FIRST AMENDMENT
TO LEASE AGREEMENT
This FIRST AMENDMENT TO LEASE AGREEMENT ("First Amendment") is made and
entered into as of May 25, 1999 ("Effective Date"), by and between OPUS SOUTH
CORPORATION, a Florida corporation, as Landlord, and NET.B@NK, INC., a Georgia
corporation, as Tenant.
RECITALS:
Landlord and Tenant did enter into that certain Lease Agreement, dated
March 17, 1999, for the leasing by Landlord to Tenant of certain space on the
first floor of the building commonly known as Royal Centre Three, 11475 Great
Oaks Way, Alpharetta, Georgia ("Building"), the space leased to Tenant being
more particularly described in the Lease as the "Premises." Landlord and Tenant
desire to enter into this First Amendment to provide for the addition of the
Expansion Space (as defined below), to the Premises pursuant to and in
accordance with the terms of this First Amendment.
Now, therefore, for and in consideration of the sum of Ten and 00/100
Dollars, the mutual covenants and obligations set forth in the Lease and in this
First Amendment and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Landlord and Tenant do hereby
agree as follows:
1. Beginning as of the Expansion Commencement Date (as defined below),
the portion of the first floor of the Building, consisting of 7,295 rentable
square feet, designated as Suite 120 and located as shown on EXHIBIT "A" to this
First Amendment ("Expansion Space"), shall be added to and become part of the
Premises, subject to and in accordance with all of the provisions of this First
Amendment and otherwise subject to and in accordance with all the provisions of
the Lease. The parties hereby acknowledge and agree that the rentable square
footage for the Expansion Space has been reviewed and confirmed by both parties
and is hereby conclusively agreed to be correct and is not subject to challenge
or dispute by either party.
2. The term with respect to the Expansion Space ("Expansion Term"),
shall commence ("Expansion Commencement Date") on the earlier of (a) the date
Tenant first occupies all or any portion of the Expansion Space for the conduct
of its business, or (b) January 1, 2000. The Expansion Term shall expire on the
last day of the Initial Lease Term for the remainder of the Premises or, if
exercised, on the last day of the Renewal Term.
3. As of the Expansion Commencement Date, the Premises shall consist of
a total of 26,910 rentable square feet which the parties conclusively agree is
correct and is not subject to challenge or dispute by either party. As of the
Expansion Commencement Date, Tenant's Prorata Share of Excess Operating Expenses
shall become 16.26%. If the Expansion Commencement Date occurs prior to January
1, 2000, Tenant's Prorata Share of Excess Operating Expenses for calendar year
1999 shall be appropriately prorated.
4. Beginning as of the Expansion Commencement Date, Tenant shall pay
Base Rent for the Expansion Space at the same rate per rentable square foot, per
annum applicable to the remainder of the Premises, as such rate is increased
annually pursuant to the provisions of Paragraph 10 of the Basic Terms of the
Lease. Tenant shall also be obligated to pay Tenant's Prorata Share of Excess
Operating
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Expenses with respect to the Expansion Space. Tenant shall pay such
Base Rent and Tenant's Prorata Share of Excess Operating Expenses on the same
terms and conditions (including a 1999 Base Year) and at the same time Tenant is
obligated to pay Base Rent and Tenant's Prorata Share of Excess Operating
Expenses with respect to the remainder of the Premises.
5. Landlord shall provide Tenant an Improvement Allowance for the
Expansion Space equal to $24.00 per rentable square foot of the Expansion Space.
Landlord shall construct, or cause to be constructed, leasehold improvements in
the Expansion Space in accordance with all of the provisions of the Work Letter
attached as EXHIBIT "D" of the Lease, except that: (i) any reference to the
Premises shall be deemed to refer to the Expansion Space; (ii) any reference to
the Plans shall be deemed to refer to the Expansion Plans and (iii) any
reference to Tenant's Work shall be deemed to be a reference to the work to be
performed by Landlord in the Expansion Space in accordance with the Expansion
Plans ("Tenant's Expansion Space Work"). Landlord will cause the Expansion Plans
to be prepared, in the same manner described in Paragraph 1 of the Work Letter,
promptly following Tenant's delivery to Landlord of Tenant's specifications and
requirements for the Expansion Space, and will proceed with due diligence
thereafter to construct, or cause to be constructed, Tenant's Expansion Space
Work.
6. Section 7.1.3 of the Lease is amended to provide that the cost to
Tenant for after-hours heating or air-conditioning services shall be $20.00 per
hour, per air-handling unit. Tenant acknowledges that the original Premises and
the Expansion Space are served by different air-handling units.
7. Except as expressly provided in this First Amendment, no free rent,
improvement allowances, moving allowances, space planning allowances or other
concessions which apply to the original Premises shall apply to the Expansion
Space. Except as modified by the terms of this First Amendment, Landlord and
Tenant do hereby ratify and reaffirm each and every provision of the Lease and
do hereby acknowledge that the Lease remains in full force and effect.
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IN WITNESS WHEREOF, the parties have hereunto set their hands and seals
as of the day, month and year first above written.
Dated: 5/25/99 LANDLORD:
--------------------
OPUS SOUTH CORPORATION, a
Florida corporation
By: /s/ Neil Rauenhorst
-------------------------
Name: Neil Rauenhorst
-------------------------
Title: President & CEO
-------------------------
Dated: 5/20/99 TENANT:
--------------------
Net.B@nk, Inc., a
Georgia corporation
By: /s/ Robert E. Bowers
-------------------------
Name: Robert E. Bowers
-------------------------
Title: CFO
-------------------------
By: /s/ Lisa M. Tyler
-------------------------
Name: Lisa M. Tyler
-------------------------
Title: Dir. HR & Administration
-------------------------
3
<PAGE>
EXHIBIT "A"
[FLOOR PLAN APPEARS HERE]
ROYAL CENTRE THREE
at Royal 400
Alpharetta, Georgia
a Development of
Opus South Corporation
4
<PAGE>
SECOND AMENDMENT
TO LEASE AGREEMENT
This SECOND AMENDMENT TO LEASE AGREEMENT ("Second Amendment") is made
and entered into as of September 15, 1999 ("Effective Date"), by and between
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA, a Minnesota corporation, as
Landlord, and NET.B@NK, INC., a Georgia corporation, as Tenant.
RECITALS:
Opus South Corporation ("Opus") and Tenant did enter into that certain
Lease Agreement, dated March 17, 1999, for the leasing of certain space on the
first floor of the building commonly known as Royal Centre Three, 11475 Great
Oaks Way, Alpharetta, Georgia ("Building"), the space leased to Tenant being
more particularly described in the Lease as the "Premises."
The Original Lease has been previously amended by First Amendment to
Lease, dated May 25, 1999 ("First Amendment"). The Original Lease, as amended by
the First Amendment, is hereinafter referred to as the "Lease."
Landlord has acquired the Building from Opus and is the current holder
of all of the Landlord's interest under the Lease.
Landlord and Tenant desire to enter into this Second Amendment to
REDEFINE the addition of the Expansion Space (as originally defined in First
Amendment and subsequently redefined below), to the Premises pursuant to and in
accordance with the terms of this Second Amendment.
Now, therefore, for and in consideration of the sum of Ten and 00/100
Dollars, the mutual covenants and obligations set forth in the Lease and in this
Second Amendment and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Landlord and Tenant do hereby
agree as follows:
1. Beginning as of the Expansion Commencement Date (as defined below),
the portion of the first floor of the Building, consisting of 10,253 rentable
square feet, designated as Suite 130 and located as shown on Exhibit "A" to this
Second Amendment ("Expansion Space"), shall be added to and become part of the
Premises, subject to and in accordance with all of the provisions of this First
Amendment and otherwise subject to and in accordance with all the provisions of
the Lease. The parties hereby acknowledge and agree that the rentable square
footage for the Expansion Space has been reviewed and confirmed by both parties
and is hereby conclusively agreed to be correct and is not subject to challenge
or dispute by either party.
2. The term with respect to the Expansion Space ("Expansion Term"),
shall commence ("Expansion Commencement Date") on the earlier of (a) the date
Tenant first occupies all or any portion of the Expansion Space for the conduct
of its business, or (b) January 1, 2000. The Expansion Term shall expire on the
last day of the Initial Lease Term for the remainder of the Premises or, if
exercised, on the last day of the Renewal Term.
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3. As of the Expansion Commencement Date, the Premises shall consist of
a total 29,868 rentable square feet which the parties conclusively agree is
correct and is not subject to challenge or dispute by either party. As of the
Expansion Commencement Date, Tenant's Prorata Share of Excess Operating Expenses
shall become 18.044%. If the Expansion Commencement Date occurs prior to January
1, 2000, Tenant's Prorata Share of Excess Operating Expenses for calendar year
1999 shall be appropriately prorated.
4. Beginning as of the Expansion Commencement Date, Tenant shall pay
Base Rent for the Expansion Space at the same rate per rentable square foot, per
annum applicable to the remainder of the Premises, as such rate is increased
annually pursuant to the provisions of Paragraph 10 of the Basic Terms of the
Lease. Tenant shall also be obligated to pay Tenant's Prorata Share of Excess
Operating Expenses with respect to the Expansion Space. Tenant shall pay such
Base Rent and Tenant's Prorata Share of Excess Operating Expenses on the same
terms and conditions (including a 1999 Base Year) and at the same time Tenant is
obligated to pay Base Rent and Tenant's Prorata Share of Excess Operating
Expenses with respect to the remainder of the Premises.
5. Landlord shall provide Tenant an Improvement Allowance for the
Expansion Space equal to $24.00 per rentable square foot of the Expansion Space.
Landlord shall construct, or cause to be constructed, leasehold improvements in
the Expansion Space in accordance with all of the provisions of the Work Letter
attached as EXHIBIT "D" of the Lease, except that: (i) any reference to the
Premises shall be deemed to refer to the Expansion Space; (ii) any reference to
the Plans shall be deemed to refer to the Expansion Plans and (iii) any
reference to Tenant's Work shall be deemed to be a reference to the work to be
performed by Landlord in the Expansion Space in accordance with the Expansion
Plans ("Tenant's Expansion Space Work"). Landlord will cause the Expansion Plans
to be prepared, in the same manner described in Paragraph 1 of the Work Letter,
promptly following Tenant's delivery to Landlord of Tenant's specifications and
requirements for the Expansion Space, and will proceed with due diligence
thereafter to construct, or cause to be constructed, Tenant's Expansion Space
Work.
6. Tenant's Right of First Refusal as described in Exhibit "E",
Paragraph 2 of the Lease is hereby modified to change the demised premises of
the Refusal Space to 7,295 rentable square feet, Suite 120 as shown on Exhibit
"A".
7. This Second Amendment modifies and overrides the expansion rights
provided for in the First Amendment. Tenant's right to the Expansion Space shall
be described in the First Amendment, or modified by this Second Amendment.
8. Except as expressly provided in this Second Amendment, no free rent,
improvement allowances, moving allowances, space planning allowances or other
concessions which apply to the original Premises shall apply to the Expansion
Space. Except as modified by the terms of this Second Amendment, Landlord and
Tenant do hereby ratify and reaffirm each and every provision of the Lease and
do hereby acknowledge that the Lease remains in full force and effect.
6
<PAGE>
IN WITNESS WHEREOF, the parties have hereunto set their hands and seals
as of the day, month and year first above written.
Dated: 9/17/00 LANDLORD:
ALLIANZ LIFE INSURANCE COMPANY OF NORTH
AMERICA, a Minnesota corporation
By: ALLIANZ OF AMERICA, INC.
its Investment Advisor
By: /s/ Brian S. Brennan
------------------------------------
Name: Brian S. Brennan
------------------------------------
Title: Director, Real Estate Acquisitions
------------------------------------
Dated: 9-15-00 TENANT:
NET.B@NK, INC., a
Georgia corporation
By: /s/ Robert E. Bowers
------------------------------------
Name: Robert E. Bowers
------------------------------------
Title: CFO
------------------------------------
By: /s/ D.R. Grimes
------------------------------------
Name: D.R. Grimes
------------------------------------
Title: CEO
------------------------------------
7
<PAGE>
EXHIBIT "A"
[Floor plan appears here]
- ROYAL CENTRE THREE -
AT ROYAL 400
ALPHARETTA, GEORGIA
GROUND FLOOR PLAN
<PAGE>
THIRD AMENDMENT
TO LEASE AGREEMENT
This THIRD AMENDMENT TO LEASE AGREEMENT ("Third Amendment") is made and
entered into as of October 26, 1999 ("Effective Date"), by and between ALLIANZ
LIFE INSURANCE COMPANY OF NORTH AMERICA, a Minnesota corporation ("Landlord"),
and NET.B@NK, INC., Georgia corporation ("Tenant").
RECITALS:
Landlord and Tenant did enter into that certain Lease Agreement, dated
March 17, 1999 ("Original Lease"), for the leasing by Landlord to Tenant of
certain space on the first floor of the building commonly known as Royal Centre
Three, 11475 Great Oaks Way, Alpharetta, Georgia ("Building"), the space leased
to Tenant being more particularly described in the Lease as the "Premises."
The Original Lease has been previously amended by First Amendment to
Lease, dated May 25, 1999 ("First Amendment") and by Second Amendment to Lease,
dated September 15, 1999 ("Second Amendment"). The Original Lease, as amended by
the First Amendment and Second Amendment, is hereinafter referred to as the
"Lease."
Landlord and Tenant desire to enter into this Third Amendment to
provide for the addition of the Second Expansion Space to the Premises pursuant
to and in accordance with the terms of this Third Amendment.
Now, therefore, for and in consideration of the sum of Ten and 00/100
Dollars, the mutual covenants and obligations set forth in the Lease and in this
Third Amendment and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Landlord and Tenant do hereby
agree as follows:
1. Effective as of January 1, 2000 ("Second Expansion Commencement
Date"), the Premises shall be increased for all purposes under the Lease by
adding thereto 7,295 rentable square feet on the first floor of the Building as
shown on the attached EXHIBIT A ("Second Expansion Space"),
2. The term for the Second Expansion Space ("Second Expansion Term")
shall terminate on June 30, 2006, coterminously with the Term for the original
Premises.
3. Base Rent for the Second Expansion Space shall be calculated in
accordance with the following schedule:
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
BASE RENT PER
PERIOD RENTABLE SQUARE FOOT MONTHLY BASE RENT
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1/1/00 - 7/31/00 * $20.50* $12,462.29*
- ------------------------------------------------------------------------------------------------------------
8/1/00 - 7/31/01 $21.01 $12,773.85
- ------------------------------------------------------------------------------------------------------------
8/1/01 - 7/31/02 $21.54 $13,093.20
- ------------------------------------------------------------------------------------------------------------
8/1/02 - 7/31/03 $22.08 $13,420.53
- ------------------------------------------------------------------------------------------------------------
8/1/03 - 7/31/04 $22.63 $13,756.04
- ------------------------------------------------------------------------------------------------------------
</TABLE>
*Notwithstanding anything to the contrary set forth herein, Base Rent
shall be abated for a 3,645 rentable square foot portion of the Second Expansion
Space for the period from January 1, 2000 through March 31, 2000. Accordingly,
during that period, the Monthly Base Rent due by Tenant with respect to the
Second Expansion shall be $6,235.42.
4. As of August 1, 2004, Base Rent per rentable square feet per annum
of the Second Expansion Space shall be that of the existing base rental rate
then in effect on the primary Premises.
5. Additional Rent, Rent and all other charges under the Lease which
are or will be applicable to the Premises shall also be applicable to the Second
Expansion Space.
6. As of the Second Expansion Commencement Date, the Premises shall
consist of a total of 37,163 rentable square feet which the parties conclusively
agree is correct and is not subject to challenge or dispute by either party. As
of the Second Expansion Commencement Date, Tenant's Prorata Share of Excess
Operating Expenses shall become 22.4513%.
7. Beginning as of the Second Expansion Commencement Date, Tenant shall
pay Base Rent for the Second Expansion Space (except the abated portion, as
provided above) at the rate per rentable square foot, per annum applicable from
time to time as set forth in Section 3 of this Third Amendment. Tenant shall
also be obligated to pay Tenant's Prorata Share of Excess Operating Expenses
with respect to the Second Expansion Space. Tenant shall pay such Base Rent and
Tenant's Prorata Share of Excess Operating Expenses on the same and terms and
conditions (including a 1999 Base Year) and at the same time Tenant is obligated
to pay Base Rent and Tenant's Prorata Share of Excess Operating Expenses with
respect to the remainder of the Premises.
8. Landlord shall provide Tenant an Improvement Allowance for the
Second Expansion Space equal to $17.00 per rentable square foot of the Second
Expansion Space and Landlord construct leasehold improvements in the Second
Expansion Space in accordance with all of the provisions of the Work Letter
attached as EXHIBIT "D" of the Lease, except that: (i) any reference to the
Premises shall be deemed to refer to the Second Expansion Space; (ii) any
reference to the Plans shall be deemed to refer to the Second Expansion Plans
and (iii) any reference to Tenant's Work shall be deemed to be a reference to
the work to be performed by Landlord in the Second Expansion Space in accordance
with the Second Expansion Plans ('Tenant's Second Expansion Space Work").
Landlord will cause the Second Expansion Plans
2
<PAGE>
to be prepared, in the same manner described in Paragraph 1 of the Work
Letter, promptly following Tenant's delivery to Landlord of Tenant's
specifications and requirements for the Second Expansion Space, and will
proceed with due diligence thereafter to construct Tenant's Second Expansion
Space Work.
9. Except as expressly provided in this Third Amendment, no free rent,
improvement allowances, moving allowances, space planning allowances or other
concessions which apply to the original Premises shall apply to the Second
Expansion Space. Except as modified by the terms of this Third Amendment,
Landlord and Tenant do hereby ratify and reaffirm each and every provisions of
the Lease and do hereby acknowledge that the Lease remains in full force and
effect.
IN WITNESS WHEREOF, the parties have hereunto set their hands and seals
as of the day, month and year first above written.
Dated: 10/26/99
LANDLORD:
ALLIANZ LIFE INSURANCE
COMPANY OF NORTH AMERICA, a
Minnesota corporation
By: ALLIANZ OF AMERICA, INC.
its Investment Advisor
By: /s/ Brian S. Brennan
------------------------------------
Name: Brian S. Brennan
------------------------------------
Title: Director, Real Estate Acquisitions
------------------------------------
Dated: TENANT:
------------------
NET.B@NK, INC., a Georgia corporation
By: /s/ Robert E. Bowers
------------------------------------
Name: Robert E. Bowers
------------------------------------
Title: CFO
------------------------------------
3
<PAGE>
EXHIBIT "A"
ROYAL CENTRE THREE
at Royal 400
Alpharetta, Georgia
Ground Floor Plan
<PAGE>
EXHIBIT 10.5
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made as of the 1st day of January, 2000, between
NET.B@NK, INC. (the "Company"), the parent bank holding company of NET.B@NK, a
federal savings bank (collectively, the "Employer"), and ROBERT E.
BOWERS, a resident of the State of Georgia (the "Executive").
RECITALS:
The Company desires to employ the Executive as the Chief Financial
Officer of the Employer and the Executive desires to accept such employment.
In consideration of the above premises and the mutual agreements
hereinafter set forth, the parties hereby agree as follows:
1. DEFINITIONS. Whenever used in this Agreement, the following terms and their
variant forms shall have the meaning set forth below:
1.1 "AGREEMENT" shall mean this Agreement and any Exhibits incorporated
herein together with any amendments hereto made in the manner described in this
Agreement.
1.2 "AFFILIATE" shall mean any business entity which controls, is
controlled by, or is under common control with, the Employer.
1.3 "AVERAGE MONTHLY COMPENSATION" shall mean the quotient determined (a)
by dividing the sum of the Executive's then-current annual Base Salary (as
defined in Section 4.1), and Incentive Compensation (as set forth in Section
4.2(a)) (b) by twelve (12). For this purpose, Incentive Compensation dependent
on Executive's performance shall be based upon the greater of the Incentive
Compensation earned by Executive in the prior calendar year or the Incentive
Compensation which would be earned by Executive by annualizing the performance
of the Employer based on year-to-date performance.
1.4 "BUSINESS OF THE EMPLOYER" shall mean the business conducted by the
Employer, which is internet-based commercial banking.
1.5 "CAUSE" shall mean:
1.5.1 With respect to termination by the Company:
(a) A material breach of the terms of this Agreement by the
Executive (including, without limitation, failure by the Executive
to perform his duties and responsibilities in the manner and to the
extent required under this Agreement, or a breach of any
representation or warranty of the Executive set forth herein); which
breach remains uncured after the expiration of thirty (30) days
following the delivery of written notice of such breach to the
Executive by the Company;
<PAGE>
(b) Conduct by the Executive that amounts to fraud, dishonesty
or willful misconduct in the performance of his duties and
responsibilities hereunder;
(c) The conviction of the Executive of a felony;
(d) Conduct by the Executive that amounts to gross and willful
insubordination or inattention to his duties and responsibilities
hereunder; or
(e) Conduct by the Executive that results in removal from his
position as an officer or executive of the Employer pursuant to a
written order by any regulatory agency with authority or
jurisdiction over the Executive.
1.5.2 With respect to termination by the Executive, a material
diminution in the powers, responsibilities or duties of Executive
hereunder, or the failure of the Boards of Directors of the Bank and the
Company to elect him as Chief Financial Officer, or a material breach of
the terms of this Agreement by the Company which remains uncured after the
expiration of thirty (30) days following the delivery of written notice of
such breach to the Company by the Executive.
1.6 "CHANGE IN CONTROL" of the Employer shall mean any transaction wherein
fifty percent (50%) of the shares of the Bank or the Company, plus at least one
additional share, are directly or indirectly transferred by sale, gift, merger,
exchange or any other means to new owners other than an Affiliate of such person
or entity transferring such shares or if a majority of the members of the Board
of Directors of the Bank or of the Company are replaced within a twelve (12)
month period.
1.7 "INITIAL TERM" shall mean that period of time commencing on the date
of execution of this Agreement by the Company and the Executive and running
until the earlier of two (2) years thereafter or any termination of employment
of the Executive under this Agreement as provided for in Section 3.
1.8 "PERMANENT DISABILITY" shall mean the total inability of the Executive
to perform his duties under this Agreement for a period of ninety (90)
consecutive days as certified by a physician chosen by the Company and
reasonably acceptable to the Executive; provided, however, if the Executive is
covered by a disability insurance policy, the term "permanent disability" shall
have the meaning set forth in such policy.
1.9 "PROPRIETARY INFORMATION" shall mean:
(a) Information related to the Employer or any Affiliate,
(i) Which derives economic value, actual or potential, from not
being generally
-2-
<PAGE>
known to or readily ascertainable by other persons who can
obtain economic value from its disclosure or use; and
(ii) Which is the subject of efforts that are reasonable under
the circumstances to maintain its secrecy; and
(b) All tangible reproductions or embodiments of such information.
Assuming the criteria in (a)(i) and (a)(ii) above are satisfied, Proprietary
Information includes, but is not limited to, technical and nontechnical data
related to the compilations, programs, methods, techniques, finances, actual or
potential customers and suppliers, existing and future products, and employees
of the Employer or its Affiliates. Proprietary Information also includes
information which has been disclosed to the Employer or its Affiliates by a
third party and which the Employer or any Affiliate is obligated to treat as
confidential.
1.10 "TERM" shall mean the Initial Term and all subsequent renewal
periods. The Term shall be automatically extended on each day for one additional
day, beginning on the first day of the Initial Term, so that the Term shall
remain a two-year term until either party gives written notice to the other that
the automatic extensions shall cease, whereupon the Term shall expire on the day
preceding the second anniversary of the date of delivery of the written notice.
2. DUTIES.
2.1 The Executive is employed as the Chief Financial Officer of the
Employer and, subject to the direction of the Chief Executive Officer and Board
of Directors of the Employer, shall perform and discharge well and faithfully
the duties which may be assigned to him from time to time by the Employer in
connection with the conduct of its business. The current duties and
responsibilities of the Executive are set forth on EXHIBIT A attached hereto.
2.2 In addition to the duties and responsibilities specifically assigned
to the Executive pursuant to Section 2.1 hereof, the Executive shall: (1) devote
substantially all of his time, energy and skill during regular business hours to
the performance of the duties of his employment (reasonable vacations and
reasonable absences due to illness excepted), and faithfully and industriously
perform such duties; (2) diligently follow and implement all management policies
and decisions communicated to him by the Chief Executive Officer and Board of
Directors of the Employer; and (3) timely prepare and forward to the Chief
Executive Officer and Board of Directors of the Employer all reports and
accounting as may be requested of the Executive.
2.3 The Executive shall devote substantially his entire business time,
attention and energies to the Business of the Employer and shall not during the
term of this Agreement be engaged (whether or not during normal business hours)
in any other business or professional activity which is competitive in nature;
or interferes with his ability to perform his duties fully; or which promotes an
-3-
<PAGE>
activity inconsistent with the nature or status of the Employer, whether or not
such activity is pursued for gain, profit or other pecuniary advantage; but this
shall not be construed as preventing the Executive from (1) investing his
personal assets in businesses which (subject to item (2) below) are not in
competition with the Business of the Employer and which will not require any
services on the part of the Executive in their operation or affairs and in which
his participation is solely that of an investor, (2) purchasing securities in
any corporation whose securities are regularly traded provided that such
purchase shall not result in his collectively owning beneficially at any time
five percent (5%) or more of the equity securities of any business in
competition with the Business of the Employer, and (3) participating in civic
and professional affairs and organizations and conferences, preparing or
publishing papers or books or teaching so long as such activity does not
materially interfere with the performance of his duties hereunder.
3. TERM AND TERMINATION.
3.1 TERM. This Agreement shall remain in effect for the Term. However,
notwithstanding the provisions of Section 1.7, (i) no extension shall be granted
that would extend the term of this Agreement beyond the last day of the month
during which the Executive attains age 65, and (ii) this Agreement shall
terminate upon the death or Permanent Disability of Executive.
3.2 TERMINATION. During the Term, the employment of the Executive under
this Agreement may be terminated only as follows:
3.2.1 By the Company:
(a) For Cause, with no prior notice except as provided in Section 1.5.1; or
(b) Without Cause at any time, provided that the Company shall
give the Executive thirty (30) days prior written notice of its
intent to terminate.
3.2.2 By the Executive:
(a) For Cause, with no prior notice except as provided in
Section 1.5.2; or
(b) Without Cause, provided that the Executive shall give the
Company thirty (30) days prior written notice of his intent to
terminate.
3.2.3 By the Executive within twelve (12) months following a Change
in Control of the Employer, provided that the Executive shall give
written notice to the Company of his intention to terminate this
Agreement within such period.
3.2.4 At any time upon mutual, written agreement of the parties.
-4-
<PAGE>
3.3 EFFECT OF TERMINATION. The effect of termination of the employment of
the Executive pursuant to Section 3.2 shall be as follows:
3.3.1 In the event of termination by the Company:
(a) For Cause, pursuant to Section 3.2.1(a), the Company shall
have no further obligation to the Executive except for the payment
of any amounts due and owing under Section 4 on the effective date
of termination;
(b) Without Cause, pursuant to Section 3.2.1(b), the Company
shall be required to meet its obligations to the Executive under
Section 3.4 below.
3.3.2 In the event of termination by the Executive:
(a) For Cause, pursuant to Section 3.2.2(a), the Company shall
be required to meet its obligations to the Executive under Section
3.4 below.
(b) Without Cause, pursuant to Section 3.2.2(b), the Executive
shall have no further obligation to the Company.
3.3.3 In the event of termination by the Executive in connection
with a Change in Control pursuant to Section 3.2.3, the Company
shall be required to meet its obligations to the Executive under
Section 3.4 below.
3.3.4 In the event of termination upon mutual agreement of the
parties pursuant to Section 3.2.4, the Company shall have no further
obligation to the Executive except for the payment of any amounts
due and owing under Section 4.1 on the effective date of termination
unless otherwise set forth in the written agreement.
3.4 TERMINATION PAYMENTS. In the event Executive's employment is
terminated under this Agreement prior to the expiration of the Term pursuant to
Section 3.3.1(b), Section 3.3.2(a) or Section 3.3.3, the Company shall pay to
the Executive as severance pay and liquidated damages a lump sum amount equal to
the product of the (a) Average Monthly Compensation multiplied by (b)
twenty-four (24). In addition, from the effective date of the termination
through the then unexpired portion of the Term (or, if greater, for a period of
twelve months following the effective date of the termination) (the "Severance
Period"), the Company shall cause the Bank to continue to provide to the
Executive, to the extent practicable, the benefits described in Section 4.3;
provided, however, that in lieu of providing health benefits, the Company shall
pay the Executive an amount equal to the cost of COBRA health continuation
coverage that would be charged by the Bank to a former employee and eligible
dependents for the greater of the Severance Period or the period during which
the Executive and his eligible dependents are entitled to COBRA health
continuation coverage from the Bank. To the extent the Company determines that
the continuation of any other
-5-
<PAGE>
benefits by the Bank is not practicable, the Company shall pay the Executive
an amount equal to what would have been the Bank's cost of providing the
coverage for such benefits during the Severance Period to the Executive and
his eligible dependents if the coverage could have been continued.
Notwithstanding any other provision of this Agreement to the contrary, if the
aggregate of the payments provided for in this Agreement and the other payments
and benefits which the Executive has the right to receive from the Employer (the
"Total Payments") would constitute a "parachute payment," as defined in Section
280G(b)(2) of the Internal Revenue Code, as amended (the "Code"), the Executive
shall receive the Total Payments unless the (a) after-tax amount that would be
retained by the Executive (after taking into account all federal, state and
local income taxes payable by the Executive and the amount of any excise taxes
payable by the Executive (the "Excise Taxes")) if the Executive were to receive
the Total Payments has a lesser aggregate value than (b) the after-tax amount
that would be retained by the Executive (after taking into account all federal,
state and local income taxes payable by the Executive) if the Executive were to
receive the Total Payments being subject to Excise Taxes (the "Reduced
Payments"), in which case the Executive shall be entitled only to the Reduced
Payments. If the Executive is to receive the Reduced Payments, the Executive
shall be entitled to determine which of the Total Payments, and the relative
portions of each, are to be reduced.
4. COMPENSATION. The Executive shall receive the following salary and benefits:
4.1 BASE SALARY. During the Initial Term, the Executive shall be
compensated at a base rate of $200,000 per annum (the "Base Salary"). The
Executive's salary shall be reviewed by the Chief Executive Officer and the
Compensation Committee of the Board of Directors annually, and the Executive
shall be entitled to receive annually an increase in such amount, if any, as may
be determined by the Chief Executive Officer and the Compensation Committee of
the Board of Directors. Such salary shall be payable in accordance with the
employer's normal payroll practices.
4.2 INCENTIVE COMPENSATION.
(a) The Executive shall be entitled to an annual incentive
bonus determined in accordance with the criteria set forth in EXHIBIT B
attached hereto (the "Incentive Compensation"). The Incentive
Compensation shall set a target bonus equal to forty percent (40%) of
Base Salary and a maximum bonus equal to one hundred percent (100%) of
Base Salary.
(b) The Executive shall be entitled to participate in such
option, bonus, incentive and other executive compensation programs as
are made available to senior management of the Employer from time to
time.
-6-
<PAGE>
4.3 BENEFITS.
(a) In addition to the Base Salary and Incentive Compensation,
the Executive shall be entitled to such other benefits as may be
available from time to time for executives of the Employer similarly
situated to the Executive. All such benefits shall be awarded and
administered in accordance with the Employer's standard policies and
practices. Such benefits may include, by way of example only, profit
sharing plans, retirement or investment funds, dental, health, life
and disability insurance benefits, and such other benefits as the
Employer deems appropriate.
(b) The Company specifically agrees to reimburse the Executive
for reasonable business expenses incurred by him in performance of
his duties hereunder, as approved from time to time by the Chief
Executive Officer; provided that the Executive shall, as a condition
of reimbursement, submit verification of the nature and amount of
such expenses in accordance with reimbursement policies from time to
time adopted by the Employer and in sufficient detail to comply with
Internal Revenue Service regulations.
(c) On a non-cumulative basis the Executive shall be entitled
to four (4) weeks of vacation in each year of this Agreement, during
which his compensation shall be paid in full. At least two
consecutive weeks each year must be taken by the Executive for
vacation, with other vacation to be taken at the time the Executive
determines appropriate, taking into account the requirements of the
Employer.
(d) The Executive shall be reimbursed for membership in a
Country Club approved by the Chief Executive Officer, and shall be
provided with an executive car approved by the Chief Executive
Officer.
(e) Options shall be granted as part of the Incentive
Compensation Agreement. See Section 4.2.
4.4 WITHHOLDING. The Employer may deduct from each payment of compensation
hereunder all amounts required to be deducted and withheld in accordance with
applicable federal and state income, FICA and other withholding requirements.
5. PROPRIETARY INFORMATION.
5.1 TREATMENT OF PROPRIETARY INFORMATION. As a senior management official
of the Employer, the Executive has access to Proprietary Information. The
Executive agrees to maintain the confidentiality of all Proprietary Information
throughout the Term and for a period of two (2) years after the termination of
this Agreement.
-7-
<PAGE>
5.2 OBLIGATIONS OF EXECUTIVE. During the period described in Section 5.1,
the Executive will hold the Proprietary Information in trust and strictest
confidence, and will not use, reproduce, distribute, disclose or otherwise
disseminate the Proprietary Information except to the extent necessary to
perform the duties assigned to him by the Employer.
5.3 DELIVERY UPON TERMINATION. Upon termination of his employment with the
Employer, the Executive will promptly deliver to the Employer all property
belonging to the Employer, including, without limitation, all Proprietary
Information then in his possession or control.
6. NON-COMPETITION. The Executive agrees that during his employment by the
Employer and, in the event of his termination, other than pursuant to Sections
3.3.1(b) or 3.3.2(a), for a period of twelve (12) months thereafter, he will not
(except on behalf of or with the prior written consent of the Company), within
the Atlanta Metropolitan (RMA) Area, either directly or indirectly, on his own
behalf or in the service or on behalf of others, in any capacity which involves
duties and responsibilities similar to those undertaken for the Employer, engage
in any business which is the same as or essentially the same as the Business of
the Employer.
7. NON-SOLICITATION. The Executive agrees that during his employment by the
Employer and, in the event of his termination, other than pursuant to Sections
3.3.1(b) or 3.3.2(a), for a period of twelve (12) months thereafter, he will not
(except on behalf of or with the prior written consent of the Company), within
the Atlanta Metropolitan (RMA) Area, on his own behalf or in the service or on
behalf of others, solicit, divert or appropriate, or attempt to solicit, divert
or appropriate, directly or by assisting others, any business from any of the
Employer's customers or vendors, including actively-sought prospective customers
or vendors, with whom the Executive has or had material contact during the last
two (2) years of his employment, for purposes of providing products or services
that are competitive with those provided by the Employer.
8. NON-SOLICITATION OF EXECUTIVES. The Executive agrees that during his
employment by the Employer and, in the event of his termination, other than
pursuant to Sections 3.3.1(b) or 3.3.2(a), for a period of twelve (12) months
thereafter, he will not, on his own behalf or in the service or on behalf of
others, solicit, recruit or hire away, or attempt to solicit, recruit or hire
away, directly or by assisting others, any employee of the Employer or its
Affiliates, whether or not such employee is a full-time employee or a temporary
employee of the Employer, and whether or not such employment is pursuant to
written agreement and whether or not such employment is for a determined period
or is at will.
9. REMEDIES. The Executive agrees that the covenants contained in Sections 5
through 8 of this Agreement are of the essence of this Agreement; that each of
the covenants is reasonable and necessary to protect the business, interests and
properties of the Employer; and that irreparable loss and damage will be
suffered by the Employer should he breach any of the covenants. Therefore, the
Executive agrees and consents that, in addition to all the remedies provided by
law or in equity, the Company shall be entitled to a temporary restraining order
and temporary and permanent
-8-
<PAGE>
injunctions to prevent a breach or contemplated breach of any of the
covenants. The Company and the Executive agree that all remedies available to
the Company or the Executive, as applicable, shall be cumulative.
10. SEVERABILITY. The parties agree that each of the provisions included in this
Agreement is separate, distinct, and severable from the other provisions of this
Agreement, and that the invalidity or unenforceability of any Agreement
provision shall not affect the validity or enforceability of any other provision
of this Agreement. Further, if any provision of this Agreement is ruled invalid
or unenforceable by a court of competent jurisdiction because of a conflict
between the provision and any applicable law or public policy, the provision
shall be redrawn to make the provision consistent with and valid and enforceable
under the law or public policy.
11. NOTICE. All notices and other communications required or permitted under
this Agreement shall be in writing and, if mailed by prepaid first-class mail or
certified mail, return receipt requested, shall be deemed to have been received
on the earlier of the date shown on the receipt or three (3) business days after
the postmarked date thereof. In addition, notices hereunder may be delivered by
hand, facsimile transmission or overnight courier, in which event the notice
shall be deemed effective when delivered or transmitted. All notices and other
communications under this Agreement shall be given to the parties hereto at the
following addresses:
(i) If to the Company, to it at:
Net.B@nk, Inc.
Royal Centre Three
Suite 100
Alpharetta, Georgia 30022
Attn: Chief Executive Officer
(ii) If to the Executive, to him at:
Robert E. Bowers
1205 Stuart Ridge
Alpharetta, Georgia 30022
12. ASSIGNMENT. Neither party hereto may assign or delegate this Agreement or
any of its rights and obligations hereunder without the written consent of the
other party hereto.
13. WAIVER. A waiver by the Company of any breach of this Agreement by the
Executive shall not be effective unless in writing, and no waiver shall operate
or be construed as a waiver of the same or another breach on a subsequent
occasion.
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<PAGE>
14. ATTORNEYS' FEES. In the event of litigation between the parties concerning
this Agreement, the party prevailing in such litigation shall be entitled to
receive from the other party all reasonable costs and expenses, including
without limitation attorneys' fees, incurred by the prevailing party in
connection with such litigation, and the other party shall pay such costs and
expenses to the prevailing party promptly upon demand by the prevailing party.
15. APPLICABLE LAW. This Agreement shall be construed and enforced under and in
accordance with the laws of the state of Georgia.
16. ENTIRE AGREEMENT. This Agreement embodies the entire and final agreement of
the parties on the subject matter stated in the Agreement. No amendment or
modification of this Agreement shall be valid or binding upon the Company or the
Executive unless made in writing and signed by both parties. All prior
understandings and agreements relating to the subject matter of this Agreement
are hereby expressly terminated.
17. RIGHTS OF THIRD PARTIES. Nothing herein expressed is intended to or shall be
construed to confer upon or give to any person, firm or other entity, other than
the parties hereto and their permitted assigns, any rights or remedies under or
by reason of this Agreement.
18. SURVIVAL. The obligations of the Executive pursuant to Sections 5, 6, 7, 8
and 9 shall survive the termination of the employment of the Executive
hereunder.
IN WITNESS WHEREOF, the Company and the Executive have executed and
delivered this Agreement as of the date first shown above.
THE COMPANY:
NET.B@NK, INC.
By: /s/ D.R. Grimes
-----------------------------
Name: D.R. Grimes
Title: Chief Executive Officer
THE EXECUTIVE:
/s/ Robert E. Bowers
-----------------------------------
Robert E. Bowers
-10-
<PAGE>
EXHIBIT A
Duties of the Executive
The initial duties of the Executive shall include, in addition to any other
duties assigned the Executive by the Boards of Directors of the Employer or its
designee, the following:
- - Foster a corporate culture that promotes ethical practices, encourages
individual integrity, fulfills social responsibility, and is conducive to
attracting, retaining and motivating a diverse group of top-quality
executives at all levels.
- - With the Board of Directors of the Bank and the Chief Executive Officer,
develop a long-term strategy for the Bank that creates shareholder value.
- - Develop and recommend to the Chief Executive Officer and the Board of
Directors of the Bank annual business plans and budgets that support the
Bank's long-term strategy.
- - Use best efforts to achieve the Bank's financial and operating goals and
objectives.
- - Improve the quality and value of the products and services provided by the
Bank.
- - Insure that the Bank maintains a satisfactory competitive position within
its industry.
- - Implement major corporate policies.
- - Insure that the Bank maintains satisfactory compliance with SEC,
Accounting and OTS regulations and procedures.
<PAGE>
EXHIBIT B
To be finalized upon completion of the independent study currently being
conducted.
<PAGE>
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
THIS AGREEMENT is made as of the 14th day of Feburary, 2000, between
NET.B@NK, INC. (the "Company"), the parent bank holding company of NET.B@NK, a
federal savings bank (collectively, the "Employer"), and MICHAEL R. FITZGERALD,
a resident of the State of Georgia (the "Executive").
RECITALS:
The Company desires to employ the Executive as the President of the
Employer and the Executive desires to accept such employment.
In consideration of the above premises and the mutual agreements
hereinafter set forth, the parties hereby agree as follows:
1. DEFINITIONS. Whenever used in this Agreement, the following terms and their
variant forms shall have the meaning set forth below:
1.1 "AGREEMENT" shall mean this Agreement and any Exhibits incorporated
herein together with any amendments hereto made in the manner described in this
Agreement.
1.2 "AFFILIATE" shall mean any business entity which controls, is
controlled by, or is under common control with, the Employer.
1.3 "AVERAGE MONTHLY COMPENSATION" shall mean the quotient determined (a)
by dividing the sum of the Executive's then-current annual Base Salary (as
defined in Section 4.1), and Incentive Compensation (as set forth in Section
4.2(a)) (b) by twelve (12). For this purpose, Incentive Compensation dependent
on Executive's performance shall be based upon the greater of the Incentive
Compensation earned by Executive in the prior calendar year or the Incentive
Compensation which would be earned by Executive by annualizing the performance
of the Employer based on year-to-date performance.
1.4 "BUSINESS OF THE EMPLOYER" shall mean the business conducted by the
Employer, which is internet-based commercial banking.
1.5 "CAUSE" shall mean:
1.5.1 With respect to termination by the Company:
(a) A material breach of the terms of this Agreement by the
Executive (including, without limitation, failure by the Executive
to perform his duties and responsibilities in the manner and to the
extent required under this Agreement, or a breach of any
representation or warranty of the Executive set forth herein); which
breach remains uncured after the expiration of thirty (30) days
following the delivery of written notice of such breach to the
Executive by the Company;
<PAGE>
(b) Conduct by the Executive that amounts to fraud, dishonesty
or willful misconduct in the performance of his duties and
responsibilities hereunder;
(c) The conviction of the Executive of a felony;
(d) Conduct by the Executive that amounts to gross and willful
insubordination or inattention to his duties and responsibilities
hereunder; or
(e) Conduct by the Executive that results in removal from his
position as an officer or executive of the Employer pursuant to a
written order by any regulatory agency with authority or
jurisdiction over the Executive.
1.5.2 With respect to termination by the Executive, a material
diminution in the powers, responsibilities or duties of Executive
hereunder, or the failure of the Boards of Directors of the Bank and the
Company to elect him as President, or a material breach of the terms of
this Agreement by the Company which remains uncured after the expiration
of thirty (30) days following the delivery of written notice of such
breach to the Company by the Executive.
1.6 "CHANGE IN CONTROL" of the Employer shall mean any transaction wherein
fifty percent (50%) of the shares of the Bank or the Company, plus at least one
additional share, are directly or indirectly transferred by sale, gift, merger,
exchange or any other means to new owners other than an Affiliate of such person
or entity transferring such shares or if a majority of the members of the Board
of Directors of the Bank or of the Company are replaced within a twelve (12)
month period.
1.7 "INITIAL TERM" shall mean that period of time commencing on the date
of execution of this Agreement by the Company and the Executive and running
until the earlier of two (2) years thereafter or any termination of employment
of the Executive under this Agreement as provided for in Section 3.
1.8 "PERMANENT DISABILITY" shall mean the total inability of the Executive
to perform his duties under this Agreement for a period of ninety (90)
consecutive days as certified by a physician chosen by the Company and
reasonably acceptable to the Executive; provided, however, if the Executive is
covered by a disability insurance policy, the term "permanent disability" shall
have the meaning set forth in such policy.
1.9 "PROPRIETARY INFORMATION" shall mean:
(a) Information related to the Employer or any Affiliate,
(i) Which derives economic value, actual or potential, from not
being generally known to or readily ascertainable by other
persons who can obtain economic value
-2-
<PAGE>
from its disclosure or use; and
(ii) Which is the subject of efforts that are reasonable under
the circumstances to maintain its secrecy; and
(b) All tangible reproductions or embodiments of such information.
Assuming the criteria in (a)(i) and (a)(ii) above are satisfied, Proprietary
Information includes, but is not limited to, technical and nontechnical data
related to the compilations, programs, methods, techniques, finances, actual or
potential customers and suppliers, existing and future products, and employees
of the Employer or its Affiliates. Proprietary Information also includes
information which has been disclosed to the Employer or its Affiliates by a
third party and which the Employer or any Affiliate is obligated to treat as
confidential.
1.10 "TERM" shall mean the Initial Term and all subsequent renewal
periods. The Term shall be automatically extended on each day for one additional
day, beginning on the first day of the Initial Term, so that the Term shall
remain a two-year term until either party gives written notice to the other that
the automatic extensions shall cease, whereupon the Term shall expire on the day
preceding the second anniversary of the date of delivery of the written notice.
2. DUTIES.
2.1 The Executive is employed as the President of the Employer and,
subject to the direction of the Chief Executive Officer and Board of Directors
of the Employer, shall perform and discharge well and faithfully the duties
which may be assigned to him from time to time by the Employer in connection
with the conduct of its business. The current duties and responsibilities of the
Executive are set forth on EXHIBIT A attached hereto.
2.2 In addition to the duties and responsibilities specifically assigned
to the Executive pursuant to Section 2.1 hereof, the Executive shall: (1) devote
substantially all of his time, energy and skill during regular business hours to
the performance of the duties of his employment (reasonable vacations and
reasonable absences due to illness excepted), and faithfully and industriously
perform such duties; (2) diligently follow and implement all management policies
and decisions communicated to him by the Chief Executive Officer and Board of
Directors of the Employer; and (3) timely prepare and forward to the Chief
Executive Officer and Board of Directors of the Employer all reports and
accounting as may be requested of the Executive.
2.3 The Executive shall devote substantially his entire business time,
attention and energies to the Business of the Employer and shall not during the
term of this Agreement be engaged (whether or not during normal business hours)
in any other business or professional activity which is competitive in nature;
or interferes with his ability to perform his duties fully; or which promotes an
activity inconsistent with the nature or status of the Employer, whether or not
such activity is
-3-
<PAGE>
pursued for gain, profit or other pecuniary advantage; but this shall not be
construed as preventing the Executive from (1) investing his personal assets
in businesses which (subject to item (2) below) are not in competition with
the Business of the Employer and which will not require any services on the
part of the Executive in their operation or affairs and in which his
participation is solely that of an investor, (2) purchasing securities in any
corporation whose securities are regularly traded provided that such purchase
shall not result in his collectively owning beneficially at any time five
percent (5%) or more of the equity securities of any business in competition
with the Business of the Employer, and (3) participating in civic and
professional affairs and organizations and conferences, preparing or
publishing papers or books or teaching so long as such activity does not
materially interfere with the performance of his duties hereunder.
3. TERM AND TERMINATION.
3.1 TERM. This Agreement shall remain in effect for the Term. However,
notwithstanding the provisions of Section 1.7, (i) no extension shall be granted
that would extend the term of this Agreement beyond the last day of the month
during which the Executive attains age 65, and (ii) this Agreement shall
terminate upon the death or Permanent Disability of Executive.
3.2 TERMINATION. During the Term, the employment of the Executive under
this Agreement may be terminated only as follows:
3.2.1 By the Company:
(a) For Cause, with no prior notice except as provided in Section 1.5.1; or
(b) Without Cause at any time, provided that the Company shall
give the Executive thirty (30) days prior written notice of its
intent to terminate.
3.2.2 By the Executive:
(a) For Cause, with no prior notice except as provided in
Section 1.5.2; or
(b) Without Cause, provided that the Executive shall give the
Company thirty (30) days prior written notice of his intent to
terminate.
3.2.3 By the Executive within twelve (12) months following a Change
in Control of the Employer, provided that the Executive shall give
written notice to the Company of his intention to terminate this
Agreement within such period.
3.2.4 At any time upon mutual, written agreement of the parties.
-4-
<PAGE>
3.3 EFFECT OF TERMINATION. The effect of termination of the employment of
the Executive pursuant to Section 3.2 shall be as follows:
3.3.1 In the event of termination by the Company:
(a) For Cause, pursuant to Section 3.2.1(a), the Company shall
have no further obligation to the Executive except for the payment
of any amounts due and owing under Section 4 on the effective date
of termination;
(b) Without Cause, pursuant to Section 3.2.1(b), the Company
shall be required to meet its obligations to the Executive under
Section 3.4 below.
3.3.2 In the event of termination by the Executive:
(a) For Cause, pursuant to Section 3.2.2(a), the Company shall
be required to meet its obligations to the Executive under Section
3.4 below.
(b) Without Cause, pursuant to Section 3.2.2(b), the Executive
shall have no further obligation to the Company.
3.3.3 In the event of termination by the Executive in connection
with a Change in Control pursuant to Section 3.2.3, the Company
shall be required to meet its obligations to the Executive under
Section 3.4 below.
3.3.4 In the event of termination upon mutual agreement of the
parties pursuant to Section 3.2.4, the Company shall have no further
obligation to the Executive except for the payment of any amounts
due and owing under Section 4.1 on the effective date of termination
unless otherwise set forth in the written agreement.
3.4 TERMINATION PAYMENTS. In the event Executive's employment is
terminated under this Agreement prior to the expiration of the Term pursuant to
Section 3.3.1(b), Section 3.3.2(a) or Section 3.3.3, the Company shall pay to
the Executive as severance pay and liquidated damages a lump sum amount equal to
the product of the (a) Average Monthly Compensation multiplied by (b)
twenty-four (24). In addition, from the effective date of the termination
through the then unexpired portion of the Term (or, if greater, for a period of
twelve months following the effective date of the termination) (the "Severance
Period"), the Company shall cause the Bank to continue to provide to the
Executive, to the extent practicable, the benefits described in Section 4.3;
provided, however, that in lieu of providing health benefits, the Company shall
pay the Executive an amount equal to the cost of COBRA health continuation
coverage that would be charged by the Bank to a former employee and eligible
dependents for the greater of the Severance Period or the period during which
the Executive and his eligible dependents are entitled to COBRA health
continuation coverage from the Bank. To the extent the Company determines that
the continuation of any other
-5-
<PAGE>
benefits by the Bank is not practicable, the Company shall pay the Executive
an amount equal to what would have been the Bank's cost of providing the
coverage for such benefits during the Severance Period to the Executive and
his eligible dependents if the coverage could have been continued.
Notwithstanding any other provision of this Agreement to the contrary, if the
aggregate of the payments provided for in this Agreement and the other payments
and benefits which the Executive has the right to receive from the Employer (the
"Total Payments") would constitute a "parachute payment," as defined in Section
280G(b)(2) of the Internal Revenue Code, as amended (the "Code"), the Executive
shall receive the Total Payments unless the (a) after-tax amount that would be
retained by the Executive (after taking into account all federal, state and
local income taxes payable by the Executive and the amount of any excise taxes
payable by the Executive (the "Excise Taxes")) if the Executive were to receive
the Total Payments has a lesser aggregate value than (b) the after-tax amount
that would be retained by the Executive (after taking into account all federal,
state and local income taxes payable by the Executive) if the Executive were to
receive the Total Payments being subject to Excise Taxes (the "Reduced
Payments"), in which case the Executive shall be entitled only to the Reduced
Payments. If the Executive is to receive the Reduced Payments, the Executive
shall be entitled to determine which of the Total Payments, and the relative
portions of each, are to be reduced.
4. COMPENSATION. The Executive shall receive the following salary and benefits:
4.1 BASE SALARY. During the Initial Term, the Executive shall be
compensated at a base rate of $200,000 per annum (the "Base Salary"). The
Executive's salary shall be reviewed by the Chief Executive Officer and the
Compensation Committee of the Board of Directors annually, and the Executive
shall be entitled to receive annually an increase in such amount, if any, as may
be determined by the Chief Executive Officer and the Compensation Committee of
the Board of Directors. Such salary shall be payable in accordance with the
employer's normal payroll practices.
4.2 INCENTIVE COMPENSATION.
(a) The Executive shall be entitled to an annual incentive
bonus determined in accordance with the criteria set forth in EXHIBIT B
attached hereto (the "Incentive Compensation"). The Incentive
Compensation shall set a target bonus equal to forty percent (40%) of
Base Salary and a maximum bonus equal to one hundred percent (100%) of
Base Salary.
(b) The Executive shall be entitled to participate in such
option, bonus, incentive and other executive compensation programs as
are made available to senior management of the Employer from time to
time.
-6-
<PAGE>
4.3 BENEFITS.
(a) In addition to the Base Salary and Incentive Compensation,
the Executive shall be entitled to such other benefits as may be
available from time to time for executives of the Employer similarly
situated to the Executive. All such benefits shall be awarded and
administered in accordance with the Employer's standard policies and
practices. Such benefits may include, by way of example only, profit
sharing plans, retirement or investment funds, dental, health, life
and disability insurance benefits, and such other benefits as the
Employer deems appropriate.
(b) The Company specifically agrees to reimburse the Executive
for reasonable business expenses incurred by him in performance of
his duties hereunder, as approved from time to time by the Chief
Executive Officer; provided that the Executive shall, as a condition
of reimbursement, submit verification of the nature and amount of
such expenses in accordance with reimbursement policies from time to
time adopted by the Employer and in sufficient detail to comply with
Internal Revenue Service regulations.
(c) On a non-cumulative basis the Executive shall be entitled
to four (4) weeks of vacation in each year of this Agreement, during
which his compensation shall be paid in full. At least two
consecutive weeks each year must be taken by the Executive for
vacation, with other vacation to be taken at the time the Executive
determines appropriate, taking into account the requirements of the
Employer.
(d) The Executive shall be reimbursed for membership in a
Country Club approved by the Chief Executive Officer, and shall be
provided with an executive car approved by the Chief Executive
Officer.
(e) Options shall be granted as part of the Incentive
Compensation Agreement. See Section 4.2.
4.4 WITHHOLDING. The Employer may deduct from each payment of compensation
hereunder all amounts required to be deducted and withheld in accordance with
applicable federal and state income, FICA and other withholding requirements.
5. PROPRIETARY INFORMATION.
5.1 TREATMENT OF PROPRIETARY INFORMATION. As a senior management official
of the Employer, the Executive has access to Proprietary Information. The
Executive agrees to maintain the confidentiality of all Proprietary Information
throughout the Term and for a period of two (2) years after the termination of
this Agreement.
-7-
<PAGE>
5.2 OBLIGATIONS OF EXECUTIVE. During the period described in Section 5.1,
the Executive will hold the Proprietary Information in trust and strictest
confidence, and will not use, reproduce, distribute, disclose or otherwise
disseminate the Proprietary Information except to the extent necessary to
perform the duties assigned to him by the Employer.
5.3 DELIVERY UPON TERMINATION. Upon termination of his employment with the
Employer, the Executive will promptly deliver to the Employer all property
belonging to the Employer, including, without limitation, all Proprietary
Information then in his possession or control.
6. NON-COMPETITION. The Executive agrees that during his employment by the
Employer and, in the event of his termination, other than pursuant to Sections
3.3.1(b) or 3.3.2(a), for a period of twelve (12) months thereafter, he will not
(except on behalf of or with the prior written consent of the Company), within
the Atlanta Metropolitan (RMA) Area, either directly or indirectly, on his own
behalf or in the service or on behalf of others, in any capacity which involves
duties and responsibilities similar to those undertaken for the Employer, engage
in any business which is the same as or essentially the same as the Business of
the Employer.
7. NON-SOLICITATION. The Executive agrees that during his employment by the
Employer and, in the event of his termination, other than pursuant to Sections
3.3.1(b) or 3.3.2(a), for a period of twelve (12) months thereafter, he will not
(except on behalf of or with the prior written consent of the Company), within
the Atlanta Metropolitan (RMA) Area, on his own behalf or in the service or on
behalf of others, solicit, divert or appropriate, or attempt to solicit, divert
or appropriate, directly or by assisting others, any business from any of the
Employer's customers or vendors, including actively-sought prospective customers
or vendors, with whom the Executive has or had material contact during the last
two (2) years of his employment, for purposes of providing products or services
that are competitive with those provided by the Employer.
8. NON-SOLICITATION OF EXECUTIVES. The Executive agrees that during his
employment by the Employer and, in the event of his termination, other than
pursuant to Sections 3.3.1(b) or 3.3.2(a), for a period of twelve (12) months
thereafter, he will not, on his own behalf or in the service or on behalf of
others, solicit, recruit or hire away, or attempt to solicit, recruit or hire
away, directly or by assisting others, any employee of the Employer or its
Affiliates, whether or not such employee is a full-time employee or a temporary
employee of the Employer, and whether or not such employment is pursuant to
written agreement and whether or not such employment is for a determined period
or is at will.
9. REMEDIES. The Executive agrees that the covenants contained in Sections 5
through 8 of this Agreement are of the essence of this Agreement; that each of
the covenants is reasonable and necessary to protect the business, interests and
properties of the Employer; and that irreparable loss and damage will be
suffered by the Employer should he breach any of the covenants. Therefore, the
Executive agrees and consents that, in addition to all the remedies provided by
law or in equity, the Company shall be entitled to a temporary restraining order
and temporary and permanent
-8-
<PAGE>
injunctions to prevent a breach or contemplated breach of any of the
covenants. The Company and the Executive agree that all remedies available to
the Company or the Executive, as applicable, shall be cumulative.
10. SEVERABILITY. The parties agree that each of the provisions included in this
Agreement is separate, distinct, and severable from the other provisions of this
Agreement, and that the invalidity or unenforceability of any Agreement
provision shall not affect the validity or enforceability of any other provision
of this Agreement. Further, if any provision of this Agreement is ruled invalid
or unenforceable by a court of competent jurisdiction because of a conflict
between the provision and any applicable law or public policy, the provision
shall be redrawn to make the provision consistent with and valid and enforceable
under the law or public policy.
11. NOTICE. All notices and other communications required or permitted under
this Agreement shall be in writing and, if mailed by prepaid first-class mail or
certified mail, return receipt requested, shall be deemed to have been received
on the earlier of the date shown on the receipt or three (3) business days after
the postmarked date thereof. In addition, notices hereunder may be delivered by
hand, facsimile transmission or overnight courier, in which event the notice
shall be deemed effective when delivered or transmitted. All notices and other
communications under this Agreement shall be given to the parties hereto at the
following addresses:
(i) If to the Company, to it at:
Net.B@nk, Inc.
Royal Centre Three
Suite 100
Alpharetta, Georgia 30022
Attn: Chief Executive Officer
(ii) If to the Executive, to him at:
Michael R. Fitzgerald
720 N. Park Lane
Alpharetta, Georgia 30004
12. ASSIGNMENT. Neither party hereto may assign or delegate this Agreement or
any of its rights and obligations hereunder without the written consent of the
other party hereto.
13. WAIVER. A waiver by the Company of any breach of this Agreement by the
Executive shall not be effective unless in writing, and no waiver shall operate
or be construed as a waiver of the same or another breach on a subsequent
occasion.
-9-
<PAGE>
14. ATTORNEYS' FEES. In the event of litigation between the parties concerning
this Agreement, the party prevailing in such litigation shall be entitled to
receive from the other party all reasonable costs and expenses, including
without limitation attorneys' fees, incurred by the prevailing party in
connection with such litigation, and the other party shall pay such costs and
expenses to the prevailing party promptly upon demand by the prevailing party.
15. APPLICABLE LAW. This Agreement shall be construed and enforced under and in
accordance with the laws of the state of Georgia.
16. ENTIRE AGREEMENT. This Agreement embodies the entire and final agreement of
the parties on the subject matter stated in the Agreement. No amendment or
modification of this Agreement shall be valid or binding upon the Company or the
Executive unless made in writing and signed by both parties. All prior
understandings and agreements relating to the subject matter of this Agreement
are hereby expressly terminated.
17. RIGHTS OF THIRD PARTIES. Nothing herein expressed is intended to or shall be
construed to confer upon or give to any person, firm or other entity, other than
the parties hereto and their permitted assigns, any rights or remedies under or
by reason of this Agreement.
18. SURVIVAL. The obligations of the Executive pursuant to Sections 5, 6, 7,
8 and 9 shall survive the termination of the employment of the Executive
hereunder.
IN WITNESS WHEREOF, the Company and the Executive have executed and
delivered this Agreement as of the date first shown above.
THE COMPANY:
NET.B@NK, INC.
By: /s/ D.R. Grimes
-----------------------------
Name: D.R. Grimes
Title: Chief Executive Officer
THE EXECUTIVE:
/s/ Michael R. Fitzgerald
-----------------------------------
Michael R. Fitzgerald
-10-
<PAGE>
EXHIBIT A
Duties of the Executive
The initial duties of the Executive shall include, in addition to any other
duties assigned the Executive by the Boards of Directors of the Employer or its
designee, the following:
- - Foster a corporate culture that promotes ethical practices, encourages
individual integrity, fulfills social responsibility, and is conducive to
attracting, retaining and motivating a diverse group of top-quality
executives at all levels.
- - With the Board of Directors of the Bank and the Chief Executive Officer,
develop a long-term strategy for the Bank that creates shareholder value.
- - Develop and recommend to the Chief Executive Officer and the Board of
Directors of the Bank annual business plans and budgets that support the
Bank's long-term strategy.
- - Use best efforts to achieve the Bank's financial and operating goals and
objectives.
- - Improve the quality and value of the products and services provided by the
Bank.
- - Insure that the Bank maintains a satisfactory competitive position within
its industry.
- - Implement major corporate policies.
- - Insure that the Bank maintains satisfactory compliance with SEC,
Accounting and OTS regulations and procedures.
<PAGE>
EXHIBIT B
To be finalized upon completion of the independent study currently being
conducted.
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA (in 000's, except per share amounts)
<TABLE>
<CAPTION>
Period from
February 20,
1996 (Date of
Incorporation) to
December 31,
1999 1998 1997 1996
<S> <C> <C> <C> <C>
Income Statement Data:
Interest income $ 54,773 $ 18,088 $ 2,223 $ 8
Interest expense 31,401 11,425 1,260 --
------ ------ -----
Net interest income 23,372 6,663 963 8
Provision for loan losses 107 20 471 --
--- -- ---
Net interest income after provision for loan losses 23,265 6,643 492 8
Non-interest income 1,659 683 63 60
Non-interest expense 20,560 5,187 6,132 3,907
------ ----- ----- -----
Income (loss) before income taxes 4,364 2,139 (5,577) (3,839)
Income tax benefit (expense) (1,316) 2,325 -- --
------ ----- ------ ------
Net income (loss) $ 3,048 $ 4,464 $ (5,577) $ (3,839)
----------- ----------- ----------- -----------
Net income (loss) per common share - basic $ 0.11 $ 0.24 $ 0.55) $ (1.44)
Net income (loss) per common and potential
common share - diluted $ 0.11 $ 0.23 $ (0.55) $ (1.44)
Weighted average shares outstanding - basic 27,052 18,447 10,062 2,658
Weighted average shares outstanding - diluted 28,045 19,152 10,062 2,658
Balance Sheet Data -D At Period End:
Total assets $ 1,257,885 $ 388,437 $ 93,220 $ 1,246
Total deposits $ 653,901 $ 283,589 $ 58,727 $ --
Total debt $ 355,935 $ 60,000 $ -- $ --
Shareholders' equity (deficit) $ 238,421 $ 38,755 $ 34,117 $ (386)
Book value per share $ 8.11 $ 2.10 $ 1.85 $ (0.10)
Percentage of Net Income (Loss) to:
Average total assets (ROA) 0.37% 1.85% (11.81)% N/M
Average shareholders' equity (deficit) (ROE) 2.20% 12.25% (33.07)% N/M
Percentage of average shareholders' equity
(deficit) to average total assets 16.84% 15.13% 35.71% (30.97)%
Number of accounts at period end 66 17 5 --
</TABLE>
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL - NetBank, Inc. is a holding company that wholly owns NetBank-
Registered Tradmark- a federal savings bank. NetBank, Inc. was incorporated as a
Georgia corporation on February 20, 1996. As of December 31, 1999, NetBank had
66,000 accounts and $653.9 million in deposits. On May 14, 1999, we effected a
three-for-one split of our common stock in the form of a stock dividend paid to
shareholders of record as of the close of business on April 23, 1999. All
references to share and per share amounts reflect the split.
FINANCIAL CONDITION - Our assets were $1.3 billion at December 31, 1999 compared
to $388.4 million at December 31, 1998. The increase of $869.4 million from
December 31, 1998 to December 31, 1999 was primarily the result of the
investment of funds received from an increase in customer deposits of $370.3
million, $199.0 million of net proceeds we received from offerings of common
stock in February and June 1999, $111.3 million in net proceeds from the
offering of $115.0 million in convertible subordinated notes in June 1999, and a
$184.0 million increase in other borrowings. The proceeds from both the February
and June 1999 offerings of common stock and debt and the increase in customer
deposits and other borrowings are being invested in federal funds sold,
investment securities, which increased $367.5 million, and loans, which
increased $502.5 million. The resulting interest income on these investments is
being used to fund increased infrastructure and operating costs resulting from
growth and a widespread marketing campaign to increase public awareness of the
NetBank name and our products and services.
Total liabilities increased $669.8 million to $1.0 billion at December 31, 1999
from $349.7 million at December 31, 1998 primarily due to the rapid growth of
our deposit portfolio of $370.3 million as a result of our widespread marketing
campaign introduced during the first quarter of 1999, the issuance of $115.0
million in convertible subordinated debentures during June 1999, and a $184.0
million increase in other borrowed funds during the year ended December 31,
1999. During the year ended December 31, 1999, NetBank obtained eight new
advances from the Federal Home Loan Bank ("FHLB") totaling $264.0 million and
paid off two advances from the FHLB totaling $60.0 million. NetBank entered into
and repaid reverse repurchase agreements totaling $94.2 million during the year.
NetBank borrowed an additional $36.0 million under a line of credit agreement
and repaid the entire $56.0 million due under that line during the year ended
December 31, 1999.
Total shareholders' equity increased $199.7 million from December 31, 1998 to
December 31, 1999 primarily due to the receipt of approximately $199.0 million
from the sale of 7.3 million and 3.5 million shares of our common stock in a
public offering in February and June 1999, respectively.
AVERAGE BALANCES, NET INTEREST INCOME AND YIELDS EARNED AND RATES PAID - The
following table sets forth, for the periods subsequent to our formation,
information regarding our average balance sheet (in 000's). The average yields
and rates represent annualized rates. Information is based on average monthly
balances during the years ended December 31, 1999 and 1998 and the five months
ended December 31, 1997 (period after obtaining bank charter).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
----------------------------
AVERAGE INTEREST AVERAGE
BALANCE EARNED/PAID YIELD/RATE
<S> <C> <C> <C>
Interest-earning assets:
Short-term investments $ 42,906 $ 2,274 5.3%
Investment securities(1) 191,841 13,237 6.9%
Loans receivable(2) 503,359 39,262 7.8%
-------- ------- ---
Total interest-earning
assets 738,106 54,773 7.4%
Non-interest-earning assets 21,695
--------
Total assets $759,801
--------
--------
Interest-bearing liabilities:
Deposits:
NOW accounts $ 19,200 $ 576 3.0%
Money market 146,591 7,501 5.1%
Certificates of deposit 253,513 14,508 5.7%
Other borrowed funds 89,383 5,363 6.0%
Convertible subordinated
debt 71,938 3,453 4.8%
-------- -------- ---
Total interest-bearing
liabilities 580,625 31,401 5.4%
Non-interest-bearing liabilities 14,385
--------
Total liabilities 595,010
Shareholders' equity 164,791
--------
Total liabilities and
shareholders' equity $759,801
--------
--------
Net interest earnings $ 23,372
---------
---------
Net yield on interest-earning
assets(3) 3.2%
===
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
-----------------
AVERAGE INTEREST AVERAGE
BALANCE EARNED/PAID YIELD/RATE
<S> <C> <C> <C>
Interest-earning assets:
Short-term investments $ 11,000 $ 634 5.8%
Investment securities(1) 48,300 2,905 6.0%
Loans receivable(2) 182,500 14,549 8.0%
------- ------ ---
Total interest-earning
assets 241,800 18,088 7.5%
Non-interest-earning assets 2,500
-----
Total assets $244,300
========
Interest-bearing liabilities:
Deposits:
NOW accounts $ 3,533 $ 106 3.0%
Money market 47,809 2,522 5.3%
Certificates of deposit 123,803 7,622 6.2%
Other borrowed funds 25,000 1,175 4.7%
------ ----- ---
Total interest-bearing
liabilities 200,145 11,425 5.7%
Non-interest-bearing liabilities 8,155
-----
Total liabilities 208,300
Equity 36,000
------
Total liabilities and
shareholders' equity $244,300
========
Net interest earnings $ 6,663
========
Net yield on interest-earning
assets(3) 2.8%
===
</TABLE>
<TABLE>
<CAPTION>
FIVE MONTHS ENDED
DECEMBER 31, 1997
-----------------
AVERAGE INTEREST AVERAGE
BALANCE EARNED/PAID YIELD/RATE
<S> <C> <C> <C>
Interest-earning assets:
Short-term investments $43,800 $ 945 5.3%
Investment securities(1) 8,900 183 7.1%
Loans receivable(2) 30,200 1,095 8.7%
------ ----- ---
Total interest-earning
assets 82,900 2,223 6.4%
Non-interest-earning assets 2,000
-----
Total assets $84,900
=======
Interest-bearing liabilities -D
deposits $48,700 $ 1,260 5.2%
Non-interest-bearing liabilities 1,000
-----
Total liabilities 49,700
Shareholders' equity 35,200
Total liabilities and
shareholders' equity $84,900
=======
Net interest earnings $ 963
=======
Net yield on interest-earning
assets(3) 2.8%
===
</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 (in 000's):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
COMPARED TO THE YEAR ENDED
DECEMBER 31, 1998
-----------------
NET INCREASE INCREASE
INCREASE (DECREASE) (DECREASE)
(DECREASE) DUE TO RATE(1) DUE TO VOLUME(1)
<S> <C> <C> <C>
Interest-bearing assets:
Short-term investments $ 1,640 $ (215) $ 1,855
Investment securities 10,332 1,727 8,605
Loans, gross 24,713 (1,007) 25,720
------ ------ ------
Total interest income 36,685 505 36,180
Interest-bearing liabilities:
NOW accounts 470 113 357
Money market 4,979 (268) 5,247
Certificates of deposit 6,886 (956) 7,842
Other borrowed funds 4,188 1,162 3,026
Convertible subordinated debt 3,453 -- 3,453
----- -----
Total interest expense 19,976 51 19,925
------ -- ------
Net interest income $16,709 $ 454 $16,255
======= ======= =======
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
COMPARED TO THE FIVE MONTHS ENDED
DECEMBER 31, 1997
-----------------
NET INCREASE INCREASE
INCREASE (DECREASE) (DECREASE)
(DECREASE) DUE TO RATE(1) DUE TO VOLUME(1)
<S> <C> <C> <C>
Interest-bearing assets:
Short-term investments $ (311) $ (59) $ (252)
Investment securities 2,722 (50) 2,772
Loans, gross 13,454 (266) 13,720
------ ---- ------
Total interest income 15,865 (375) 16,240
Interest-bearing liabilities:
NOW accounts 92 3 89
Money market 758 (104) 862
Certificates of deposit 8,140 (74) 8,214
Other borrowed funds 1,175 -- 1,175
----- -----
Total interest expense 10,165 (175) 10,340
------ ---- ------
Net interest income $ 5,700 $ (200) $ 5,900
======== ======== ========
</TABLE>
(1) The changes in interest income and/or expense not due solely to rate or
volume have been allocated to the volume component.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
GENERAL - Net income for the year ended December 31, 1999 was $3.0 million, a
decrease of $1.4 million compared to $4.5 million in net income for the year
ended December 31, 1998. The decrease in net income was the result of the
recognition of a one-time federal income tax benefit of $3.3 million recorded in
1998 related to operating losses incurred in 1996 and 1997 that were recognized
once we achieved profitability during the year ended 1998. Income before income
taxes increased $2.2 million for the year ended December 31, 1999 to $4.4
million as compared to $2.1 million for the year ended December 31, 1998. This
increase was due to the $496.3 million increase in average interest earning
assets coupled with less than incremental growth in non-interest expense.
INTEREST INCOME - Interest income related to our loan and investment portfolio
for the year ended December 31, 1999 was $54.8 million compared to $18.1 million
for the year ended December 31, 1998. The increase in interest income was the
result of the growth of our loan portfolio from $277.2 million at December 31,
1998 to $779.7 million at December 31, 1999, a 181.2% increase, and the growth
in our investment portfolio from $61.5 million at December 31, 1998 to $429.0
million at December 31, 1999, a 598.0% increase. The significant increase in the
loan portfolio was primarily due to the purchase of $665.2 million in loans
during the year ended December 31, 1999. Loan yields averaged 8.0% for the year
ended December 31, 1998 as compared to 7.8% for the year ended December 31,
1999. This decrease in loan yields is primarily the result of a change in the
composition of our loan portfolio from 31.0% to 61.0% in first and second
residential mortgages, which carry a lower yield. The investment portfolio grew
as proceeds from the increase in customer deposits, FHLB advances, and NetBank's
two common stock offerings and one debt offering during the year ended December
31, 1999 were invested. The yield on the investment portfolio was 6.0% for the
year ended December 31, 1998 as compared with 6.9% for the year ended December
31, 1999. The increase in investment yield was primarily due to an increase in
interest rates during the year.
INTEREST EXPENSE - For the year ended December 31, 1999, $22.6 million in
interest expense on deposits was recorded compared to $10.3 million for the year
ended December 31, 1998 as a result of an approximately 130.6% increase in
customer deposits from $283.6 million at December 31, 1998 to $653.9 million at
December 31, 1999. In addition, due to declining interest rates in late 1998 and
early 1999, interest paid on average deposits decreased from 5.7% for the year
ended December 31, 1998 to 5.3% for the year ended December 31, 1999. Also,
during the year ended December 31, 1999, we recorded approximately $8.8 million
in interest expense associated with our advances from the FHLB, con-
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
vertible subordinated notes issued during June 1999, and short-term borrowings.
NET INTEREST INCOME - Net interest income is determined by our interest rate
spread, which is the difference between the yield earned on our interest-earning
assets and the rates paid on our interest-bearing liabilities, and the relative
amounts of interest-earning assets and interest-bearing liabilities. Net
interest income was $23.4 million for the year ended December 31, 1999 compared
to $6.7 million for the year ended December 31, 1998. The increase in net
interest income resulted from the increase in interest income earned from
increased loans and investment securities, offset by the increase in interest
expense associated with the growth in our deposit base from December 31, 1998 to
December 31, 1999.
PROVISION FOR LOAN LOSSES - In connection with the purchase of loan portfolios,
we assess the inherent loss in the portfolios and record the necessary allowance
by adjusting the premium associated with each portfolio. During the year ended
December 31, 1999, we recorded $5.8 million as an addition to premiums related
to allowance for loan losses for loans purchased during the year. We also
recorded a provision for loan losses of $0.1 million related to originated
loans. This compares to a provision of $20,000 recorded during the year ended
December 31, 1998. We periodically review the performance of our loan portfolio
by reviewing chargeoffs, delinquency statistics and industry statistics on a
pool by pool basis for our purchased portfolio and a loan by loan basis for our
originated loans. If a decline in credit quality for a specific pool or a loan
is noted, we record an additional allowance through a charge to the provision
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.
We determine the adequacy of the allowance based upon reviews of individual and
pools of loans, recent loss experience, current economic conditions, the risk
characteristics of the various categories of loans and other pertinent factors.
NON-INTEREST INCOME - For the year ended December 31, 1999, we recorded
approximately $1.7 million in non-interest income compared to $0.7 million
recorded during the year ended December 31, 1998. Of the $1.7 million in
non-interest income recorded, $1.2 million relates to loan and deposit service
charges and fees. The increase in service charges was a result of increased
deposit fee income as a result of the significant increase in customer deposits
and increased first mortgage origination fee income. The remaining $0.5 million
of non-interest income for the year ended December 31, 1999 represents gains on
securities sold, arising out of a re-alignment of our investment securities
portfolio during 1999.
NON-INTEREST EXPENSES - Non-interest expenses include all operating expenses
including salaries and benefits, marketing, general and administrative expenses
(excluding interest expense, provision for loan losses and income taxes).
Non-interest expense increased approximately 296.3%, or $15.4 million, for the
year ended December 31, 1999 as compared with the year ended December 31, 1998.
This increase was primarily the result of increases in marketing ($6.7 million),
customer services ($3.4 million), and salaries and benefits ($2.1 million).
Marketing increased as NetBank launched an expanded marketing initiative
including nationwide radio and print advertising campaigns designed to build
public awareness of NetBank and establish "NetBank" as the brand of choice among
Internet users. Customer services increased as NetBank expanded its deposit
base, increasing incremental expenses such as outsourced call center support
services, postage, telephone and loan servicing fees, and continued to provide
free checking services. Salaries and benefits increased as we continued to add
employees to support the rapid growth of NetBank's activities and customer base.
YEAR ENDED DECEMBER 31, 1998
COMPARED TO YEAR ENDED DECEMBER 31, 1997
GENERAL - Net income for the year ended December 31, 1998 amounted to $4.5
million, an increase of $10.1 million compared to the $5.6 million loss for the
year ended December 31, 1997. The statement of operations for the year ended
December 31, 1997 reflects our operations before and immediately following the
acquisition of our bank charter. Because we did not acquire the charter until
July 31, 1997, we had no earning assets prior to that date. A substantial
portion of the income for the year ended December 31, 1998 resulted from the
recognition of $2.3 million in tax benefits. The benefits resulted from the
reversal of a valuation allowance of $3.3 million previously associated with our
deferred tax assets offset by income tax expense for the year ended December 31,
1998. Because we achieved profitability during 1998, we now believe it is more
likely than not that the deferred tax assets will be realized.
INTEREST INCOME - Interest income related to our loan and investment portfolio
for the year ended December 31, 1998 was $18.1 million compared to $2.2 million
for the year ended December 31, 1997. The increase is a result of the growth of
our loan portfolio from $44.9 million at December 31, 1997 to $280.4 million at
December 31, 1998 offset by a decrease in average yield from 8.7% for the year
ended December 31, 1997 to 8.0% for the year ended December 31, 1998. In
addition, the
18
<PAGE>
investment security portfolio grew from $18.1 million at December 31, 1997 to
$59.5 million at December 31, 1998 as we invested cash received from customer
deposits. The yield on the investment portfolio was 7.1% for the year ended
December 31, 1997 compared to 6.0% for the year ended December 31, 1998.
INTEREST EXPENSE - For the year ended December 31, 1998, we recorded $10.2
million in interest expense on deposits as a result of our increase in customer
deposits from $58.7 million at December 31, 1997 to $283.6 million at December
31, 1998. In addition, the average interest rate paid on deposits increased from
5.2% for the year ended December 31, 1997 to 5.8% for the year ended December
31, 1998. We recorded interest expense on deposits of $1.3 million during the
year ended December 31, 1997 as we transferred our deposits to our banking
subsidiary from Carolina First Bank and began paying interest on those deposits.
In addition, during the year ended December 31, 1998, we recorded approximately
$1.2 million of interest expense associated with other borrowed funds under our
line of credit agreements and FHLB advances.
NET INTEREST INCOME - Net interest income is determined by our interest rate
spread, which is the difference between the yields earned on our
interest-earning assets and the rates paid on our interest-bearing liabilities,
and the relative amounts of interest-earning assets and interest-bearing
liabilities. With the growth in our operations, net interest income increased to
$6.7 million for the year ended December 31, 1998, compared to $963,000 for the
year ended December 31, 1997.
PROVISION FOR LOAN LOSSES - During 1998, we recorded $3.6 million as an addition
to premium related to allowance for loan losses for purchased loans. In
addition, we recorded a $20,000 provision for loan losses for the year ended
December 31, 1998, compared to $0.5 million recorded during the year ended
December 31, 1997 for declines in credit quality on a specific pool of
automobile loans and additional allowance related to originated loans.
NON-INTEREST INCOME - For the year ended December 31, 1998, we recorded
approximately $0.7 million in loan and deposit service charges and fees compared
to $63,000 recorded during the year ended December 31, 1997. The significant
increase in service charges was driven by the significant increase in both the
loan and deposit portfolios.
NON-INTEREST EXPENSES - Non-interest expenses decreased approximately $0.9
million for the year ended December 31, 1998 compared to the year ended December
31, 1997. The primary component of the decrease during the year ended December
31, 1998 was a $1.4 million decrease in the amortization of the service contract
with Carolina First Bank as the service contract was fully amortized during the
second quarter of 1997. In addition, salaries and benefits decreased $1.0
million as we outsourced certain services and paid $0.5 million of bonuses to
our employees upon completion of our Initial Public Offering in July 1997. These
decreases were partially offset by increases in marketing, customer service,
data processing, occupancy and other expenses as we moved to our new offices and
began soliciting and serving new deposit customers.
STOCK OPTIONS
NetBank has a 1996 Stock Incentive Plan (the "Plan"), which provides that
employees, officers, directors and consultants of NetBank may be granted
nonqualified and incentive stock options to purchase shares of common stock of
NetBank, derivative securities related to the value of the common stock, or cash
awards. The Plan limits the number of shares that could be awarded to 3,750,000
that are reserved for the Plan. Generally, the options expire ten years from the
date of the grant.
A summary of the status of the Plan and activity during the year follows (in
000's, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,597 $ 3.84 1,099 $ 1.99 50 $ 0.40
Granted 892 $ 37.02 573 $ 6.50 1,058 $ 1.94
Exercised (224) $ 3.14 (33) $ 1.21
Terminated (118) $ 12.30 (42) $ 2.19 (9) $ 1.21
Outstanding at end of year 2,147 $ 17.24 1,597 $ 3.84 1,099 $ 1.99
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Grant prices approximated the fair value of the stock at the grant date.
In connection with the issuance of some of the options during the year
ended December 31, 1997, $390,000 of compensation expense was recognized over
the option vesting period. The vesting of certain of those options accelerated
on July 28, 1997 upon completion of the Initial Public Offering, and $320,000 of
unamortized compensation expense was recognized. The other options had
completely vested as of February 25, 1999, and all remaining compensation
expense related to those options has been recognized. Of the 1,267,000 options
exercisable as of December 31, 1999, 708,000 are subject to an agreement with
the OTS whereby the related shares of common stock cannot be sold until July 28,
2000.
INTEREST RATE SENSITIVITY
We measure interest rate sensitivity as the difference between amounts of
interest-earning assets and interest-bearing liabilities that mature, reprice,
or repay 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 a gap 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
to have its asset yields adjusted upward. This 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 adjusted downward at a faster
rate than one with a negative gap. This would tend to reduce or restrain the
growth of its net interest income.
The following table sets forth the interest rate sensitivity of our assets and
liabilities as of December 31, 1999 (in 000's):
<TABLE>
<CAPTION>
OVER THREE OVER ONE
LESS THAN MONTHS YEAR OVER FIVE
THREE THROUGH THROUGH YEARS AND
MONTHS ONE YEAR FIVE YEARS INSENSITIVE TOTAL
------ -------- ---------- ----------- -----
TERM TO REPRICING, REPAYMENT, OR MATURITY
<S> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Cash and cash equivalents $ 5,265 $ -- $ -- $ -- $ 5,265
Federal funds sold 8,378 -- -- -- 8,378
Investment securities 64,529 29,267 211,644 111,374 416,814
Stock of Federal Home Loan Bank of Atlanta 12,200 -- -- -- 12,200
Loans receivable 194,420 196,693 321,685 66,940 779,738
Loan sale proceeds receivable 6,165 -- -- -- 6,165
----- -----
Total interest-earning assets: 290,957 225,960 533,329 178,314 1,228,560
------- ------- ------- ------- ---------
Non-interest-earning assets -- -- -- 29,325 29,325
------- ------- -------- -------- ------
Total assets $ 290,957 $ 225,960 $ 533,329 $ 207,639 $1,257,885
---------- ---------- ---------- ---------- ----------
Interest-Bearing Liabilities:
Interest-bearing deposits $ 186,110 $ 392,442 $ 32,829 $ 38,781 $ 650,162
Other borrowed funds 50,000 -- 139,000 55,000 244,000
Convertible subordinated debt -- -- 111,935 -- 111,935
------- --------- ---------- --------- -------
Total interest-bearing liabilities: 236,110 392,442 283,764 93,781 1,006,097
------- ------- ------- ------ ---------
Interest-free deposits -- -- -- 3,739 3,739
Other interest-free liabilities and equity -- -- -- 248,049 248,049
------- -------- -------- --------- -------
Total liabilities and equity $ 236,110 $ 392,442 $ 283,764 $ 345,569 $1,257,885
========== ========== ========== ========== ==========
Net interest rate sensitivity gap $ 54,847 $ (166,482) $ 249,565 $ 84,533 $ 222,463
Cumulative gap $ 54,847 $ (111,635) $ 137,930 $ 222,463 --
Net interest rate sensitivity gap as a
percent of interest-earning assets 18.9% (73.7)% 46.8% 47.4% 18.1%
Cumulative gap as a percent of cumulative
interest-earning assets 18.9% (21.6)% 13.1% 18.1% --N
</TABLE>
20
<PAGE>
MARKET RISK
Our principal business is the originating and purchasing of loans funded by
customer deposits and, to the extent necessary, other borrowed funds.
Consequently, a significant portion of our assets and liabilities are monetary
in nature and fluctuations in interest rates, specifically the prime rate, will
affect our future net interest income and cash flows. This interest rate risk is
our primary market risk exposure. We do not enter into derivative financial
instruments such as futures, forwards, swaps or options. Also, we have no market
risk-sensitive instruments held for trading purchases. Our exposure to market
risk is reviewed on a regular basis by our management.
NetBank measures interest rate risk based on Net Portfolio Value ("NPV")
analysis. NPV equals the present value of expected net cash flows from existing
assets minus the present value of expected net cash flows from existing
liabilities. An NPV ratio is determined by dividing NPV by the present value of
assets. The Board of Directors manages NetBank's interest rate risk by
establishing limits for the minimum acceptable NPV ratio over a series of
hypothetical interest rate scenarios or "rate shocks." As of December 31, 1999,
NetBank's estimated NPV ratios were well within these Board approved limits. The
following table sets forth the estimated percentage change in NetBank's NPV
ratio as of December 31, 1999 assuming rate shocks of +300 to -300 basis points:
<TABLE>
<CAPTION>
LIMITS AND CURRENT NPV RATIOS
-----------------------------
BOARD LIMITS ESTIMATED
RATE SHOCK (MINIMUM DECEMBER 31, 1999
(IN BASIS POINTS) NPV RATIOS) NPV RATIOS
<S> <C> <C>
+300 9.0% 13.4
+200 10.0% 14.9
+100 11.0% 16.3
Flat 12.0% 17.3
-100 12.0% 18.0
-200 12.0% 18.1
-300 12.0% 18.1
</TABLE>
A second statistic, called the "Sensitivity Measure," is determined by
calculating the change in the NPV ratio from the flat rate shock and the +200
rate shock. NetBank's Sensitivity Measure was 240 basis points as of December
31, 1999. The OTS classifies an institution with a combination of: 1) an NPV
ratio of greater than 10%, and 2) a Sensitivity Measure less than 400 basis
points, as having a "minimal level of interest rate risk." Thus, as of December
31, 1999, management believes that NetBank qualified as having a minimal level
of interest rate risk.
Computation of prospective effects of hypothetical rate changes are based on
many assumptions, including relative levels of market interest rates, loan
prepayments and deposit decay. They should not be relied upon as indicative of
actual results. Further, the computations do not contemplate certain actions
management could undertake in response to changes in interest rates.
LENDING ACTIVITIES
GENERAL - At December 31, 1999, 1998 and 1997, our loans receivable portfolio
totaled $787.3 million, $280.7 million and $44.9 million, or 62.6%, 72.2% and
48.2% of total assets, respectively. The majority of our loans were purchased
from other originating institutions. We have concentrated our purchasing
activities on one- and three-year adjustable rate mortgage loans, home equity
lines of credit, fixed first and second residential mortgages, and leases. We
also participate in construction loans with other institutions.
LOAN PORTFOLIO COMPOSITION - The following table sets forth the composition of
our loan portfolio by type of loan as of December 31, 1999, 1998 and 1997 (in
000's):
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- ----------------- -----------------
AMOUNT % AMOUNT % AMOUNT %
<S> <C> <C> <C> <C> <C> <C>
Residential mortgages $480,470 61.0% $144,361 51.4% $ 13,954 31.0%
Home equity lines 177,670 22.6 89,054 31.7 4,412 9.8
Leases 62,295 7.9 1,231 0.4 5,122 11.4
Multi-family housing commercial participations 48,783 6.2 8,556 3.1 4,478 10.0
Construction 10,723 1.4 27,997 10.0 278 0.6
Consumer 4,183 0.5 1,710 0.6 2,066 4.6
Auto 3,211 0.4 7,804 2.8 14,624 32.6
----- --- ----- --- ------ ----
$787,335 100.0% $280,713 100.0% $ 44,934 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
CONTRACTUAL PRINCIPAL REPAYMENTS - The following table sets forth certain
information at December 31, 1999 regarding the dollar amount of loans maturing
in our 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 (in 000's):
<TABLE>
<CAPTION>
DUE 1 YEAR DUE 1-5 DUE AFTER WEIGHTED
OR LESS YEARS 5 YEARS TOTAL AVERAGE YIELD
------- ----- ------- ----- -------------
<S> <C> <C> <C> <C> <C>
Residential mortgages $ -- $ -- $480,470 $480,470 7.4%
Home equity loans -- -- 177,670 177,670 7.7%
Leases -- 62,295 -- 62,295 10.5%
Multi-family housing commercial participations -- -- 48,783 48,783 7.7%
Construction 10,723 -- -- 10,723 8.5%
Consumer 4,183 -- -- 4,183 9.5%
Auto 642 2,569 -- 3,211 9.0%
--- ----- ----- ---
Total $ 15,548 $ 64,864 $706,923 $787,335 7.8%
======== ======== ======== ======== ===
</TABLE>
The following table sets forth the dollar amount of total loans due after one
year from December 31, 1999, as shown in the preceding table, which have fixed
interest rates or which have floating or adjustable interest rates (in 000's):
<TABLE>
<CAPTION>
FLOATING OR
FIXED RATE ADJUSTABLE RATE TOTAL
<S> <C> <C> <C>
Residential mortgages $ 45,875 $434,595 $480,470
Home equity loans -- 177,670 177,670
Leases 62,295 -- 62,295
Multi-family housing
commercial participations 32,814 15,969 48,783
Auto 2,569 -- 2,569
-------- -------- --------
Total $143,553 $628,234 $771,787
-------- -------- --------
-------- -------- --------
</TABLE>
A savings institution generally may not make loans to one borrower and related
entities in an amount that 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 December 31, 1999, our limit
on loans to one borrower was approximately $35.7 million (15% unimpaired capital
and surplus). At December 31, 1999, we had not made any loans to any one
borrower, including persons or entities related to the borrower, exceeding the
limitation.
ASSET QUALITY AND NON-PERFORMING ASSETS - During the years ended December 31,
1999, 1998 and 1997, NetBank did not have any significant loans on non-accrual
status, significant loans past due 90 days or more, or restructured loans.
CONCENTRATIONS OF CREDIT RISK - At December 31, 1999 and 1998, the majority of
NetBank's loans were with customers residing in the Western and Southeastern
United States. At December 31, 1997, all of our loans were with customers
residing in the 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 our portfolio is purchased, we make an estimate of
the loss inherent in the purchased portfolio based on industry statistics and
record an allowance for loan losses by adjust-
22
<PAGE>
ing the premium associated with the purchased loans. We periodically review the
adequacy of the allowance based upon reviews of individual loans and loan pools,
recent loss experience, current economic conditions, the risk characteristics of
the various pools of loans or individual loans, industry statistics and other
pertinent factors. If we note a decline in credit quality for a specific loan
pool or a loan, we record an additional allowance through a charge to the
provision for loan losses. Loans that we deem uncollectible are charged to the
allowance. We also add provisions for loan losses and recoveries on loans
previously charged off to the allowance.
Although we use 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 Office of Thrift Supervision, as an integral
part of the examination process, periodically reviews our allowance for loan
losses. The agency may require us to recognize additions to the allowance based
on their judgments about the information available to them at the time of their
examination.
The following table sets forth an analysis of our allowance for loan losses
during the years ended December 31, 1999, 1998 and 1997 (in 000's):
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1999 1998 1997
<S> <C> <C> <C>
Balance-Beginning of year $ 3,472 $ 453 $ --
------- ------- -------
Allowances recorded in connection
with the purchase of loan pools 5,808 3,586 --
------- ------- -------
Provision for loan losses 107 20 471
------- ------- -------
Loans charged off:
Residential mortgages (1,376) (327) --
Equipment leases (3) (31) (8)
Auto (102) (171) --
Home equity lines (307) (44) --
Other (2) (14) (10)
------- ------- -------
Total loans charged off (1,790) (587) (18)
------- ------- -------
Balance-End of year $ 7,597 $ 3,472 $ 453
======= ======= =======
Allowances for loan losses as a
percent of total loans outstanding 1.0% 1.2% 1.0%
=== === ===
</TABLE>
The following table sets forth information concerning the allocation of our
allowance for loan losses by loan category at December 31, 1999, 1998 and 1997
(in 000's):
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- ----------------- -----------------
PERCENT OF PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH LOANS IN EACH
CATEGORY TO CATEGORY TO CATEGORY TO
AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS AMOUNT TOTAL LOANS
<S> <C> <C> <C> <C> <C> <C>
Residential mortgages $3,449 61.0% $1,882 51.4% $ 46 31.0%
Home equity lines 2,982 22.6 1,484 31.7 49 9.8
Leases 814 7.9 81 0.4 113 11.4
Multi-family housing commercial
participations 343 6.2 -- 3.1 -- 10.0
Construction -- 1.4 -- 10.0 52 0.6
Consumer 6 0.5 16 0.6 13 4.6
Auto 3 0.4 9 2.8 180 32.6
- --- - --- --- ----
$7,597 100.0% $3,472 100.0% $ 453 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
INVESTING ACTIVITIES
Investment securities - Our investment policy, 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. Our investment
policy is currently implemented by the investment committee within the
parameters set by the Board of Directors.
We are 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, net of tax, excluded from earnings and
reported in other comprehensive income. At December 31, 1999, 1998 and 1997, all
of our investment securities were classified as available for sale. At December
31, 1999, 1998 and 1997, investments in the debt and/or equity securities of any
one issuer did not exceed more than 10% of our shareholders' equity.
The following tables set forth certain information relating to our
available-for-sale securities at December 31, 1999, 1998 and 1997 (in 000's):
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------
GROSS ESTIMATED
---------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
Mortgage backed securities $249,436 $ -- $ 3,399 $246,037
United States government agencies obligations 162,356 29 1,485 160,900
Corporate bonds 9,639 -- 1 9,638
Habitat bonds and other 239 -- -- 239
--- ---
$421,670 $ 29 $ 4,885 $416,814
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------
GROSS ESTIMATED
---------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
Mortgage backed securities $59,213 $ -- $ 2 $59,211
Habitat bonds and other 254 254
--- ---
$59,467 $ -- $ 2 $59,465
======= === ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------
GROSS ESTIMATED
-----
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
Mortgage backed securities $ 8,128 $ -- $ -- $ 8,128
United States government agencies obligations 10,009 -- 83 9,926
------- ----- ------- -------
$18,137 $ -- $ 83 $18,054
======= ===== ======= =======
</TABLE>
The following table sets forth the amount of our investment securities (in
000's) that mature during each of the periods indicated and the weighted average
yields for each range of maturities at December 31, 1999. The actual maturity of
our investment securities may differ from contractual maturity as certain of our
investment securities are subject to call provisions, which allow the issuer to
accelerate the maturity date of the security:
<TABLE>
<CAPTION>
CONTRACTUALLY MATURING
----------------------
WEIGHTED GREATER WEIGHTED
LESS THAN 5 WEIGHTED 5-10 AVERAGE THAN AVERAGE
YEARS AVERAGE YIELD YEARS YIELD 10 YEARS YIELD
<S> <C> <C> <C> <C> <C> <C>
Mortgage backed securities $ 2,339 6.6% $ 2,008 8.9% $241,696 7.1%
United States government agencies obligations 94,092 6.5% 44,748 7.1% 22,060 6.0%
Corporate bonds -- -- -- -- 9,638 7.1%
Habitat bonds and other -- -- 233 3.5% -- --
--- ---
$ 96,431 6.5% $ 46,989 7.2% $273,394 7.0%
======== === ======== === ======== ===
</TABLE>
24
<PAGE>
SOURCES OF FUNDS
GENERAL - NetBank's liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financial activities. NetBank'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. NetBank invests excess funds in overnight deposits and other
short-term interest-earning assets. NetBank can use cash generated through the
retail deposit market, its traditional funding source, to offset the cash
utilized in investing activities. NetBank'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,
NetBank had availability under existing line of credit agreements totaling $92.9
million at December 31, 1999.
DEPOSITS - Our deposit products include a broad selection of deposit
instruments, including commercial checking accounts, negotiable order of
withdrawal accounts, money market accounts and term certificate accounts.
Deposit account terms vary, with the principal differences being the minimum
balance required, the time periods the funds must remain on deposit and the
interest rate.
We utilize traditional print and radio media and less traditional on-line
campaigns to attract new customers and savings deposits. Our target market
includes Internet users, online shoppers and special niche customers. We market
our products and services by placing banner advertisements on portals and web
sites that we believe will attract our target customers. We also derive a
marketing benefit from media coverage. Additionally, we continually seek 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.
We are competitive in the types of accounts and range of interest rates we
offer on our deposit products. Our deposit levels have increased during the
years ended December 31, 1999, 1998 and 1997, primarily as a result of
competitive rates we offer and Internet advertising. The weighted average
interest rate paid during the years ended December 31, 1999, 1998 and 1997 was
5.6%, 5.8% and 5.2%, respectively. Although market demand generally dictates
which deposit maturities and rates will be accepted by the public, we intend to
continue to promote checking and negotiable order of withdrawal 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 us at
December 31, 1999, 1998 and 1997 (in 000's):
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------------------------------------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INTEREST INTEREST
AMOUNT PERCENTAGE RATE AMOUNT PERCENT RATE
<S> <C> <C> <C> <C> <C>
Demand checking accounts $ 3,739 0.6% N/A $ 9,285 3.3% N/A
Interest-bearing:
NOW accounts 38,590 5.9 3.1% 6,091 2.1 3.5%
Money market 219,898 33.6 5.3% 65,326 23.0 5.1%
Certificate of deposit
under $100,000 351,074 53.7 6.1% 197,163 69.5 5.7%
Certificate of deposit
over $100,000 40,600 6.2 6.1% 5,724 2.1 5.7%
- ----------------------------------------------------------------------------------------------------------------
Total $653,901 100.0% $283,589 100.0%
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------
WEIGHTED
AVERAGE
INTEREST
AMOUNT PERCENTAGE RATE
<S> <C> <C> <C>
Demand checking accounts $ 293 0.5% N/A
Interest-bearing:
NOW accounts 1,573 2.7 3.3%
Money market 36,535 62.2 5.5%
Certificate of deposit
under $100,000 16,662 28.4 6.2%
Certificate of deposit
over $100,000 3,663 6.2 6.2%
- -------------------------------------------------------------------------------
Total $ 58,726 100.0%
===============================================================================
</TABLE>
The following table shows maturity information for our certificates of deposit
at December 31, 1999 (in 000's):
<TABLE>
<CAPTION>
MATURITY DATE
--------------------------------------------
ONE YEAR 1 TO 2 2 TO 3 3 TO 4
OR LESS YEARS YEARS YEARS TOTAL
<S> <C> <C> <C> <C> <C>
5.00-5.99% $186,302 $11,591 $ 760 $ -- $198,653
6.00-6.54% 174,522 309 18,061 129 193,021
- --------------------------------------------------------------------------------
Total $360,824 $11,900 $18,821 $129 $391,674
================================================================================
</TABLE>
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
The following table sets forth the maturities of our certificates of
deposit having principal amounts of $100,000 or more at December 31, 1999 (in
000's):
<TABLE>
<CAPTION>
<S> <C>
Within three months $10,682
Over three months through six months 6,654
Over six months through one year 14,474
Over one year 8,790
- --------------------------------------------------
Total certificates of deposit with balance of
$100,000 or more $40,600
==================================================
</TABLE>
CAPITAL RESOURCES - NetBank is subject to various regulatory capital
requirements administered by the federal banking agencies. Failure of NetBank 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 NetBank's consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, NetBank must meet specific capital guidelines that involve quantitative
measures of NetBank's assets, liabilities, and certain off-balance-sheet items
as calculated under regulatory accounting practices. NetBank'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, NetBank may not pay a dividend to NetBank, Inc. if doing
so would cause NetBank to be less than adequately capitalized, as defined below.
Quantitative measures established by regulation to ensure capital adequacy
require NetBank to maintain minimum amounts and ratios set forth in the table
below. NetBank's regulatory agency, the OTS, requires NetBank to maintain
minimum ratios of tangible capital to tangible assets of 1.5%, core capital to
tangible assets of 3.0% and total capital to risk-weighted assets of 8.0%.
Management believes, as of December 31, 1999, that NetBank meets all the capital
adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification from the OTS
categorized NetBank as well capitalized under the regulatory framework for
prompt corrective action. To be well capitalized, NetBank must maintain minimum
total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in
the table. There are no conditions or events since that notification that
management believes would have changed the institution's category.
NetBank's actual capital amounts and ratios as of December 31, 1999 and 1998,
are as follows (in 000's):
<TABLE>
<CAPTION>
TO BE CATEGORIZED
AS WELL CAPITALIZED
FOR CAPITAL UNDER PROMPT
ADEQUACY CORRECTIVE
ACTUAL PURPOSES ACTION PLAN
--------------------------------------------------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1999
Total capital (to risk-weighted assets) $228,832 31.3% $58,438 8.0% $73,048 10.0%
Core capital (to tangible assets) $221,235 17.6% $37,743 3.0% $62,904 5.0%
Tangible capital (to tangible assets) $221,297 17.6% $18,871 1.5% N/A N/A
Tier I capital (to risk-weighted assets) $221,235 30.3% N/A N/A $43,829 6.0%
DECEMBER 31, 1998
Total capital (to risk-weighted assets) $ 38,297 15.4% $19,947 8.0% $24,934 10.0%
Core capital (to tangible assets) $ 35,996 9.3% $11,595 3.0% $19,325 5.0%
Tangible capital (to tangible assets) $ 35,996 9.3% $ 5,798 1.5% N/A N/A
Tier I capital (to risk-weighted assets) $ 35,996 14.4% N/A N/A $14,960 6.0%
</TABLE>
26
<PAGE>
Under current Office of Thrift Supervision regulations, NetBank may pay
dividends and make other capital distributions after giving notice to the Office
of Thrift Supervision. During the year ended December 31, 1999, NetBank issued
$115,000,000 in convertible subordinated notes (the "Notes") in a public
offering. Net proceeds after deducting estimated expenses and underwriting
discounts and commissions were $111,300,000. The Notes mature on June 1, 2004
unless previously redeemed and bear interest at 4.75% payable semi-annually on
June 1 and December 1 of each year beginning December 1, 1999. Holders of the
Notes may convert any Notes or portions of the Notes into shares of NetBank's
common stock at a conversion price of $35.67 per share, subject to adjustment.
This is equivalent to 28.0348 shares of common stock per $1,000 principal amount
of the Notes.
Subsequent to December 31, 1999, NetBank exchanged 595,000 shares of its
common stock and $15,349,000 in cash for $31 million of the Notes and recorded
an extraordinary gain on early extinguishment of debt of approximately
$4,521,000, net of tax.
As of December 31, 1998, NetBank had three $20,000,000 advances outstanding
at interest rates ranging from 4.4-5.0%, two from the Federal Home Loan Bank
("FHLB") and one under a line of credit agreement. During the year ended
December 31, 1999, NetBank obtained eight new advances from the FHLB totaling
$264,000,000 and paid off two advances from the FHLB totaling $60,000,000.
NetBank borrowed an additional $36,000,000 under the line of credit agreement
and repaid the entire $56,000,000 due under that line during the year ended
December 31, 1999. NetBank entered into and repaid reverse repurchase agreements
totaling $94,150,000 during the year. See Note 7 to our consolidated financial
statements.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The
statement requires NetBank to recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value. In
July 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities N Deferral of the Effective Date of FASB Statement No.
133," which changed the effective date of SFAS No. 133 to fiscal years beginning
after June 15, 2000. NetBank has not finished evaluating the impact of the
adoption of SFAS No. 133 and is therefore unable to disclose the effect, if any,
that adoption of SFAS No. 133 will have on our financial statements.
SUBSEQUENT EVENT
Effective January 20, 2000, NetBank's Board of Directors adopted a Shareholder
Rights Plan pursuant to which all shareholders of record on February 4, 2000,
will receive one right to purchase a fractional (1/1000th) share of a new series
of preferred stock for each share of NetBank's common stock owned on that date.
These rights will only trade with NetBank's common stock if certain events
occur. In the event of a merger of NetBank into another entity or an acquisition
of 20% of NetBank's common stock by any person or entity, these rights, unless
previously redeemed by NetBank, will convert into a right to acquire at a
discount price, either the stock of the acquiring entity or additional shares of
NetBank's common stock. These rights will be exercisable at $150.00 for each
1/1000th of a share of preferred stock and will expire on February 4, 2010. The
rights are redeemable at $.01 per right at the option of NetBank.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial data for the years ended December 31, 1999 and 1998 is
summarized as follows (in 000's, except per share amounts):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
<S> <C> <C> <C> <C>
1999
Interest income $ 7,558 $ 10,421 $16,323 $ 20,471
Interest expense 4,560 5,730 8,865 12,246
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income 2,998 4,691 7,458 8,225
- ----------------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 50 55 2 -
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 2,948 4,636 7,456 8,225
Non-interest income 246 232 311 870
Non-interest expense 2,147 3,704 6,064 8,645
- ----------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,047 1,164 1,703 450
Income tax benefit (expense) (355) (396) (579) 14
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 692 $ 768 1,124 $ 464
====================================================================================================================================
Basic net income per common and common
equivalent share outstanding $ 0.03 $ 0.03 $ 0.04 $ 0.02
====================================================================================================================================
Diluted net income per common and common
equivalent share outstanding $ 0.03 $ 0.03 $ 0.04 $ 0.02
====================================================================================================================================
1998
Interest income $ 2,207 $ 4,253 $ 5,284 $ 6,343
Interest expense 1,304 2,714 3,220 4,186
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income 903 1,539 2,064 2,157
- ----------------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 4 6 6 4
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 899 1,533 2,058 2,153
Non-interest income 123 104 190 266
Non-interest expense 1,173 1,397 1,290 1,327
- ----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (151) 240 958 1,092
Income tax benefit (expense) -- 3,029 (345) (359)
- ----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (151) $ 3,269 $ 613 $ 733
====================================================================================================================================
Basic net income (loss) per common and common
equivalent share outstanding $ (0.01) $ 0.18 $ 0.03 $ 0.04
====================================================================================================================================
Diluted net income (loss) per common and common
equivalent share outstanding $ (0.01) $ 0.17 $ 0.03 $ 0.04
====================================================================================================================================
</TABLE>
28
<PAGE>
CONSOLIDATED BALANCE SHEETS (in 000's, except share and per share amounts)
<TABLE>
<CAPTION>
December 31, 1999 1998
<S> <C> <C>
Assets
Cash and cash equivalents:
Cash and due from banks $ 5,265 $ 405
Federal funds sold 8,378 12,055
- ----------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 13,643 12,460
Investment securities available for sale - At fair value (amortized cost of
$421,670 and $59,467, respectively) 416,814 59,465
Stock of Federal Home Loan Bank of Atlanta - At cost 12,200 2,000
Loans receivable - Net of allowance for loan losses of
$7,597 and $3,472, respectively 779,738 277,241
Accrued interest receivable 7,349 2,333
Furniture and equipment - Net 5,502 1,322
Deferred income taxes 2,881 2,297
Loan sale proceeds receivable 6,165 23,203
Other assets 13,593 8,116
- ----------------------------------------------------------------------------------------------------------------
Total assets $ 1,257,885 $ 388,437
================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits $ 653,901 $ 283,589
Other borrowed funds 244,000 60,000
Convertible subordinated debt 111,935 --
Accrued interest payable 8,517 5,882
Accounts payable and accrued liabilities 1,111 211
- ----------------------------------------------------------------------------------------------------------------
1,019,464 349,682
Commitments and Contingencies -- --
Shareholders' Equity:
Preferred stock, no par (10,000,000 shares authorized, none outstanding) -- --
Common stock, $.01 par (100,000,000 shares authorized, 29,413,121 and
18,470,274 shares issued and outstanding, respectively) 294 185
Additional paid-in capital 243,236 43,549
Unamortized stock plan expense -- (24)
Deficit (1,905) (4,953)
Accumulated other comprehensive loss, net of tax (3,204) (2)
- ----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 238,421 38,755
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,257,885 $ 388,437
================================================================================================================
</TABLE>
See notes to consolidated financial statements.
29
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS (in 000's except per share amounts)
Management's discussion and analysis of financial condition and results of
operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 1998 1997
<S> <C> <C> <C>
Interest Income:
Loans $ 39,262 $ 14,549 $ 1,095
Investment securities 13,237 2,905 183
Short-term investments 2,274 634 945
- -----------------------------------------------------------------------------------------------------
Total interest income 54,773 18,088 2,223
- -----------------------------------------------------------------------------------------------------
Interest Expense:
Deposits 22,585 10,250 1,260
Other borrowed funds 8,816 1,175 --
- -----------------------------------------------------------------------------------------------------
Total interest expense 31,401 11,425 1,260
- -----------------------------------------------------------------------------------------------------
Net interest income 23,372 6,663 963
Provision for loan losses 107 20 471
- -----------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 23,265 6,643 492
- -----------------------------------------------------------------------------------------------------
Non-interest income 1,659 683 63
- -----------------------------------------------------------------------------------------------------
Non-interest Expense:
Salaries and benefits 3,524 1,430 2,396
Amortization of service contract with affiliate -- -- 1,440
Marketing 7,358 695 525
Customer services 4,796 1,378 310
Data processing 1,395 316 539
Depreciation and amortization 1,085 272 218
Office expenses 431 175 177
Occupancy 281 147 107
Travel and entertainment 288 88 65
Other 1,402 686 355
- -----------------------------------------------------------------------------------------------------
Total non-interest expense 20,560 5,187 6,132
- -----------------------------------------------------------------------------------------------------
Income (loss) before income taxes 4,364 2,139 (5,577)
Income tax benefit (expense) (1,316) 2,325 --
- -----------------------------------------------------------------------------------------------------
Net income (loss) $ 3,048 $ 4,464 $(5,577)
- -----------------------------------------------------------------------------------------------------
Net income (loss) per common share and potential common share:
Basic $ 0.11 $ 0.24 $ (0.55)
Diluted $ 0.11 $ 0.23 $ (0.55)
Weighted average common and potential common shares outstanding:
Basic 27,052 18,447 10,062
Diluted 28,045 19,152 10,062
</TABLE>
See notes to consolidated financial statements.
30
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in 000's)
<TABLE>
<CAPTION>
Common Additional Common
Common Stock Paid-in Stock
Shares ($.01 Par) Capital Subscrbed
<S> <C> <C> <C> <C>
Balance - December 31, 1996 3,748 $ 38 $ 1,043 $ 3,844
Comprehensive loss:
Net loss for the year ended
December 31, 1997 -- -- -- --
Change in net unrealized loss on
securities available for sale, net
of reclassification adjustment
and tax effects -- -- -- --
Comprehensive loss (5,660)
Proceeds from issuance of stock 14,689 147 42,075 (3,844)
Issuance of compensatory stock options -- -- 390 --
Amortization of service contract -- -- -- --
Amortization of stock plan expense -- -- -- --
BALANCE - December 31, 1997 18,437 185 43,508 --
Comprehensive income:
Net income for the year ended
December 31, 1998 -- -- -- --
Change in net unrealized loss of
securities available for sale,
net of reclassification
adjustment and tax effects -- -- -- --
Comprehensive income 4,545
Exercised stock options 33 -- 41 --
Amortization of stock plan expense -- -- -- --
BALANCE - December 31, 1998 18,470 185 43,549 --
Comprehensive loss:
--et income for the year ended
December 31, 1999 -- -- -- --
Change in net unrealized loss on
securities available for sale, net
of reclassification adjustment
and tax effects -- -- -- --
Comprehensive loss
Proceeds from issuance of stock 10,740 108 199,348 --
Exercised stock options 203 1 339 --
Amortization of stock plan expense -- -- -- --
BALANCE - December 31, 1999 29,413 $ 294 $ 243,236 $ --
</TABLE>
<TABLE>
<CAPTION>
UNAMORTIZED
AFFILIATE
SERVICE UNAMORTIZED
STOCK CONTRACT STOCK
SUBSCRIPTIONS EXPENSE, PLAN
RECEIVABLE NET OF TAX EXPENSE DEFICIT
<S> <C> <C> <C> <C>
Balance - December 31, 1996 $(4) $(1,440) $ (28) $ (3,840)
Comprehensive loss:
Net loss for the year ended
December 31, 1997 -- -- -- (5,577)
Change in net unrealized loss on
securities available for sale, net
of reclassification adjustment
and tax effects -- -- -- --
Comprehensive loss
Proceeds from issuance of stock 4 -- -- --
Issuance of compensatory stock options -- -- (390) --
Amortization of service contract -- 1,440 -- --
Amortization of stock plan expense -- -- 343 --
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE - December 31, 1997 -- -- (75) (9,417)
Comprehensive income:
Net income for the year ended
December 31, 1998 -- -- -- 4,464
Change in net unrealized loss of
securities available for sale,
net of reclassification
adjustment and tax effects -- -- -- --
Comprehensive income
Exercised stock options -- -- -- --
Amortization of stock plan expense -- -- 51 --
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE - December 31, 1998 -- -- (24) (4,953)
Comprehensive loss:
--et income for the year ended
December 31, 1999 -- -- -- 3,048
Change in net unrealized loss on
securities available for sale, net
of reclassification adjustment
and tax effects -- -- -- --
Comprehensive loss
Proceeds from issuance of stock -- -- -- --
Exercised stock options -- -- -- --
Amortization of stock plan expense -- -- 24 --
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE - December 31, 1999 $-- $ $ -- $(1,905)
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME
(LOSS),
NET OF TAX TOTAL
<S> <C>
Balance - December 31, 1996 $ -- $ (387)
Comprehensive loss:
Net loss for the year ended
December 31, 1997 (5,577)
Change in net unrealized loss on
securities available for sale, net
of reclassification adjustment
and tax effects (83) (83)
-----------
Comprehensive loss (5,660)
Proceeds from issuance of stock -- 38,382
Issuance of compensatory stock options -- --
Amortization of service contract -- 1,440
Amortization of stock plan expense -- 343
- -------------------------------------------------------------------------------------------
BALANCE - December 31, 1997 (83) 34,118
Comprehensive income:
Net income for the year ended
December 31, 1998 -- 4,464
Change in net unrealized loss of
securities available for sale,
net of reclassification
adjustment and tax effects 81 81
-----------
Comprehensive income 4,545
Exercised stock options -- 41
Amortization of stock plan expense -- 51
- -------------------------------------------------------------------------------------------
BALANCE - December 31, 1998 (2) 38,755
Comprehensive loss:
--et income for the year ended
December 31, 1999 -- 3,048
Change in net unrealized loss on
securities available for sale, net
of reclassification adjustment
and tax effects (3,202) (3,202)
-----------
Comprehensive loss (154)
Proceeds from issuance of stock -- 199,456
Exercised stock options -- 340
Amortization of stock plan expense -- 24
- -------------------------------------------------------------------------------------------
BALANCE - December 31, 1999 $(3,204) $238,421
===========================================================================================
</TABLE>
See notes to consolidated financial statements.
31
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (in 000's)
Management's discussion and analysis of financial condition and results of
operations
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 1998
<S> <C> <C>
Operating Activities:
Net income (loss) $ 3,048 $ 4,464
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Net amortization (accretion) of premiums (discounts)
on investment securities (511) 237
Amortization of premiums on purchased loans 8,134 2,510
Provision for loan losses 107 20
Depreciation and amortization 1,047 323
Amortization of debt discount 385 --
Amortization of service contract --
Changes in assets and liabilities which provide (use) cash:
Increase in accrued interest receivable (5,016) (2,210)
(Increase) decrease in deferred tax asset 1,068 (2,266)
Loans originated for sale (382,305) (142,189)
Proceeds from sale of loans 399,343 118,986
Increase in other assets (5,477) (7,569)
Increase in accrued interest payable 2,635 5,807
Increase (decrease) in payables and accrued liabilities 900 (90)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 23,358 (21,977)
Investing Activities:
Purchases of securities available for sale (473,706) (59,333)
Principal repayments on investment securities 19,080 11,105
Sales and maturities of available for sale securities 92,934 6,580
Purchase of Federal Home Loan Bank stock (10,200) (225)
Origination and purchase of loans (676,387) (352,666)
Principal repayments on loans 165,649 117,704
Capital expenditures (2,499) (592)
Capitalized software costs (2,704) (592)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (887,833) (279,569)
Financing Activities:
Increase in deposits 370,312 224,862
Proceeds from other borrowed funds 356,000 72,000
Repayments of other borrowed funds (172,000) (12,000)
Net proceeds from issuance of convertible subordinated notes 111,550 --
Net proceeds from the sale of stock 199,456 --
Net proceeds from exercise of stock options 340 41
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 865,658 284,903
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 1,183 (16,643)
Cash and Cash Equivalents:
Beginning of Year 12,460 29,103
- ------------------------------------------------------------------------------------------------------------------------------
End of Year $ 13,643 $ 12,460
==============================================================================================================================
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for interest $ 28,766 $ 5,694
Cash paid during the year for income taxes $ 103 $ 30
==============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
<S> <C>
Operating Activities:
Net income (loss) $ (5,577)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Net amortization (accretion) of premiums (discounts)
on investment securities 49
Amortization of premiums on purchased loans 117
Provision for loan losses 471
Depreciation and amortization 562
Amortization of debt discount --
Amortization of service contract
Changes in assets and liabilities which provide (use) cash: 1,440
Increase in accrued interest receivable (372)
(Increase) decrease in deferred tax asset --
Loans originated for sale --
Proceeds from sale of loans --
Increase in other assets (492)
Increase in accrued interest payable 75
Increase (decrease) in payables and accrued liabilities (1,333)
- ---------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (5,060)
Investing Activities:
Purchases of securities available for sale (19,348)
Principal repayments on investment securities 1,161
Sales and maturities of available for sale securities --
Purchase of Federal Home Loan Bank stock
Origination and purchase of loans (52,909)
Principal repayments on loans 7,839
Capital expenditures (232)
Capitalized software costs --
- ---------------------------------------------------------------------------------------------------------
Net cash used in investing activities (63,714)
Financing Activities:
Increase in deposits 58,727
Proceeds from other borrowed funds --
Repayments of other borrowed funds --
Net proceeds from issuance of convertible subordinated notes --
Net proceeds from the sale of stock 38,381
Net proceeds from exercise of stock options --
- ---------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 97,108
- ---------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 28,334
Cash and Cash Equivalents:
Beginning of Year 769
- ---------------------------------------------------------------------------------------------------------
End of Year $ 29,103
=========================================================================================================
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for interest $ 1,185
Cash paid during the year for income taxes $ --
=========================================================================================================
</TABLE>
See notes to consolidated financial statements.
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1999 and 1998, and for the years ended December 31, 1999,
1998 and 1997
1. ORGANIZATION AND BASIS OF PRESENTATION
NetBank, Inc. ("NetBank") is a bank holding company that wholly owns the
outstanding stock of NetBank, a federal savings bank.
2. ACCOUNTING POLICIES
The accounting and reporting policies of NetBank 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 NetBank, Inc. include
the financial statements of NetBank, NetBank, Inc.'s wholly owned bank
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 - NetBank's assets and liabilities are generally monetary in
nature and interest rate changes have an impact on NetBank's performance.
NetBank decreases the effect of interest rate changes on its performance by
striving to match maturities and interest sensitivity among loans, investment
securities, deposits and other borrowings. However, a significant change in
interest rates, specifically the prime rate, could have a material effect on
NetBank's results of operations.
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. Unrealized holding gains or
losses, net of tax, on available-for-sale securities are reported as a net
amount in other comprehensive income in the statement of shareholders' equity.
Gains and losses from dispositions are based on the net proceeds and the
adjusted carrying amounts of the securities sold using the specific
identification method. Any decreases in investment value other than temporary
declines would be recognized in operations. Premiums and discounts are
recognized in interest income using the straight-line method over the average
life of the security.
DEFERRED FEES AND COSTS - Loan origination fees and certain direct origination
costs are capitalized and recognized as an adjustment of the yield of the
related loans.
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 NetBank'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 and pools of 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. NetBank 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 December 31,
1999.
CAPITALIZED SOFTWARE - Certain costs incurred to develop internal use computer
software are capitalized. Such costs include external direct costs of materials
and services consumed in developing internal use software and payroll and
payroll-related costs for employees who devote time to the internal use software
project. Once the capitalization criteria have been met, such costs are
classified as furniture and fixtures and are amortized on a straight-line basis
over three years once the software has been put into use.
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, 120 or 180 days past
due, depending on loan type, or when, in management's opinion, collectibility of
such interest is doubtful. In addition, for first mortgages, any previously
accrued interest is reversed when the
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
loan becomes 90 days past due. Second mortgages and open-ended credit loans,
including any accrued but unpaid interest, are written off at either 120 or 180
days depending on loan type.
PREMIUM ON LOANS PURCHASED - Premiums on loans purchased from third parties are
capitalized and amortized over the average life of the loan as an adjustment to
yield. Such premiums are classified with the loan balance to which they relate
for financial reporting purposes.
LOAN SALES PROCEEDS RECEIVABLE - NetBank is a party to agreements with unrelated
third parties whereby NetBank acts as a loan originator on behalf of the third
parties. Under the terms of the agreements, the third parties are required to
purchase all loans, including the related servicing of these loans, originated
by NetBank, unless NetBank elects to retain the loans. As a result of the
agreements, loans originated for the third parties for which the purchase price
has not yet been received are accounted for as receivables.
ADVERTISING - NetBank expenses the cost of advertising over the period that the
campaign runs.
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. NetBank 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 Common Share and Potential
Common Share - NetBank computes basic net income per common and potential common
share based on the weighted average number of common shares outstanding during
the year. Diluted net income per common and potential common share is computed
based on the weighted average number of common and potential dilutive common
shares outstanding during the year.
NEW ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standard
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities." This statement establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded
in other contracts, and for hedging activites. The statement requires NetBank
to recognize all derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. In July 1999, the FASB
issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities --Deferral of the Effective Date of FASB Statement No. 133, " which
changed the effective date of SFAS No. 133 to fiscal years beginning after
June 15, 2000. NetBank has not finished evaluating the impact of the adoption
of SFAS No. 133 and is therefore unable to disclose the effect, if any, that
adoption of SFAS No. 133 will have on its financial statements.
RECLASSIFICATIONS - Certain reclassifications have been made to the 1997 and
1998 financial statements to conform to the 1999 presentation.
3. 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 (in 000's):
<TABLE>
<CAPTION>
GROSS
--------------------------
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
<S> <C> <C> <C> <C>
AT DECEMBER 31, 1999
Collateralized mortgage obligations $249,436 $ -- $ 3,399 $246,037
Unites States government agencies 162,356 29 1,485 160,900
Corporate bonds 9,639 -- 1 9,638
Habitat bonds and other 239 -- -- 239
- ----------------------------------------------------------------------------------------------------
$421,670 $ 29 $ 4,885 $416,814
====================================================================================================
AT DECEMBER 31, 1998
Collateralized mortgage obligations $ 59,213 $ -- $ 2 $ 59,211
Habitat bonds and other 254 -- -- 254
- ----------------------------------------------------------------------------------------------------
$ 59,467 $ -- $ 2 $ 59,465
====================================================================================================
</TABLE>
34
<PAGE>
The amortized cost and estimated fair value of these securities at December 31,
1999, by contractual maturity, are shown below (in 000's). 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 December 31, 1999
Due in more than one year but less than five years $ 97,374 $96,431
Due in more than five years but less than ten years 47,280 46,989
Due after ten years 277,016 273,394
- ----------------------------------------------------------------------------------------------------
$421,670 $416,814
====================================================================================================
</TABLE>
Gains on sales or calls of securities included in non-interest income were
$525,000, $10,000, and $0, for the years ended December 31, 1999, 1998, and
1997, respectively.
4. LOANS
NetBank's primary loan strategy is to originate or purchase high credit quality
packages of loans from other financial institutions. The servicing on all loan
purchases is retained by the selling institutions. As of December 31, 1999, fees
paid for servicing range from .25% to 1.25%. A summary of loans purchased during
the years ended December 31, 1999 and 1998 follows (in 000's):
<TABLE>
<CAPTION>
TYPES OF LOANS PRINCIPAL PREMIUM RANGE OF STATED
PURCHASED AMOUNT AMOUNT INTEREST RATES
<S> <C> <C> <C>
1999 First and second mortgages $ 375,333 $ 2,983 5.9-10.0%
Home equity lines 136,909 6,949 9.0-10.8%
Leases 94,449 8.0-12.0%
Multi-family housing commercial participations 48,539 6.6-9.3%
- ----------------------------------------------------------------------------------------------------
$ 655,230 $ 9,932
====================================================================================================
1998 First and second mortgages $ 134,789 $ 5,002 6.1-17.0%
Home equity lines 122,746 7,247 7.3-13.0%
- ----------------------------------------------------------------------------------------------------
$ 257,535 $12,249
====================================================================================================
</TABLE>
Loans are summarized as follows (in 000's):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1999 1998
% OF % OF
AMOUNT PORTFOLIO AMOUNT PORTFOLIO
<S> <C> <C> <C> <C>
Residential mortgages $480,470 61.0 $144,361 51.4%
Home equity lines 177,670 22.6 89,054 31.7
Leases 62,295 7.9 1,231 0.4
Multi-family housing commercial participations 48,783 6.2 8,556 3.0
Construction 10,723 1.4 27,997 10.0
Consumer 4,183 0.5 1,710 0.6
Auto 3,211 0.4 7,804 2.8
- ----------------------------------------------------------------------------------------------------
Total gross loans 787,335 100.0% 280,713 100.0%
- ----------------------------------------------------------------------------------------------------
Less allowance for loan losses 7,597 3,472
- ----------------------------------------------------------------------------------------------------
Total net loans $779,738 $277,241
====================================================================================================
</TABLE>
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NetBank provides lines of credit and overdraft protection to its banking
customers on a nationwide basis. At December 31, 1999 and 1998, outstanding
lines of credit totaled $178,375,000 and $110,070,000 respectively, and unused
committements totaled $120,196,000 and $47,618,000, respectively. NetBank's home
equity and construction lines are secured by residential property. At December
31, 1999 and 1998, the majority of NetBank's loans were with customers residing
in the Western and Southern United States.
5. ALLOWANCE FOR LOAN LOSS
An analysis of the allowance for loan losses for the years ended December 31,
1999, 1998 and 1997 follows (in 000's):
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Balance-Beginning of year $ 3,472 $ 453 $ --
Allowance recorded in connection
with the purchase of loan pools 5,808 3,586 --
Provision for loan losses 107 20 471
Loans charged off (1,790) (587) (18)
------ ---- ---
Balance-End of year $ 7,597 $ 3,472 $ 453
======= ======= =====
</TABLE>
NetBank 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. NetBank 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 years ended December 31, 1999 and 1998, NetBank had no
significant amount of impaired loans or nonaccrual loans. The amount of impaired
loans written off during the years ended December 31, 1999, 1998 and 1997 was
$1,790,000, $587,000 and $18,000, respectively. NetBank had no restructured
loans as of either December 31, 1999 or 1998.
NetBank 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. NetBank's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit is represented by the contractual amount of those instruments.
NetBank 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, 1999 and 1998, NetBank had outstanding loan
commitments of $120,196,000 and $47,618,000, respectively.
The amount of collateral obtained by NetBank, 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
NetBank 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.
6. DEPOSITS
The following table sets forth the dollar amount of deposits in the various
types of deposit programs offered by NetBank (in 000's):
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------------------
AMOUNT PERCENTAGE AMOUNT PERCENTAGE
<S> <C> <C> <C> <C>
Demand checking accounts $ 3,739 0.6% $ 9,285 3.3%
Interest-bearing:
NOW accounts 38,590 5.9% 6,091 2.1%
Money markets 219,898 33.6% 65,326 23.0%
Certificates of deposit under $100,000 351,074 53.7% 197,163 69.5%
Certificates of deposit over $100,000 40,600 6.2% 5,724 2.1%
-------- ------ --- ----- ---
Total deposits $653,901 100.0% $283,589 100.0%
======== ===== ======== =====
</TABLE>
At December 31, 1999, the scheduled maturities of certificates of deposit were
as follows (in 000's):
<TABLE>
<S> <C>
Within three months $ 77,543
Over three months through six months 103,101
Over six months through one year 180,180
Over one year 30,850
------
Total $391,674
========
</TABLE>
36
<PAGE>
7. OTHER BORROWINGS
During the year ended December 31, 1999, NetBank issued $115,000,000 in
convertible subordinated notes (the "Notes") in a public offering. Net proceeds
after deducting estimated expenses and underwriting discounts and commissions
were $111,300,000. The Notes mature on June 1, 2004, unless previously redeemed
and bear interest at 4.75% payable semi-annually on June 1 and December 1 of
each year beginning December 1, 1999. Holders of the Notes may convert any Notes
or portions of the Notes into shares of NetBank's common stock at a conversion
price of $35.67 per share, subject to adjustment. This is equivalent to 28.0348
shares of common stock per $1,000 principal amount of the Notes.
NetBank may redeem the Notes, in whole or in part, before June 4, 2002, at
a redemption price equal to $1,000 per $1,000 principal amount of the Notes,
plus accrued interest, if any, to the redemption date, if the closing price of
NetBank's common stock has exceeded 150% of the conversion price for at least 20
trading days within a period of 30 consecutive trading days ending on the
trading day prior to the date of the mailing of the notice of redemption.
NetBank will make an additional payment in cash with respect to the Notes called
for redemption of $187.00 per $1,000 principal amount of the Notes, less the
amount of interest actually paid on the Notes before the call for redemption.
NetBank may redeem the Notes, in whole or in part, at any time on or after June
4, 2002, at the declining redemption prices listed in the indenture plus accrued
interest.
In the event of a change of control, under certain circumstances holders of
the Notes may require NetBank to repurchase their Notes in whole or in part at a
repurchase price of 100% of the principal amount plus accrued interest. The
Notes are unsecured and are subordinated to all of NetBank's existing and future
"senior indebtedness," as defined in the indenture governing the Notes.
As of December 31, 1998, NetBank had three $20,000,000 advances outstanding
at interest rates ranging from 4.43-5.00%, two from the Federal Home Loan Bank
("FHLB") and one under a line of credit agreement. During the year ended
December 31, 1999, NetBank obtained eight new advances from the FHLB totaling
$264,000,000 and paid off two advances from the FHLB totaling $60,000,000.
NetBank borrowed an additional $36,000,000 under the line of credit agreement
and repaid the entire $56,000,000 due under that line during the year ended
December 31, 1999. NetBank entered into and repaid reverse repurchase agreements
totaling $94,150,000 during the year. Borrowings as of December 31, 1999 are
summarized as follows (in 000's):
<TABLE>
<CAPTION>
DESCRIPTION MATURITY DATE STATED INTEREST RATE PRINCIPAL AMOUNT
<S> <C> <C> <C>
Convertible Subordinated Notes June 1, 2004; Redeemable until June 4, 2002 4.75% $115,000
FHLB Advance October 16, 2003; Subject to early conversion or
termination option October 16, 2000 4.43% 20,000
FHLB Advance February 18, 2009; Subject to early conversion or
termination option February 18, 2001 4.64% 25,000
FHLB Advance August 24, 2004; Subject to early conversion or
termination option August 24, 2001 6.03% 50,000
FHLB Advance August 12, 2004; Subject to early conversion or
termination option August 12, 2001 6.02% 25,000
FHLB Advance September 15, 2000 5.48%; Reprices quarterly
based on three-month LIBOR
minus 3 basis points 25,000
FHLB Advance October 29, 2001 6.47% 44,000
FHLB Advance November 4, 2004; Subject to early conversion or
termination option November 4, 2001 5.92% 30,000
FHLB Advance March 28, 2000 6.17% 25,000
- ----------------------------------------------------------------------------------------------------------------------------
Total 359,000
Less Unamortized Discount 3,065
- ----------------------------------------------------------------------------------------------------------------------------
Total Debt $355,935
============================================================================================================================
</TABLE>
Subsequent to December 31, 1999, NetBank exchanged 595,000 shares of its
common stock and $15,349,000 in cash for $31,000,000 of its 4.75% Convertible
Subordinated Notes due June 2004 and recorded an extraordinary gain on early
extinguishment of debt of approximately $4,521,000, net of tax.
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
All of these borrowings are secured by NetBank's investment securities or
mortgage loans except for the convertible subordinated notes, which are
unsecured. If converted, the interest rate on applicable FHLB advances becomes
equivalent to three month floating LIBOR.
8. FURNITURE AND EQUIPMENT
Furniture and equipment as of December 31, 1999 and 1998, are summarized as
follows (in 000's):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
<S> <C> <C>
Furniture and fixtures $1,231 $ 234
Equipment 1,349 284
Software 4,286 1,341
- ---------------------------------------------------------------------
Total 6,866 1,859
Less accumulated depreciation 1,364 537
- ---------------------------------------------------------------------
Furniture and equipment, net $5,502 $1,322
=====================================================================
</TABLE>
9. LEASES
NetBank leases its facilities and certain other equipment under operating lease
agreements. Future minimum noncancelable payments as of December 31, 1999 under
these leases follow (in 000's):
<TABLE>
<S> <C> <C>
2000 $768
2001 793
2002 810
2003 827
2004 and beyond 1,116
</TABLE>
Rent expense for the years ended December 31, 1999, 1998 and 1997, was $243,000,
$110,000 and $92,000, respectively.
10. INCOME TAXES
NetBank 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 December 31, 1999, NetBank
had federal and state net operating loss carryforwards of $5,810,000 and
$3,988,000, respectively, which will expire in 2012, if not utilized. As of
December 31, 1999 and 1998, NetBank had deferred tax assets and deferred tax
liabilities as follows (in 000's):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1999 1998
<S> <C> <C>
Net operating loss carryforwards $ 1,705 $ 2,102
Unrealized loss on available for
sale securities 1,652 --
Allowance for loan losses 2,754 (244)
Loan premium amortization (2,313) 357
Amortization of capitalized software (947) (7)
Exercise of stock options 148 --
General business and AMT credits 130 --
Start-up costs 84 132
Depreciation (56) --
Other, net 73 (43)
- ------------------------------------------------------------------------
Total deferred tax asset 3,230 2,297
- ------------------------------------------------------------------------
Less valuation allowance (349) --
- ------------------------------------------------------------------------
Net deferred tax asset $ 2,881 $ 2,297
========================================================================
</TABLE>
At December 31, 1999, the potential deferred tax benefit associated with
NetBank's state net operating loss carryforwards was $349,000. NetBank has
provided a full valuation allowance against these deferred state benefits
because of the uncertainty of future realization.
NetBank's income tax (expense) benefit consists of current and deferred
income tax (expense) benefit as follows (in 000's):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1999 1998
<S> <C> <C>
Current $ (248) $ 59
Deferred (1,068) 2,266
- ---------------------------------------------------------------
Income tax (expense) benefit $(1,316) $ 2,325
===============================================================
</TABLE>
NetBank did not incur any income tax expense or benefit during the year
ended December 31, 1997.
38
<PAGE>
Income tax (expense) benefit is reconciled to the tax computed by applying
the federal statutory rate of 34% to income before income taxes as follows (in
000's):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998
AMOUNT PERCENTAGE
<S> <C> <C> <C>
Income tax at statutory rate $(1,484) (34.0)% $ (727)
Change in valuation allowance -- -- 3,260
Other 168 3.8 (208)
- -----------------------------------------------------------------------------------------
Income tax (expense) benefit $(1,316) (30.2)% $ 2,325
=========================================================================================
</TABLE>
A percentage reconciliation is not presented for the year ended December
31, 1998 as the information is not meaningful. The 1998 income tax benefit
results from the reversal of the valuation allowance relating to federal net
operating loss carryforwards offset by taxable income for the year.
11. OTHER EXPENSE
Items comprising other expense (in 000's):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
<S> <C> <C> <C>
Accounting and legal services $ 866 $ 423 $ 239
Directors and officers
insurance 136 53 22
Annual meeting and report 127 93 --
Directors fees 118 37 6
Investor relations 49 40 7
Miscellaneous fees and taxes 44 5 --
OTS fees 40 24 --
Other 22 11 28
Consultants -- -- 53
- -----------------------------------------------------------------------------
$1,402 $ 686 $ 355
=============================================================================
</TABLE>
12. EMPLOYEE BENEFIT PLAN
NetBank has a 401(k) plan (the "Plan"), which covers substantially all of its
employees. NetBank, at its discretion, matches 25% of employee contributions to
the Plan, up to a maximum Company contribution of 1% of an employee's
compensation. NetBank expensed $9,000, $10,000 and $0 during the years ended
December 31, 1999, 1998 and 1997, respectively, related to the plan.
13. SHAREHOLDERS' EQUITY
On May 14, 1999, NetBank effected a three-for-one split of its common stock in
the form of a stock dividend to shareholders of record as of the close of
business on April 23, 1999. All references to share and per share amounts
reflect the split. In addition common stock and paid in capital have been
retroactively adjusted to reflect the split.
On February 10, 1999, NetBank received net proceeds of approximately
$105,000,000 from the sale of 7,290,000 shares of its common stock in a public
offering and on June 9, 1999, NetBank received net proceeds of approximately
$94,000,000 from the sale of 3,450,000 shares of its common stock in a public
offering.
On March 17, 1997, the Company declared a 33.125 for one stock split of its
common stock effected in the form of a stock dividend payable on the effective
date of the initial public offering of the Company's common stock. All
references to share and per share amounts reflect the split.
Under current OTS regulations, NetBank may pay dividends and make other
capital distributions after giving notice to the Office of Thrift Supervision.
14. STOCK OPTIONS
NetBank has a 1996 Stock Incentive Plan (the "Plan"), which provides that
employees, officers, directors, and consultants of NetBank may be granted
nonqualified and incentive stock options to purchase shares of common stock of
NetBank, derivative securities related to the value of the common stock, or cash
awards. The Plan limits the number of shares that could be awarded to 3,750,000
which are reserved for the Plan. Generally, the options expire ten years from
the date of the grant.
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A summary of the status of the Plan and activity during the year follows (shares
in 000's):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1999 1998 1997
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,597 $ 3.84 1,099 $ 1.99 50 $ 0.40
Granted 892 $ 37.02 573 $ 6.50 1,058 $ 1.94
Exercised (224) $ 3.14 (33) $ 1.21 -- --
Terminated (118) $ 12.30 (42) $ 2.19 (9) $ 1.21
- --------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 2,147 $ 17.24 1,597 $ 3.84 1,099 $ 1.99
==========================================================================================================================
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1999 (shares in 000's):
<TABLE>
<CAPTION>
OPTIONS WEIGHTED AVERAGE WEIGHTED AVERAGE OPTIONS WEIGHTED AVERAGE
OUTSTANDING AT REMAINING EXERCISE PRICE OF EXERCISABLE AT EXERCISE PRICE OF
EXERCISE DECEMBER 31, CONTRACTUAL OPTIONS DECEMBER 31, OPTIONS
PRICE 1999 LIFE OUTSTANDING 1999 EXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
$ 0.00- 5.33 986 7.3 $ 2.68 872 $ 2.40
$ 5.34-10.67 297 8.9 $ 7.87 185 $ 7.92
$10.68-16.00 51 9.1 $12.45 - -
$16.01-21.33 - - - - -
$21.34-26.67 47 9.4 $23.12 - -
$26.68-32.00 - - - - -
$32.01-37.33 589 9.5 $35.44 133 $35.44
$37.34-42.66 - - - - -
$42.67-48.00 - - - - -
$48.01-53.33 177 9.3 $53.33 77 $53.33
- ------------------------------------------------------------------------------------------------------------------------------------
2,147 1,267
====================================================================================================================================
</TABLE>
In connection with the issuance of some of the options during the year
ended December 31, 1997, $390,000 of compensation expense was recognized over
the option vesting period. The vesting of certain of those options accelerated
on July 28, 1997 upon completion of the Initial Public Offering, and $320,000 of
unamortized compensation expense was recognized. The other options had
completely vested as of February 25, 1999, and all remaining compensation
expense related to those options has been recognized.
40
<PAGE>
NetBank accounts for its stock-based compensation plan under Accounting
Principles Board 25. NetBank 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 NetBank's stock option plan during the
years ended December 31, 1999 1998 and 1997 was estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions used:
<TABLE>
<CAPTION>
OPTIONS GRANTED OPTIONS GRANTED
DURING THE DURING THE OPTIONS GRANTED
YEAR ENDED YEAR ENDED JULY 30, 1997 OPTIONS GRANTED
DECEMBER 31, DECEMBER 31, (IPO DATE) TO FEBRUARY 20, 1996
1999 1998 DECEMBER 31, 1997 TO JULY 29, 1997
<S> <C> <C> <C> <C>
Fair value $ 31.81 $ 4.02 $ 2.51 $ 0.32
Expected life (years) 5 5 5 5
Risk-free interest rate 6.12% 4.96% 5.95% 6.2%
Dividend rate 0.0% 0.0% 0.0% 0.0%
Expected volatility 124.3% 70.0% 75.0% 0.0%
Forfeiture rate 25.0% 1.0% 1.0% 0.0%
</TABLE>
Had compensation cost for NetBank'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,
NetBank's net income (loss) and net income (loss) per common share and potential
dilutive common share for the years ended December 31, 1999, 1998 and 1997,
would have changed to the pro forma amounts indicated below (in 000's):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
<S> <C> <C> <C>
Net income (loss):
As reported $ 3,048 $ 4,464 $ (5,577)
====================================================================================
Pro forma $ (5,920) $ 3,960 $ (5,504)
====================================================================================
Net income (loss) per share:
As reported:
Basic $ 0.11 $ 0.24 $ (0.55)
====================================================================================
Diluted $ 0.11 $ 0.23 $ (0.55)
====================================================================================
Pro forma:
Basic $ (0.22) $ 0.21 $ (0.55)
====================================================================================
Diluted $ (0.21) $ 0.21 $ (0.55)
====================================================================================
</TABLE>
15. EARNINGS PER SHARE
Basic and diluted net income (loss) per common and potential common share have
been calculated based on the weighted average number of shares outstanding. The
following schedule reconciles the numerators and denominators of the basic and
diluted net income per common and potential common share. The only years
presented relate to those with net income as potential securities would be
anti-dilutive to years with a net loss. The effect of convertible debt
securities issued during the year ended December 31, 1999 has not been included
as the assumed conversion of such securities would be anti-dilutive to earnings
per share for the year ended December 31, 1999.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1999
----------------------------------------
(IN 000'S, EXCEPT PER SHARE AMOUNTS)
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
Basic EPS $3,048 27,052 $0.11
Effect of Dilutive Securities-
Options to purchase
common shares 993
- --------------------------------------------------------------------------
Diluted EPS $3,048 28,045 $0.11
==========================================================================
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1998
----------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C>
Basic EPS $4,464 18,447 $0.24
Effect of Dilutive Securities-
Options to purchase
common shares 704
- --------------------------------------------------------------------------
Diluted EPS $4,464 19,151 $0.23
==========================================================================
</TABLE>
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
16. CAPITAL ADEQUACY
NetBank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure of NetBank 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 NetBank's consolidated financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
NetBank must meet specific capital guidelines that involve quantitative measures
of NetBank's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. NetBank'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, NetBank may not pay a dividend to NetBank, Inc. if doing
so would cause NetBank to be less than adequately capitalized, as defined below.
Quantitative measures established by regulation to ensure capital adequacy
require NetBank to maintain minimum amounts and ratios set forth in the table
below. NetBank's regulatory agency, the OTS, requires NetBank to maintain
minimum ratios of tangible capital to tangible assets of 1.5%, core capital to
tangible assets of 3.0%, and total capital to risk-weighted assets of 8.0%.
Management believes, as of December 31, 1999, that NetBank meets all the capital
adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification from the OTS
categorized NetBank as well capitalized under the regulatory framework for
prompt corrective action. To be well capitalized NetBank must maintain minimum
total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in
the table. There are no conditions or events since that notification that
management believes would have changed the institution's category.
NetBank's actual capital amounts and ratios as of December 31, 1999 and 1998,
are as follows (in 000's):
<TABLE>
<CAPTION>
TO BE CATEGORIZED
AS WELL CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PLAN
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
DECMEBER 31, 1999
Total capital (to risk-weighted assets) $228,832 31.3% $ 58,438 8.0% $ 73,048 10.0%
Core capital (to tangible assets) $221,235 17.6% $ 37,743 3.0% $ 62,904 5.0%
Tangible capital (to tangible assets) $221,297 17.6% $ 18,871 1.5% N/A N/A
Tier I capital (to risk-weighted assets) $221,235 30.3% N/A N/A $ 43,829 6.0%
DECEMBER 31, 1998
Total capital (to risk-weighted assets) $ 38,297 15.4% $ 19,947 8.0% $ 24,934 10.0%
Core capital (to tangible assets) $ 35,996 9.3% $ 11,595 3.0% $ 19,325 5.0%
Tangible capital (to tangible assets) $ 35,996 9.3% $ 5,798 1.5% N/A N/A
Tier I capital (to risk-weighted assets) $ 35,996 14.4% N/A N/A $ 14,960 6.0%
</TABLE>
42
<PAGE>
17. COMMITMENTS AND CONTINGENCIES
Effective June 1, 1999, NetBank entered into an agreement extending to May 31,
2004 with an unrelated third party to act as a loan originator and servicer on
behalf of NetBank. Under the terms of the agreement, loans originated through
NetBank's website that meet NetBank's pre-established credit criteria will be
retained by NetBank with the third party receiving a portion of the origination
fee charged to the customer. Loans that do not meet NetBank's pre-established
credit criteria may be retained by the third party, who in turn will pay NetBank
a flat fee per loan originated. The third party will also perform servicing on
NetBank's portfolio for a monthly fee. In addition, NetBank paid the third party
a $300,000 set-up fee for reimbursement of out-of-pocket expenses incurred by
the third party in conjunction with certain setup services, as defined in the
agreement.
18. RELATED PARTY TRANSACTIONS
NetBank paid $60,000 and $105,000 for the years ended December 31, 1998 and
1997, respectively, in consulting fees to a director. In addition, NetBank
expensed $246,000 for amounts paid to a company owned by the Chairman of the
Board of NetBank for accounting and management services provided to NetBank
during the year ended December 31, 1997.
19. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by NetBank 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 NetBank 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 (in
000's).
<TABLE>
<CAPTION>
DECEMBER 31, 1999
--------------------------
CARRYING FAIR
AMOUNT VALUE
<S> <C> <C>
Assets:
Cash and due from banks $ 5,265 $ 5,265
Federal funds sold 8,378 8,378
Securities available for sale 416,814 416,814
Loans 779,738 755,661
Loan sale proceeds receivable 6,165 6,165
Liabilities:
Non-interest-bearing deposits 3,739 3,739
Interest-bearing deposits-
certificates of deposit 391,674 392,180
Interest-bearing deposits-other 258,488 258,488
Convertible subordinated debt 111,935 103,441
Other borrowed funds 244,000 240,896
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------
CARRYING FAIR
AMOUNT VALUE
<S> <C> <C>
Assets:
Cash $ 405 $ 405
Federal funds sold 12,055 12,055
Securities available for sale 59,465 59,465
Loans 280,713 278,607
Loan sale proceeds receivable 23,203 23,203
Liabilities:
Non-interest-bearing deposits 9,286 9,286
Interest-bearing deposits-
certificates of deposit 202,887 203,293
Interest-bearing deposits-other 71,417 71,417
Other borrowed funds 60,000 59,924
</TABLE>
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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
and other borrowed funds is estimated by discounting the future cash flows using
NetBank's current interest rates for such financial instruments.
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 at December 31, 1999 and 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.
20. CONDENSED FINANCIAL STATEMENTS OF NETBANK, INC. (PARENT ONLY)
The condensed balance sheets of NetBank, Inc. (parent only) as of December 31,
1999 and 1998 follow (in 000's):
CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1999 1998
<S> <C> <C>
Assets:
Cash and due from banks $ 92 $ 3
Fed funds sold 2,022 41
- --------------------------------------------------------------------------------
Total cash and cash equivalents 2,114 44
Investment in subsidiary 218,122 38,343
Due from subsidiary 129,688 32
Intangible assets 566 336
Other assets 324 --
- --------------------------------------------------------------------------------
Total assets $350,814 $ 38,755
================================================================================
Liabilities:
Convertible subordinated debt $111,935 $ --
Accrued interest payable 458 --
- --------------------------------------------------------------------------------
Total liabilities $112,393 $ --
Shareholders' equity:
Common stock 294 62
Other shareholders' equity 238,127 38,693
- --------------------------------------------------------------------------------
Total shareholders' equity 238,421 38,755
- --------------------------------------------------------------------------------
$350,814 $ 38,755
================================================================================
</TABLE>
44
<PAGE>
The condensed statements of operations and comprehensive income and cash
flows for years ended December 31, 1999, 1998 and 1997 follow (in 000's):
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net interest income $ 804 $ 162 $ 88
Expenses (77) (58) (4,151)
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) before equity in undistributed net income (loss) of subsidiary 727 104 (4,063)
Equity in undistributed net income (loss) of subsidiary 2,321 4,360 (1,514)
- -------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 3,048 $ 4,464 $ (5,577)
Other comprehensive income (loss) of subsidiary (3,202) 81 (83)
- -------------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $ (154) $ 4,545 $ (5,660)
===============================================================================================================================
</TABLE>
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Operating activities:
Net income (loss) $ 3,048 $ 4,464 $ (5,577)
Adjustments to reconcile net income (loss) to net
cash used by operating activities:
Equity in undistributed net income (loss) of subsidiary (2,321) (4,360) 1,514
Amortization 75 51 1,783
Accretion of debt discount 635
Changes in assets and liabilities:
(Increase) in due from subsidiary (129,656)
(Increase) in intangible assets (281)
(Increase) decrease in other assets (324) (14) 125
Increase in accrued interest payable 458
Decrease in other liabilities (10) (1,623)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used by operating activities (128,366) 131 (3,778)
Investing activities-investment in subsidiary (180,660) (10,250) (25,249)
Financing activities:
Net proceeds from sale of stock 199,796 40 38,381
Net proceeds from issuance of convertible subordinated debt 111,300
Net cash provided by financing activities 311,096 40 38,381
- -------------------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents 2,070 (10,079) 9,354
Cash:
Beginning of year 44 10,123 769
- -------------------------------------------------------------------------------------------------------------------------------
End of year $ 2,114 $ 44 $ 10,123
Supplemental disclosure of cash flow
information: Cash paid during the year for:
Interest $ 2,610 $ 23 $ 163
Income taxes $ 103 $ 30
==============================================================================================================================
</TABLE>
45
<PAGE>
21. SUBSEQUENT EVENT
Effective January 20, 2000, NetBank's Board of Directors adopted a Shareholder
Rights Plan pursuant to which all shareholders of record on February 4, 2000,
will receive one right to purchase a fractional (1/1000th) share of a new series
of preferred stock for each share of NetBank's common stock owned on that date.
These rights will only trade with NetBank's common stock if certain events
occur. In the event of a merger of NetBank into another entity or an acquisition
of 20% of NetBank's common stock by any person or entity, these rights, unless
previously redeemed by NetBank, will convert into a right to acquire at a
discount price, either the stock of the acquiring entity or additional shares of
NetBank's common stock. These rights will be exercisable at $150.00 for each
1/1000th of a share of preferred stock and will expire on February 4, 2010. The
rights are redeemable at $.01 per right at the option of NetBank.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
NetBank, Inc.
We have audited the consolidated balance sheets of NetBank, Inc. and its
subsidiary ("NetBank") as of December 31, 1999 and 1998 and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years ended December 31, 1999, 1998 and 1997. These financial statements are
the responsibility of NetBank'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 NetBank as of December 31, 1999
and 1998, and the results of its operations and its cash flows for the years
ended December 31, 1999, 1998 and 1997 in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Atlanta, Georgia
March 20, 2000
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
333-43073 and 333-64697 of Net.B@nk, Inc. on Form S-8 of our report dated
March 20, 2000, incorporated by reference in this Annual Report on Form 10-K of
Net.B@nk, Inc. for the year ended December 31, 1999.
DELOITTE & TOUCHE LLP
Atlanta, Georgia
March 27, 2000
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 5,265
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8,378
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 416,814
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 787,335
<ALLOWANCE> 7,597
<TOTAL-ASSETS> 1,257,885
<DEPOSITS> 653,901
<SHORT-TERM> 0
<LIABILITIES-OTHER> 9,628
<LONG-TERM> 355,935
0
0
<COMMON> 294
<OTHER-SE> 238,127
<TOTAL-LIABILITIES-AND-EQUITY> 1,257,885
<INTEREST-LOAN> 39,262
<INTEREST-INVEST> 15,511
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 54,773
<INTEREST-DEPOSIT> 22,585
<INTEREST-EXPENSE> 31,401
<INTEREST-INCOME-NET> 23,372
<LOAN-LOSSES> 107
<SECURITIES-GAINS> 525
<EXPENSE-OTHER> 20,560
<INCOME-PRETAX> 4,364
<INCOME-PRE-EXTRAORDINARY> 3,048
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,048
<EPS-BASIC> 0.11
<EPS-DILUTED> 0.11
<YIELD-ACTUAL> 3.2
<LOANS-NON> 0
<LOANS-PAST> 840
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 3,472
<CHARGE-OFFS> 1,790
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 7,597
<ALLOWANCE-DOMESTIC> 7,597
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
