NetBank

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This article is about the failed United States bank, Net.B@nk. For the online service of Commonwealth Bank, see Commonwealth Bank. For the current NetBank brand, see BofI Federal Bank.
NetBank, Inc.
Traded as NASDAQ: NTBK
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, United States
Key people
Steven F. Herbert, CEO
Products
  • Retail Banking
  • Mortgage Banking
  • Business Finance
Website www.netbank.com

NetBank, is currently a direct bank owned and operated by BofI Holding Inc that markets to the unbanked.

Before being operated by BofI, Netbank was a public company and a bank that was shut down on September 28, 2007 by the Office of Thrift Supervision. After the shutdown, NetBank was sold to ING Direct, which was in turn acquired by Capital One. In 2012, the NetBank name and domain were sold to BofI Holding Inc, which launched a new bank under the NetBank name.[1]

The original incarnation of NetBank is recognized as one of the first direct banks in the United States.

History[edit]

Beginning[edit]

NetBank was founded in 1996 as one of the nation's first Internet-only banks under the name Atlanta Internet Bank , which was changed to NetBank in 1998.[2]. 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 completed its initial public offering of stock in July 1997, raising $42 million.[3]

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[edit]

In 2001, NetBank acquired deposit accounts from CompuBank.[4] NetBank also acquired Market Street Mortgage.[5] Douglas K. Freeman, was appointed CEO of the company. In 2002, Netbank acquired Resource Bancshares Mortgage Group.[6]

In 2003, NetBank added several 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-premises ATM and merchant processing services. Several 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[edit]

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 originated loans and resold 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 did not meet the underwriting guidelines were 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 shut down the company starting in spring 2007. In May 2007, NetBank reached an agreement to sell its core banking operation to EverBank.[7] All accounts were to have been transferred by September 15, 2007, but the deal depended on NetBank coming up with some cash, which it expected to realize from the sale of other investments. NetBank proved unable to sell those investments,[8] and on September 17, 2007, EverBank terminated the agreement.[9]

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.[10]

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.[11] 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.[12] The shutdown marked the biggest failure of a savings and loan association since the savings and loan crisis in the 1980s.[13] $1.4 billion in FDIC-insured deposits, as well as some loan assets, were sold to ING Direct for $14 million.[14][15][16] ING Direct also took on 104,000 NetBank customers as part of the deal.[17] 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.[18]

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.[19] Federal savings and loan associations are prohibited from filing for bankruptcy protection and must be liquidated by the FDIC.[19]

Business model[edit]

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[edit]

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[edit]

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[edit]

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[edit]

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

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

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

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

Shareholders filed class action lawsuits against Netbank and its executives claiming misrepresentation of the company before it was shutdown by regulators. The suits were settled in November 2011 for $12.5 million.[20]

See also[edit]

References[edit]

External links[edit]