<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
<TABLE>
<S> <C>
FOR THE QUARTER ENDED JUNE 30, 2000 COMMISSION FILE NO. 0-22361
</TABLE>
NETBANK, INC.
(Exact name of registrant as specified in its charter)
------------------------
<TABLE>
<S> <C>
GEORGIA 58-2224352
(State of incorporation) (I.R.S. Employer Identification Number)
11475 GREAT OAKS WAY
SUITE 100
ALPHARETTA, GEORGIA 30022
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (770) 343-6006
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES /X/ NO / /
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
<TABLE>
<CAPTION>
CLASS SHARES OUTSTANDING AT AUGUST 8, 2000
----- ------------------------------------
<S> <C>
Common Stock, par value $.01 29,671,132
</TABLE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
NETBANK, INC.
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Condensed consolidated balance sheets as of June 30, 2000
and as of December 31, 1999............................... 3
Condensed consolidated statements of operations for the
three and six months ended June 30, 2000 and 1999......... 4
Condensed consolidated statement of shareholders' equity
from December 31, 1999 to
June 30, 2000............................................. 5
Condensed consolidated statements of cash flows for the six
months ended June 30, 2000
and 1999.................................................. 6
Notes to condensed consolidated financial statements........ 7
</TABLE>
2
<PAGE>
NETBANK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN 000'S EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
---------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and due from banks................................... $ 1,848 $ 5,265
Federal funds sold........................................ 11,854 8,378
---------- ----------
Total cash and cash equivalents......................... 13,702 13,643
Investment securities available for sale--At fair value
(amortized cost of $428,145 and $421,670, respectively)... 420,818 416,814
Stock of Federal Home Loan Bank of Atlanta--At cost......... 19,450 12,200
Loans receivable--Net of allowance for loan losses of
$10,164 and $7,597........................................ 1,033,318 779,738
Accrued interest receivable................................. 7,540 7,349
Furniture and equipment--Net................................ 6,898 5,502
Deferred income taxes....................................... 3,722 2,881
Loan sales proceeds receivable.............................. 3,962 6,165
Other assets................................................ 29,122 13,593
---------- ----------
Total assets............................................ $1,538,532 $1,257,885
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits.................................................. $ 808,433 $ 653,901
Other borrowed funds...................................... 397,989 244,000
Convertible subordinated debt............................. 64,760 111,935
Accrued interest payable.................................. 13,464 8,517
Accounts payable and accrued liabilities.................. 5,294 1,111
---------- ----------
Total liabilities....................................... 1,289,940 1,019,464
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,
30,007,932 and 29,413,121 shares issued and outstanding,
respectively)........................................... 300 294
Additional paid-in capital................................ 251,572 243,236
Retained earnings (deficit)............................... 4,927 (1,905)
Accumulated other comprehensive loss, net of tax.......... (4,834) (3,204)
Treasury stock, at cost (336,800 shares).................. (3,373) --
---------- ----------
Total shareholders' equity.............................. 248,592 238,421
---------- ----------
Total liabilities and shareholders' equity.............. $1,538,532 $1,257,885
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
NETBANK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN 000'S EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest income:
Loans................................................. $19,056 $ 7,705 $35,092 $13,717
Investment securities................................. 7,726 1,698 15,201 2,913
Short-term investments................................ 164 1,018 367 1,349
------- ------- ------- -------
Total interest income:.............................. 26,946 10,421 50,660 17,979
Interest expense:
Deposits.............................................. 11,014 4,846 20,504 8,870
Other borrowed funds.................................. 7,104 884 12,380 1,420
------- ------- ------- -------
Total interest expense.............................. 18,118 5,730 32,884 10,290
------- ------- ------- -------
Net interest income..................................... 8,828 4,691 17,776 7,689
Provision for loan losses............................... 96 55 278 105
------- ------- ------- -------
Net interest income after provision for loan losses..... 8,732 4,636 17,498 7,584
Non-interest income-Service charges and fees............ 531 232 872 477
Non-interest expense:
Salaries and benefits................................. 1,330 748 3,008 1,255
Customer service...................................... 2,399 950 4,425 1,543
Marketing............................................. 4,017 841 6,854 1,228
Data processing....................................... 596 233 1,182 462
Depreciation and amortization......................... 573 211 1,088 352
Office expenses....................................... 225 102 329 186
Occupancy............................................. 172 35 358 75
Travel and entertainment.............................. 234 30 344 52
Other................................................. 337 554 1,248 698
------- ------- ------- -------
Total non-interest expense.......................... 9,883 3,704 18,836 5,851
------- ------- ------- -------
Income (loss) before income taxes and extraordinary
gain.................................................. (620) 1,164 (466) 2,210
Income tax (expense) benefit............................ 210 (396) 158 (751)
------- ------- ------- -------
Income (loss) before extraordinary gain................. (410) 768 (308) 1,459
Extraordinary gain on early extinguishment of debt, net
of tax................................................ 2,620 -- 7,140 --
------- ------- ------- -------
Net income.......................................... $ 2,210 $ 768 $ 6,832 $ 1,459
======= ======= ======= =======
Income (loss) before extraordinary gain per common and
potential common share outstanding:
Basic............................................... $(0.01) $0.03 $(0.01) $0.06
Diluted............................................. $(0.01) $0.03 $(0.01) $0.06
Net income per common and potential common share
outstanding:
Basic............................................... $0.07 $0.03 $0.23 $0.06
Diluted............................................. $0.07 $0.03 $0.22 $0.06
Weighted average common and potential common shares
outstanding:
Basic............................................... 29,878 26,917 29,724 24,692
Diluted............................................. 30,731 28,045 30,686 25,744
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
NETBANK, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN 000'S)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON ADDITIONAL RETAINED OTHER TREASURY
COMMON STOCK PAID-IN EARNINGS COMPREHENSIVE STOCK AT
SHARES ($.01 PAR) CAPITAL (DEFICIT) LOSS COST TOTAL
-------- ---------- ---------- --------- ------------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance--December 31, 1999...... 29,413 $294 $243,236 $(1,905) $(3,204) $ -- $238,421
Comprehensive income:
Net income for six months
ended June 30, 2000......... -- -- -- 6,832 -- -- 6,832
Unrealized losses on
securities, net of taxes and
reclassification
adjustment.................. -- -- -- -- (1,630) -- (1,630)
--------
Comprehensive income.......... 5,202
Issuance of common stock in
connection with repurchase
of convertible subordinated
notes....................... 595 6 8,336 -- -- -- 8,342
Purchase of 336,800 shares of
common stock................ -- -- -- -- -- (3,373) (3,373)
------ ---- -------- ------- ------- ------- --------
Balance--June 30, 2000.......... 30,008 $300 $251,572 $ 4,927 $(4,834) $(3,373) $248,592
====== ==== ======== ======= ======= ======= ========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
NETBANK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN 000'S)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
----------------------
2000 1999
--------- ----------
<S> <C> <C>
Operating activities:
Net income.................................................. $ 6,832 $ 1,459
Adjustments to reconcile net income to net cash used in
operating activities:
Net amortization (accretion) of premiums (discounts) on
investment securities................................... (899) 199
Amortization of premiums on purchased loans............... 1,812 2,191
Provision for loan losses................................. 278 105
Depreciation and amortization............................. 1,257 355
Loss on disposal of fixed assets.......................... 13
Extraordinary gain on debt extinguishment................. (10,825)
Amortization of debt discount............................. 278 40
Changes in assets and liabilities which use cash:
Increase in accrued interest receivable................... (191) (1,308)
Increase in other assets.................................. (15,628) (3,300)
Loans originated for sale................................. (31,195) (108,814)
Proceeds from sale of loans............................... 33,395 105,890
Increase (decrease) in accrued interest payable........... 5,092 (1,110)
Increase in accounts payable and accrued liabilities...... 4,183 2,933
-------- ---------
Net cash used in operating activities................... (5,595) (1,360)
Investing activities:
Purchases of securities available for sale................ (45,040) (181,871)
Purchase of Federal Home Loan Bank stock.................. (7,250) (570)
Principal repayments on investment securities............. 39,465 7,227
Origination and purchase of loans......................... (351,582) (324,414)
Principal payments on loans............................... 95,882 85,416
Capital expenditures...................................... (1,084) (972)
Capitalized software costs................................ (1,582) (1,264)
-------- ---------
Net cash used in investing activities................... (271,191) (416,448)
Financing activities:
Increase in deposits...................................... 154,532 131,878
Net proceeds from the issuance of common stock............ -- 199,573
Proceeds from other borrowed funds........................ 397,228 136,550
Repayments of other borrowed funds........................ (243,239) (40,000)
Repurchase of convertible subordinated notes.............. (28,303) --
Purchase of treasury stock at cost........................ (3,373)
-------- ---------
Net cash provided by financing activities............... 276,845 428,001
Net increase in cash and cash equivalents................... 59 10,193
Cash and cash equivalents:
Beginning of period....................................... 13,643 12,460
End of period............................................. 13,702 $ 22,653
Supplemental disclosures of cash flow information:
Cash paid during the period for interest.................... $ 27,937 $ 11,410
Cash paid during the period for income taxes................ $ 506 $ 103
Non-cash financing activity:
Issuance of common stock for repurchase of convertible
subordinated notes........................................ $ 8,342 --
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
NETBANK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BASIS OF PRESENTATION
NetBank, Inc. is a holding company that wholly owns "NetBank", a federal
savings bank.
In the opinion of management, the unaudited condensed consolidated financial
statements included herein reflect all adjustments, consisting only of normal
recurring accruals, which are necessary for the fair statement of the results
for the interim periods presented. Certain information and footnote disclosures
normally included in financial statements have been condensed or omitted
pursuant to applicable rules and regulations of the Securities and Exchange
Commission ("SEC"). The financial statements included herein should be read in
conjunction with the financial statements and notes thereto, included in
NetBank's Form 10-K filed with the SEC for the year ended December 31, 1999 and
NetBank's Form 10-Q for the quarter ended March 31, 2000. The results of
operations for the interim periods reported herein are not necessarily
indicative of results to be expected for the full year. Certain 1999 amounts
have been reclassified for comparability with 2000 amounts.
2. ACCOUNTING POLICIES
Reference is made to the accounting policies of NetBank described in the
notes to financial statements contained in NetBank's Form 10-K for the year
ended December 31, 1999. The Company has followed those policies in preparing
this report.
3. LOANS
During the three months ended June 30, 2000, NetBank purchased the following
loan pools (in 000's):
<TABLE>
<CAPTION>
PREMIUM
(DISCOUNT) RANGE OF STATED
TYPES OF LOANS PURCHASED PRINCIPAL AMOUNT AMOUNT INTEREST RATES
------------------------ ---------------- ---------- ---------------
<S> <C> <C> <C>
First adjustable rate mortgages...... $ 57,978 $ (235) 7.4-7.8%
Fixed second mortgages............... 50,158 1,168 10.4%
Commercial participations............ 20,934 -- 9.0%
Leases............................... 15,955 -- 11.2%
-------- ------
Total.............................. $145,025 $ 933
======== ======
</TABLE>
An analysis of the allowance for loan losses for the three months ended
June 30, 2000 follows (in 000's):
<TABLE>
<S> <C>
Balance-beginning of period................................. $ 8,788
Allowance recorded in connection with purchase of loan
pools................................................... 1,942
Provision for loan losses................................. 96
Loans charged off, net of recoveries...................... (662)
-------
Balance-end of period....................................... $10,164
=======
</TABLE>
4. BORROWINGS
During the three months ended June 30, 2000, NetBank obtained six new
advances from the Federal Home Loan Bank ("FHLB") totaling $150,000,000 and paid
off four FHLB advances totaling $125,000,000. Of the new advances obtained
during the quarter, two were still outstanding as of June 30, 2000 for
$25,000,000 each at fixed rates of 7.4% and 7.5%. Also during the three months
ended June 30,
7
<PAGE>
2000, NetBank entered into reverse repurchase agreements totalling $226,700,000
and repaid agreements totaling $192,211,000 by June 30, 2000. Three reverse
repurchase agreements remained outstanding as of June 30, 2000 for $10,000,000,
$23,989,000, and $25,000,000, at interest rates of 6.95%, 6.62%, and 6.65%,
respectively. In addition, during the three months ended June 30, 2000, NetBank
repurchased $17,673,000 of its convertible subordinated notes outstanding for
$13,229,000 in cash and recorded an extraordinary gain on early extinguishment
of debt of $2,620,000, net of tax. Subsequent to June 30, 2000, NetBank
repurchased an additional $8,405,000 of its convertible subordinated notes for
$6,514,000 in cash and recorded an extraordinary gain on early extinguishment of
debt of $1,108,000, net of tax. Borrowings as of June 30, 2000 are summarized as
follows (in 000's):
<TABLE>
<CAPTION>
STATED INTEREST
DESCRIPTION MATURITY DATE RATE PRINCIPAL AMOUNT
----------- --------------------------- --------------------------- ----------------
<S> <C> <C> <C>
Convertible Subordinated June 1, 2004; Redeemable 4.75% $ 66,327
Notes.................... until June 4, 2002
FHLB Advance............... October 16, 2003; Subject 4.43% 20,000
to early conversion or
termination option
October 16, 2000
FHLB Advance............... February 18, 2009; Subject 4.64% 25,000
to early conversion or
termination option
February 18, 2001
FHLB Advance............... August 24, 2004; Subject to 6.03% 50,000
early conversion or
termination option August
24, 2001
FHLB Advance............... August 12, 2004; Subject to 6.02% 25,000
early conversion or
termination option August
12, 2001
FHLB Advance............... September 15, 2000 5.48%; Reprices quarterly 25,000
based on three-month LIBOR
minus 3 basis points
FHLB Advance............... October 29, 2001 6.47% 44,000
FHLB Advance............... November 4, 2004: Subject 5.92% 30,000
to early conversion or
termination option
November 4, 2001
FHLB Advance............... March 21, 2005; Subject to 6.58% 35,000
early conversion or
termination option March
21, 2002
FHLB Advance............... March 21, 2003 7.17% 35,000
FHLB Advance............... June 27, 2005 7.41% 25,000
FHLB Advance............... June 26, 2007 7.50% 25,000
Reverse Repurchase
Agreement................ July 7, 2000 6.95% 10,000
Reverse Repurchase
Agreement................ July 28, 2000 6.62% 23,989
Reverse Repurchase
Agreement................ August 9, 2000 6.65% 25,000
--------
Total...................... 464,316
Less unamortized (1,567)
discount...................
--------
Total debt............... $462,749
========
</TABLE>
All of these borrowings are secured by NetBank's investment securities or
mortgage loans except for the convertible subordinated notes, which are
unsecured.
8
<PAGE>
5. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Basic and diluted net income per common and potential common share have been
calculated based on the weighted average number of shares outstanding. The
following schedule reconciles the numerator and denominator of the basic and
diluted net income per common and potential common shares (in 000's except per
share amounts). The effect of convertible debt securities outstanding has not
been included as the assumed conversion of such securities would be
anti-dilutive to earnings per share for the both the three and six months ended
June 30, 2000 and 1999.
<TABLE>
<CAPTION>
2000
---------------------------------------
NET
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Three Months Ended June 30:
Basic EPS................................................. $2,210 29,878 $0.07
Effect of dilutive securities-options to purchase common
shares.................................................. 853
------ ------ -----
Diluted EPS............................................... $2,210 30,731 $0.07
====== ====== =====
Six Months Ended June 30:
Basic EPS................................................. $6,832 29,724 $0.23
Effect of dilutive securities-options to purchase common
shares.................................................. 962
------ ------ -----
Diluted EPS............................................... $6,832 30,686 $0.22
====== ====== =====
</TABLE>
<TABLE>
<CAPTION>
1999
---------------------------------------
NET
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Three Months Ended June 30:
Basic EPS................................................. $ 768 26,917 $0.03
Effect of dilutive securities-options to purchase common
shares.................................................. 1,128
------ ------ -----
Diluted EPS............................................... $ 768 28,045 $0.03
====== ====== =====
Six Months Ended June 30:
Basic EPS................................................. $1,459 24,692 $0.06
Effect of dilutive securities-options to purchase common
shares.................................................. 1,052
------ ------ -----
Diluted EPS............................................... $1,459 25,744 $0.06
====== ====== =====
</TABLE>
6. SHAREHOLDERS' EQUITY
During the three months ended June 30, 2000, NetBank began acquiring shares
of its common stock in connection with a stock repurchase program announced in
April 2000. That program authorizes NetBank to purchase up to one million common
shares from time to time on the open market at price levels NetBank deems
attractive. NetBank purchased 337,000 shares of its common stock during the
three months ended June 30, 2000 at an aggregate cost of $3,373,000.
7. STOCK OPTIONS
NetBank has a 1996 Stock Incentive Plan (the "Plan") which provides that our
employees, officers, directors, and consultants 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.
9
<PAGE>
Currently, the total number of shares reserved for the Plan is 3,750,000. Stock
option activity during the three months ended June 30, 2000 was as follows (in
000's except price per share amounts):
<TABLE>
<CAPTION>
EXERCISE PRICE
NUMBER OF OPTIONS PER SHARE
----------------- --------------
<S> <C> <C>
Balance-Beginning of Period.................... 3,024 $ 0.40-53.33
Granted...................................... 5 $10.06-12.19
Exercised.................................... --
Terminated................................... --
-----
Balance-End of Period.......................... 3,029 $ 0.40-53.33
=====
</TABLE>
Grant prices approximated the fair value of the stock at the grant date.
10
<PAGE>
NETBANK, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SOME OF THE STATEMENTS IN THIS REPORT ARE FORWARD-LOOKING STATEMENTS.
FORWARD-LOOKING STATEMENTS INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF OR
CURRENT EXPECTATIONS OF NETBANK OR ITS OFFICERS AND CAN BE IDENTIFIED BY THE USE
OF FORWARD-LOOKING TERMS SUCH AS "MAY," "WILL," "SHOULD," "BELIEVE," "EXPECT,"
"ANTICIPATE," "ESTIMATE," "CONTINUE," OR COMPARABLE TERMINOLOGY. OUR ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED FROM THE FORWARD-LOOKING
STATEMENTS, DEPENDING ON VARIOUS IMPORTANT FACTORS. THESE FACTORS INCLUDE A
POSSIBLE DECLINE IN ASSET QUALITY, THE EVOLVING NATURE OF THE MARKET FOR
INTERNET BANKING, THE POSSIBLE ADVERSE EFFECTS OF UNEXPECTED CHANGES IN THE
INTEREST RATE ENVIRONMENT, AND INCREASING COMPETITION AND REGULATORY CHANGES.
THE SECTION HEADED "RISK FACTORS" IN OUR PROSPECTUS DATED JUNE 3, 1999 CONTAINS
ADDITIONAL DETAILS ON THESE AND OTHER RISKS THAT ARE MATERIAL TO OUR OPERATIONS.
ALL FORWARD-LOOKING STATEMENTS IN THIS REPORT ARE BASED ON INFORMATION AVAILABLE
TO US AS OF THE DATE THIS REPORT WAS FILED WITH THE SEC. WE DO NOT UNDERTAKE TO
UPDATE ANY FORWARD-LOOKING STATEMENTS THAT MAY BE MADE BY US OR ON OUR BEHALF IN
THIS PROSPECTUS OR OTHERWISE.
GENERAL--NetBank, Inc. is a holding company that wholly owns NetBank, a
federal savings bank. NetBank, Inc. was incorporated as a Georgia corporation on
February 20, 1996. As of June 30, 2000, we had 104,275 deposit accounts and
approximately $808.4 million in deposits.
FINANCIAL CONDITION--Our assets were $1.5 billion at June 30, 2000 compared
to $1.3 billion at December 31, 1999. The increase of $280.6 million from
December 31, 1999 to June 30, 2000 was primarily the result of the investment of
funds received from an increase in customer deposits of approximately
$154.5 million and an increase in other borrowed funds of $154.0 million. Both
the increase in customer deposits and the increase in other borrowed funds were
invested in loan receivables and investment securities that increased
$253.6 million and $11.3 million, respectively. The resulting interest income on
these receivables and investments is being used to fund increased infrastructure
and operating costs resulting from growth, as well as marketing expenditures to
increase public awareness of the "NetBank-Registered Trademark-" brand name and
our products and services.
Total liabilities increased $270.5 million to $1.3 billion at June 30, 2000
from $1.0 billion at December 31, 1999 primarily due to the rapid growth of our
deposit portfolio of $154.5 million as well as a $154.0 million increase in
other borrowed funds. During the three months ended June 30, 2000, NetBank
obtained six new advances from the Federal Home Loan Bank ("FHLB") totaling
$150.0 million and paid off four FHLB advances totaling $125.0 million. Of the
new advances obtained during the quarter, two were still outstanding as of
June 30, 2000 for $25.0 million each at fixed rates of 7.4% and 7.5%. Also
during the three months ended June 30, 2000, NetBank entered into reverse
repurchase agreements totalling $226.7 million and repaid agreements totaling
$192.2 million by June 30, 2000. Three reverse repurchase agreements remained
outstanding as of June 30, 2000 for $10.0 million, $24.0 million, and
$25.0 million, at interest rates of 6.95%, 6.62%, and 6.65%, respectively. In
addition, during the three months ended June 30, 2000, NetBank repurchased
$17.7 million of its convertible subordinated notes outstanding for
$13.2 million in cash and recorded an extraordinary gain on early extinguishment
of debt of $2.6 million net of tax. Subsequent to June 30, 2000, NetBank
repurchased an additional $8.4 million of its convertible subordinated notes for
$6.5 million in cash and recorded an extraordinary gain on early extinguishment
of debt of $1.1 million, net of tax.
Total shareholders' equity increased $10.2 million from December 31, 1999 to
June 30, 2000 primarily due to the issuance of $8.3 million of additional shares
of common stock in conjunction with the repurchase of some of our convertible
subordinated notes and the addition of earnings for the six months ended
June 30, 2000 which included a $7.1 million gain on early extinguishment of debt
net of tax, offset by an increase in unrealized losses on our securities
portfolio of $1.6 million due to changes in interest rates and the purchase of
approximately 337,000 shares of common stock to be held in treasury at a cost of
$3.4 million.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES--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 $136 million at June 30, 2000.
NetBank is required by Office of Thrift Supervision regulations to maintain
tangible capital equal to at least 1.5% of tangible assets, core capital equal
to at least 3.0% of tangible assets, and total capital equal to at least 8.0% of
risk-weighted assets. To be categorized as "well capitalized" under a prompt
corrective action plan, NetBank must maintain minimum Tier I, core, and
risk-based capital ratios of at least 6%, 5%, and 10%, respectively. NetBank
exceeded such requirements with tangible, core, total risk-based, and Tier I
capital ratios of 14.32%, 24.56%, 25.69%, and 14.32%, respectively, at June 30,
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 is
considered negative when the amount of interest-rate sensitive liabilities
exceeds the amount of interest-rate sensitive assets. In a rising interest rate
environment, an institution with a positive gap would be in a better position
than an institution with a negative gap to invest in higher yielding assets or
have its asset yields adjusted upward, which would result in the yield on its
assets increasing at a faster pace than the cost of its interest-bearing
liabilities. During a period of falling interest rates, however, an institution
with a positive gap would tend to have its assets maturing at a faster rate than
one with a negative gap, which would tend to reduce or restrain the growth of
its net interest income.
12
<PAGE>
The following table sets forth the interest rate sensitivity of our assets
and liabilities as of June 30, 2000 (in 000's):
<TABLE>
<CAPTION>
TERM TO REPRICING, REPAYMENT, OR MATURITY
-----------------------------------------------------------------
OVER THREE OVER ONE
LESS THAN MONTHS YEAR OVER FIVE
THREE THROUGH THROUGH YEARS AND
MONTHS ONE YEAR FIVE YEARS INSENSITIVE TOTAL
--------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Interest-Earning Assets:
Cash and cash equivalents............. $ 1,848 $ -- $ -- $ -- $ 1,848
Federal funds sold.................... 11,854 -- -- -- 11,854
Investment securities................. 80,027 27,676 200,260 112,855 420,818
Stock of Federal Home Loan Bank of
Atlanta............................. 19,450 -- -- -- 19,450
Loan sale proceeds receivable......... 3,962 -- -- -- 3,962
Loans receivable...................... 261,121 267,784 386,979 117,434 1,033,318
-------- -------- -------- -------- ----------
Total interest-earning assets....... 378,262 295,460 587,239 230,289 1,491,250
Non interest-earning assets............. -- -- -- 47,283 47,283
-------- -------- -------- -------- ----------
Total assets............................ $378,262 $295,460 $587,239 $277,571 $1,538,532
======== ======== ======== ======== ==========
Interest-Bearing Liabilities:
Interest-bearing deposits............. $219,417 $479,226 $ 50,087 $ 57,196 $ 805,926
Convertible subordinated debt......... -- -- 64,760 -- 64,760
Other borrowed funds.................. 83,989 -- 264,000 50,000 397,989
-------- -------- -------- -------- ----------
Total interest-bearing
liabilities....................... 303,406 479,226 378,847 107,196 1,268,675
Interest-free deposits.................. 2,507 2,507
Other interest-free liabilities and
equity................................ -- -- -- 267,350 267,350
-------- -------- -------- -------- ----------
Total liabilities and equity........ $303,406 $479,226 $378,847 $377,053 $1,538,352
======== ======== ======== ======== ==========
Net interest rate sensitivity gap....... $ 74,856 (183,766) $208,392 $123,093 $ 222,575
Cumulative gap.......................... $ 74,856 (108,910) $ 99,482 $222,575
Net interest rate sensitivity gap as a
percent of interest-earning assets.... 19.79% (62.20)% 35.49% 53.45% 14.93%
Cumulative gap as a percent of
cumulative interest-earning assets.... 19.79% (16.17)% 7.89% 14.93% 0.00%
</TABLE>
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 June 30, 2000,
NetBank's estimated NPV ratios were well within these board approved limits. The
following table
13
<PAGE>
sets forth the estimated percentage change in NetBank's NPV ratio as of
June 30, 2000 assuming rate shocks of +300 to -300 basis points:
LIMITS AND CURRENT NPV RATIOS
<TABLE>
<CAPTION>
ESTIMATED
BOARD LIMITS JUNE 30,
RATE SHOCK (MINIMUM 2000
(IN BASIS POINTS) NPV RATIOS) NPV RATIOS
----------------- ------------ ----------
<S> <C> <C>
+300 9.00% 9.94%
+200 10.00% 11.39%
+100 11.00% 12.67%
Flat 12.00% 13.66%
-100 12.00% 14.27%
-200 12.00% 14.34%
-300 12.00% 14.20%
</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 Sensitiy Measure was 226 basis points as of June 30, 2000.
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 June 30, 2000,
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.
INVESTMENT SECURITIES. The following tables set forth certain information
relating to our available-for-sale securities at June 30, 2000 and December 31,
1999 (in 000's):
<TABLE>
<CAPTION>
JUNE 30, 2000
----------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED ESTIMATED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------------
GROSS
<S> <C> <C> <C> <C>
Collateralized mortgage obligations.............. $255,458 $190 $5,240 $250,408
U.S. government agencies......................... 162,363 80 2,349 160,094
Corporate bonds.................................. 9,646 -- 8 9,638
Habitat bonds and other.......................... 678 -- -- 678
-------- ---- ------ --------
Total........................................ $428,145 $270 $7,597 $420,818
======== ==== ====== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED ESTIMATED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------------
GROSS
<S> <C> <C> <C> <C>
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
======== ========= ====== ========
</TABLE>
14
<PAGE>
LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition
of our loan portfolio by type of loan as of June 30, 2000 and December 31, 1999
(in 000's):
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
--------------------- -------------------
<S> <C> <C> <C> <C>
Residential mortgages.................................. $ 697,513 66.8% $480,470 61.0%
Home equity lines...................................... 157,434 15.1 177,670 22.6
Leases................................................. 84,305 8.1 62,295 7.9
Commercial participations.............................. 93,055 8.9 48,783 6.2
Construction........................................... 2,803 0.3 10,723 1.4
Consumer............................................... 6,500 0.6 4,183 0.5
Auto................................................... 1,872 0.2 3,211 0.4
---------- ----- -------- -----
Total.............................................. 1,043,482 100.0% 787,335 100.0%
===== =====
Less allowance for loan losses......................... 10,164 7,597
---------- --------
Total.............................................. $1,033,318 $779,738
========== ========
</TABLE>
ASSET QUALITY AND NON-PERFORMING ASSETS--During the three months ended
June 30, 2000 and 1999, NetBank did not have any significant loans on
non-accrual status, significant loans past due 90 days or more, or restructured
loans.
DEPOSITS. 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 June 30, 2000 and December 31, 1999 (in 000's):
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
-------------------------------- --------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
INTEREST INTEREST
AMOUNT PERCENTAGE RATE AMOUNT PERCENTAGE RATE
-------- ---------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Demand checking accounts.................. $ 2,709 0.0% N/A $ 3,739 0.6% N/A
Interest bearing:
NOW accounts.............................. 57,097 7.1 3.05% 38,590 5.9 3.05%
Money market.............................. 227,649 28.3 6.00% 219,898 33.6 5.26%
Certificate of deposit under $100,000..... 443,221 54.9 7.25% 351,074 53.7 6.51%
Certificate of deposit over $100,000...... 77,757 9.7 7.25% 40,600 6.2 6.51%
-------- ----- -------- -----
Total deposits........................ $808,433 100.0% $653,901 100.0%
======== ===== ======== =====
</TABLE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
GENERAL. Net income for the three months ended June 30, 2000 amounted to
$2.2 million, an increase of $1.4 million compared to net income of
$0.8 million for the three months ended June 30, 1999. The increase in net
income was primarily the result of a $2.6 million extraordinary gain on the
early extinguishment of $17.7 million of our convertible subordinated notes. A
portion of this gain was reinvested in increased marketing and infrastructure
expenses during the quarter to continue to fuel the growth of our deposit base
and the recognition of our brand name.
INTEREST INCOME. Interest income related to our loan and investment
portfolio for the three months ended June 30, 2000 was $26.9 million compared to
$10.4 million for the three months ended June 30, 1999. The increase in interest
income was a result of the growth of our loan portfolio of $512.7 million from
June 30, 1999 to June 30, 2000, compounded by an increase in the average yield
on loans from 7.9%
15
<PAGE>
for the three months ended June 30, 1999 to 8.1% for the three months ended
June 30, 2000. In addition, the investment portfolio grew from $233.4 million at
June 30, 1999 to $440.3 million at June 30, 2000. The yield on the investment
portfolio was 6.3% for the three months ended June 30, 1999 as compared with
7.2% for the three months ended June 30, 2000.
INTEREST EXPENSE. For the three months ended June 30, 2000, $11.0 million
in interest expense on deposits was recorded compared to $4.8 million for the
three months ended June 30, 1999 as a result of our increase in customer
deposits from $415.5 million at June 30, 1999 to $808.4 million at June 30,
2000. In addition, the average interest rate paid on deposits increased from
5.2% for the three months ended June 30, 1999 to 5.7% for the three months ended
June 30, 2000. Interest expense associated with other borrowed funds increased
$6.2 million from $0.9 million for the three months ended June 30, 1999 to
$7.1 million for the three months ended June 30, 2000 due to the addition of
several new advances from the FHLB and borrowings under reverse repurchase
agreements, offset by a reduction in interest expense associated with our
convertible subordinated notes due to the repurchase of $48.7 million of the
notes during the first six months of 2000.
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. Net interest income was $8.8 million for the three months ended
June 30, 2000 compared to $4.7 million for the three months ended June 30, 1999.
The increase in net interest income resulted from the increase in the amount of
loans and deposits from June 30, 1999 to June 30, 2000.
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 three months ended June 30, 2000, we recorded $1.9 million as an
addition to premiums related to allowance for loan losses for loans purchased
during the quarter. In addition, we also recorded a provision for loan losses of
$96,000 as compared with $55,000 recorded during the three months ended
June 30, 1999 due to a significant increase in our originated loan portfolio. 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 loans, recent loss
experience, current economic conditions, the risk characteristics of the various
categories of loans and other pertinent factors.
NON-INTEREST INCOME. For the three months ended June 30, 2000, we recorded
approximately $0.5 million in loan and deposit service charges and fees compared
to $0.2 million recorded during the three months ended June 30, 1999. The
increase in non-interest income stems from the increase in both our loan and
deposit portfolios.
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 166.9%, or $6.2 million, for the three months
ended June 30, 2000 as compared with the three months ended June 30, 1999 as the
number of customer accounts increased almost three-fold from 37,206 at June 30,
1999 to 104,275 at June 30, 2000. This increase in non-interest expense was
primarily the result of increased marketing activities as we expanded our
marketing programs to build public awareness of the
NetBank-Registered Trademark- name and our products and services, as well as
increased salaries and benefits, customer service, and data processing expense
as additional employees and operational activities were added to support
additional customers.
16
<PAGE>
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
GENERAL. Net income for the six months ended June 30, 2000 amounted to
$6.8 million, an increase of $5.4 million compared to net income of
$1.4 million for the six months ended June 30, 1999. The increase in net income
was primarily the result of a $7.1 million extraordinary gain on the early
extinguishment of $48.7 million of our convertible subordinated notes. A portion
of this gain was reinvested in increased marketing and infrastructure expenses
during the six months ended June 30, 2000 to continue to fuel the growth of our
deposit base and the recognition of our brand name.
INTEREST INCOME. Interest income related to our loan and investment
portfolio for the six months ended June 30, 2000 was $50.7 million compared to
$18.0 million for the six months ended June 30, 1999. The increase in interest
income was a result of the growth of our loan portfolio of $512.7 million from
June 30, 1999 to June 30, 2000, compounded by an increase in the average yield
on loans from 7.8% for the six months ended June 30, 1999 to 8.0% for the six
months ended June 30, 2000. In addition, the investment portfolio grew from
$233.4 million at June 30, 1999 to $440.3 million at June 30, 2000. The yield on
the investment portfolio was 6.3% for the six months ended June 30, 1999 as
compared with 7.1% for the six months ended June 30, 2000.
INTEREST EXPENSE. For the six months ended June 30, 2000, $20.5 million in
interest expense on deposits was recorded compared to $8.9 million for the six
months ended June 30, 1999 as a result of our increase in customer deposits from
$415.5 million at June 30, 1999 to $808.4 million at June 30, 2000. In addition,
the average interest rate paid on deposits increased from 5.2% for the six
months ended June 30, 1999 to 5.6% for the six months ended June 30, 2000.
Interest expense associated with other borrowed funds increased $11.0 million
from $1.4 million for the six months ended June 30, 1999 to $12.4 million for
the six months ended June 30, 2000 due to the addition of several new advances
from the FHLB as well as interest expense paid on our convertible subordinated
notes issued during June 1999 and interest paid on reverse repurchase
agreements.
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. Net interest income was $17.8 million for the six months ended
June 30, 2000 compared to $7.7 million for the six months ended June 30, 1999.
The increase in net interest income resulted from the increase in the amount of
loans and deposits from June 30, 1999 to June 30, 2000.
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 six months ended June 30, 2000, we recorded $3.5 million as an
addition to premiums related to allowance for loan losses for loans purchased
during the period. In addition, we also recorded a provision for loan losses of
$0.3 million as compared with $0.1 million recorded during the six months ended
June 30, 1999 due to a significant increase in our originated loan portfolio. 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 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 six months ended June 30, 2000, we recorded
approximately $0.9 million in loan and deposit service charges and fees compared
to $0.5 million recorded during the six months ended June 30, 1999. The increase
in non-interest income stems from the increase in both our loan and deposit
portfolios.
17
<PAGE>
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 221.9%, or $13.0 million, for the six months
ended June 30, 2000 as compared with the six months ended June 30, 1999 as the
number of customer accounts increased almost three-fold from 37,206 at June 30,
1999 to 104,275 at June 30, 2000. This increase in non-interest expense was
primarily the result of increased marketing activities as we expanded our
marketing programs to build public awareness of the
NetBank-Registered Trademark- name and our products and services, as well as
increased salaries and benefits, customer service, and data processing expense
as additional employees and operational activities were added to support
additional customers.
SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
On April 27, 2000, NetBank, Inc. held its annual meeting of shareholders at
which the following actions were taken:
<TABLE>
<CAPTION>
ELECTION OF DIRECTORS FOR A TERM EXPIRING IN 2003 VOTES FOR VOTES WITHELD
------------------------------------------------- ---------- -------------
<S> <C> <C>
Robin C. Kelton............................................. 18,986,013 1,958,974
Thomas H. Muller, Jr........................................ 18,986,593 1,958,394
Donald S. Shapleigh, Jr..................................... 18,985,637 1,959,350
J. Joe Ricketts............................................. 18,986,656 1,958,331
</TABLE>
<TABLE>
<CAPTION>
VOTES FOR VOTES AGAINST ABSTENTIONS BROKER NON-VOTES
---------- ------------- ----------- ----------------
<S> <C> <C> <C> <C>
Ratification of Deloitte & Touche LLP
as Independent Auditors.................. 20,884,318 31,207 29,642 --
</TABLE>
18
<PAGE>
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 FINANCIAL DATA SCHEDULE (FOR SEC USE ONLY)
(b) No reports on Form 8-K were filed during the quarter for which this report
is filed.
19
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NETBANK, INC.
By:
Laura P. Moon
CHIEF ACCOUNTING OFFICER
Dated: August 11, 2000
20
