ATLANTA, Aug. 8, 2006 (PRIMEZONE) -- NetBank, Inc. (Nasdaq:NTBK), a diversified financial services provider and parent company of NetBank(r) (www.netbank.com), today reported financial results for the quarter ended June 30, 2006. The company recorded an after-tax loss of $31.4 million or $.68 per share for the period, compared with after-tax income of $2.3 million or $.05 per share during the same quarter a year ago. On a year-to-date basis, the company recorded an after-tax loss of $42.4 million or $.92 per share, versus after-tax income of $296,000 or $.01 per share during the first half of 2005.
As seen in the 2006 year-to-date results above, second quarter performance worsened from an after-tax loss of $.24 per share in the first quarter. Current quarter results include a number of charges. These items and other drivers behind the change in performance from last quarter to this quarter appear below. All comparisons are on a sequential quarter basis unless noted otherwise. Many of these drivers are addressed in greater detail later in this release.
-- Further Reduction in Earning Assets. Average earning assets declined by $285 million to $4.3 billion as management continued to moderate asset growth to maintain its internal targets for risk-based capital ratios. -- Less Mortgage Activity. Mortgage originations and sales softened during the quarter based on origination trends in general as well as the company's decision during the quarter to cut capacity and emphasize a more limited set of products in its non-conforming operation. Conforming and non-conforming production totaled $2.6 billion, a decrease of $233 million. Following the decline in production, sales eased by $400 million to $2.5 billion. -- Heightened Mortgage Repurchase Activity. Our indirect conforming and non-conforming mortgage operations experienced markedly higher repurchase requests on loans previously delivered to investors. Provision expense within our Financial Intermediary segment totaled $20.3 million this quarter, an increase of $13.2 million from last quarter. -- Negative Net Servicing Results. Net servicing losses steepened from $5.8 million, pre-tax, a quarter ago to $16.7 million, pre-tax, this quarter. This quarter's results include a $15.0 million pre-tax charge to the carrying value of the company's portfolio of mortgage servicing rights ("MSRs") that the company is actively marketing for sale. Management recorded the impairment charge based on market data it has gathered during the sales process. The adjustment brings our valuation into closer alignment with the valuation estimates observed in the third-party marketing data. -- Goodwill Impairment. Management wrote off goodwill on the company's recreational vehicle, boat and aircraft lending business following the second quarter, which tends to be the operation's busiest season. Production and performance within the channel remained below historical results and our internal projections. The business continues to be adversely impacted by rising fuel costs and slower boat sales following the severe hurricane season of 2005. We concluded that the existing level of goodwill no longer accurately reflected the value of the operation's brand and other market intangibles in today's more challenging environment and that a pre-tax impairment to goodwill of $6.4 million was warranted.
The company's board of directors did not declare a dividend. In serving shareholder interests, the board felt it was more prudent to protect the company's capital base and tangible book value from further erosion than to support a dividend at this time. The board continues to view dividends as an attractive way to distribute shareholder wealth and create additional value. It intends to consider returning a dividend when current earnings pressures abate and meaningful profitability is restored.
Management Commentary
"Quarterly results remain unacceptable," said Douglas K. Freeman, chairman and chief executive officer. "The company's performance continues to be adversely impacted by the flat yield curve and relentless pricing and operating pressures we and other institutions are experiencing on the mortgage side of our businesses. In light of these conditions, our number one priority is to protect shareholder equity to the extent possible without sacrificing the components of our franchise that have the greatest long-term value.
"We announced previously that we were evaluating our various lines of business from a risk-adjusted return on capital standpoint so we can redirect resources in a disciplined, strategic way. As part of this effort, we have made staffing reductions in underperforming areas. We are also pursuing a sale of our mortgage servicing platform and portfolio of mortgage servicing rights. This process is ongoing, and we remain optimistic in our ability to get a deal done to free up capital currently allocated to this asset.
"Our efforts do not end there," Freeman continued. "We made a number of changes in our non-conforming operation during the quarter. We moved our focus to a set of products that tend to carry better margins and less repurchase risk. This change allowed us to cut staffing by approximately 16%. We are also evaluating other opportunities for this business since we are increasingly concerned that the non-conforming environment will remain under duress for a protracted period. Other institutions announced similar concerns along with their intent to explore alternatives for their non-conforming operations.
"We are also addressing performance within our recreational vehicle, boat and aircraft lending operation. We recently reorganized the business under our auto lending unit. This integration will allow us to deliver more effectively on the synergy that exists between these businesses and drive improved sales volumes. We still believe in its long-term earnings potential as well as the cross-sell opportunities that exist given the similarities between the underlying borrowers and our online banking customers.
"Execution of these initiatives will move us back toward profitability and keep us well positioned to build on the momentum we have seen elsewhere in our company," Freeman concluded. "We have built a profitable bank with a highly attractive deposit and customer base. Our retail mortgage business, Market Street Mortgage, has maintained consistent profitability and grown its market share. Our deposit and payment forwarding service, QuickPost(sm), is also meeting with wide market interest and acceptance. These businesses represent tremendous, hidden value in our organization today, and we continue to believe that they will serve as the key to significant shareholder return over time."
Retail Banking Segment Performance
Table 1 below details results in the company's Retail Banking segment. Pre-tax income for the segment totaled $788,000, a decrease of $897,000 from last quarter. Interest income remained under pressure during the quarter, but the majority of the decline relates to increased variable expense with QuickPost. QuickPost and related initiatives had a $3.2 million negative effect on the banking segment's bottom line. Exclusive of these initiatives, the segment's overall expense ratio remained relatively flat at 160 basis points ("bps").
QuickPost was initially developed for and rolled out to our bank customers. Management has stated previously that we intend to break out the operation as a channel and move it into our Transaction Processing segment. We have routinely reviewed our financial reporting methodology at the beginning of each year to make refinements or enhancements. We plan to do so again in 2007 and will consider separate reporting for QuickPost at that time. We have added a line item for QuickPost and related initiatives to the Retail Banking table below as well as to corresponding schedules in the financial supplement on our Web site. This additional transparency should provide investors a better understanding of pure banking performance.
Quarterly expenses associated with QuickPost are likely to level off in the coming quarters. These costs are largely driven by the number of UPS Stores sending packages on a daily basis. Approximately two-thirds of the 4,100 stores in the network generate packages right now on a given day. This penetration rate may increase, but it is unlikely to ever run at 100%. Management is now focused on driving greater revenue in its effort to move the operation toward profitability. Revenue is tied to the number of third-party deposits or payments included in the packages since the company receives a fee for processing those items. The more third-party items in the package, the higher the revenue.
Average earning assets within the banking segment declined by $285 million during the quarter due to lower mortgage production and a sale of home equity loans. Management elected to sell $104 million in home equity loans held by the bank as part of its overall capital management strategy. Home equity loans are included in the 100% risk weighted category in terms of risk-based capital calculations. The sale generated $308,000 in revenue and a $1.9 million reversal in provision expense.
Table 1 RETAIL BANKING ($ in 000s, Unaudited) 2006 2006 2nd Quarter 1st Quarter Change ------------- ------------- ------------ Net interest income $ 18,306 $ 20,969 $ (2,663) Provision for credit losses 972 2,999 (2,027) ------------- ------------- ------------ Net interest income after provision 17,334 17,970 (636) Gain on sales of loans 308 - 308 Fees, charges and other income 3,650 3,372 278 ------------- ------------- ------------ Total banking revenues 21,292 21,342 (50) Total banking expenses 17,310 17,770 (460) ------------- ------------- ------------ Pre-tax banking operations 3,982 3,572 410 Net QuickPost, PowerPost & NetServ Results (3,194) (1,887) (1,307) ------------- ------------- ------------ Pre-tax income 788 1,685 (897) ============= ============= ============ Average earning assets $ 4,324,185 $ 4,609,654 $ (285,469) QuickPost transactions 238,674 72,302 166,372 Banking operations to average earning assets Net interest income after provision 1.60% 1.56% 0.04% Gain on sales, fees, charges and other income 0.37% 0.29% 0.08% ------------- ------------- ------------ Banking revenues 1.97% 1.85% 0.12% Banking expenses 1.60% 1.54% 0.06% ------------- ------------- ------------ Pre-tax banking income 0.37% 0.31% 0.06% ============= ============= ============
Additional performance drivers behind Retail Banking segment performance include the following. All comparisons are on a sequential quarter basis unless noted otherwise.
-- Deposits decreased by $101 million or 3.6%. The decline in deposits was basically split between a drop in retail deposits and escrow funds within our mortgage servicing operation. The marketplace for retail deposits remains hyper competitive. Management is somewhat impeded in its ability to compete aggressively for deposits given the company's current earnings pressure and need to balance the benefits of higher marketing costs with reduced operating expenses. -- Our business finance operation contributed pre-tax earnings of $3.3 million, an increase of $230,000 or 7.0%. Its production rose by $7.2 million or 14.0% to $58.5 million. -- Our auto lending business continues to show marked improvement in its profitability. Its pre-tax earnings increased from $54,000 to $229,000.
Financial Intermediary Segment Performance
Table 2 below details results in the company's Financial Intermediary segment. The segment reported a pre-tax loss of $22.9 million this quarter compared with a loss of $4.0 million last quarter. The difference in quarter-over-quarter performance relates primarily to the heightened repurchase activity mentioned above. We experienced a significant increase in repurchase demands within both our conforming and non-conforming channels. As a result of the larger-than-anticipated volume, provision expense for the quarter totaled $20.3 million, an increase of $13.2 million over last quarter.
Provision expense is taken as a direct deduction from gain on sale income. The segment's revenue margin fell to 42 bps, a decline of 64 bps from a quarter ago. The heightened provision cost accounted for most of the decrease. The segment's operating expense ratio crept up slightly, but the increase was a function of the decline in overall production. In terms of absolute dollars, expenses within the segment came down by more than $1.4 million.
We believe the increased frequency of repurchase demands is indicative of a larger trend where investors are being more assertive in returning delinquent or problematic loans. We constantly analyze the main reasons behind repurchase demands to improve internal processes and protocols to ensure we meet the required underwriting and documentation standards.
Table 2 FINANCIAL INTERMEDIARY ($ in 000s, Unaudited) 2006 2006 2nd Quarter 1st Quarter Change ----------- ----------- --------- Net interest income $ 4,781 $ 6,693 $ (1,912) Gain on sales of loans 10,434 22,890 (12,456) Other income 895 524 371 Net Beacon Credit Services results (6,332) (286) (6,046) Net MG Reinsurance results 597 881 (284) ----------- ----------- --------- Total revenues 10,375 30,702 (20,327) Salary and employee benefits 18,022 18,294 (272) Occupancy and depreciation expense 6,108 6,235 (127) Other expenses 9,145 10,172 (1,027) ----------- ----------- -------- Total expenses 33,275 34,701 (1,426) ----------- ----------- --------- Pre-tax loss $ (22,900) $ (3,999) $ (18,901) ============ =========== ========== Production 2,582,727 2,815,262 $ (232,535) Sales (includes inter- company sales) 2,494,743 2,894,307 $ (399,564) Total revenues to sales 0.42% 1.06% (0.64%) Total expenses to production 1.29% 1.23% 0.06% ----------- ----------- --------- Pre-tax margin (0.87%) (0.17%) (0.70%) ============ ============ ===========
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 $2.1 billion, a decrease of 4.8%. Conforming sales declined by 11.0% to $2.0 billion. Although pricing pressures within the channel remain pronounced, management has made progress in its effort to streamline the operation's capital markets execution and to further diversify its production into alternate loan products. Without the heightened provision expense, conforming performance would have been near breakeven this quarter. -- Non-conforming production fell by 20.9% to $479 million as management narrowed the focus of the operation and reduced capacity accordingly. Non-conforming sales fell in turn to $538 million, a decrease of 22.7%.
Transaction Processing Segment Performance
Table 3 below details results in the company's Transaction Processing segment. Pre-tax income totaled $631,000, a decrease of $867,000 from last quarter. The decline in income is centered primarily in the company's ATM and merchant processing operation. This business recorded a pre-tax loss of $640,000 for the quarter based on charge-offs relating to past due receivables and revenue accruals.
Table 3 TRANSACTION PROCESSING ($ in 000s, Unaudited) 2006 2006 2nd Quarter 1st Quarter Change ----------- ----------- ------------ Total revenue $ 5,173 $ 6,225 $ (1,052) Total expenses 4,542 4,727 (185) ---------- ----------- ------------ Pre-tax income $ 631 $ 1,498 $ (867) ========== =========== ============
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 declined by 8.7% to 8,750 machines. The ATMs that dropped from the network were inactive locations. The total number of ATM transactions processed during the quarter actually rose by 6.9% to 7.6 million. -- Our number of merchant processing terminals in deployment slipped by 6.4% to 2,180. The volume of transactions cleared through these terminals was off by 2.8% to $46.5 million. Management remains committed to growing this line of business and believes it can reverse the current trend through its ongoing sales effort.
Servicing Asset Segment Performance
Table 4 below details results in the company's Servicing Asset segment. The segment reported a pre-tax loss of $16.7 million compared with a pre-tax loss of $5.8 million last quarter. Current quarter results include a $15.0 million impairment charge to the carrying value of the company's portfolio of MSRs. Management announced a plan to pursue a sale of this asset last quarter as part of its ongoing capital management program. A sale could enable us to free up some of the capital currently allocated to the asset and use it to fund additional growth at the bank or in other parts of our business.
We noted in our initial discussion of the proposed sale that the carrying value of our servicing asset might be plus or minus 10% of market averages. Marketing ranges, bids and other data we have gathered thus far in the sales process suggested that our valuation was high relative to current market conditions. We elected to adjust our valuation to bring it into closer alignment with the midpoint we observed in the data.
The sales process is ongoing. Based on our efforts to date and feedback from various market participants, we remain optimistic on our ability to execute a deal at a satisfactory price.
Table 4 SERVICING ASSET ($ in 000s, Unaudited) 2006 2006 2nd Quarter 1st Quarter Change ------------ ------------ ----------- Net interest income $ 887 $ 326 $ 561 Servicing fees 9,700 10,601 (901) Other income 35 28 7 ------------ ------------ ----------- Total revenue 10,622 10,955 (333) Amortization of MSRs 9,890 10,547 (657) Subservicing fees paid 2,409 2,503 (94) Other expenses 716 623 93 ------------ ------------ ----------- Total expenses 13,015 13,673 (658) ------------ ------------ ----------- Pre-tax servicing margin (2,393) (2,718) 325 ------------ ------------ ----------- Loss on hedges (4,764) (6,698) 1,934 (Impairment) recovery (9,517) 3,611 (13,128) ------------ ------------ ----------- Net hedge results (14,281) (3,087) (11,194) ------------ ------------ ----------- Net pre-tax loss $ (16,674) $ (5,805) $ (10,869) ============ ============ ===========
Additional performance drivers behind Servicing Asset segment performance include the following. All comparisons are on a sequential quarter basis unless noted otherwise.
-- The unpaid balance of the MSRs in our portfolio continues to decline as underlying mortgages prepay. The balance currently averages $12.8 billion, a decrease of $373 million or 2.8%.
Third Quarter Earnings Outlook
Short-term earnings remain under pressure due to the flat yield curve, competitive operating pressures within our mortgage channels and other market factors discussed earlier in this release. Management is executing a series of initiatives to blunt the impact of these adverse conditions as much as possible. However, the full benefit of these initiatives will likely take several quarters to materialize. The risk for an additional loss in the third quarter therefore exists.
The current analyst estimates for the company's third quarter results range from income of $.01 per share to a loss of $.16 per share. Given the outlook above, we are presently biased toward the bottom of the range. Continued operating pressures within our mortgage businesses and the potential for significant negative net servicing results remain as risks that could drive performance below our current expectations.
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. EDT. Interested parties may dial in or listen via an audiocast on the company's Web site.
Call Title: NetBank, Inc. Earnings Announcement Call Leader: Douglas K. Freeman Passcode: NetBank Toll-Free: (888) 889-1959 International: +1-773-756-0455 One-Week Replay: (888) 393-9638 or (203) 369-3143
About NetBank, Inc.
NetBank, Inc. (Nasdaq:NTBK) operates a diverse group of complementary financial services businesses that leverage technology for more efficient and cost-effective delivery of services. Its primary areas of operation include personal and small business banking, retail and wholesale mortgage lending, and transaction processing. For more information, please visit www.netbankinc.com.
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) The prospects for better sales performance out of the recreational vehicle, boat and aircraft lending business after it is integrated into the auto lending unit; 2) Execution of management's various strategic initiatives helping the company curb losses and restore profitability; 3) Management's ability to achieve a favorable sale of the servicing platform and/or servicing asset; and 4) Sales efforts generating a significant number of new ATM and/or merchant processing relationships.
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. 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.
NetBank, Inc. Consolidated Statements of Operations For the six months ended June 30, (Unaudited and in 000's except per share data) 2006 ----------------------------------------- Financial Trans- Retail inter- action Servicing banking mediary processing Asset --------------------------------------------------------------------- Interest income: Loans and leases $ 61,722 $ 50,284 $ 14 $ -- Investment securities 16,504 3 -- -- Short-term investments 507 342 -- -- Inter-segment 46,266 111 -- 5,437 --------------------------------------------------------------------- Total interest income 124,999 50,740 14 5,437 Interest expense: Deposits 45,013 -- -- -- Other borrowed funds 30,025 1,562 -- 94 Inter-segment 10,686 37,165 190 4,130 --------------------------------------------------------------------- Total interest expense 85,724 38,727 190 4,224 --------------------------------------------------------------------- Net interest income 39,275 12,013 (176) 1,213 Provision for credit losses 3,971 105 -- -- --------------------------------------------------------------------- Net interest income after provision for credit losses 35,304 11,908 (176) 1,213 Non-interest income: Mortgage servicing fees 6 1,538 2,669 20,301 Amortization of MSRs -- (14) -- (20,437) Recovery (impairment) of MSRs -- -- -- (5,906) (Loss) gain on derivatives -- -- -- (11,462) Gain on sales of investment securities -- -- -- -- Service charges and fees 5,634 (1) 4,163 -- Gain on sales of loans and MSRs 308 35,391 -- -- Other income 2,139 1,160 1,052 63 Intersegment servicing/ processing fees -- -- 6,476 -- --------------------------------------------------------------------- Total non-interest income 8,087 38,074 14,360 (17,441) Non-interest expense: Salaries and benefits 10,146 37,915 5,180 -- Customer service 5,652 -- 145 -- Marketing costs 3,075 3,565 147 -- Data processing 5,257 1,424 1,119 -- Depreciation and amortization 3,487 4,893 1,904 -- Office expenses 3,758 3,435 959 -- Occupancy 2,224 7,648 531 -- Travel and entertainment 448 1,555 218 -- Professional fees 1,338 2,246 812 -- Prepaid lost interest from curtailments -- 10 -- 1,307 Impairment of goodwill -- 6,358 -- -- Other 5,294 6,507 1,040 32 Inter-segment servicing/ processing fees 239 1,325 -- 4,912 --------------------------------------------------------------------- Total non-interest expense 40,918 76,881 12,055 6,251 --------------------------------------------------------------------- (Loss) income before income taxes $ 2,473 $(26,899) $ 2,129 $(22,479) ====================================== 2006 2005 -------------------------- ------------ Other/ Corporate Consolidated Consolidated overhead NetBank, Inc. NetBank, Inc. ------------------------------------------------------ ------------ Interest income: Loans and leases $ 253 $ 112,273 $ 100,959 Investment securities - 16,507 17,667 Short-term investments - 849 895 Inter-segment (51,814) -- -- ------------------------------------------------------ ------------ Total interest income (51,561) 129,629 119,521 Interest expense: Deposits -- 45,013 28,814 Other borrowed funds 1,280 32,961 28,988 Inter-segment (52,171) -- -- ------------------------------------------------------ ------------ Total interest expense (50,891) 77,974 57,802 ------------------------------------------------------ ------------ Net interest income (670) 51,655 61,719 Provision for credit losses -- 4,076 4,681 ------------------------------------------------------ ------------ Net interest income after provision for credit losses (670) 47,579 57,038 Non-interest income: Mortgage servicing fees -- 24,514 25,454 Amortization of MSRs -- (20,451) (22,144) Recovery (impairment) of MSRs -- (5,906) (1,020) (Loss) gain on derivatives -- (11,462) (944) Gain on sales of investment securities -- -- 4,182 Service charges and fees -- 9,796 9,843 Gain on sales of loans and MSRs (355) 35,344 54,752 Other income (310) 4,104 5,579 Intersegment servicing/ processing fees (6,476) -- -- ------------------------------------------------------ ------------ Total non-interest income (7,141) 35,939 75,702 Non-interest expense: Salaries and benefits 15,441 68,682 61,817 Customer service 75 5,872 6,520 Marketing costs 297 7,084 5,221 Data processing 1,437 9,237 8,787 Depreciation and amortization 1,398 11,682 11,613 Office expenses (449) 7,703 5,822 Occupancy 3,389 13,792 11,853 Travel and entertainment 458 2,679 2,640 Professional fees 2,353 6,749 8,805 Prepaid lost interest from curtailments -- 1,317 2,083 Impairment of goodwill -- 6,358 -- Other (5,754) 7,119 6,832 Inter-segment servicing/ processing fees (6,476) -- -- ------------------------------------------------------ ------------ Total non-interest expense 12,169 148,274 131,993 ------------------------------------------------------ ------------ (Loss) income before income taxes $(19,980) (64,756) 747 =========== Income tax benefit (expense) 22,369 (451) ------------ ------------ Net (loss) income $(42,387) $ 296 ============ ============ Net (loss) income per common and potential common shares outstanding: Basic $ (0.92) $ 0.01 Diluted $ (0.92) $ 0.01 Weighted average common and potential common shares outstanding: Basic 46,293 46,241 Diluted 46,293 46,538 NetBank, Inc. Consolidated Statements of Operations For the three months ended June 30, (Unaudited and in 000's except per share data) 2006 -------------------------------------- Financial Trans- Retail inter- action Servicing banking mediary processing Asset --------------------------------------------------------------------- Interest income: Loans and leases $ 30,328 $ 23,868 $ 7 $ -- Investment securities 8,091 2 -- -- Short-term investments 118 185 -- -- Inter-segment 22,671 54 -- 3,093 --------------------------------------------------------------------- Total interest income 61,208 24,109 7 3,093 Interest expense: Deposits 23,116 -- -- -- Other borrowed funds 14,050 1,041 -- 90 Inter-segment 5,736 18,000 102 2,116 --------------------------------------------------------------------- Total interest expense 42,902 19,041 102 2,206 --------------------------------------------------------------------- Net interest income 18,306 5,068 (95) 887 Provision for credit losses 972 47 -- -- --------------------------------------------------------------------- Net interest income after provision for credit losses 17,334 5,021 (95) 887 Non-interest income: Mortgage servicing fees 3 979 1,213 9,700 Amortization of MSRs -- 43 -- (9,890) Recovery (impairment) of MSRs -- -- -- (9,517) (Loss) gain on derivatives -- -- -- (4,764) Gain on sales of investment securities -- -- -- -- Service charges and fees 3,091 1 1,806 -- Gain on sales of loans and MSRs 308 11,589 -- -- Other income 1,054 360 553 35 Intersegment servicing/ processing fees -- -- 3,113 -- --------------------------------------------------------------------- Total non-interest income 4,456 12,972 6,685 (14,436) Non-interest expense: Salaries and benefits 5,575 18,809 2,583 -- Customer service 2,382 -- 86 -- Marketing costs 1,737 1,515 92 -- Data processing 2,671 725 576 -- Depreciation and amortization 1,717 2,436 943 -- Office expenses 2,457 1,582 466 -- Occupancy 951 3,783 261 -- Travel and entertainment 261 829 103 -- Professional fees 455 1,243 348 -- Prepaid lost interest from curtailments -- 3 -- 699 Impairment of goodwill 6,358 -- -- Other 2,678 3,024 501 17 Inter-segment servicing/ processing fees 118 586 -- 2,409 --------------------------------------------------------------------- Total non-interest expense 21,002 40,893 5,959 3,125 --------------------------------------------------------------------- (Loss) income before income taxes $ 788 $(22,900) $ 631 $(16,674) ======================================= 2006 2005 -------------------------- ------------ Other/ Corporate Consolidated Consolidated overhead NetBank, Inc. NetBank, Inc. ------------------------------------------------------- ------------ Interest income: Loans and leases $ 155 $ 54,358 $ 53,106 Investment securities -- 8,093 8,879 Short-term investments -- 303 516 Inter-segment (25,818) -- -- ------------------------------------------------------- ------------ Total interest income (25,663) 62,754 62,501 Interest expense: Deposits -- 23,116 15,598 Other borrowed funds 660 15,841 15,961 Inter-segment (25,954) -- -- ------------------------------------------------------- ------------ Total interest expense (25,294) 38,957 31,559 ------------------------------------------------------- ------------ Net interest income (369) 23,797 30,942 Provision for credit losses -- 1,019 2,330 ------------------------------------------------------- ------------ Net interest income after provision for credit losses (369) 22,778 28,612 Non-interest income: Mortgage servicing fees -- 11,895 13,192 Amortization of MSRs -- (9,847) (11,516) Recovery (impairment) of MSRs -- (9,517) (1,700) (Loss) gain on derivatives -- (4,764) 1,845 Gain on sales of investment securities -- -- 1,705 Service charges and fees -- 4,898 5,092 Gain on sales of loans and MSRs (533) 11,364 29,932 Other income (89) 1,913 2,691 Intersegment servicing/ processing fees (3,113) -- -- ------------------------------------------------------- ------------ Total non-interest income (3,735) 5,942 41,241 Non-interest expense: Salaries and benefits 6,875 33,842 30,094 Customer service 51 2,519 3,396 Marketing costs 146 3,490 2,366 Data processing 721 4,693 4,412 Depreciation and amortization 718 5,814 6,010 Office expenses (230) 4,275 3,002 Occupancy 1,821 6,816 5,952 Travel and entertainment 231 1,424 1,390 Professional fees 1,357 3,403 4,815 Prepaid lost interest from curtailments -- 702 1,059 Impairment of goodwill -- 6,358 -- Other (2,798) 3,422 3,483 Inter-segment servicing/ processing fees (3,113) -- -- ------------------------------------------------------- ------------ Total non-interest expense 5,779 76,758 65,979 ------------------------------------------------------- ------------ (Loss) income before income taxes $ (9,883) (48,038) 3,874 ========= Income tax benefit (expense) 16,602 (1,549) ------------ ------------ Net (loss) income $ (31,436) $ 2,325 ============ ============ Net (loss) income per common and potential common shares outstanding: Basic $ (0.68) $ 0.05 Diluted $ (0.68) $ 0.05 Weighted average common and potential common shares outstanding: Basic 46,323 46,116 Diluted 46,323 46,492 NetBank, Inc. Condensed Consolidated Balance Sheet (Unaudited and in 000's) June 30, March 31, June 30, 2006 2006 2005 ----------------------------------------- Assets Cash and cash equivalents: Cash and due from banks $ 72,807 $ 151,609 $ 119,108 Cash equivalents and fed funds 22,948 26,599 67,279 ------------------------------------------- Total cash, cash equivalents and fed funds 95,755 178,208 186,387 Investment securities available for sale-at fair value 574,590 606,959 659,093 Stock of Federal Home Loan Bank of Atlanta-at cost 46,002 54,359 66,172 Loans held for sale 972,004 974,430 1,388,495 Loan and lease receivables- net of allowance for losses 2,011,325 2,192,073 2,181,089 Mortgage servicing rights 203,406 212,094 176,583 Accrued interest receivable 16,416 16,849 13,673 Furniture, equipment and capitalized software 51,644 54,053 47,186 Goodwill and other intangibles 77,778 84,918 81,424 Due from servicers and investors 15,641 20,699 26,513 Unsettled trades - - 26,171 Other assets 77,444 74,209 101,981 ------------------------------------------- Total assets $ 4,142,005 $ 4,468,851 $ 4,954,767 =========================================== Liabilities Deposits $ 2,721,937 $ 2,826,267 $ 2,792,100 Other borrowed funds 867,619 1,056,692 1,470,775 Subordinated debt 32,477 32,477 32,477 Accrued interest payable 21,223 17,301 13,449 Loans in process 41,153 29,448 61,473 Representations and warranties 21,688 16,234 19,037 Accounts payable and accrued liabilities 88,471 105,402 155,807 ------------------------------------------- Total liabilities 3,794,568 4,083,821 4,545,118 ------------------------------------------- Minority interests in affiliates 638 613 560 Shareholders' equity Preferred stock, no par - - - Common stock, $.01 par 528 528 528 Additional paid-in capital 433,809 433,109 432,192 Retained (deficit) earnings (5,282) 27,173 41,618 Accumulated other comprehensive loss, net of tax (19,673) (13,430) (488) Treasury stock, at cost (62,583) (62,963) (63,236) Unearned compensation - - (1,525) ------------------------------------------- Total shareholders' equity 346,799 384,417 409,089 ------------------------------------------ Total liabilities, minority interests and shareholders' equity $ 4,142,005 $ 4,468,851 $ 4,954,767 =========================================== NetBank, Inc. Consolidated Selected Financial and Operating Data (Unaudited and in 000's except per share data) Quarter Ended June 30, March 31, June 30, ----------- ----------- ----------- 2006 2006 2005 ----------- ----------- ----------- Consolidated: Net income (loss) $ (31,436) $ (10,951) $ 2,325 Total assets $ 4,142,005 $ 4,468,851 $ 4,954,767 Total equity $ 346,799 $ 384,417 $ 409,089 Shares outstanding 46,360 46,360 46,298 Return on average equity (34.39%) (11.17%) 2.29% Return on average assets (2.79%) (0.89%) 0.19% Book value per share $ 7.48 $ 8.30 $ 8.84 Tangible book value per share $ 5.80 $ 6.47 $ 7.08 NetBank, FSB: Deposits $ 2,726,334 $ 2,827,509 $ 2,794,220 Customers 275,632 282,961 268,849 Estimated Capital Ratios: Tier 1 core capital ratio 6.77% 6.83% 6.17% Total risk-based capital ratio 10.79% 10.31% 10.36% Asset quality numbers: CMC Lease portfolio $ 25,615 $ 25,762 $ 26,960 Non-performing loan and lease receivables 6,227 6,214 5,056 ----------- ----------- ----------- Total non- performing loan and lease receivables 31,842 31,976 32,016 Non-performing loans held for sale (a) 32,896 40,499 22,859 ----------- ----------- ----------- Total non- performing loans and leases 64,738 72,475 54,875 Repossessed assets (b) 10,528 10,806 7,102 ----------- ----------- ----------- Total non- performing assets $ 75,266 $ 83,281 $ 61,977 Allowance for credit losses (ALLL) $ 27,371 $ 28,302 $ 25,792 Net charge-offs of loan and lease receivables $ (3,004) $ (2,356) $ (1,613) Asset quality ratios: Total non- performing assets / average assets 1.67% 1.69% 1.27% ALLL / total non-performing loan and lease receivables 85.96% 88.51% 80.56% Net annualized charge-offs / total assets 0.29% 0.21% 0.13% Mortgage Banking: Production Activity: Retail $ 975,201 $ 794,628 $ 843,914 Correspondent 703,166 917,284 1,009,951 Wholesale 401,107 456,542 681,865 RMS 24,360 41,574 54,540 ----------- ----------- ----------- Total Agency-eligible 2,103,834 2,210,028 2,590,270 Non-conforming 478,893 605,234 865,229 ----------- ----------- ----------- Total $ 2,582,727 $ 2,815,262 $ 3,455,499 =========== =========== =========== Sales Activity: Third-party sales $ 2,494,743 $ 2,887,567 $ 3,084,829 ----------- ----------- ----------- Intercompany sales - 7,211 53,473 Total sales $ 2,494,743 $ 2,894,778 $ 3,138,302 =========== =========== =========== Pipeline: Locked conforming mortgage loan pipeline $ 962,059 $ 842,835 $ 1,200,719 UPB of loans serviced: $ 15,465,530 $ 16,286,000 $ 18,483,938 (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.