NetBank, Inc. Reports Loss of $.68 per Share for the Second Quarter

NetBank, Inc. (Nasdaq:NTBK), one of the few Internet-only banks, reported a loss of $31.4 million today in their second quarter.

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.”