NetBank
Encyclopedia
NetBank, formerly named Atlanta Internet Bank (1996) and Net.B@nk (1998), was a financial company engaged primarily in retail banking
, mortgage
banking, business finance and providing ATM
and merchant processing services. NetBank was founded in February 1996 and completed its initial public offering
of stock in July 1997. It was one of the pioneers of the Internet banking
industry, and recognized as one of the first internet-only banks. Its headquarters was in Suite 100 of the Royal Centre Three in Alpharetta, Georgia
.
Netbank was closed on September 28, 2007, by the Office of Thrift Supervision
(OTS) in conjunction with the Federal Deposit Insurance Corporation
(FDIC). FDIC insured deposits were acquired by another virtual bank
, ING Direct. Several shareholders have filed class action lawsuits against Netbank claiming misrepresentation of the company value during the restructuring period.
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.
In 2000, Netbank added the following products and services: Online safe deposit boxes for safe storage of electronic records, individual retirement accounts, and expanded customer support (online chat and 24x7 availability).
In 2001, Netbank acquired Resource Bancshares Mortgage Group, a leading provider of mortgage banking services. An online currency program was launched. And, NetBank acquired Market Street Mortgage, a leading provider of home mortgage to American consumers. The same year also brought a change in management to NetBank. A new CEO, Douglas K. Freeman, was appointed to head and manage the company. Freeman came from RBMG and had a background in mortgages rather than banking.
In 2003, NetBank added a number of business and product lines: NetBank expanded into automobiles by offering auto insurance through sister company NetInsurance and direct consumer auto loans through Florida auto dealerships. NetBank also acquired what became NetBank Payment Systems, a provider of off-premise ATM and merchant processing services. A number of ATMs were acquired in this acquisition. Finally, NetBank also launched a small business banking program.
In 2004, NetBank continued adding new product lines and acquired additional companies. NetBank acquired the assets of Beacon Credit Services, a leading provider of RV, boat and aircraft financing. They added business credit cards, internet payroll services, prepaid Visa gift cards, and expanded financial planning services. In response to customer concerns about mailing in deposits, NetBank launched Financial Technologies Inc (FTI) whose primary product was QuickPost, where deposits are shipped overnight from UPS stores to NetBank for processing.
NetBank reached the peak of the operation at the end of 2004 and through 2005. The rapid expansion into multiple lines of businesses may have proved to be too much, too soon for NetBank and it started to lose money in 2005.
In 2005, NetBank suffered some setbacks due to the cyclical nature of the mortgage industry and did not add any businesses or products to their line, instead choosing to preserve capital until the mortgage curve righted itself and they could resume earning profit from the mortgage businesses. They also introduced a tiered deposit system, where they paid the highest interest rates to people who also were customers of their other products (home or auto loan, savings account, or CD) and the lowest interest rate to people that only had a savings or checking account. The intent was to better cross-sell the products and help transition the banking customers to the other platforms. Many customers were turned off by the tiered system because NetBank's auto loan rates were higher than other banks and many people didn't choose to have Autoloans through NetBank.
During the same year, NetBank's mortgage operations suffered greatly. NetBank normally originates loans and resells the loans to other financial institutions on the open markets. Some of the loans that NetBank sold did not meet the underwriting guidelines and NetBank was forced to repurchase these loans from the other banks. Since the loans that do not meet the underwriting guidelines are often past due loans, NetBank was forced to repurchase a large number of failed loans that it had written. This loss of capital was very harmful to the company's equity position and was the first clue to the bank's poor financial position.
In 2007, NetBank finally recognized that the restructuring attempt was unsuccessful, and the company announced an intention to shutdown the company starting in spring of 2007. In May 2007 NetBank reached an agreement to sell its core banking operation to EverBank
. All accounts were to have been transferred by September 15, 2007, but the deal depended on NetBank's coming up with some cash, which it expected to realize from the sale of other investments. NetBank proved unable to sell these investments, and on September 17, 2007, Everbank terminated the agreement.
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.
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. 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. The shutdown marked the biggest failure of a savings and loan association
since the savings and loan crisis
in the 1980s. $1.4 billion in FDIC-insured deposits, as well as some loan assets, were sold to ING Direct for $14 million. ING Direct also took on 104,000 NetBank customers as part of the deal.
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.
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. Federal savings and loan association
s are prohibited from filing for bankruptcy protection and must be liquidated by the FDIC.
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.
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.
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
.
Retail banking
Retail banking is banking in which banking institutions execute transactions directly with consumers, rather than corporations or other banks. Services offered include: savings and transactional accounts, mortgages, personal loans, debit cards, credit cards, and so forth.-Types of...
, mortgage
Mortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
banking, business finance and providing ATM
Automated teller machine
An automated teller machine or automatic teller machine, also known as a Cashpoint , cash machine or sometimes a hole in the wall in British English, is a computerised telecommunications device that provides the clients of a financial institution with access to financial transactions in a public...
and merchant processing services. NetBank was founded in February 1996 and completed its initial public offering
Initial public offering
An initial public offering or stock market launch, is the first sale of stock by a private company to the public. It can be used by either small or large companies to raise expansion capital and become publicly traded enterprises...
of stock in July 1997. It was one of the pioneers of the Internet banking
Online banking
Online banking allows customers to conduct financial transactions on a secure website operated by their retail or virtual bank, credit union or building society.-Features:...
industry, and recognized as one of the first internet-only banks. Its headquarters was in Suite 100 of the Royal Centre Three in Alpharetta, Georgia
Alpharetta, Georgia
-Demographics:As of the census of 2000, there were 34,854 people, 13,911 households, and 8,916 families residing in the city. The population density was 1,631.6 people per square mile . There were 14,670 housing units at an average density of 686.7 per square mile...
.
Netbank was closed on September 28, 2007, by the Office of Thrift Supervision
Office of Thrift Supervision
The Office of Thrift Supervision was a United States federal agency under the Department of the Treasury that charters, supervises, and regulates all federally- and state-chartered savings banks and savings and loans associations. It was created in 1989 as a renamed version of another federal agency...
(OTS) in conjunction with the Federal Deposit Insurance Corporation
Federal Deposit Insurance Corporation
The Federal Deposit Insurance Corporation is a United States government corporation created by the Glass–Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks, currently up to $250,000 per depositor per bank. , the FDIC insures deposits at...
(FDIC). FDIC insured deposits were acquired by another virtual bank
Virtual bank
A direct bank is a bank without any branch network. It offers its financial services by:* Telephone banking* Online banking* Automated teller machines * Mail banking* Mobile banking...
, ING Direct. Several shareholders have filed class action lawsuits against Netbank claiming misrepresentation of the company value during the restructuring period.
Beginning
NetBank was founded in 1996 as one of the nation's first Internet-only banks. Using a new business model, NetBank paid higher interest rates for computer-savvy customers in exchange for not having physical bank branches. This model made sense and the bank early on paid very nice interest rates.NetBank made its money from a mortgage and lending operation. The majority of home loans were offered through traditional channels and a small percentage of loans were offered through the same internet channels as the banking offerings.
NetBank obtained customers by offering some sort of "sign on" bonus. A $50 bonus was a common bonus. NetBank signed many agreements with other companies to promote itself and the companies would offer gift certificate or credit to their loyalty programs (i.e., frequent flyer programs) equivalent to around $50. These customer acquisition programs proved beneficial and NetBank gained many customers in this manner.
Growth
Starting in the early 2000s, NetBank acquired a number of financial-related companies to diversify and improve the bottom line.In 2000, Netbank added the following products and services: Online safe deposit boxes for safe storage of electronic records, individual retirement accounts, and expanded customer support (online chat and 24x7 availability).
In 2001, Netbank acquired Resource Bancshares Mortgage Group, a leading provider of mortgage banking services. An online currency program was launched. And, NetBank acquired Market Street Mortgage, a leading provider of home mortgage to American consumers. The same year also brought a change in management to NetBank. A new CEO, Douglas K. Freeman, was appointed to head and manage the company. Freeman came from RBMG and had a background in mortgages rather than banking.
In 2003, NetBank added a number of business and product lines: NetBank expanded into automobiles by offering auto insurance through sister company NetInsurance and direct consumer auto loans through Florida auto dealerships. NetBank also acquired what became NetBank Payment Systems, a provider of off-premise ATM and merchant processing services. A number of ATMs were acquired in this acquisition. Finally, NetBank also launched a small business banking program.
In 2004, NetBank continued adding new product lines and acquired additional companies. NetBank acquired the assets of Beacon Credit Services, a leading provider of RV, boat and aircraft financing. They added business credit cards, internet payroll services, prepaid Visa gift cards, and expanded financial planning services. In response to customer concerns about mailing in deposits, NetBank launched Financial Technologies Inc (FTI) whose primary product was QuickPost, where deposits are shipped overnight from UPS stores to NetBank for processing.
NetBank reached the peak of the operation at the end of 2004 and through 2005. The rapid expansion into multiple lines of businesses may have proved to be too much, too soon for NetBank and it started to lose money in 2005.
In 2005, NetBank suffered some setbacks due to the cyclical nature of the mortgage industry and did not add any businesses or products to their line, instead choosing to preserve capital until the mortgage curve righted itself and they could resume earning profit from the mortgage businesses. They also introduced a tiered deposit system, where they paid the highest interest rates to people who also were customers of their other products (home or auto loan, savings account, or CD) and the lowest interest rate to people that only had a savings or checking account. The intent was to better cross-sell the products and help transition the banking customers to the other platforms. Many customers were turned off by the tiered system because NetBank's auto loan rates were higher than other banks and many people didn't choose to have Autoloans through NetBank.
Decline
In 2006, NetBank recognized that there were some significant operating deficiencies and started to restructure the company in an effort to resume profitability. They shuttered a number of businesses and sold off most businesses that were not shuttered. Some of the shuttered companies included FTI, payroll and finance services, non-auto (RV, boat, and aircraft) loans, and the subprime/non-conforming mortgage companies. The large network of ATMs were sold off to other companies. The independent auditor, Ernst and Young, resigned in 2006.During the same year, NetBank's mortgage operations suffered greatly. NetBank normally originates loans and resells the loans to other financial institutions on the open markets. Some of the loans that NetBank sold did not meet the underwriting guidelines and NetBank was forced to repurchase these loans from the other banks. Since the loans that do not meet the underwriting guidelines are often past due loans, NetBank was forced to repurchase a large number of failed loans that it had written. This loss of capital was very harmful to the company's equity position and was the first clue to the bank's poor financial position.
In 2007, NetBank finally recognized that the restructuring attempt was unsuccessful, and the company announced an intention to shutdown the company starting in spring of 2007. In May 2007 NetBank reached an agreement to sell its core banking operation to EverBank
EverBank
EverBank is an American diversified financial services company providing banking, mortgages, and investing services. It is based in Jacksonville, Florida, U.S. It operates through standard banking offices, and through its Direct Banking division. EverBank Direct operates by telephone, mail, and...
. All accounts were to have been transferred by September 15, 2007, but the deal depended on NetBank's coming up with some cash, which it expected to realize from the sale of other investments. NetBank proved unable to sell these investments, and on September 17, 2007, Everbank terminated the agreement.
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.
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. On August 3, it was delisted from the Nasdaq.
On September 28, 2007, the Office of Thrift Supervision
Office of Thrift Supervision
The Office of Thrift Supervision was a United States federal agency under the Department of the Treasury that charters, supervises, and regulates all federally- and state-chartered savings banks and savings and loans associations. It was created in 1989 as a renamed version of another federal agency...
(OTS) announced that it had closed NetBank. The shutdown marked the biggest failure of a savings and loan association
Savings and loan association
A savings and loan association , also known as a thrift, is a financial institution that specializes in accepting savings deposits and making mortgage and other loans...
since the savings and loan crisis
Savings and Loan crisis
The savings and loan crisis of the 1980s and 1990s was the failure of about 747 out of the 3,234 savings and loan associations in the United States...
in the 1980s. $1.4 billion in FDIC-insured deposits, as well as some loan assets, were sold to ING Direct for $14 million. ING Direct also took on 104,000 NetBank customers as part of the deal.
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.
NetBank Inc., parent of the savings-and-loan, filed for Chapter 11 (reorganization) bankruptcy
Bankruptcy
Bankruptcy is a legal status of an insolvent person or an organisation, that is, one that cannot repay the debts owed to creditors. In most jurisdictions bankruptcy is imposed by a court order, often initiated by the debtor....
protection and announced intentions to sell Columbia, South Carolina
Columbia, South Carolina
Columbia is the state capital and largest city in the U.S. state of South Carolina. The population was 129,272 according to the 2010 census. Columbia is the county seat of Richland County, but a portion of the city extends into neighboring Lexington County. The city is the center of a metropolitan...
real estate
Real estate
In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...
it owns as well as its captive reinsurance
Captive insurance
Captive insurance companies are insurance companies established with the specific objective of financing risks emanating from their parent group or groups, but they sometimes also insure risks of the group's customers as well...
subsidiary M.G. Reinsurance Inc. Federal savings and loan association
Savings and loan association
A savings and loan association , also known as a thrift, is a financial institution that specializes in accepting savings deposits and making mortgage and other loans...
s are prohibited from filing for bankruptcy protection and must be liquidated by the FDIC.
Business model
The closed NetBank’s former business modelBusiness model
A business model describes the rationale of how an organization creates, delivers, and captures value...
had several strategies: Retail and business banking, financial intermediary, and transaction processing. All of the bank’s operations and assets were located within the United States of America.
Retail banking
The retail banking segment consisted of personal and small business banking operations. The major products and services offered through the retail banking segment included individual and small business deposit accounts, mortgages, home equity loans and lines of credit, auto loans, business equipment financing, financial planning and investment services, online bill payment, and Visa check and credit cards. NetBank, through its Internet banking operations, operated as an FDIC-insured, federally chartered thrift institutionSavings and loan association
A savings and loan association , also known as a thrift, is a financial institution that specializes in accepting savings deposits and making mortgage and other loans...
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
Internet
The Internet is a global system of interconnected computer networks that use the standard Internet protocol suite to serve billions of users worldwide...
, 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
The UPS Store
The UPS Store is a subsidiary of UPS, with locations in the United States and Canada. Each store offers shipping, postal, online printing, and other business services. In the United States, each store is independently owned and operated by a licensed franchisee of Mail Boxes Etc., Inc...
for overnight delivery to NetBank) and ATM deposits.
Financial intermediary
NetBank also offered several loan products through the financial intermediary segment of business. These products and services included additional mortgages for both conforming and nonconforming products, home equity loans and lines of credit, RV, boat and aircraft loans, and NetBank offered an automated mortgage underwriting service.Transaction processing
NetBank provided a variety of financial-related processing services to merchants, community banks and other organizations. The Company acquired an ATM and merchant transaction processing operation. During NetBank's peak years, the company operated approximately 8,000 ATMs across the country, which the Company made available to its banking customers on a surcharge-free basis. The network of ATMs ranked as the second largest bank-operated ATM network in the country in 2003.Criticism
One of the downsides to having no physical branches was the risk of deposits getting lost, damaged, or delayed in the mail. Several people complained about NetBank losing or delaying payments to the account for a variety of reasons. The invention of deposit-taking ATMs alleviated some of this concern because customers could make the deposit in a local ATM, where the check will post and clear very quickly. The widespread nature of NetBank's customers made it difficult to have an ATM handy for all customers, though, and many were still required to use mail-in deposits.NetBank attempted to alleviate the issue of lost deposits by creating QuickPost, an innovative service where a customer drops a deposit off at a UPS Store location to be shipped overnight to NetBank. The idea behind QuickPost is one shipment could contain deposits from several customers, justifying the additional expense of overnight shipping. However, the product did not take off, and NetBank shut down this operation in 2006. Further, the program suffered enormous losses after NetBank tried to sell the service to other banks.
NetBank's CEO sold NetBank his personal residence on two occasions in the years leading up to the failure of NetBank. Each time, NetBank had substantial losses related to the sale of the residence as disclosed in the 2005 Annual Report (Related Party Transaction footnote).
NetBank also encountered several complaints due to NetBank's freezing customer accounts for security reasons. When flagged, the customers were required to send several forms of identification to NetBank before the account would become unfrozen. It is uncertain if the requirements were due to internal NetBank policies or the requirements imposed by the USA Patriot Act
USA PATRIOT Act
The USA PATRIOT Act is an Act of the U.S. Congress that was signed into law by President George W. Bush on October 26, 2001...
.
See also
- CompuBankCompuBankCompuBank, N.A. was a financial company engaged primarily in retail banking, mortgage banking, business finance and providing ATM and merchant processing services. CompuBank was founded in 1998 by banking veteran Frank Goldberg and launched on the internet in early October the same year...
- Online bankingOnline bankingOnline banking allows customers to conduct financial transactions on a secure website operated by their retail or virtual bank, credit union or building society.-Features:...
- Telephone bankingTelephone bankingTelephone banking is a service provided by a financial institution, which allows its customers to perform transactions over the telephone.Most telephone banking services use an automated phone answering system with phone keypad response or voice recognition capability...