ATLANTA, Nov. 8, 2006 (PRIMEZONE) -- NetBank, Inc. (Nasdaq:NTBK), parent company of NetBank(r) (www.netbank.com) and a leading mortgage lender, today reported financial results for the quarter ended September 30, 2006. The company recorded an after-tax loss of $73.3 million or $1.58 per share for the period, compared with an after-tax loss of $1.4 million or $.03 per share during the same quarter a year ago. On a year-to-date basis, the company recorded an after-tax loss of $116 million or $2.50 per share, versus a net loss of $1.1 million or $.02 per share during the first nine months of 2005.
Book value declined by $1.22 per share from $7.48 on June 30, 2006 to $6.26 on September 30, 2006. However, the impact on the company's tangible book value was substantially less. Tangible book value declined $.70 per share from $5.80 on June 30, 2006 to $5.10 on September 30, 2006. On an after-tax basis, the reported loss included a $19.5 million expense of non-deductible goodwill and a $2.4 million expense of deductible goodwill, both of which did not negatively impact tangible book value. In addition, the company sold certain on-balance sheet investments allocated as economic hedges of its mortgage servicing rights ("MSRs") during the quarter. The unrealized loss on these securities was already deducted from tangible book value on June 30 through other comprehensive loss included in the equity section of the balance sheet. Thus, the realized loss on those securities did not impact tangible book value. (Details related to amounts excluded from tangible book value are provided in the attached Reconciliation of Non-GAAP Financial Measures.)
The company's after-tax loss increased by $42.0 million on a quarter-over-quarter basis. Key trends worth noting include the following. All comparisons are on a sequential quarter basis unless noted otherwise.
-- Decreased Earning Assets. The bank's average earning assets
were down $348 million to $4.0 billion. The primary drivers of
the decrease were the sale of $336 million of investment
securities and $27.4 million of home equity loans during the
quarter.
-- Lower Net Interest Margin. The banking segment's net interest
margin fell by 0.14% to 1.46% due to continuation of the flat
yield curve, lower average asset balances and higher deposit
costs.
-- Flat Mortgage Production and Sales. Mortgage production in all
channels remained soft due to lower origination volumes across
the industry. Production totaled $2.4 billion, a decrease of $143
million or 5.5%. Sales were down as a result. Sales across all
channels totaled $2.4 billion, a decrease of $66.8 million or
2.7%.
-- Lower Mortgage Repurchase Expense. Although mortgage repurchase
demands improved from last quarter, they remained at an elevated
level. As a result, provision expense totaled $12.2 million this
quarter, a decrease of $8.1 million from last quarter.
The board of directors determined earlier this year that the company needed to make significant changes to its operating plan to return to profitability and protect capital. As part of that effort, the board of directors voluntarily entered into a supervisory agreement with the bank's regulators at the Office of Thrift Supervision ("OTS") after the close of the third quarter. Under the agreement, the board will work with management to develop and execute a written, multi-year plan based upon the change in strategy. The board and management are in the process of finalizing this plan, which centers largely on the tactical initiatives management already has underway to refocus the business on its banking and conforming mortgage competencies. Additional details on this agreement can be found later in this release under the heading "Regulatory Matters."
Unusual Charges
Current quarter results include the following unusual charges.
-- Mortgage Servicing Rights Sale. As reported earlier, the
company sold most of its MSRs associated with conventional,
agency-eligible loans in two, separate transactions during
the quarter that resulted in an after-tax loss of $19.3 million.
The company also elected to liquidate $336 million of investment
securities that it held as an economic on-balance sheet hedge
resulting in an after-tax loss of $8.7 million on the sale of
those securities. The charges related to these transactions
equated to an after-tax loss of $28.1 million or $.61 per share.
-- Impairment of Goodwill. Management expensed goodwill on two of
the company's business units during the quarter. The company
recorded $19.5 million, or $.42 per share, in after-tax goodwill
impairment associated with its non-conforming mortgage business.
It also recorded after-tax impairment of $2.4 million, or $.05
per share, on a portion of the goodwill related to its ATM and
merchant processing business.
Management Commentary
"This quarter's results reflect a company in transition," said Steven F. Herbert, chief executive officer. "It was very noisy with a number of unusual charges related to the steps we are taking to narrow our lines of business and refocus on our core banking and conforming mortgage operations. Our immediate focus is on stabilizing the company's operating profile, preserving capital and returning to profitability as quickly as possible. With that in mind, we moved quickly to execute on needed changes.
"During the quarter, we completed the sale of the majority of our MSR portfolio. Earlier this week, we announced transactions that are facilitating the exit of our non-conforming mortgage and RV, boat and aircraft financing operations. We have also made the decision to move forward with several other initiatives that are essential to our action plan. They include: implementing a plan to shut down FTI and the QuickPost service; completing a sale of our NetInsurance operation; consolidating our indirect, conforming mortgage loan operations into a central location; and downsizing our management team to reflect the more streamlined organization we are becoming.
"We currently estimate that these actions will be completed before year-end, and that one-time fourth quarter charges for all of them will total about $14 million to $15 million after tax. While we had hoped for more favorable outcomes, our plan fully contemplated the potential for the types of one-time, adverse impacts to tangible book value that we have seen.
"We are also considering options for our auto lending and ATM and merchant processing businesses. We estimate that a worst-case, one-time charge related to the options we are considering for the auto business would be about $1 million after tax. Given that most of the value of the ATM business is reflected as intangibles, tangible book value would be positively impacted if we were to move forward with any of the options being considered.
"So all-in it was a challenging quarter," Herbert concluded. "But it's exciting to be on the path forward again. I believe we have been able to implement our plan quickly and successfully. We remain on track to complete most of the changes before year end. Effectively all of it should be done by the end of the first quarter. And while we may not see the full benefits of our plan for a couple more quarters, I expect to see a significant improving trend in our operating profile going forward."
Retail Banking Segment Performance
Table 1 below details results in the company's Retail Banking segment. The segment reported a pre-tax loss of $1.7 million, compared to income of $788,000 from last quarter. Excluding QuickPost expenses, the decline is a result of the return to more normal provision expense levels from last quarter, as well as continued pressure on net interest income due to the flat yield curve and a smaller average asset base. This quarter we recorded a $2.4 million provision for credit losses compared to $972,000 in the previous quarter. The previous quarter's lower provision expense level was a result of a $1.9 million reduction in provision expense related to the sale of home equity loans held by the bank.
QuickPost expenses leveled off during the quarter at $3.3 million. While the company believes QuickPost is a useful service, NetBank can't afford losses at the current level. Management has decided to shut down this product as part of its effort to return to profitability. Excluding QuickPost, the segment's overall expense ratio remained relatively flat at 164 bps.
Table 1
RETAIL BANKING
($ in 000s, Unaudited)
2006 2006
3rd Quarter 2nd Quarter Change
---------- ---------- ---------
Net interest income $ 16,878 $ 18,306 $ (1,428)
Provision for credit losses 2,410 972 1,438
---------- ---------- ---------
Net interest income
after provision 14,468 17,334 (2,866)
(Loss) gain on sales of loans (33) 308 (341)
Fees, charges and other income 3,477 3,650 (173)
---------- ---------- ---------
Total retail banking revenues 17,912 21,292 (3,380)
Total retail banking expenses 16,334 17,310 (976)
---------- ---------- ---------
Pre-tax retail banking
operations 1,578 3,982 (2,404)
Net QuickPost, PowerPost &
NetServ Results (3,301) (3,194) (107)
---------- ---------- ---------
Pre-tax net (loss) income $ (1,723) $ 788 $ (2,511)
========== ========== =========
Average earning assets $3,975,800 $4,324,185 $(348,385)
Operations to average earning
assets excluding QuickPost
Net interest income
after provision 1.46% 1.60% (0.14%)
Gain on sale, fees, charges
and other income 0.35% 0.37% (0.02%)
---------- ---------- ---------
Total retail banking revenues 1.81% 1.97% (0.16%)
Total retail banking expenses 1.64% 1.60% 0.04%
---------- ---------- ---------
Pre-tax retail banking
operations 0.17% 0.37% (0.20%)
========== ========== =========
Additional performance drivers behind Retail Banking segment performance include the following. All comparisons are on a sequential quarter basis unless noted otherwise.
-- The company's business finance operation remains a consistently
profitable contributor. Pre-tax earnings for the quarter were flat
at $3.2 million. Its production was off by $19.3 million or 33%
to $39.2 million as competition from other lenders increased.
-- Our auto lending business recorded pre-tax earnings of $410,000,
a 79% increase over the previous quarter due to prudent expense
management.
Financial Intermediary Segment Performance
Table 2 below details results in the company's Financial Intermediary segment. The segment reported a pre-tax loss of $39.5 million this quarter compared with a loss of $22.9 million last quarter. The challenging mortgage market continues to weigh on the segment's performance, as did some of the unusual charges outlined earlier in this release.
As discussed above, management chose to expense goodwill on the company's non-conforming mortgage business. We had been exploring our options with respect to exiting the business and concluded that the existing level of goodwill no longer accurately reflected the value of the operation's brand and other market intangibles. Subsequently, the company decided to shut down its non-conforming mortgage operation during the fourth quarter.
We saw a decrease in the demand for mortgage repurchases from last quarter, but they remained at an elevated level during the current quarter. Management continues to believe the issue is both market-driven and systemic, and is focused on taking the necessary steps to address it. We have been evaluating ways to improve internal processes and are currently in the process of centralizing our indirect, conforming mortgage operating centers. The company's regional operating centers in Jacksonville, Portland and St. Louis are being consolidated into the Columbia, S.C. facility. Management believes that by centralizing our operations, we can improve communication and better ensure improved loan quality.
Table 2
FINANCIAL INTERMEDIARY
($ in 000s, Unaudited)
2006 2006
3rd Quarter 2nd Quarter Change
----------- ----------- ---------
Net interest income $ 3,948 $ 4,781 $ (833)
Gain on sales of loans 4,396 10,586 (6,190)
Loss on sale of MSRs (96) (152) 56
Other income 272 895 (623)
Net Beacon credit services
results (103) (6,332) 6,229
Net MG Reinsurance results 898 597 301
---------- ---------- ---------
Total revenues 9,315 10,375 (1,060)
Salary and employee benefits 14,061 18,022 (3,961)
Occupancy and depreciation
expense 6,464 6,108 356
Other expenses 8,824 9,145 (321)
Goodwill impairment 19,505 -- 19,505
---------- ---------- ---------
Total expenses 48,854 33,275 15,579
---------- ---------- ---------
Pre-tax loss $ (39,539) $ (22,900) $ (16,639)
========== ========== =========
Production $2,439,654 $2,582,727 $(143,073)
Sales (includes
intercompany sales) $2,427,891 $2,494,743 $ (66,852)
Total revenues to sales 0.38% 0.42% (0.04)%
Total expenses to production 2.00% 1.29% 0.71%
---------- ---------- ---------
Pre-tax margin (1.62%) (0.87%) (0.75%)
========== ========== =========
Additional performance drivers behind Financial Intermediary segment performance include the following. All comparisons are on a sequential quarter basis unless noted otherwise.
-- Conforming production totaled $2.0 billion, a decrease of
$76.9 million or 3.7% due to seasonal factors. Conforming
sales remained flat at $2.0 billion. The channel's revenue
margin fell to 43 bps, a decline of 50 bps, as a result of
decreased gain on sale margins.
-- Non-conforming production fell by 13.8% to $413 million as
management continued to narrow the focus of the operation and
reduced capacity accordingly. Non-conforming sales fell in turn
to $435 million, a decrease of 19.1%.
Transaction Processing Segment Performance
Table 3 below details results in the company's Transaction Processing segment. The segment recorded a pre-tax loss of $2.4 million, compared to income of $631,000 the previous quarter. The loss is a result of a $2.4 million after-tax impairment to a portion of goodwill that management elected to take during the quarter. As the number of ATMs in our network, along with our total number of merchant processing contracts, has decreased, management felt the existing level of goodwill no longer accurately reflected the value of the operation's brand and other market intangibles.
Table 3
TRANSACTION PROCESSING
($ in 000s, Unaudited)
2006 2006
3rd Quarter 2nd Quarter Change
----------- ----------- -------
Total revenue $ 5,517 $ 5,173 $ 344
Total expenses 7,894 4,542 3,352
----------- ----------- -------
Pre-tax (loss) income $ (2,377) $ 631 $(3,008)
=========== =========== =======
Additional performance drivers behind Transaction Processing segment performance include the following. All comparisons are on a sequential quarter basis unless noted otherwise.
-- The number of ATMs in our network dropped by 3.7% to 8,427
machines. The ATMs that dropped from the network were inactive
locations. The total number of ATM transactions processed during
the quarter rose again, this time by 2.5% to 7.8 million.
-- The total number of merchant processing terminals in deployment
declined by 10.3% to 1,956. The decline represents inactive
terminals that we no longer report in our POS portfolio.
Servicing Asset Segment Performance
Table 4 below details results in the company's Servicing Asset segment. The segment reported a pre-tax loss of $51.3 million compared with a pre-tax loss of $16.7 million last quarter. The loss was primarily centered in the company's sale of the majority of its mortgage servicing rights as reported earlier in this release. As a result of the sale, the company eliminated significant earnings volatility going forward, and will no longer have the same exposure to impairment and hedge-related losses.
Table 4
SERVICING ASSET
($ in 000s, Unaudited)
2006 2006
3rd Quarter 2nd Quarter Change
---------- ----------- --------
Net interest income $ 395 $ 887 $ (492)
Servicing fees 7,095 9,700 (2,605)
Loss on sale of MSRs (29,702) -- (29,702)
Other income 102 35 67
-------- -------- --------
Total revenue (22,110) 10,622 (32,732)
Amortization of MSRs 6,981 9,890 (2,909)
Subservicing fees paid 2,345 2,409 (64)
Other expenses 543 716 (173)
-------- -------- --------
Total expenses 9,869 13,015 (3,146)
-------- -------- --------
Pre-tax servicing margin (31,979) (2,393) (29,586)
-------- -------- --------
(Loss) on hedges (4,357) (4,764) 407
Impairment (1,474) (9,517) 8,043
Loss on sale of securities (13,461) -- (13,461)
-------- -------- --------
Net hedge results (19,292) (14,281) (5,011)
-------- -------- --------
Pre-tax loss $(51,271) $(16,674) $(34,597)
======== ======== ========
Additional performance drivers behind Servicing Asset segment performance include the following. All comparisons are on a sequential quarter basis unless noted otherwise.
-- The average unpaid balance of the MSRs in our portfolio declined
by 20.3% to $10.2 billion as a result of the MSR sale. Since the
sale closed on the final day of the quarter, the full effect
won't be seen until the fourth quarter.
Regulatory Matters
The board determined earlier in the year that the company needed to alter its business strategy given the losses it was sustaining and directed management to outline the steps necessary to return to profitability and preserve capital. The board ultimately approved these steps once presented and appointed a new CEO to see the initiatives through. The company's new chairman along with the new CEO outlined the initiatives to the OTS in detail upon their appointment in early October. The OTS responded favorably to this effort, and, as part of that discussion, indicated that it would require a more formal framework to further document the company's objectives during this transitional period.
The company's board of directors subsequently entered into a supervisory agreement to proactively address the bank's recent financial performance and the impact that losses have had on the bank's capital position over the past several quarters. The agreement sets forth specific strategies and actions the board will take to improve the bank's performance and to ensure proper practices in critical areas of operation and compliance. The board believes execution of such an agreement is prudent at this stage in the company's development as a sign of its commitment to effective oversight.
Under the agreement, the board has charged management with preparing and executing a written, multi-year business plan designed to 1) remedy the bank's underperforming lines of business; 2) to increase the percentage of core deposits versus brokered funds; and 3) to reduce the level of loan repurchases in the company's indirect mortgage operations. The initiatives management already has underway to exit all businesses that are not essential to the company's banking and conforming mortgage operations form the backbone of the plan. Management is also focused on lowering operational costs and reducing overhead so it can improve the competitiveness of the bank's deposit rates in the marketplace and resume meaningful deposit growth. The company has already begun to orchestrate changes in executive management and is in the process of making additional staffing adjustments to streamline operations and cut costs.
The board will monitor and report to the OTS on the bank's adherence to the business plan. The board also agreed to seek prior approval and to modify the bank's business plan before engaging in any new activity or operation not contemplated in the approved version of the plan.
The agreement went into effect on November 6 and will remain in force until the board and the OTS are satisfied with the bank's progress in resolving the underlying performance issues.
Fourth Quarter Earnings Outlook
The fourth quarter will be another transitional quarter as we make the remaining necessary changes. The current analyst estimates for the company's fourth quarter results range from a loss of $.07 per share to a loss of $.28 per share. Given our current outlook, we are presently biased toward the lower end of the range. There are some risks to the downside, but we fully expect to see marked improvement over third quarter results. We will provide meaningful guidance as we move the through the quarter.
Supplemental Financial Data
The company posts additional financial information directly to its Web site. We publish a report that breaks out quarterly results by line of business within each segment. The data is presented in a five-quarter format where current quarter results are shown alongside results from the most recent four quarters. This report is designed to give interested parties a more granular look at the company's results and to make it easier for them to monitor performance trends.
You can access this material at www.netbankinc.com. Go to the "Investor Relations" area and click on the "Financial Data" link. Within this same area, we post a monthly report that shows key operating statistics for the company's major lines of business. Management also uses this report to update the company's quarterly earnings guidance as needed. The company publishes this report around the 20th of each month and files it simultaneously with the Securities Exchange Commission under Form 8-K.
Conference Call Information
Management has scheduled a conference call to discuss today's reported results with investors, financial analysts and other interested parties. The call will be held today at 10 a.m. EST. Interested parties may dial in or listen via an audiocast on the company's Web site.
Call Title: NetBank, Inc. Earnings Announcement Call Leader: Steven F. Herbert Pass Code: NetBank Domestic: 888-889-1959 International: +1-773-756-0814 One-Week Replay: 800-294-7483 or +1-203-369-3234
About NetBank, Inc.
NetBank, Inc. (Nasdaq:NTBK) is a financial holding company that operates a family of businesses focused primarily on consumer and small business banking as well as conforming mortgage lending. The company's businesses have a shared value proposition of providing consumers in select markets a superior combination of price, service and experience through skilled associates and advanced technology systems. Retail brands include NetBank and Market Street Mortgage. For more information, please visit www.netbankinc.com.
Non-GAAP Financial Measures
This press release contains non-GAAP financial measures within the meaning of Regulation G promulgated by the SEC, including tangible book value and tangible book value per share for the third quarter of 2006. Tangible book value is defined as total shareholders' equity reduced by recorded goodwill and other intangible assets. Tangible book value per share is defined tangible book value divided by total common shares outstanding. These non-GAAP financial measures exclude from total shareholders' equity our recorded goodwill and other intangible assets. Management believes that these non-GAAP financial measures, when considered together with the GAAP financial measures, provide information may be helpful for those investors who seek to evaluate our total stockholders' equity without giving effect to goodwill and other intangible assets. Management also believes that these non-GAAP financial measures enhance the ability of investors to analyze the company's business trends and to better understand the company's financial condition. In addition, the company may utilize non-GAAP financial measures as a guide in its forecasting, budgeting, and long-term planning process and to measure operating performance for some management compensation purposes. Any analysis of non-GAAP financial measures should be used only in conjunction with amounts presented in accordance with GAAP, including total shareholders' equity and goodwill and other intangible assets.
Forward-Looking Statements
Statements in this press release that are not historical facts are forward-looking statements that reflect management's current expectations, assumptions, and estimates of future performance and economic conditions. Such statements are made in reliance upon the safe harbor provisions of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements in this press release include but are not limited to: 1) Projected fourth quarter restructuring actions being completed by the end of the year; 2) The one-time charges related to projected fourth quarter restructuring actions totaling $14 million to $15 million; 3) Worst-case, one-time charges related to possible options being considered for the company's auto business being about $1 million after tax; 4) Tangible book value being positively impacted by any options being considered for company's ATM business; 5) Completion of the company's restructuring plan by the end of the first quarter 2007; 6) The prospect of a significant improvement trend in the company's operating profile going forward; 7) Management's belief that consolidating our indirect, conforming mortgage operations will lead to improved communication and further ensure loan quality.
These forward-looking statements are subject to a number of risks and uncertainties that may cause actual results and future trends to differ materially from those expressed in or implied by such forward-looking statements. The company's consolidated results of operations and such forward-looking statements could be affected by many factors, including but not limited to: 1) the evolving nature of the market for internet banking and financial services generally; 2) the public's perception of the internet as a secure, reliable channel for transactions; 3) the success of new products and lines of business considered critical to the company's long-term strategy, such as small business banking and transaction processing services; 4) potential difficulties in integrating the company's operations across its multiple lines of business; 5) the cyclical nature of the mortgage banking industry generally; 6) a possible decline in asset quality; 7) changes in general economic or operating conditions that could adversely affect mortgage loan production and sales, mortgage servicing rights, loan delinquency rates and/or loan defaults; 8) the possible adverse effects of unexpected changes in the interest rate environment; 9) adverse legal rulings, particularly in the company's litigation over leases originated by Commercial Money Center, Inc.; and 10) increased competition and regulatory changes.
Further information relating to these and other factors that may impact the company's results of operations and such forward-looking statements are disclosed in the company's filings with the SEC, including under the caption "Item 1A. Risks Factors" in its Annual Report on Form 10-K for the year ended December 31, 2005 and Quarterly Reports on Form 10-Q for the quarters ended June 30, 2006 and September 30, 2006. Except as required by the securities laws, the company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Reconciliation of Non-GAAP Financial Measures
($ in 000s, Unaudited)
September 30, June 30,
2006 2006
-------- --------
Shareholders' equity $290,598 $346,799
Goodwill and intangibles 53,849 77,778
-------- --------
Tangible equity $236,749 $269,021
Outstanding shares 46,397 46,360
-------- --------
Tangible book value $ 5.10 $ 5.80
======== ========
NetBank, Inc.
Consolidated Statements of Operations
For the nine months ended September 30,
(Unaudited and in 000's except per share data)
2006
------------------------------------------------------
Other/
Retail Financial Transaction Servicing Corporate
banking intermediary processing Asset overhead
--------------------------------------------------------------------
Interest income:
Loans and
leases $90,106 $73,840 $ 27 $ -- $ 470
Investment
securities 22,623 5 -- -- --
Short-term
investments 680 529 -- -- --
Inter-segment 69,850 182 -- 8,312 (78,344)
--------------------------------------------------------------------
Total interest
income 183,259 74,556 27 8,312 (77,874)
Interest
expense:
Deposits 69,567 -- -- -- --
Other borrowed
funds 41,055 2,797 -- 155 1,978
Inter-segment 16,487 55,483 284 6,549 (78,803)
--------------------------------------------------------------------
Total interest
expense 127,109 58,280 284 6,704 (76,825)
--------------------------------------------------------------------
Net interest
income 56,150 16,276 (257) 1,608 (1,049)
Provision for
credit losses 6,381 102 -- -- --
--------------------------------------------------------------------
Net interest
income after
provision for
credit losses 49,769 16,174 (257) 1,608 (1,049)
Non-interest
income:
Mortgage
servicing fees 10 2,125 3,965 27,396 --
Amortization
of MSRs -- (94) -- (27,418) --
(Impairment)
recovery of
MSRs -- -- -- (7,380) --
Losses on
derivatives -- -- -- (15,819) --
(Loss) gain on
sales of
investment
securities -- -- -- (13,461) --
Service charges
and fees 8,890 -- 6,430 -- --
Gain on sales
of loans 276 40,966 -- -- (409)
Loss on sales
of MSRs -- (394) -- (29,702) --
Other income 3,307 1,686 1,455 165 (652)
Intersegment
servicing/
processing
fees -- -- 9,343 -- (9,343)
--------------------------------------------------------------------
Total
non-interest
income 12,483 44,289 21,193 (66,219) (10,404)
Non-interest
expense:
Salaries and
benefits 14,985 52,742 7,370 -- 21,363
Customer
service 8,169 8 256 -- 113
Marketing
costs 4,281 4,641 232 -- 381
Data processing 8,233 2,030 1,607 -- 2,083
Depreciation
and
amortization 5,212 7,319 2,865 -- 2,182
Office
expenses 6,671 4,813 1,381 -- (642)
Occupancy 3,213 11,802 749 -- 5,048
Travel and
entertainment 603 2,134 283 -- 657
Professional
fees 1,888 3,211 1,124 -- 3,547
Prepaid lost
interest from
curtailments -- 18 -- 1,836 --
Impairment of
goodwill -- 25,863 3,682 -- --
Other 7,897 10,584 1,635 46 (9,697)
Inter-segment
servicing/
processing
fees 350 1,736 -- 7,257 (9,343)
--------------------------------------------------------------------
Total non-
interest
expense 61,502 126,901 21,184 9,139 15,692
--------------------------------------------------------------------
Loss before
income taxes $ 750 $ (66,438) $ (248) $ (73,750) $(27,145)
====================================================================
2006 2005
------------ ------------
Consolidated Consolidated
NetBank, Inc. NetBank, Inc.
------------------------------------------------ ------------
Interest income:
Loans and leases $ 164,443 $ 159,051
Investment securities 22,628 26,169
Short-term investments 1,209 1,557
Inter-segment -- --
--------------------------------------------- ---------
Total interest income 188,280 186,777
Interest expense:
Deposits 69,567 48,992
Other borrowed funds 45,985 45,836
Inter-segment -- --
--------------------------------------------- ---------
Total interest expense 115,552 94,828
--------------------------------------------- ---------
Net interest income 72,728 91,949
Provision for credit losses 6,483 7,389
--------------------------------------------- ---------
Net interest income after provision
for credit losses 66,245 84,560
Non-interest income:
Mortgage servicing fees 33,496 38,746
Amortization of MSRs (27,512) (34,873)
(Impairment) recovery of MSRs (7,380) 3,224
Losses on derivatives (15,819) (149)
(Loss) gain on sales of investment
securities (13,461) 4,182
Service charges and fees 15,320 15,139
Gain on sales of loans 40,833 83,270
Loss on sales of MSRs (30,096) (448)
Other income 5,961 7,759
Intersegment servicing/processing fees -- --
--------------------------------------------- ---------
Total non-interest income 1,342 116,850
Non-interest expense:
Salaries and benefits 96,460 92,649
Customer service 8,546 10,116
Marketing costs 9,535 9,697
Data processing 13,953 13,105
Depreciation and amortization 17,578 17,693
Office expenses 12,223 9,422
Occupancy 20,812 18,411
Travel and entertainment 3,677 4,223
Professional fees 9,770 13,276
Prepaid lost interest from
curtailments 1,854 3,345
Impairment of goodwill 29,545 --
Other 10,465 10,756
Inter-segment servicing/processing
fees -- --
--------------------------------------------- ---------
Total non-interest expense 234,418 202,693
--------------------------------------------- ---------
Loss before income taxes (166,831) (1,283)
Income tax benefit 51,163 208
--------- ---------
Net loss $(115,668) $ (1,075)
========= =========
Net loss per common and potential
common shares outstanding:
Basic $ (2.50) $ (0.02)
Diluted $ (2.50) $ (0.02)
Weighted average common and potential
common shares outstanding:
Basic 46,316 46,201
Diluted 46,316 46,201
NetBank, Inc.
Consolidated Statements of Operations
For the three months ended September 30,
(Unaudited and in 000's except per share data)
2006
------------------------------------------------------
Other/
Retail Financial Transaction Servicing Corporate
banking intermediary processing Asset overhead
--------------------------------------------------------------------
Interest income:
Loans and
leases $28,384 $23,556 $ 13 $ -- $ 217
Investment
securities 6,119 2 -- -- --
Short-term
investments 173 187 -- -- --
Inter-segment 23,584 71 -- 2,875 (26,530)
--------------------------------------------------------------------
Total interest
income 58,260 23,816 13 2,875 (26,313)
Interest
expense:
Deposits 24,554 -- -- -- --
Other borrowed
funds 11,030 1,235 -- 61 698
Inter-segment 5,801 18,318 94 2,419 (26,632)
--------------------------------------------------------------------
Total interest
expense 41,385 19,553 94 2,480 (25,934)
--------------------------------------------------------------------
Net interest
income 16,875 4,263 (81) 395 (379)
Provision for
credit losses 2,410 (3) -- -- --
--------------------------------------------------------------------
Net interest
income after
provision for
credit losses 14,465 4,266 (81) 395 (379)
Non-interest
income:
Mortgage
servicing fees 4 587 1,296 7,095 --
Amortization
of MSRs -- (80) -- (6,981) --
(Impairment)
recovery of
MSRs -- -- -- (1,474) --
(Loss) gain on
derivatives -- -- -- (4,357) --
Loss on sales
of investment
securities -- -- -- (13,461) --
Service charges
and fees 3,256 1 2,267 -- --
(Loss) gain on
sales of loans (32) 5,276 -- -- (54)
Loss on sales
of MSRs -- (95) -- (29,702) --
Other income 1,168 526 403 102 (342)
Intersegment
servicing/
processing
fees -- -- 2,867 -- (2,867)
--------------------------------------------------------------------
Total non-
interest
income 4,396 6,215 6,833 (48,778) (3,263)
Non-interest
expense:
Salaries and
benefits 4,839 14,827 2,190 -- 5,922
Customer
service 2,517 8 111 -- 38
Marketing
costs 1,206 1,076 85 -- 84
Data processing 2,976 606 488 -- 646
Depreciation
and
amortization 1,725 2,426 961 -- 784
Office
expenses 2,913 1,378 422 -- (193)
Occupancy 989 4,154 218 -- 1,659
Travel and
entertainment 155 579 65 -- 199
Professional
fees 550 965 312 -- 1,194
Prepaid lost
interest from
curtailments -- 8 -- 529 --
Impairment of
goodwill -- 19,505 3,682 -- --
Other 2,603 4,077 595 14 (3,943)
Inter-segment
servicing/
processing
fees 111 411 -- 2,345 (2,867)
--------------------------------------------------------------------
Total non-
interest
expense 20,584 50,020 9,129 2,888 3,523
--------------------------------------------------------------------
Loss before
income taxes $(1,723) $(39,539) $ (2,377) $(51,271) $(7,165)
====================================================================
2006 2005
---------- ----------
Consolidated Consolidated
NetBank, Inc. NetBank, Inc.
----------------------------------------------------- -------------
Interest income:
Loans and leases $ 52,170 $58,092
Investment securities 6,121 8,502
Short-term investments 360 662
Inter-segment -- --
----------------------------------------------------- -------------
Total interest income 58,651 67,256
Interest expense:
Deposits 24,554 20,178
Other borrowed funds 13,024 16,848
Inter-segment -- --
----------------------------------------------------- -------------
Total interest expense 37,578 37,026
----------------------------------------------------- -------------
Net interest income 21,073 30,230
Provision for credit losses 2,407 2,708
----------------------------------------------------- -------------
Net interest income after provision
for credit losses 18,666 27,522
Non-interest income:
Mortgage servicing fees 8,982 13,292
Amortization of MSRs (7,061) (12,729)
(Impairment) recovery of MSRs (1,474) 4,244
(Loss) gain on derivatives (4,357) 795
Loss on sales of investment
securities (13,461) --
Service charges and fees 5,524 5,296
(Loss) gain on sales of loans 5,190 28,308
Loss on sales of MSRs (29,797) (238)
Other income 1,857 2,180
Intersegment servicing/processing fees -- --
----------------------------------------------------- -------------
Total non-interest income (34,597) 41,148
Non-interest expense:
Salaries and benefits 27,778 30,832
Customer service 2,674 3,596
Marketing costs 2,451 4,476
Data processing 4,716 4,318
Depreciation and amortization 5,896 6,080
Office expenses 4,520 3,600
Occupancy 7,020 6,558
Travel and entertainment 998 1,583
Professional fees 3,021 4,471
Prepaid lost interest from
curtailments 537 1,262
Impairment of goodwill 23,187 --
Other 3,346 3,924
Inter-segment servicing/processing fees -- --
----------------------------------------------------- -------------
Total non-interest expense 86,144 70,700
----------------------------------------------------- -------------
Loss before income taxes (102,075) (2,030)
Income tax benefit 28,794 659
----------------------------------------------------- -------------
Net loss $(73,281) $(1,371)
===================================================== =============
Net loss per common and potential
common shares outstanding:
Basic $(1.58) $(0.03)
Diluted $(1.58) $(0.03)
Weighted average common and potential
common shares outstanding:
Basic 46,362 46,119
Diluted 46,362 46,119
NetBank, Inc.
Condensed Consolidated Balance Sheet
(Unaudited and in 000's)
September 30, June 30, September 30,
2006 2006 2005
-------------------------------------
Assets
Cash and cash equivalents:
Cash and due from banks $ 347,980 $ 72,807 $189,930
Cash equivalents and fed funds 21,995 22,948 112,390
-------------------------------------
Total cash, cash equivalents and
fed funds 369,975 95,755 302,320
Investment securities available
for sale-at fair value 252,546 574,590 681,420
Stock of Federal Home Loan Bank
of Atlanta-at cost 36,507 46,002 69,952
Loans held for sale 946,475 972,004 1,459,717
Loan and lease receivables-net
of allowance for losses 1,910,770 2,011,325 2,145,023
Mortgage servicing rights - net 39,076 203,406 193,798
Accrued interest receivable 16,555 16,416 16,113
Furniture, equipment and
capitalized software - net 48,261 51,644 49,004
Goodwill and other intangibles -
net 53,849 77,778 81,131
Due from servicers and investors 113,624 15,641 26,837
Other assets 61,770 77,444 89,998
-------------------------------------
Total assets $3,849,408 $4,142,005 $5,115,313
=====================================
Liabilities
Deposits $2,728,316 $2,721,937 $3,007,143
Other borrowed funds 654,033 867,619 1,444,018
Subordinated debt 32,477 32,477 32,477
Accrued interest payable 24,049 21,223 16,684
Loans in process 31,843 41,153 59,122
Representations and warranties 21,550 21,688 21,275
Accounts payable and accrued
liabilities 65,633 88,471 132,250
-------------------------------------
Total liabilities 3,557,901 3,794,568 4,712,969
-------------------------------------
Minority interests in affiliates 909 638 561
Shareholders' equity
Preferred stock, no par -- -- --
Common stock, $.01 par 528 528 528
Additional paid-in capital 434,303 433,809 432,202
Retained (deficit) earnings (78,661) (5,282) 39,180
Accumulated other comprehensive
loss, net of tax (3,310) (19,673) (6,092)
Treasury stock, at cost (62,262) (62,583) (62,628)
Unearned compensation -- -- (1,407)
-------------------------------------
Total shareholders' equity 290,598 346,799 401,783
-------------------------------------
Total liabilities, minority
interests and shareholders'
equity $3,849,408 $4,142,005 $5,115,313
=====================================
NetBank, Inc. Consolidated
Selected Financial and Operating Data
(Unaudited and in 000's except per share data)
Quarter Ended
---------------------------------------
September 30, June 30, September 30,
------------- -------- -------------
2006 2006 2005
------------- -------- -------------
Consolidated:
Net loss $ (73,281) $ (31,436) $ (1,371)
Total assets $ 3,849,408 $ 4,142,005 $5,115,313
Total equity $ 290,598 $ 346,799 $ 401,783
Shares outstanding 46,397 46,360 46,358
Return on average equity (86.00%) (34.39%) (1.35%)
Return on average assets (7.06%) (2.79%) (0.11%)
Book value per share $ 6.26 $ 7.48 $ 8.67
Tangible book value per share $ 5.10 $ 5.80 $ 6.92
NetBank, FSB:
Deposits $ 2,734,080 $ 2,726,334 $3,007,928
Customers 268,769 275,632 282,575
Estimated Capital Ratios:
Tier 1 core capital ratio 6.38% 6.77% 6.09%
Total risk-based capital ratio 10.13% 10.79% 10.21%
Asset quality numbers:
CMC Lease portfolio $ 25,505 $ 25,615 $ 26,435
Non-performing loan and lease
receivables 7,300 6,227 6,481
----------- ----------- -----------
Total non-performing loan and
lease receivables 32,805 31,842 32,916
Non-performing loans held for
sale(a) 50,418 32,896 27,432
----------- ----------- -----------
Total non-performing loans
and leases 83,223 64,738 60,348
Repossessed assets(b) 13,357 10,528 7,963
----------- ----------- -----------
Total non-performing assets $ 96,580 $ 75,266 $ 68,311
Allowance for credit losses
(ALLL) $ 26,477 $ 27,371 $ 26,730
Net charge-offs of loan and
lease receivables $ (3,301) $ (3,004) $ (1,770)
Asset quality ratios:
Total non-performing assets /
average assets 2.33% 1.67% 1.35%
ALLL / total non-performing
loan and lease receivables 80.71% 85.96% 81.21%
Net annualized charge-offs /
total assets 0.34% 0.29% 0.14%
Mortgage Banking:
Production Activity:
Retail $ 779,963 $ 975,201 $1,089,137
Correspondent 833,138 703,166 1,025,626
Wholesale 392,350 401,107 692,828
RMS 21,487 24,360 74,180
----------- ----------- -----------
Total Agency-eligible 2,026,938 2,103,834 2,881,771
Non-conforming 412,716 478,893 883,210
----------- ----------- -----------
Total $ 2,439,654 $ 2,582,727 $3,764,981
=========== =========== ===========
Sales Activity:
Third party sales $ 2,419,711 $ 2,494,743 $3,631,112
Intercompany sales 8,180 -- 57,290
----------- ----------- -----------
Total sales $ 2,427,891 $ 2,494,743 $3,688,402
=========== =========== ===========
Pipeline:
Locked conforming mortgage
loan pipeline $ 610,853 $ 962,059 $ 1,053,315
UPB of loans serviced: $14,960,710 $15,465,530 $18,470,922
(a) Held for sale assets are carried at the lower of cost or market
(LOCOM). LOCOM adjustments, under GAAP, are direct reductions
of the assets' carrying values and are not considered
allowances.
(b) Repossessed assets are carried at net realizable value.