<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 March 31, 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>
<S> <C>
CLASS SHARES OUTSTANDING AT MAY 11, 2000
Common Stock, par value $.01 29,977,932
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
NETBANK, INC.
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Condensed consolidated balance sheets as of March 31, 2000
and as of December 31, 1999............................... 3
Condensed consolidated statements of operations for the
three months ended March 31, 2000 and 1999................ 4
Condensed consolidated statement of shareholders' equity
from December 31, 1999 to March 31, 2000.................. 5
Condensed consolidated statements of cash flows for the
three months ended March 31, 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>
MARCH 31, DECEMBER 31,
2000 1999
---------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Cash and due from banks................................... $ 2,993 $ 5,265
Federal funds sold........................................ 5,505 8,378
---------- ----------
Total cash and cash equivalents....................... 8,498 13,643
Investment securities available for sale--At fair value
(amortized cost of $404,268 and $421,670)................. 397,729 416,814
Stock of Federal Home Loan Bank of Atlanta--At cost......... 15,700 12,200
Loans receivable--Net of allowance for loan losses of $8,788
and $7,597................................................ 948,307 779,738
Accrued interest receivable................................. 9,113 7,349
Furniture and equipment--Net................................ 5,864 5,502
Deferred income taxes....................................... 3,452 2,881
Loan sales proceeds receivable.............................. 2,851 6,165
Other assets................................................ 20,260 13,593
---------- ----------
Total assets.......................................... $1,411,774 $1,257,885
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits.................................................. $ 725,113 $ 653,901
Other borrowed funds...................................... 338,500 244,000
Convertible subordinated debt............................. 81,887 111,935
Accrued interest payable.................................. 11,652 8,517
Accounts payable and accrued liabilities.................. 4,349 1,111
---------- ----------
Total liabilities..................................... 1,161,501 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)............................................ 300 294
Additional paid-in capital................................ 251,572 243,236
Retained earnings (deficit)............................... 2,717 (1,905)
Accumulated other comprehensive loss, net of tax.......... (4,316) (3,204)
---------- ----------
Total shareholders' equity............................ 250,273 238,421
---------- ----------
Total liabilities and shareholders' equity............ $1,411,774 $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
MARCH 31,
-----------------------
2000 1999
---------- ----------
<S> <C> <C>
Interest income:
Loans..................................................... $16,036 $6,012
Investment securities..................................... 7,475 1,215
Short-term investments.................................... 203 331
------- ------
Total interest income:................................ 23,714 7,558
Interest expense:
Deposits.................................................. 9,490 4,023
Other borrowed funds...................................... 5,276 536
------- ------
Total interest expense................................ 14,766 4,559
------- ------
Net interest income......................................... 8,948 2,999
Provision for loan losses................................... 182 50
------- ------
Net interest income after provision for loan losses......... 8,766 2,949
Non-interest income--Service charges and fees............... 341 246
Non-interest expense:
Salaries and benefits..................................... 1,677 507
Customer service.......................................... 2,026 594
Marketing................................................. 2,837 387
Data processing........................................... 586 229
Depreciation and amortization............................. 515 141
Office expenses........................................... 104 84
Occupancy................................................. 186 39
Travel and entertainment.................................. 111 22
Other..................................................... 912 145
------- ------
Total non-interest expense............................ 8,954 2,148
------- ------
Income before income taxes and extraordinary gain........... 153 1,047
Income tax expense.......................................... 52 355
------- ------
Income before extraordinary gain............................ 101 692
Extraordinary gain on early extinguishment of debt, net of
tax....................................................... 4,521 --
------- ------
Net income.................................................. $ 4,622 $ 692
======= ======
Income before extraordinary gain per common and potential
common share outstanding:
Basic..................................................... $ -- $ 0.03
Diluted................................................... $ -- $ 0.03
Net income per common and potential common share
outstanding:
Basic..................................................... $ 0.16 $ 0.03
Diluted................................................... $ 0.15 $ 0.03
Weighted average common and potential common shares
outstanding:
Basic..................................................... 29,569 22,536
Diluted................................................... 30,568 23,424
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
NETBANK, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN 000'S)
<TABLE>
<CAPTION>
COMMON ACCUMULATED
STOCK ADDITIONAL RETAINED OTHER
COMMON ($.01 PAID-IN EARNINGS COMPREHENSIVE
SHARES PAR) CAPITAL (DEFICIT) LOSS TOTAL
-------- -------- ---------- --------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance--December 31, 1999............ 29,413 $294 $243,236 $(1,905) $(3,204) $238,421
Comprehensive loss:
Net income for three months ended
March 31, 2000.................... 4,622 4,622
Unrealized losses on securities, net
of taxes and reclassification
adjustment........................ (1,112) (1,112)
--------
Comprehensive loss.............. 3,510
Issuance of common stock in
connection with repurchase of
convertible subordinated notes.... 595 6 8,336 8,342
------ ---- -------- ------- ------- --------
Balance--March 31, 2000............... 30,008 $300 $251,572 $ 2,717 $(4,316) $250,273
====== ==== ======== ======= ======= ========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
NETBANK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN 000'S)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Operating activities:
Net income.................................................. $ 4,622 $ 692
Adjustments to reconcile net income to net cash used in
operating activities:
Net amortization (accretion) of premiums (discounts) on
investment securities................................... (235) 43
Amortization of premiums on purchased loans............... 1,624 971
Provision for loan losses................................. 182 50
Depreciation and amortization............................. 495 151
Amortization of debt discount............................. 952 --
Changes in assets and liabilities which provide (use)
cash:
Increase in accrued interest receivable................. (1,764) (503)
(Increase) decrease in other assets..................... (6,667) 1,768
Loans originated for sale............................... (34,397) (95,780)
Proceeds from sale of loans............................. 37,711 83,979
Increase (decrease) in accrued interest payable......... 3,135 (1,320)
Increase in accounts payable and accrued liabilities.... 3,238 264
-------- --------
Net cash provided by (used in) operating activities... 8,896 (9,685)
Investing activities:
Purchases of securities available for sale.................. -- (24,852)
Purchase of Federal Home Loan Bank stock.................... (3,500) (570)
Principal repayments on investment securities............... 17,637 2,951
Origination and purchase of loans........................... (210,789) (123,426)
Principal payments on loans................................. 40,414 39,620
Capital expenditures........................................ (525) (318)
Capitalized software costs.................................. (332) (233)
-------- --------
Net cash used in investing activities................. (157,095) (106,828)
Financing activities:
Increase in deposits........................................ 71,212 49,089
Net proceeds from the issuance of common stock.............. 8,342 104,957
Proceeds from other borrowed funds.......................... 154,000 25,000
Repayments of other borrowed funds.......................... (59,500) (40,000)
Repurchase of convertible subordinated notes................ (31,000) --
-------- --------
Net cash provided by financing activities............. 143,054 139,046
-------- --------
Net increase (decrease) in cash and cash equivalents........ (5,145) 22,533
Cash and cash equivalents:
Beginning of period....................................... 13,643 12,460
-------- --------
End of period............................................. $ 8,498 $ 34,993
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for interest.................... $ 11,631 $ 5,830
Cash paid during the period for income taxes................ $ 10 $ 12
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. 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 March 31, 2000, NetBank purchased the
following loan pools (in 000's):
<TABLE>
<CAPTION>
PREMIUM RANGE OF STATED
TYPES OF LOANS PURCHASED PRINCIPAL AMOUNT AMOUNT INTEREST RATES
- ------------------------ ---------------- -------- -----------------
<S> <C> <C> <C>
First adjustable rate mortgages....... $165,594 $956 6.65-7.94%
Commercial participations............. 27,082 -- 8.59%
Leases................................ 11,992 -- 11.2%
-------- ----
Total............................... $204,668 $956
======== ====
</TABLE>
An analysis of the allowance for loan losses for the three months ended
March 31, 2000 follows (in 000's):
<TABLE>
<S> <C>
Balance--beginning of period................................ $7,597
Allowance recorded in connection with purchase of loan
pools................................................... 1,543
Provision for loan losses................................. 182
Loans charged off, net of recoveries...................... (534)
------
Balance--end of period...................................... $8,788
======
</TABLE>
4. BORROWINGS
During the three months ended March 31, 2000, NetBank paid off a $25,000,000
advance and obtained three new advances from the Federal Home Loan Bank
("FHLB"). The advances were for $35,000,000, $25,000,000, and $35,000,000 at
fixed rates of 6.58%, 6.24%, and 7.17%, respectively. The 6.58% advance is
callable on the second anniversary date of the advance and if not called, renews
for an additional three years. The other advances are not callable. Also during
the three months ended March 31,
7
<PAGE>
NETBANK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. BORROWINGS (CONTINUED)
2000, NetBank entered into reverse repurchase agreements totalling $59,000,000
and repaid $34,500,000 by March 31, 2000. The agreement outstanding as of
March 31, 2000 reprices and can be paid down daily. In addition, during the
three months ended March 31, 2000, NetBank repurchased $31,000,000 of its
convertible subordinated notes outstanding for 594,811 shares of NetBank common
stock and $15,349,000 in cash and recorded an extraordinary gain on early
extinguishment of debt of $4,521,000, net of tax. Subsequent to March 31, 2000,
NetBank repurchased an additional $15,800,000 of its convertible subordinated
notes for $11,768,000 in cash and recorded an extraordinary gain on early
extinguishment of debt of $2,388,000, net of tax. Borrowings as of March 31,
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
Notes until June 4, 2002 4.75% $ 84,000
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 6.12%; 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
</TABLE>
8
<PAGE>
NETBANK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. BORROWINGS (CONTINUED)
<TABLE>
<CAPTION>
STATED INTEREST
DESCRIPTION MATURITY DATE RATE PRINCIPAL AMOUNT
- ----------- ------------------------- ------------------------ ----------------
<S> <C> <C> <C>
FHLB Advance June 28, 2000 6.24% 25,000
FHLB Advance March 21, 2005; Subject
to early conversion or
termination option
March 21, 2002 6.58% 35,000
FHLB Advance March 21, 2003 7.17% 35,000
Reverse Repurchase Matures daily 6.50% at March 31, 2000;
Agreement reprices daily 24,500
--------
Total................... 422,500
Less unamortized
discount.............. 2,113
--------
Total debt.............. $420,387
========
</TABLE>
All of these borrowings are secured by NetBank's investment securities or
mortgage loans except for the convertible subordinated notes, which are
unsecured.
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 issued during June
1999 has not been
9
<PAGE>
NETBANK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE (CONTINUED)
included as the assumed conversion of such securities would be anti-dilutive to
earnings per share for the three months ended March 31, 2000.
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 2000
---------------------------------------
NET
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS................................................. $4,622 29,569 $0.16
Effect of dilutive securities-options to purchase common
shares.................................................. 999
------ ------
Diluted EPS............................................... $4,622 30,568 $0.15
====== ======
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1999
---------------------------------------
NET
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS................................................. $692 22,536 $0.03
Effect of dilutive securities-options to purchase common
shares.................................................. 888
------ ------
Diluted EPS............................................... $692 23,424 $0.03
====== ======
</TABLE>
5. SHAREHOLDERS' EQUITY
The Company has authorized 100,000 shares of Series A Junior Participating
Preferred Stock, without par value ("Series A Stock"). Each share of Series A
Stock will be entitled to 1,000 votes on all matters submitted to a shareholder
vote. The Series A Stock is not redeemable or convertible into any other
security. Each share of Series A Stock will have a minimum cumulative
preferential quarterly dividend rate equal to the greater of $1.00 per share or
1,000 times the aggregate per share amount of dividends declared on common stock
in the related quarter. In the event of liquidation, shares of Series A Stock
will be entitled to a preferential liquidation payment equal to the greater of
$1,000 per share plus any accrued and unpaid dividends or 1,000 times the
payment to be made per share of common stock. No shares of Series A Stock are
presently outstanding, and no shares are expected to be issued except in
connection with the shareholder rights plan referred to below.
On January 20, 2000, the Company's Board of Directors adopted a shareholder
rights plan. Under the plan, the Company distributed to shareholders of record
on February 4, 2000 a dividend of one right per share of the Company's common
stock owned. When exercisable, each right will permit the holder to purchase
from the Company 1/1000th of a share (a "unit") of Series A stock at a purchase
price of $150 per unit, subject to certain adjustments. These rights generally
become exercisable ten business days after a person or group acquires 15% of
more of the Company's common stock or commences a tender offer that could result
in such person or group owning 15% or more of the Company's common stock. If
certain subsequent events occur after the rights first become exercisable,
holders will be entitled to purchase upon exercise of the right shares of common
stock of the Company, or of an acquiring company, having a value equal to two
times the exercise price of the right. In general, the rights may be redeemed by
the Company at $.01 per right at any time prior to the later of (i) ten business
days after 15% or more of the Company's stock is acquired by a person or group
and (ii) the first date of a public announcement that a person or
10
<PAGE>
NETBANK, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
group has acquired 15% or more of the Company's common stock. The rights expire
on February 4, 2010 unless terminated earlier in accordance with the rights
plan.
6. STOCK OPTIONS
The Company 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.
Currently, the total number of shares reserved for the Plan is 3,750,000. Stock
option activity during the three months ended March 31, 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.................. 2,147 $ 0.40-53.33
Granted..................................... 879 $ 12.25-17.50
Exercised................................... -- --
Terminated.................................. (2) $ 5.25-35.44
-----
Balance--End of Period........................ 3,024 $ 0.40-53.33
=====
</TABLE>
Grant prices approximated the fair value of the stock at the grant date.
7. SUBSEQUENT EVENTS
Subsequent to March 31, 2000, NetBank announced a plan to repurchase up to
1,000,000 shares of its common stock.
11
<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 March 31, 2000, we had 81,771 deposit accounts and
approximately $725.1 million in deposits.
FINANCIAL CONDITION--Our assets were $1.4 billion at March 31, 2000 compared
to $1.3 billion at December 31, 1999. The increase of $153.9 million from
December 31, 1999 to March 31, 2000 was primarily the result of the investment
of funds received from an increase in customer deposits of approximately
$71.2 million and an increase in other borrowed funds of $94.5 million. Both the
increase in customer deposits and the increase in other borrowed funds were
invested in loan receivables which increased $168.6 million. The resulting
interest income on these receivables 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 $142.0 million to $1.2 billion at March 31, 2000
from $1.0 billion at December 31, 1999 primarily due to the rapid growth of our
deposit portfolio of $71.2 million as well as a $94.5 million increase in other
borrowed funds. During the three months ended March 31, 2000, NetBank paid off a
$25 million advance and obtained three new advances from the FHLB. The advances
were for $35,000,000, $25,000,000, and $35,000,000 at fixed rates of 6.58%,
6.24%, and 7.17%, respectively. The 6.58% advance is callable on the second
anniversary date of the advance and if not called, renews for an additional
three years. The other advances are not callable. Also during the three months
ended March 31, 2000, NetBank entered into reverse repurchase agreements
totalling $59,000,000 and repaid $34,500,000 by March 31, 2000. The agreement
outstanding as of March 31, 2000 reprices and can be paid down daily. In
addition, during the three months ended March 31, 2000, NetBank repurchased
$31,000,000 of its convertible subordinated notes outstanding for 594,811 shares
of NetBank common stock and $15,349,000 in cash and recorded an extraordinary
gain on early extinguishment of debt of $4,521,000, net of tax. Subsequent to
March 31, 2000, NetBank repurchased an additional $15,800,000 of its convertible
subordinated notes for $11,768,000 in cash and recorded an extraordinary gain on
early extinguishment of debt of $2,388,000, net of tax.
Total shareholders' equity increased $11.9 million from December 31, 1999 to
March 31, 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 quarter
ended March 31, 2000 which included a $4.5 million gain on early extinguishment
of debt, offset by an increase in unrealized losses on our securities portfolio
due to changes in interest rates of $1.1 million.
12
<PAGE>
NETBANK, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 $52 million at March 31, 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, and Tier I capital ratios
of 15.63%, 15.63%, 28.24%, and 27.16%, respectively, at March 31, 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.
13
<PAGE>
NETBANK, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
The following table sets forth the interest rate sensitivity of our assets
and liabilities as of March 31, 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............................... $ 2,993 $ -- $ -- $ -- $ 2,993
Federal funds sold...................................... 5,505 -- -- -- 5,505
Investment securities................................... 63,907 26,888 203,171 103,764 397,730
Stock of Federal Home Loan Bank of Atlanta.............. 15,700 -- -- -- 15,700
Loan sale proceeds receivable........................... 2,851 -- -- -- 2,851
Loans receivable........................................ 193,584 264,278 413,072 86,160 957,094
-------- --------- -------- -------- ----------
Total interest-earning assets:.......................... 284,540 291,166 616,243 189,924 1,381,873
Non interest-earning assets............................... -- -- -- 29,901 29,901
-------- --------- -------- -------- ----------
Total assets.............................................. $284,540 $ 291,166 $616,243 $219,825 $1,411,774
======== ========= ======== ======== ==========
Interest-Bearing Liabilities:
Interest-bearing deposits............................... $219,080 $ 417,751 $ 34,680 $ 50,033 $ 721,544
Convertible subordinated debt........................... -- -- 81,887 -- 81,887
Other borrowed funds.................................... 74,500 -- 239,000 25,000 338,500
-------- --------- -------- -------- ----------
Total interest-bearing liabilities:..................... 293,580 417,751 355,567 75,033 1,141,931
Interest-free deposits.................................... -- -- -- 3,570 3,570
Other interest-free liabilities and equity................ -- -- -- 266,273 266,273
-------- --------- -------- -------- ----------
Total liabilities and equity.............................. $293,580 $ 417,751 $355,567 $344,876 $1,411,774
======== ========= ======== ======== ==========
Net interest rate sensitivity gap......................... $ (9,040) $(126,585) $260,676 $114,891 $ 239,942
Cumulative gap............................................ $ (9,040) $(135,625) $125,051 $239,942 --
Net interest rate sensitivity gap as a percent of
interest-earning assets................................. (3.18%) (43.48%) 42.30% 60.49% 17.36%
Cumulative gap as a percent of cumulative interest-earning
assets.................................................. (3.18%) (23.56%) 10.49% 17.36% --
</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 March 31, 2000,
NetBank's estimated NPV ratios were well within these board approved limits. The
following table
14
<PAGE>
NETBANK, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
sets forth the estimated percentage change in NetBank's NPV ratio as of
March 31, 2000 assuming rate shocks of +300 to -300 basis points:
LIMITS AND CURRENT NPV RATIOS
<TABLE>
<CAPTION>
BOARD LIMITS ESTIMATED
RATE SHOCK (MINIMUM 3/31/00
(IN BASIS POINTS) NPV RATIOS) NPV RATIOS
- --------------------- ------------ ----------
<S> <C> <C>
+300 9.00% 12.89%
+200 10.00% 14.41%
+100 11.00% 15.70%
Flat 12.00% 16.66%
-100 12.00% 17.21%
-200 12.00% 17.36%
-300 12.00% 17.42%
</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 225 basis points as of March 31,
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 March 31, 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.
15
<PAGE>
NETBANK, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
INVESTMENT SECURITIES. The following tables set forth certain information
relating to our available-for-sale securities at March 31, 2000 and
December 31, 1999:
<TABLE>
<CAPTION>
MARCH 31, 2000
-----------------------
GROSS
-----------------------
AMORTIZED UNREALIZED UNREALIZED ESTIMATED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
Collateralized mortgage obligations.............. $232,035 $ 2 $4,275 $227,762
U.S. government agencies......................... 162,359 66 2,327 160,098
Corporate bonds.................................. 9,643 -- 5 9,638
Habitat bonds and other.......................... 231 -- -- 231
-------- --- ------ --------
Total.......................................... $404,268 $68 $6,607 $397,729
======== === ====== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------
GROSS
-----------------------
AMORTIZED UNREALIZED UNREALIZED ESTIMATED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------------
<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>
LOAN PORTFOLIO COMPOSITION. The following table sets forth the composition
of our loan portfolio by type of loan as of March 31, 2000 and December 31,
1999:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---------------- ----------------
<S> <C> <C> <C> <C>
Residential mortgages..................................... $628,701 65.7% $480,470 61.0%
Home equity lines......................................... 169,347 17.7 177,670 22.6
Leases.................................................... 71,672 7.5 62,295 7.9
Commercial participations................................. 72,520 7.6 48,783 6.2
Construction.............................................. 5,849 0.6 10,723 1.4
Consumer.................................................. 6,583 0.7 4,183 0.5
Auto...................................................... 2,423 0.2 3,211 0.4
----- -----
Total................................................... 957,095 100.0% 787,335 100.0%
===== =====
Less allowance for loan losses............................ 8,788 7,597
-------- --------
Total................................................. $948,307 $779,738
======== ========
</TABLE>
ASSET QUALITY AND NON-PERFORMING ASSETS-During the three months ended
March 31, 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.
16
<PAGE>
NETBANK, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
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 March 31, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
MARCH 31, 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.................. $ 3,570 0.5% N/A $ 3,739 0.6% N/A
Interest bearing:
NOW accounts............................ 49,868 6.9 3.05% 38,590 5.9 3.05%
Money market............................ 235,184 32.4 5.26% 219,898 33.6 5.26%
Certificate of deposit under $100,000... 389,891 53.8 6.90% 351,074 53.7 6.51%
Certificate of deposit over $100,000...... 46,600 6.4 6.78% 40,600 6.2 6.51%
-------- ----- -------- -----
Total deposits............................ $725,113 100.0% $653,901 100.0%
======== ===== ======== =====
</TABLE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999
GENERAL. Net income for the three months ended March 31, 2000 amounted to
$4.6 million, an increase of $3.9 million compared to net income of $692,000 for
the three months ended March 31, 1999. The increase in net income was primarily
the result of a $4.5 million extraordinary gain on the early extinguishment of
$31 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 March 31, 2000 was $23.7 million compared
to $7.6 million for the three months ended March 31, 1999. The increase in
interest income was a result of the growth of our loan portfolio of
$588.6 million from March 31, 1999 to March 31, 2000, compounded by an increase
in the average yield on loans from 7.6% for the three months ended March 31,
1999 to 7.7% for the three months ended March 31, 2000. In addition, the
investment portfolio grew from $80.3 million at March 31, 1999 to
$397.7 million at March 31, 2000. The yield on the investment portfolio was 6.2%
for the three months ended March 31, 1999 as compared with 7.0% for the three
months ended March 31, 2000.
INTEREST EXPENSE. For the three months ended March 31, 2000, $9.5 million
in interest expense on deposits was recorded compared to $4.0 million for the
three months ended March 31, 1999 as a result of our increase in customer
deposits from $332.7 million at March 31, 1999 to $725.1 million at March 31,
2000. In addition, the average interest rate paid on deposits increased from
5.3% for the three months ended March 31, 1999 to 5.6% for the three months
ended March 31, 2000. Interest expense associated with other borrowed funds
increased $4.7 million from $536,000 for the three months ended March 31, 1999
to $5.3 million for the three months ended March 31, 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.
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
17
<PAGE>
NETBANK, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
interest income was $8.9 million for the three months ended March 31, 2000
compared to $3.0 million for the three months ended March 31, 1999. The increase
in net interest income resulted from the increase in the amount of loans and
deposits from March 31, 1999 to March 31, 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 March 31, 2000, we recorded $1.5 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
$182,000 related primarily to originated loans. This compares to a provision of
$50,000 recorded during the three months ended March 31, 1999. 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 March 31, 2000, we recorded
approximately $341,000 in loan and deposit service charges and fees compared to
$246,000 recorded during the three months ended March 31, 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 317%, or $6.8 million, for the three months ended
March 31, 2000 as compared with the three months ended March 31, 1999 as the
number of customer accounts increased over threefold from 24,634 at March 31,
1999 to 81,771 at March 31, 2000. This increase in non-interest expense was
primarily the result of increases in salaries and benefits, customer service,
and data processing expense as additional employees and operational activities
were added to support additional customers, and an increase in marketing expense
as we expanded our marketing programs to build public awareness of the
NetBank-Registered Trademark- name and our products and services.
18
<PAGE>
EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amendment to Articles of Incorporation
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.
<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.
<TABLE>
<S> <C> <C>
NETBANK, INC.
By: /s/ LAURA P. MOON
-----------------------------------------
Laura P. Moon
CHIEF ACCOUNTING OFFICER
</TABLE>
Dated: May 15, 2000
<PAGE>
ARTICLES OF AMENDMENT
OF
THE ARTICLES OF INCORPORATION
OF
NET.B@NK, INC.
Pursuant to Sections 14-2-1002 and - 1006 of the Georgia Business Corporation
Code (the "Code"), the Articles of Incorporation of Net.B@nk, Inc. (the
"Corporation") are hereby amended according to these Articles of Amendment.
I.
The current name of the Corporation is Net.B@nk, Inc.
II.
On April 27, 2000, the Board of Directors of the Corporation duly
adopted the following amendment (the "Amendment") to the Corporation's
Articles of Incorporation:
Article I of the Corporation's Articles of Incorporation shall be
deleted in its entirety and replaced with the following:
Article I: The name of the Corporation is NetBank, Inc.
III.
Pursuant to Section 14-2-1002(6) of the Code, no shareholder vote
is required for the adoption and approval of the Amendment.
IN WITNESS WHEREOF, these Articles of Amendment have been signed by
Robert E. Bowers, Secretary, as of the 27th day of April, 2000.
NET.B@NK, INC.
By: /s/ Robert E. Bowers
-----------------------------
Robert E. Bowers, Secretary
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<CIK> 0001035826
<NAME> NETBANK
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 2,993
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 5,505
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 397,729
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 957,095
<ALLOWANCE> 8,788
<TOTAL-ASSETS> 1,411,774
<DEPOSITS> 725,113
<SHORT-TERM> 0
<LIABILITIES-OTHER> 16,001
<LONG-TERM> 420,387
0
0
<COMMON> 300
<OTHER-SE> 249,973
<TOTAL-LIABILITIES-AND-EQUITY> 1,411,774
<INTEREST-LOAN> 16,036
<INTEREST-INVEST> 7,678
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 23,714
<INTEREST-DEPOSIT> 9,490
<INTEREST-EXPENSE> 14,766
<INTEREST-INCOME-NET> 8,948
<LOAN-LOSSES> 182
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 8,953
<INCOME-PRETAX> 153
<INCOME-PRE-EXTRAORDINARY> 101
<EXTRAORDINARY> 4,521
<CHANGES> 0
<NET-INCOME> 4,622
<EPS-BASIC> .16
<EPS-DILUTED> .15
<YIELD-ACTUAL> 2.7
<LOANS-NON> 0
<LOANS-PAST> 849
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,597
<CHARGE-OFFS> 534
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 8,788
<ALLOWANCE-DOMESTIC> 8,788
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
