NetBank

NetBank, Inc.
Traded as NASDAQ: NTBK (1997-2007)
Industry Finance
Fate Closed by the Office of Thrift Supervision. Most of the deposits acquired by ING Direct
Founded 1996 (1996)
Defunct 2007 (2007)
Headquarters Alpharetta, Georgia
Key people
 Steven F. Herbert, CEO
Products Retail Banking
Mortgage Banking
Business Finance
Website Archived August 20, 2007, at the Wayback Machine.

NetBank, formerly named Atlanta Internet Bank (1996) and Net.B@nk (1998),[1] was a direct bank that offered online banking, retail banking, mortgage loans, business finance, ATMs, and merchant processing services.

Netbank was closed on September 28, 2007 by the Office of Thrift Supervision (OTS) in conjunction with the Federal Deposit Insurance Corporation (FDIC). It deposits were acquired by ING Direct and the Netbank.com domain name was acquired by Axos Financial.

History

NetBank was founded in February 1996 as one of the first direct banks in the United States. Using a business model typical of direct banks, NetBank paid higher than average interest rates in exchange for not having physical bank branches.[2]

On July 29, 1997, NetBank completed its initial public offering, raising $42 million.[3]

In 2001, NetBank acquired deposit accounts from CompuBank.[4] NetBank also acquired Market Street Mortgage.[5][6] In 2002, Netbank acquired Resource Bancshares Mortgage Group.[7] Douglas K. Freeman, was appointed CEO of the company as of March 31, 2002 and was appointed chairman as of January 29, 2003.[8]

In 2003, NetBank began offering vehicle insurance through sister company NetInsurance and began offering direct consumer auto loans through Florida auto dealerships.[9] NetBank also acquired what became NetBank Payment Systems, a provider of off-premises ATM and merchant processing services and Financial Technologies Inc, a provider of ATMs and retail transaction processing services.[10]

In July 2004, NetBank acquired the assets of Beacon Credit Services, a leading provider of RV, boat and aircraft financing.[11][12]

NetBank reported a loss in 2005.[13]

In 2006, Netbank began to offer check deposit services via The UPS Stores.[14]

In 2006, Netbank shut down or sold several non-core businesses. However, NetBank did not curtail its mortgage banking operations. Instead, it lowered its documentation and underwriting standards to increase loan production. NetBank sold many of its loans to other investors, with the loans being partially recourse to NetBank. In 2006, NetBank was forced to repurchase $182 million in bad loans that it sold previously.[2]

In November 2006, the company's independent auditor, Ernst and Young, resigned.[15]

For the full year 2006, the company reported a $202 million loss.[16]

On May 1, 2007, the company sold its ATM and merchant-servicing operation (NetBank Payment Systems Inc.) to PAI ATM Services LLC, a subsidiary of Payment Alliance International Inc.[17]

On May 21, 2007, NetBank reached an agreement to sell its core banking operation to EverBank.[18] All accounts were to have been transferred by September 15, 2007, but the deal depended on NetBank coming up with some cash, which it expected to realize from the sale of other investments. NetBank was unable to sell those investments, and on September 17, 2007, EverBank terminated the agreement.[15]

On May 15, 2007, NetBank received a warning from the NASDAQ because it was late in filing its quarterly report. NetBank received a similar notice from Nasdaq in March 2007 because it did not file its 2006 annual report on time.[15] The report was delayed because the company needed to find a new independent auditor following the resignation of Ernst & Young LLP in November 2006. NetBank hired Porter Keadle Moore LLP as its new independent auditor in February 2007. NetBank said it planned to file the annual and quarterly reports by the end of June 2007.[19][20]

On July 3, 2007, NetBank Inc. received a deficiency notice from the NASDAQ Stock Market because its stock for the previous 30 consecutive business days failed to close above the minimum bid price of $1 per share.[21] On August 3, it was delisted from the Nasdaq.

On September 28, 2007, the Office of Thrift Supervision (OTS) announced that it had closed NetBank.[22] The shutdown marked the biggest failure of a savings and loan association since the savings and loan crisis in the 1980s.[23] It was also the biggest bank failure in Georgia.[24] All of its customers, including its $1.4 billion in FDIC-insured deposits, as well as some loan assets, were sold to ING Direct for $14 million.[25][26]

Customers with balances exceeding the FDIC limit received 50% of the excess balance and became creditors in the bank's receivership for the remainder.[27]

In November 2007, NetBank Inc., parent of the savings-and-loan, filed for Chapter 11 (reorganization) bankruptcy protection and announced intentions to liquidate, including selling its real estate in Columbia, South Carolina as well as its captive insurance subsidiary M.G. Reinsurance Inc. Federal savings and loan associations are prohibited from filing for bankruptcy protection and must be liquidated by the FDIC.[28]

A class action lawsuit was filed by former shareholders against certain officers and directors of the company alleging that they inflated the stock price by making misleading statements. The lawsuits were settled in November 2011 for $12.5 million.

Business model

NetBank’s former business model had several strategies: Retail and business banking, financial intermediary and transaction processing. All of the bank’s operations and assets were located within the United States of America.

Retail banking

The retail banking segment consisted of personal and small business banking operations. The major products and services offered through the retail banking segment included individual and small business deposit accounts, mortgages, home equity loans and lines of credit, auto loans, business equipment financing, financial planning and investment services, online bill payment and Visa check and credit cards. NetBank, through its Internet banking operations, operated as an FDIC-insured, federally chartered thrift institution serving approximately 286 thousand customers throughout the United States and in more than 90 foreign countries. NetBank delivered its products and services through remote delivery channels, such as the Internet, telephone and ATMs, that are available 24 hours a day and seven days a week. It did not maintain a branch network to support its banking business. The branchless model provided an opportunity to operate with less overhead expense than traditional branch banks. Customers initially relied on direct deposit and first class mail to make deposits into their accounts, supplemented later by QuickPost (free deposit drop-off at UPS Stores for overnight delivery to NetBank) and ATM deposits.

Financial intermediary

NetBank also offered several loan products through the financial intermediary segment of business. These products and services included additional mortgages for both conforming and nonconforming products, home equity loans and lines of credit, RV, boat and aircraft loans and NetBank offered an automated mortgage underwriting service.

Transaction processing

NetBank provided a variety of financial-related processing services to merchants, community banks and other organizations. The Company acquired an ATM and merchant transaction processing operation. During NetBank's peak years, the company operated approximately 8,000 ATMs across the country, which the Company made available to its banking customers on a surcharge-free basis. The network of ATMs ranked as the second largest bank-operated ATM network in the country in 2003.

Criticism

One of the downsides to having no physical branches was the risk of deposits getting lost, damaged, or delayed in the mail. Several people complained about NetBank losing or delaying payments to the account for a variety of reasons. The invention of deposit-taking ATMs alleviated some of this concern because customers could make the deposit in a local ATM, where the check will post and clear very quickly. The widespread nature of NetBank's customers made it difficult to have an ATM handy for all customers, though and many were still required to use mail-in deposits.

NetBank attempted to alleviate the issue of lost deposits by creating QuickPost, an innovative service where a customer drops a deposit off at a UPS Store location to be shipped overnight to NetBank. The idea behind QuickPost is one shipment could contain deposits from several customers, justifying the additional expense of overnight shipping. However, the product did not take off and NetBank shut down this operation in 2006. Further, the program suffered enormous losses after NetBank tried to sell the service to other banks.

NetBank's CEO sold NetBank his personal residence on two occasions in the years leading up to the failure of NetBank. Each time, NetBank had substantial losses related to the sale of the residence as disclosed in the 2005 Annual Report (Related Party Transaction footnote).

NetBank also encountered several complaints due to NetBank's freezing customer accounts for security reasons. When flagged, the customers were required to send several forms of identification to NetBank before the account would become unfrozen. It is uncertain if the requirements were due to internal NetBank policies or the requirements imposed by the USA Patriot Act.

Shareholders filed class action lawsuits against Netbank and its executives claiming misrepresentation of the company before it was shutdown by regulators.[29]

References

  1. ↑ "Atlanta Internet Bank to become Net.B@nk". American City Business Journals. August 10, 1998.
  2. 1 2 "SAFETY AND SOUNDNESS: Material Loss Review of NetBank, FSB (OIG-08-032)" (PDF). United States Department of the Treasury. April 23, 2008.
  3. ↑ "NETBANK INC (NTBK) IPO". NASDAQ.
  4. ↑ "NetBank Acquires CompuBank Deposit Accounts" (Press release). PRNewswire. March 29, 2001.
  5. ↑ "NetBank Completes Acquisition of Market Street Mortgage" (Press release). PRNewswire. July 2, 2001.
  6. ↑ "NetBank completes Market Street Mortgage acquisition". American City Business Journals. July 2, 2001.
  7. ↑ "NetBank, Inc. Completes Acquisition of Resource Bancshares Mortgage Group, Inc" (Press release). PRNewswire. April 1, 2002.
  8. ↑ "NETBANK, INC. Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934" (Press release). U.S. Securities and Exchange Commission. March 28, 2003.
  9. ↑ "NetBank Launches Homeowners Insurance Through Sister Company NetInsurance, Inc.; Consumers Now Have Easy Access to Insurance Products for the Home and Auto from Top Providers" (Press release). Business Wire. November 10, 2003.
  10. ↑ "NetBank, Inc. Completes Acquisition of Financial Technologies, Inc.; Acquisition is Part of Company's Revenue Diversification Strategy" (Press release). Business Wire. December 8, 2003.
  11. ↑ "NetBank, Inc. Completes Deal with Beacon Credit Services" (Press release). Business Wire. July 2, 2004.
  12. ↑ "NetBank to buy Beacon Credit Services". American City Business Journals. June 11, 2004.
  13. ↑ "NetBank, Inc. Reports Financial Results for Third Quarter; Loss of $.03 per Share Based on $3.5 Million Provision Related to Previously Identified Issues on a Limited Group of Loans" (Press release). Business Wire. November 14, 2005.
  14. ↑ "Financial Technologies, Inc. Adds ebank to QuickPost Deposit and Payment Forwarding Service" (Press release). Globe Newswire. March 9, 2006.
  15. 1 2 3 "IN RE NETBANK, INC. SECURITIES LITIGATION" (PDF). July 3, 2008.
  16. ↑ "NetBank annual loss reaches $202 million". American City Business Journals. February 21, 2007.
  17. ↑ "Payment Alliance International Acquires NetBank Payment Systems" (Press release). Globe Newswire. May 7, 2007.
  18. ↑ "NetBank Reaches Agreement With EverBank for Sale of Select Assets and Assumption of Deposit Liabilities" (Press release). GlobeNewswire. May 21, 2007.
  19. ↑ Wolfe, Daniel (February 22, 2007). "Despite Revamp, NetBank Will Stay in Red This Quarter". American Banker.
  20. ↑ "NetBank warned of delisting". American City Business Journals. March 23, 2007.
  21. ↑ "NetBank, Inc. Receives NASDAQ Deficiency Notice" (Press release). Globe Newswire. July 9, 2007.
  22. ↑ "FDIC: Bank Closing Information for NetBank". Federal Deposit Insurance Corporation. September 28, 2007.
  23. ↑ "Online Bank Fails and Regulators Shut It". Associated Press. The New York Times. September 29, 2007.
  24. ↑ Rauch, Joe (August 10, 1998). "NetBank closed by feds in 2007". American City Business Journals.
  25. ↑ "ING DIRECT Acquires Deposits of NetBank" (Press release). Business Wire. September 28, 2007.
  26. ↑ "ING wins from online bank failure". BBC. September 30, 2007.
  27. ↑ Rosencrance, Linda (October 1, 2007). "FDIC shuts down NetBank". Computer World.
  28. ↑ Stempel, Jonathan (November 26, 2007). "NetBank says to liquidate in bankruptcy". Reuters.
  29. ↑ NetBank Class Action Settlement
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