NetBank

This article is about the United States bank with the name NetBank. For the online service of Commonwealth Bank, see Commonwealth Bank.

NetBank, Inc.

Industry	Finance
Fate	Closed by the Office of Thrift Supervision. Most of the deposits acquired by ING Direct
Founded	1996
Defunct	2007
Headquarters	Alpharetta, Georgia, USA
Key people	Steven F. Herbert, CEO
Products	retail banking, mortgage banking, and business finance
Website	www.netbank.com

NetBank, formerly named Atlanta Internet Bank (1996) and Net.B@nk (1998),^[1] was a financial company engaged primarily in retail banking, mortgage banking, business finance and providing ATM and merchant processing services. NetBank was founded in February 1996 and completed its initial public offering of stock in July 1997. It was one of the pioneers of the Internet banking industry, and recognized as one of the first internet-only banks. Its headquarters was in Suite 100 of the Royal Centre Three in Alpharetta, Georgia.^[2]

Netbank was closed on September 28, 2007, by the Office of Thrift Supervision (OTS) in conjunction with the Federal Deposit Insurance Corporation (FDIC). FDIC insured deposits were acquired by another virtual bank, ING Direct. Several shareholders have filed class action lawsuits against Netbank claiming misrepresentation of the company value during the restructuring period.

History

Beginning

NetBank was founded in 1996 as one of the nation's first Internet-only banks. Using a new business model, NetBank paid higher interest rates for computer-savvy customers in exchange for not having physical bank branches. This model made sense and the bank early on paid very nice interest rates.

NetBank made its money from a mortgage and lending operation. The majority of home loans were offered through traditional channels and a small percentage of loans were offered through the same internet channels as the banking offerings.

NetBank obtained customers by offering some sort of "sign on" bonus. A $50 bonus was a common bonus. NetBank signed many agreements with other companies to promote itself and the companies would offer gift certificate or credit to their loyalty programs (i.e., frequent flyer programs) equivalent to around $50. These customer acquisition programs proved beneficial and NetBank gained many customers in this manner.

Growth

Starting in the early 2000s, NetBank acquired a number of financial-related companies to diversify and improve the bottom line.

In 2000, Netbank added the following products and services: Online safe deposit boxes for safe storage of electronic records, individual retirement accounts, and expanded customer support (online chat and 24x7 availability).

In 2001, Netbank acquired Resource Bancshares Mortgage Group, a leading provider of mortgage banking services. An online currency program was launched. And, NetBank acquired Market Street Mortgage, a leading provider of home mortgage to American consumers. The same year also brought a change in management to NetBank. A new CEO, Douglas K. Freeman, was appointed to head and manage the company. Freeman came from RBMG and had a background in mortgages rather than banking.

In 2003, NetBank added a number of business and product lines: NetBank expanded into automobiles by offering auto insurance through sister company NetInsurance and direct consumer auto loans through Florida auto dealerships. NetBank also acquired what became NetBank Payment Systems, a provider of off-premise ATM and merchant processing services. A number of ATMs were acquired in this acquisition. Finally, NetBank also launched a small business banking program.

In 2004, NetBank continued adding new product lines and acquired additional companies. NetBank acquired the assets of Beacon Credit Services, a leading provider of RV, boat and aircraft financing. They added business credit cards, internet payroll services, prepaid Visa gift cards, and expanded financial planning services. In response to customer concerns about mailing in deposits, NetBank launched Financial Technologies Inc (FTI) whose primary product was QuickPost, where deposits are shipped overnight from UPS stores to NetBank for processing.

NetBank reached the peak of the operation at the end of 2004 and through 2005. The rapid expansion into multiple lines of businesses may have proved to be too much, too soon for NetBank and it started to lose money in 2005.

In 2005, NetBank suffered some setbacks due to the cyclical nature of the mortgage industry and did not add any businesses or products to their line, instead choosing to preserve capital until the mortgage curve righted itself and they could resume earning profit from the mortgage businesses. They also introduced a tiered deposit system, where they paid the highest interest rates to people who also were customers of their other products (home or auto loan, savings account, or CD) and the lowest interest rate to people that only had a savings or checking account. The intent was to better cross-sell the products and help transition the banking customers to the other platforms. Many customers were turned off by the tiered system because NetBank's auto loan rates were higher than other banks and many people didn't choose to have Autoloans through NetBank.

Decline

In 2006, NetBank recognized that there were some significant operating deficiencies and started to restructure the company in an effort to resume profitability. They shuttered a number of businesses and sold off most businesses that were not shuttered. Some of the shuttered companies included FTI, payroll and finance services, non-auto (RV, boat, and aircraft) loans, and the subprime/non-conforming mortgage companies. The large network of ATMs were sold off to other companies. The independent auditor, Ernst and Young, resigned in 2006.

During the same year, NetBank's mortgage operations suffered greatly. NetBank normally originates loans and resells the loans to other financial institutions on the open markets. Some of the loans that NetBank sold did not meet the underwriting guidelines and NetBank was forced to repurchase these loans from the other banks. Since the loans that do not meet the underwriting guidelines are often past due loans, NetBank was forced to repurchase a large number of failed loans that it had written. This loss of capital was very harmful to the company's equity position and was the first clue to the bank's poor financial position.

In 2007, NetBank finally recognized that the restructuring attempt was unsuccessful, and the company announced an intention to shutdown the company starting in spring of 2007. In May 2007 NetBank reached an agreement to sell its core banking operation to EverBank.^[3] All accounts were to have been transferred by September 15, 2007, but the deal depended on NetBank's coming up with some cash, which it expected to realize from the sale of other investments. NetBank proved unable to sell these investments,^[4] and on September 17, 2007, Everbank terminated the agreement.^[5]

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

On May 15, 2007, the listed holding company, NetBank, Inc., received a warning from the Nasdaq Stock Market because it was late in filing its most recent quarterly report. NetBank received a similar notice from Nasdaq in March 2007 because it did not file its 2006 annual report on time. The report was delayed because the company needed to find a new independent auditor following the resignation of Ernst & Young LLP in November. NetBank hired Porter Keadle Moore LLP as its new independent auditor in February. NetBank said it planned to file the annual and quarterly reports by the end of June 2007.^[6]

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.^[7] 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.^[8] The shutdown marked the biggest failure of a savings and loan association since the savings and loan crisis in the 1980s.^[9] $1.4 billion in FDIC-insured deposits, as well as some loan assets, were sold to ING Direct for $14 million.^[10][11][12] ING Direct also took on 104,000 NetBank customers as part of the deal.^[13] Customers with balances exceeding the FDIC limit have received 50% of the excess balance, and became creditors in the bank's receivership for the remainder.^[14]

NetBank Inc., parent of the savings-and-loan, filed for Chapter 11 (reorganization) bankruptcy protection and announced intentions to sell Columbia, South Carolina real estate it owns as well as its captive reinsurance subsidiary M.G. Reinsurance Inc.^[15] Federal savings and loan associations are prohibited from filing for bankruptcy protection and must be liquidated by the FDIC.^[15]

Business model

The closed 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.

See also

	Atlanta portal
	Companies portal
	Internet portal

• CompuBank
• Online banking
• Telephone banking

References

1. ^ "Atlanta Internet Bank to become Net.B@nk". Atlanta Business Chronicle. August 10, 1998. http://www.bizjournals.com/atlanta/stories/1998/08/10/daily4.html. 
2. ^ "Contact Us." NetBank. January 11, 2001. Retrieved on February 25, 2011. "NetBank Royal Centre Three, Suite 100 11475 Great Oaks Way Alpharetta, GA 30022."
3. ^ "Great News!". NetBank. Archived from the original on 2007-05-23. http://web.archive.org/web/20070523055805/http://netbank.com/about_everbank.htm. 
4. ^ "NetBank Conversion Update". http://www.netbank.com/about_everbank.htm. 
5. ^ "EverBank Announces Termination of NetBank Acquisition Agreement". http://www.everbank.com/004Press20070917.aspx?LinkID=Body1. 
6. ^ NetBank Gets 2nd Nasdaq Warning AP, May 15, 2007.
7. ^ NetBank gets deficiency notice from NASDAQ ATM Market Place, July 17, 2007.
8. ^ FDIC: Bank Closing Information for NetBank
9. ^ "Online Bank Fails, and Regulators Shut It". New York Times. September 29, 2007. http://www.nytimes.com/2007/09/29/business/29netbank.html. Retrieved May 20, 2010. , October 1, 2007
10. ^ ING DIRECT Acquires Deposits of NetBank ING Direct, Press release, September 28, 2007.
11. ^ BBC ING Direct/NetBank news
12. ^ Feds unplug NetBank; ING takes over most deposits
13. ^ ING Direct Acquires NetBank
14. ^ FDIC shuts down NetBank Computerworld, MA, October 1, 2007.
15. ^ ^{a b} Bill Rochelle (2007-09-27). "NetBank Files for Bankruptcy After Regulators Take Over Unit". Bloomberg L.P.. http://www.bloomberg.com/apps/news?pid=20601087&sid=ajOPHuXaoV3c. Retrieved 2007-10-08. 

• United States Securities and Exchange Commission: NetBank, Inc. Annual Report 2005.

External links

• Netbank (Archive)
• FDIC Bank Closing Information for NetBank
• EverBank
• ING Direct
• NetBank thread on iBankDesign
• Netbank: The Conservative Internet Entrepreneurs (teaching case)