NetBank's Failure Shows Online Limits

[R.A. Hettinga]

<http://online.wsj.com/article_print/SB119101077898343000.html>

The Wall Street Journal

NetBank's Failure Shows Online Limits

By VALERIE BAUERLEIN and DAMIAN PALETTA

September 29, 2007

NetBank Inc., the pioneering Internet-only savings and loan born in the
late 1990s, is being taken over by federal regulators in the biggest bank
failure in 14 years.

The demise of NetBank, which had $2.5 billion in assets, demonstrates the
perils of relying on virtual relationships in what is commonly a
face-to-face business. Its challenges were exacerbated by a relatively late
effort to diversify into the subprime-mortgage business, which left the
company vulnerable to the housing debacle.

But its Achilles' heel was sloppy underwriting of loans, according to
federal regulators. The Office of Thrift Supervision said weak underwriting
standards, failed business strategies and a lack of proper controls forced
NetBank to suffer significant losses -- including more than $200 million
for 2006.

"They had significant problems with respect to loan underwriting, poor
documentation and a high amount of early payment defaults," OTS spokesman
Kevin Petrasic said.

NetBank was once an investor darling, with shares peaking at a
split-adjusted price of $78.33 in April 1999. But the company has struggled
for years; in August it was delisted from the Nasdaq Stock Market. In
recent months NetBank shut down its subprime unit and sold its
mortgage-servicing portfolio, and an agreement to sell its assets to
Jacksonville, Fla.-based EverBank Financial Corp. fell through two weeks
ago.

Customers with less than $100,000 in checking, savings and other deposit
accounts with NetBank are protected by coverage with the Federal Deposit
Insurance Corp. and will have full access to their money, FDIC spokesman
David Barr said. Customers with retirement investment accounts, such as
IRAs, are generally covered to as much as $250,000, according to the FDIC.

Customers with deposits above the insured level will become creditors of
NetBank, Mr. Barr said. The company filed for Chapter 11 bankruptcy
protection Friday. The FDIC has taken over NetBank and is selling its
assets, such as accounts, to former competitors, including EverBank, which
is buying $700 million of NetBank's mortgages. ING Groep NV's online bank
ING Direct is buying $1.5 billion in deposits.

Arkadi Kuhlmann, chief executive of ING Direct, said he paid $14 million,
or about a penny on the dollar for deposits in the hope he can retain
customers' business. "We are taking on the risk that we can get those
customers happy and that they will stay," Mr. Kuhlmann said.

Bank failures have become rare as the banking industry has been buffered by
good credit and a strong economy. Of 8,600 banks insured by the FDIC, only
one other has failed this year -- Metropolitan Savings Bank of Pittsburgh.
NetBank is the biggest failure since the June 1993 failure of Western FSB,
Marina del Rey, Calif., which held $3.8 billion in assets.

But pressure has been building on banks, particularly stresses related to
mortgage lending and a difficult interest-rate environment. The FDIC said
last month that loans at least 90 days past due rose in the second quarter
by $11.4 billion, or 36%, compared with the second quarter of 2006.

Federal regulators say banks overall are in good financial condition.

"In good times as well as in bad, banks have failed," the FDIC said in a
statement. "It wouldn't be realistic to say that there will be absolutely
no more failures, but the vast majority of banks will be able to withstand
any problems because of their near historically high capitalization."


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R. A. Hettinga <mailto: rah at ibuc.com>
The Internet Bearer Underwriting Corporation <http://www.ibuc.com/>
44 Farquhar Street, Boston, MA 02131 USA
"... however it may deserve respect for its usefulness and antiquity,
[predicting the end of the world] has not been found agreeable to
experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'