** **

**UNITED STATES**

**SECURITIES ANDEXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**QUARTERLY REPORT PURSUANT TO SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**Forthe Quarterly Period Ended June 30, 2003**

 

**CommissionFile No. 0-22361**

 

**NETBANK,INC.**

(Exact name of registrant as specified in itscharter)

 

| **Georgia**                                               |   | **58-2224352**                          |
|-----------------------------------------------------------|--------|-----------------------------------------|
| (State of incorporation)                                  |   | (I.R.S. Employer Identification Number) |
|                                                      |   |                                    |
| **11475 Great Oaks Way  Suite 100  Alpharetta, Georgia**  |   | **30022**                               |
| (Address of principal executive offices)                  |   | (Zip Code)                              |
|                                                      |   |                                    |
| **(770) 343-6006**                                        |
| Registrant’s telephone number, including  area code: |

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  YES ý  NO o

 

Indicateby check mark whether the registrant is an accelerated filer (as defined inExchange Act Rule 12b-2):  YES ý NO o

 

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock,as of the latest practicable date:

 
| **Class**                    |   | **Shares  Outstanding At July 31, 2003** |
|------------------------------|--------|------------------------------------------|
| Common Stock, par value $.01 |   | 47,828,096                               |

 

 

----

 

**NETBANK, INC.****TABLE OFCONTENTS**

 

**Part I.**

 
| **Item I. Financial  Statements (unaudited)**                                                             |
|-----------------------------------------------------------------------------------------------------------|
|                                                                                                      |
| **Consolidated balance sheets  as of June 30, 2003 and December 31, 2002**                           |
|                                                                                                      |
| **Consolidated statements of operations for  the three and six months ended June 30, 2003 and 2002**      |
|                                                                                                      |
| **Consolidated statements of shareholders’  equity for the six months ended June 30, 2003 and 2002** |
|                                                                                                      |
| **Consolidated statements of cash flows for  the six months ended June 30, 2003 and 2002**                |
|                                                                                                      |
| **Notes to consolidated financial statements**                                                            |
|                                                                                                      |
| **Item  2. Management’s Discussion and Analysis of Financial Condition and Results of  Operations**  |
|                                                                                                      |
| **Item  3. Quantitative and Qualitative Disclosures about Market Risk**                                   |
|                                                                                                      |
| **Item  4. Controls and Procedures**                                                                      |
|                                                                                                      |
| **Part II. OTHER  INFORMATION**                                                                           |
|                                                                                                      |
| **Item  1. Legal Proceedings**                                                                            |
|                                                                                                      |
| **Item  2. Changes in Securities and Use of Proceeds**                                                    |
|                                                                                                      |
| **Item 3. Defaults Upon Senior Securities**                                                               |
|                                                                                                      |
| **Item  4. Submission of Matters to a Vote of Security Holders**                                          |
|                                                                                                      |
| **Item  5. Other Information**                                                                            |
|                                                                                                      |
| **Item  6. Exhibits and Reports on Form 8-K**                                                             |
|                                                                                                      |
| **Signature Page**                                                                                        |

 

2

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**Part I. Item 1. Financial Statements**

 

**NetBank, Inc.**

**ConsolidatedBalance Sheets**

**(unaudited and in 000’s except share amounts)**

 
|                                                                                                             |   | **June 30,  2003** |      | **December 31,  2002** |   |
|------------------------------------------------------------------------------------------------------------------|--------|--------------------|-----------|------------------------|--------|
| **Assets**                                                                                                       |   |               |      |                   |   |
| Cash and cash equivalents:                                                                                       |   |               |      |                   |   |
| Cash and due from banks                                                                                          |   | $                  | 34,236    |                   | $      | 34,687 |   |
| Federal funds sold                                                                                               |   | 24,674             |      | 76,878                 |   |
| Total cash and cash equivalents                                                                                  |   | 58,910             |      | 111,565                |   |
| Investment securities available for sale-at fair value (amortized  costs of $329,080 and $636,991, respectively) |   | 347,747            |      | 654,719                |   |
| Stock of Federal Home Loan Bank of Atlanta - at cost                                                             |   | 50,505             |      | 36,600                 |   |
| Loans held for sale                                                                                              |   | 2,527,302          |      | 1,514,625              |   |
| Loans and leases receivable - net of allowance for credit losses of  $41,855 and $42,576, respectively           |   | 1,184,696          |      | 892,093                |   |
| Mortgage servicing rights – net                                                                             |   | 103,094            |      | 88,502                 |   |
| Accrued interest receivable                                                                                      |   | 11,903             |      | 12,839                 |   |
| Furniture, equipment and capitalized software – net                                                         |   | 51,409             |      | 46,610                 |   |
| Goodwill and other intangibles – net                                                                        |   | 45,959             |      | 41,696                 |   |
| Due from servicers and investors                                                                                 |   | 40,037             |      | 70,526                 |   |
| Other assets                                                                                                     |   | 88,863             |      | 57,777                 |   |
| **Total assets**                                                                                                 |   | $                  | 4,510,425 |                   | $      | 3,527,552 |   |
|                                                                                                             |   |               |      |                   |   |
| **Liabilities and shareholders’ equity**                                                                    |   |               |      |                   |   |
| **Liabilities:**                                                                                                 |   |               |      |                   |   |
| Deposits                                                                                                         |   | $                  | 2,464,232 |                   | $      | 2,044,922 |   |
| Other borrowed funds                                                                                             |   | 1,352,589          |      | 882,488                |   |
| Convertible subordinated debt                                                                                    |   | 26,213             |      | 26,126                 |   |
| Trust preferred securities                                                                                       |   | 8,764              |      | 4,382                  |   |
| Accrued interest payable                                                                                         |   | 10,435             |      | 13,266                 |   |
| Loans in process                                                                                                 |   | 119,870            |      | 45,734                 |   |
| Accounts payable and accrued liabilities                                                                         |   | 107,994            |      | 109,044                |   |
| Total liabilities                                                                                                |   | 4,090,097          |      | 3,125,962              |   |
|                                                                                                             |   |               |      |                   |   |
| Commitments and contingencies                                                                                    |   | —             |      | —                 |   |
|                                                                                                             |   |               |      |                   |   |
| **Shareholders’ equity:**                                                                                   |   |               |      |                   |   |
| Preferred stock, no par (10,000,000 shares authorized; none  outstanding)                                        |   | —             |      | —                 |   |
| Common stock, $.01 par (100,000,000 shares authorized,  52,761,508 and 52,674,751 shares issued, respectively)   |   | 528                |      | 527                    |   |
| Additional paid-in capital                                                                                       |   | 431,389            |      | 426,485                |   |
| Retained earnings (deficit)                                                                                      |   | 20,410             |      | (2,568                 | )      |
| Accumulated other comprehensive income, net of taxes of $7,057  and$6,702, respectively                          |   | 11,608             |      | 11,026                 |   |
| Treasury stock, at cost (4,905,710 and 4,024,193 shares,  respectively)                                          |   | (43,607            | )         | (33,880                | )      |
| Total shareholders’ equity                                                                                  |   | 420,328            |      | 401,590                |   |
| **Total liabilities and shareholders’ equity**                                                              |   | $                  | 4,510,425 |                   | $      | 3,527,552 |   |

 

See notes to consolidated financial statements.

 

3

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**NetBank, Inc.**

 

**Consolidated Statements of Operations**

 

**(unaudited and in 000’s except per share amounts)**

 
|                                                                  |   | **Three months ended June 30,** |   | **Six months ended June 30,** |   |
|-----------------------------------------------------------------------|--------|---------------------------------|--------|-------------------------------|--------|
|                                                                  |   | **2003**                        |   | **2002**                      |   | **2003** |   | **2002** |   |
| **Interest income:**                                                  |   |                            |   |                          |   |   |   |   |   |
| Loans and leases                                                      |   | $                               | 44,903 |                          | $      | 27,380 |   | $ | 83,164 |   | $ | 54,942 |   |
| Investment securities                                                 |   | 5,351                           |   | 8,030                         |   | 11,960 |   | 16,433 |   |
| Short-term investments                                                |   | 87                              |   | 829                           |   | 219 |   | 1,642 |   |
| Total interest income                                                 |   | 50,341                          |   | 36,239                        |   | 95,343 |   | 73,017 |   |
|                                                                  |   |                            |   |                          |   |   |   |   |   |
| **Interest expense:**                                                 |   |                            |   |                          |   |   |   |   |   |
| Deposits                                                              |   | 12,534                          |   | 14,009                        |   | 24,980 |   | 27,783 |   |
| Other borrowed funds                                                  |   | 9,099                           |   | 16,418                        |   | 18,152 |   | 27,079 |   |
| Total interest expense                                                |   | 21,633                          |   | 30,427                        |   | 43,132 |   | 54,862 |   |
| Net interest income                                                   |   | 28,708                          |   | 5,812                         |   | 52,211 |   | 18,155 |   |
| Provision for credit losses                                           |   | 894                             |   | 26,422                        |   | 1,762 |   | 26,526 |   |
| Net interest income (loss) after provision for credit losses          |   | 27,814                          |   | (20,610                       | )      | 50,449 |   | (8,371 | ) |
|                                                                  |   |                            |   |                          |   |   |   |   |   |
| **Non-interest income:**                                              |   |                            |   |                          |   |   |   |   |   |
| Service charges and fees                                              |   | 12,452                          |   | 12,573                        |   | 23,778 |   | 15,958 |   |
| Gains on sales of mortgage loans and mortgage servicing rights        |   | 59,624                          |   | 29,504                        |   | 108,547 |   | 35,177 |   |
| Net gain (loss) on sales of securities                                |   | 5,062                           |   | (1,772                        | )      | 11,394 |   | (1,857 | ) |
| Other income                                                          |   | 3,416                           |   | 998                           |   | 5,979 |   | 998 |   |
| Total non-interest income                                             |   | 80,554                          |   | 41,303                        |   | 149,698 |   | 50,276 |   |
|                                                                  |   |                            |   |                          |   |   |   |   |   |
| **Non-interest expense:**                                             |   |                            |   |                          |   |   |   |   |   |
| Salaries and benefits                                                 |   | 32,075                          |   | 28,053                        |   | 61,885 |   | 33,683 |   |
| Customer service                                                      |   | 2,827                           |   | 3,535                         |   | 5,598 |   | 6,773 |   |
| Loan servicing                                                        |   | 555                             |   | 2,114                         |   | 1,161 |   | 4,157 |   |
| Marketing                                                             |   | 2,257                           |   | 1,718                         |   | 4,331 |   | 3,285 |   |
| Data processing                                                       |   | 3,871                           |   | 3,445                         |   | 8,021 |   | 5,811 |   |
| Depreciation and amortization                                         |   | 3,655                           |   | 6,301                         |   | 7,191 |   | 8,216 |   |
| Impairment and amortization of mortgage servicing rights              |   | 17,534                          |   | 7,504                         |   | 27,335 |   | 7,504 |   |
| Office expenses                                                       |   | 2,642                           |   | 3,015                         |   | 5,365 |   | 3,676 |   |
| Occupancy                                                             |   | 4,240                           |   | 5,878                         |   | 8,553 |   | 6,848 |   |
| Travel and entertainment                                              |   | 1,093                           |   | 1,028                         |   | 1,945 |   | 1,170 |   |
| Professional fees                                                     |   | 3,715                           |   | 3,056                         |   | 6,602 |   | 3,496 |   |
| Other expenses                                                        |   | 5,494                           |   | 2,897                         |   | 10,803 |   | 3,535 |   |
| Prepayment penalties on the early extinguishment of debt              |   | 5,975                           |   | 2,493                         |   | 11,951 |   | 2,493 |   |
| Acquisition and severance                                             |   | —                          |   | —                        |   | — |   | 10,085 |   |
| Total non-interest expense                                            |   | 85,933                          |   | 71,037                        |   | 160,741 |   | 100,732 |   |
| Income (loss) before income taxes                                     |   | 22,435                          |   | (50,344                       | )      | 39,406 |   | (58,827 | ) |
| Income tax (expense) benefit                                          |   | (8,222                          | )      | 19,057                        |   | (14,491 | ) | 21,902 |   |
| Net income (loss)                                                     |   | $                               | 14,213 |                          | $      | (31,287 | ) | $ | 24,915 |   | $ | (36,925 | ) |
|                                                                  |   |                            |   |                          |   |   |   |   |   |
| Net income (loss) per common and potential common shares outstanding: |   |                            |   |                          |   |   |   |   |   |
| Basic                                                                 |   | $                               | 0.30   |                          | $      | (0.64 | ) | $ | 0.52 |   | $ | (0.94 | ) |
| Diluted                                                               |   | $                               | 0.29   |                          | $      | (0.64 | ) | $ | 0.51 |   | $ | (0.94 | ) |
|                                                                  |   |                            |   |                          |   |   |   |   |   |
| Weighted average common and potential common shares outstanding:      |   |                            |   |                          |   |   |   |   |   |
| Basic                                                                 |   | 47,968                          |   | 49,248                        |   | 48,146 |   | 39,299 |   |
| Diluted                                                               |   | 48,639                          |   | 49,248                        |   | 48,700 |   | 39,299 |   |
|                                                                  |   |                            |   |                          |   |   |   |   |   |
| Dividends declared on common stock                                    |   | $                               | .02    |                          | $      | — |   | $ | .04 |   | $ | — |   |

 

See notes to consolidatedfinancial statements.

 

4

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**NetBank, Inc.**

 

**Consolidated Statements of Shareholders’ Equity**

 

**(unaudited and in 000’s)**

 
|                                                                |   | **Common  shares** |   | **Common********stock** |   | **Additional  paid-in capital** |   | **Retained  (deficit)  earnings** |   | **Accumulated other  comprehensive  income** |   | **Treasury stock** |   | **Total** |   |
|---------------------------------------------------------------------|--------|--------------------|--------|-------------------------|--------|---------------------------------|--------|-----------------------------------|--------|----------------------------------------------|--------|--------------------|--------|-----------|--------|
| Balance - December 31, 2002                                         |   | 52,675             |   | $                       | 527    |                            | $      | 426,485                           |   | $                                            | (2,568 | )                  | $      | 11,026    |   | $ | (33,880 | ) | $ | 401,590 |   |
| Comprehensive income:                                               |   |               |   |                    |   |                            |   |                              |   |                                         |   |               |   |      |   |
| Net income for the three months endedMarch 31, 2003                 |   | —             |   | —                  |   | —                          |   | 10,702                            |   | —                                       |   | —             |   | 10,702    |   |
| Unrealized loss on securities, net of taxes                         |   | —             |   | —                  |   | —                          |   | —                            |   | (2,167                                       | )      | —             |   | (2,167    | )      |
| Comprehensive income                                                |   |               |   |                    |   |                            |   |                              |   |                                         |   |               |   | 8,535     |   |
| Dividends declared on common stock                                  |   | —             |   | —                  |   | —                          |   | (973                              | )      | —                                       |   | —             |   | (973      | )      |
| Purchase of shares of common stock for treasury, net of reissuances |   | —             |   | —                  |   | (3                              | )      | —                            |   | —                                       |   | (7,499             | )      | (7,502    | )      |
| Issuances of common stock                                           |   | 68                 |   | —                  |   | 4,575                           |   | —                            |   | —                                       |   | —             |   | 4,575     |   |
| Balance - March 31, 2003                                            |   | 52,743             |   | $                       | 527    |                            | $      | 431,057                           |   | $                                            | 7,161  |               | $      | 8,859     |   | $ | (41,379 | ) | $ | 406,225 |   |
| Comprehensive income:                                               |   |               |   |                    |   |                            |   |                              |   |                                         |   |               |   |      |   |
| Net income for the three months endedJune 30, 2003                  |   | —             |   | —                  |   | —                          |   | 14,213                            |   | —                                       |   | —             |   | 14,213    |   |
| Unrealized gain on securities, net of taxes                         |   | —             |   | —                  |   | —                          |   | —                            |   | 2,749                                        |   | —             |   | 2,749     |   |
| Comprehensive income                                                |   |               |   |                    |   |                            |   |                              |   |                                         |   |               |   | 16,962    |   |
| Dividends declared on common stock                                  |   | —             |   | —                  |   | —                          |   | (964                              | )      | —                                       |   | —             |   | (964      | )      |
| Purchase of shares of common stock for treasury, net of reissuances |   | —             |   | —                  |   | (16                             | )      | —                            |   | —                                       |   | (2,228             | )      | (2,244    | )      |
| Issuances of common stock                                           |   | 19                 |   | 1                       |   | 348                             |   | —                            |   | —                                       |   | —             |   | 349       |   |
| Balance - June 30, 2003                                             |   | 52,762             |   | $                       | 528    |                            | $      | 431,389                           |   | $                                            | 20,410 |               | $      | 11,608    |   | $ | (43,607 | ) | $ | 420,328 |   |

 
|                                                                                               |   | **Common  shares** |   | **Common********stock** |   | **Additional  paid-in capital** |   | **Retained  earnings**

**(deficit)** |   | **Accumulated other  comprehensive  (loss) income** |    | **Treasury stock** |   | **Total** |   |
|----------------------------------------------------------------------------------------------------|--------|--------------------|--------|-------------------------|--------|---------------------------------|--------|---------------------------------------|--------|-----------------------------------------------------|---------|--------------------|--------|-----------|--------|
| Balance - December 31, 2001                                                                        |   | 31,751             |   | $                       | 318    |                            | $      | 267,004                               |   | $                                                   | 13,289  |               | $      | (3,648    | )      | $ | (21,509 | ) | $ | 255,454 |   |
| Comprehensive loss:                                                                                |   |               |   |                    |   |                            |   |                                  |   |                                                |    |               |   |      |   |
| Net loss for the three months endedMarch 31, 2002                                                  |   | —             |   | —                  |   | —                          |   | (5,638                                | )      | —                                              |    | —             |   | (5,638    | )      |
| Unrealized loss on securities, net of taxes                                                        |   | —             |   | —                  |   | —                          |   | —                                |   | (23                                                 | )       | —             |   | (23       | )      |
| Comprehensive loss                                                                                 |   |               |   |                    |   |                            |   |                                  |   |                                                |    |               |   | (5,661    | )      |
| Reissuance of shares of common stock held in treasury                                              |   | —             |   | —                  |   | —                          |   | —                                |   | —                                              |    | 42                 |   | 42        |   |
| Issuance of stock in conjunction with the acquisition of Resource  Bancshares Mortgage Group, Inc. |   | 19,717             |   | 197                     |   | 155,365                         |   | —                                |   | —                                              |    | —             |   | 155,562   |   |
| Issuances of common stock                                                                          |   | —             |   | —                  |   | 3                               |   | —                                |   | —                                              |    | —             |   | 3         |   |
| Balance - March 31, 2002                                                                           |   | 51,468             |   | $                       | 515    |                            | $      | 422,372                               |   | $                                                   | 7,651   |               | $      | (3,671    | )      | $ | (21,467 | ) | $ | 405,400 |   |
| Comprehensive loss:                                                                                |   |               |   |                    |   |                            |   |                                  |   |                                                |    |               |   |      |   |
| Net loss for the three months endedJune 30, 2002                                                   |   | —             |   | —                  |   | —                          |   | (31,287                               | )      | —                                              |    | —             |   | (31,287   | )      |
| Unrealized gain on securities, net of taxes                                                        |   | —             |   | —                  |   | —                          |   | —                                |   | 7,214                                               |    | —             |   | 7,214     |   |
| Comprehensive loss                                                                                 |   |               |   |                    |   |                            |   |                                  |   |                                                |    |               |   | (24,073   | )      |
| Reissuance of shares of common stock held in treasury                                              |   | —             |   | —                  |   | —                          |   | —                                |   | —                                              |    | 225                |   | 225       |   |
| Issuances of common stock                                                                          |   | 1,012              |   | 10                      |   | 3,325                           |   | —                                |   | —                                              |    | —             |   | 3,335     |   |
| Balance - June 30, 2002                                                                            |   | 52,480             |   | $                       | 525    |                            | $      | 425,697                               |   | $                                                   | (23,636 | )                  | $      | 3,543     |   | $ | (21,242 | ) | $ | 384,887 |   |

 

See notes to consolidatedfinancial statements.

 

5

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**NetBank, Inc.**

**Consolidated Statementsof Cash Flows**

**(unaudited and in000’s)**

 
|                                                                                                 |   | **Six months  ended June 30,** |   |
|------------------------------------------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                                                                 |   | **2003**                       |   | **2002** |   |
| Operating activities:                                                                                |   |                           |   |   |   |
| Net income (loss)                                                                                    |   | $                              | 24,915 |   | $ | (36,925 | ) |
| Adjustments to reconcile net income (loss)  to net cash (used in) provided by operating activities:  |   |                           |   |   |   |
| Depreciation and amortization                                                                        |   | 7,191                          |   | 8,216 |   |
| Amortization of premiums (discounts) on  investment securities, loan and lease receivables, and debt |   | 4,545                          |   | 18,334 |   |
| Origination of loans held for sale                                                                   |   | (9,958,953                     | )      | (3,398,653 | ) |
| Proceeds from sales of loans held for sale                                                           |   | 9,053,416                      |   | 3,561,194 |   |
| Net gain on sales of mortgage loans and  servicing rights                                            |   | (108,547                       | )      | (35,177 | ) |
| Capitalization of mortgage servicing rights                                                          |   | (84,732                        | )      | (59,946 | ) |
| Proceeds from sales of mortgage servicing  rights                                                    |   | 42,073                         |   | 78,159 |   |
| Impairment and amortization of mortgage  servicing rights                                            |   | 27,335                         |   | 7,504 |   |
| Provision for credit losses                                                                          |   | 1,762                          |   | 26,526 |   |
| Changes in assets and liabilities which  provide (use) cash:                                         |   |                           |   |   |   |
| Decrease (increase) in accrued interest  receivable                                                  |   | 936                            |   | (5,056 | ) |
| (Increase) decrease in other assets, due  from servicers, and intangibles                            |   | (4,860                         | )      | 18,612 |   |
| Decrease in accrued interest payable                                                                 |   | (2,831                         | )      | (1,288 | ) |
| Increase in loans in process                                                                         |   | 74,136                         |   | 14,204 |   |
| (Decrease) increase in accounts payable and  accrued liabilities                                     |   | (1,050                         | )      | 9,003 |   |
| Net cash (used in) provided by operating  activities                                                 |   | (924,664                       | )      | 204,707 |   |
|                                                                                                 |   |                           |   |   |   |
| Investing activities:                                                                                |   |                           |   |   |   |
| Purchases of available for sale securities                                                           |   | (50,508                        | )      | (1,527,914 | ) |
| Principal repayments on available for sale  investment securities                                    |   | 48,040                         |   | 166,428 |   |
| Sales and maturities of available for sale  investment securities                                    |   | 318,304                        |   | 1,483,670 |   |
| (Gain) loss on investment securities                                                                 |   | (11,394                        | )      | 1,857 |   |
| (Purchase) sale of Federal Home Loan Bank  Stock                                                     |   | (13,905                        | )      | 14,944 |   |
| Origination and purchases of loans and  leases                                                       |   | (482,148                       | )      | (255,152 | ) |
| Principal repayments on loans and leases                                                             |   | 188,576                        |   | 391,140 |   |
| Purchases of furniture, fixtures, and  equipment                                                     |   | (11,990                        | )      | (10,211 | ) |
| Net cash acquired in business combination                                                            |   | —                         |   | 29,762 |   |
| Net cash (used in) provided by investing  activities                                                 |   | (15,025                        | )      | 294,524 |   |
|                                                                                                 |   |                           |   |   |   |
| Financing activities:                                                                                |   |                           |   |   |   |
| Increase in money market and checking  accounts                                                      |   | 512,190                        |   | 186,070 |   |
| (Decrease) increase in certificates of  deposits                                                     |   | (92,880                        | )      | 107,794 |   |
| Proceeds from other borrowed funds                                                                   |   | 5,418,491                      |   | 3,903,446 |   |
| Repayments of other borrowed funds                                                                   |   | (4,948,390                     | )      | (4,557,786 | ) |
| Net proceeds from issuance of trust  preferred securities                                            |   | 4,382                          |   | — |   |
| Exercise of stock options                                                                            |   | 4,924                          |   | 3,338 |   |
| Net (purchase) issuance of treasury stock                                                            |   | (9,746                         | )      | 267 |   |
| Dividend payments on common stock                                                                    |   | (1,937                         | )      | — |   |
| Net cash provided by (used in) financing  activities                                                 |   | 887,034                        |   | (356,871 | ) |
| Net (decrease) increase in cash and cash  equivalents                                                |   | (52,655                        | )      | 142,360 |   |
| Cash and cash equivalents:                                                                           |   |                           |   |   |   |
| Cash, beginning of period                                                                            |   | 111,565                        |   | 22,347 |   |
| Cash, end of period                                                                                  |   | $                              | 58,910 |   | $ | 164,707 |   |
|                                                                                                 |   |                           |   |   |   |
| Supplemental disclosures of cash flow  information:                                                  |   |                           |   |   |   |
| Cash paid during the period for interest                                                             |   | $                              | 45,963 |   | $ | 57,732 |   |
| Cash paid during the period for income  taxes                                                        |   | $                              | 1,824  |   | $ | 883 |   |
|                                                                                                 |   |                           |   |   |   |
| Non-cash investing and financing  activities:                                                        |   |                           |   |   |   |
| Fair value of assets  acquired                                                                       |   | $                              | — |   | $ | 1,075,492 |   |
| Liabilities assumed                                                                                  |   | —                         |   | (919,930 | ) |
| Stock issued in transaction                                                                          |   | —                         |   | (155,562 | ) |
| Cash paid for business                                                                               |   | $                              | — |   | $ | — |   |

 

See notes to consolidated financialstatements.

 

6

----

 

**NETBANK,INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**June30, 2003**

 

**1.             ORGANIZATIONAND BASIS OF PRESENTATION**

 

NetBank, Inc. is a savings and loan holding company that wholly ownsthe outstanding stock of NetBank®, (“NetBank, FSB”), a federal savings bank;Meritage Mortgage Corporation (“Meritage”), a wholesale nonconforming mortgageprovider; MG Reinsurance Company (“MG Reinsurance”), a captive reinsurancecompany; NetInsurance, Inc., (“NetInsurance”), a licensed insurance agency; andNB Partners, Inc., a corporation formed to be involved in strategic partneringopportunities. NetBank, FSB also owns all of the outstanding stock of MarketStreet Mortgage Corporation (“Market Street”), a retail mortgage company, andResource Bancshares Mortgage Group, Inc. (“Resource”). Resource wholly ownsRBMG, Inc. (“RBMG”), a wholesale mortgage banking company, and Republic LeasingCompany, Inc. (“Republic Leasing”), a small ticket commercial financingcompany.

 

NetBank, Inc. acquired Resourceon March 31, 2002, and subsequently reorganized the holding company structureas described above based on operational, licensing and funding needs. NetBank,Inc. acquired Market Street on June 29, 2001 and subsequently donated MarketStreet to NetBank, FSB. Accordingly, the financial impact of Resource andMarket Street are included from the dates of acquisition. The entire consolidatedcompany is referred to herein as “NetBank” or “the Company”.

 

In the opinion of management,the unaudited consolidated financial statements included herein reflect alladjustments, consisting only of normal recurring accruals, which are necessaryfor the fair presentation of the financial condition and results of operationsfor the interim periods presented. Certain information and footnote disclosuresnormally included in financial statements have been condensed or omittedpursuant to applicable rules and regulations of the Securities and ExchangeCommission (“SEC”). The financial statements included herein should be read inconjunction with the financial statements and notes thereto, included inNetBank’s Form 10-K filed with the SEC for the year endedDecember 31, 2002. The results of operations for the interim periodsreported herein are not necessarily indicative of results to be expected forthe full year. Certain 2002 amounts have been reclassified for comparabilitywith 2003 amounts.

 

All dollar figures arepresented in thousands (000s) except per share data unless otherwise noted.

 

**2.             ACQUISITIONS**

** **

On March 31, 2002, NetBank consummated its acquisition of Resourcepursuant to an Agreement and Plan of Merger dated November 18, 2001. Inthe merger, NetBank issued 1.1382 shares of NetBank common stock in exchangefor each outstanding share of Resource common stock, equivalent to 19.7 millionshares of common stock plus cash in lieu of fractional shares. The transactionwas accounted for as a purchase and a total of $20.6 million of goodwill wasrecorded.

 

On June 29, 2001, NetBank, Inc.acquired all of the outstanding stock of Market Street pursuant to an agreementdated April 15, 2001, and amended as of June 29, 2001, among NetBank, NetInterim, Inc., Republic Bank, Republic Bancorp, Inc. and certain shareholdersof Market Street. The consideration paid consisted of 1.7 million shares ofNetBank common stock valued at $8.96 per share and cash of $6.1 million. Theacquisition was accounted for as a purchase, and approximately $20.1 million ingoodwill, including transaction costs, was recorded.

 

Pro-forma unaudited financialinformation assuming Resource was included in the results of operations for thesix months ended June 30, 2002 follows:

 

7

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| Net interest income    |   | $ | 31,259  |   |
|------------------------|--------|---|---------|--------|
| Net loss               |   | $ | (37,693 | )      |
| Basic loss per share   |   | $ | (0.77   | )      |
| Diluted loss per share |   | $ | (0.77   | )      |

** **

**3.             ACCOUNTINGPOLICIES**

** **

Reference is made to theaccounting policies of NetBank described in the notes to consolidated financialstatements contained in NetBank’s Form 10-K for the year endedDecember 31, 2002. The Company has followed those policies in preparingthis report.

 

*Significant Estimates.*Thepreparation of the consolidated financial statements in conformity withaccounting principles generally accepted in the United States requiresmanagement to make estimates and assumptions that affect the amounts reportedin the consolidated financial statements and accompanying notes.  Such estimates relate to the Company’sallowance for credit losses, the fair values of mortgage loans held for sale,lease receivables, servicing rights, servicing hedges and the Company’s otherhedging instruments.  Because of theinherent uncertainties associated with any estimation process and due topossible future changes in market and economic conditions that will affect fairvalues, it is possible that actual future results and realization of theunderlying assets and liabilities could differ significantly from the amountsreflected as of the balance sheet date.

 

*Stock Options.*TheCompany accounts for stock options issued under the recognition and measurementprinciples of Accounting Principles Board 25, *Accounting for Stock Issued toEmployees,*and related Interpretations. No stock option-basedemployee compensation cost is reflected in the results of operations, as alloptions granted under those plans had an exercise price equal to the marketvalue of the underlying common stock on the date of grant. The following tableillustrates the pro forma effects on the results of operations and earnings pershare if the Company had applied the fair value recognition provisions of FASBStatement 123, *Accounting for Stock-Based Compensation,*to stockoption-based employee compensation.

 
|                                                                                                                                         |   | **Three months ended  June 30,** |   | **Six months ended********June 30,** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|--------------------------------------|--------|
|                                                                                                                                         |   | **2003**                         |   | **2002**                             |   | **2003** |   | **2002** |   |
| Net income (loss), as reported                                                                                                               |   | $                                | 14,213 |                                 | $      | (31,287 | ) | $ | 24,915 |   | $ | (36,925 | ) |
| Deduct:                                                                                                                                      |   |                             |   |                                 |   |   |   |   |   |
| Total stock option-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |   | (552                             | )      | (679                                 | )      | (1,021 | ) | (917 | ) |
| Pro forma net income (loss)                                                                                                                  |   | $                                | 13,661 |                                 | $      | (31,966 | ) | $ | 23,894 |   | $ | (37,842 | ) |
|                                                                                                                                         |   |                             |   |                                 |   |   |   |   |   |
| Earnings (loss) per share:                                                                                                                   |   |                             |   |                                 |   |   |   |   |   |
| Basic – as reported                                                                                                                     |   | $                                | 0.30   |                                 | $      | (0.64 | ) | $ | 0.52 |   | $ | (0.94 | ) |
| Basic – pro forma                                                                                                                       |   | $                                | 0.28   |                                 | $      | (0.65 | ) | $ | 0.50 |   | $ | (0.96 | ) |
|                                                                                                                                         |   |                             |   |                                 |   |   |   |   |   |
| Diluted – as reported                                                                                                                   |   | $                                | 0.29   |                                 | $      | (0.64 | ) | $ | 0.51 |   | $ | (0.94 | ) |
| Diluted – pro forma                                                                                                                     |   | $                                | 0.28   |                                 | $      | (0.65 | ) | $ | 0.49 |   | $ | (0.96 | ) |

** **

**Inaddition, for the quarter ended June 30, 2003 and year to date through June 30,2003, compensation expense of $31 and $52, respectively, related to restrictedstock awards was recognized and included in net income as reported.**

** **

**8**

----

** **

***New Accounting Pronouncements.***In November 2002, the FASB issued Interpretation No. 45 (“FIN 45”),“Guarantors Accounting and Disclosure Requirements for Guarantees, IncludingIndirect Guarantees of Indebtedness of Others”, to clarify accounting anddisclosure requirements relating to a guarantor’s issuance of certain types ofguarantees.  FIN 45 requires entities todisclose additional information about certain guarantees, or groups of similarguarantees, even if the likelihood of the guarantor’s having to make anypayments under the guarantee is remote. The disclosure provisions are effective for financial statements forfiscal years ended after December 15, 2002. For certain guarantees, the interpretation also requires that guarantorsrecognize a liability equal to the fair value of the guarantee upon itsissuance.  This initial recognition andmeasurement provision is to be applied only on a prospective basis toguarantees issued or modified after December 31, 2002.  During the six months ended June 30, 2003,NetBank recorded a charge of $12,539 associated with the establishment ofreserves for potential future losses based on current loan sales in accordancewith this new interpretation.

** **

**InJanuary 2003, the Financial Accounting Standards Board issued InterpretationNo. 46 (“FIN 46”), “Consolidation of Variable Interest Entities” (“VIEs”), aninterpretation of Accounting Research Bulletin No. 51, “Consolidated FinancialStatements,” to improve financial reporting of special purpose and otherentities.  The adoption of thisinterpretation will have no significant impact on the financial condition orresults of operations of the Company.**

** **

In May 2003, the FASB issuedStatement of Financial Accounting Standards No. 150, *“Accounting for Certain Financial Instruments with Characteristics ofboth Liabilities and Equity”*. This statement established standards for how an issuer classifies andmeasures certain financial instruments with characteristics of both liabilitiesand equity.  NetBank’s accountingpolicies were already in compliance with FASB statement No. 150 at the time ofits issuance.

 

**4.             LOANAND LEASE RECEIVABLES**

** **

Prior to its acquisition ofResource, NetBank’s primary loan investment strategy was to purchase pools ofloans from other financial institutions. Generally the selling institutionsretained the servicing for such loan purchases. However, since its acquisitionsof Market Street and Resource, NetBank has discontinued purchasing pools ofloans from other financial institutions and selectively retains a portion ofits originated loans for investment purposes. Additionally, NetBank retains primarily all of the small ticketequipment leases it originates. At June 30, 2003 and December 31, 2002 theCompany had net unamortized premiums on its loans and leases of $25,002 and$23,547, respectively.

 

The following is a summary ofNetBank’s loan and lease portfolio:

 
|                             |   | **As of********June 30, 2003** |      | **As of********December 31, 2002** |   |
|----------------------------------|--------|--------------------------------|-----------|------------------------------------|--------|
|                             |   | **Amount**                     |      | **%**                              |   | **Amount** |   | **%** |   |
| Residential mortgages            |   | $                              | 841,913   |                               | 68.6   | % | $ | 545,120 |   | 58.3 | % |
| Leases                           |   | 324,954                        |      | 26.5                               | %      | 305,276 |   | 32.7 | % |
| Home equity lines                |   | 57,136                         |      | 4.7                                | %      | 82,051 |   | 8.8 | % |
| Consumer                         |   | 2,547                          |      | 0.2                                | %      | 2,025 |   | 0.2 | % |
| Construction                     |   | —                         |      | 0.0                                | %      | 188 |   | 0.0 | % |
| Auto                             |   | 1                              |      | 0.0                                | %      | 9 |   | 0.0 | % |
| Total                            |   | 1,226,551                      |      | 100.0                              | %      | 934,669 |   | 100.0 | % |
| Less allowance for credit losses |   | (41,855                        | )         |                               |   | (42,576 | ) |   |   |
| Total                            |   | $                              | 1,184,696 |                               |   |   | $ | 892,093 |   |   |   |

 

9

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**5.             ALLOWANCEFOR CREDIT LOSSES**

** **

The following is a summary ofthe allowance for credit losses:

 
|                                                                 |   | **Three months ended********June 30,** |   | **Six months ended********June 30,** |   |
|----------------------------------------------------------------------|--------|----------------------------------------|--------|--------------------------------------|--------|
|                                                                 |   | **2003**                               |   | **2002**                             |   | **2003** |   | **2002** |   |
| **Beginning balance**                                                |   | $                                      | 41,957 |                                 | $      | 27,740 |   | $ | 42,576 |   | $ | 22,865 |   |
| Allowance recorded on purchased loan pools                           |   | —                                 |   | 95                                   |   | — |   | 7,257 |   |
| Provision for credit losses                                          |   | 894                                    |   | 26,422                               |   | 1,762 |   | 26,526 |   |
| Allowance acquired in connection with acquisition of Resource        |   | —                                 |   | —                               |   | — |   | 1,828 |   |
| Allowance transferred to held for sale                               |   | —                                 |   | —                               |   | — |   | (3,270 | ) |
| Charge-offs:                                                         |   |                                   |   |                                 |   |   |   |   |   |
| Residential mortgages                                                |   | (78                                    | )      | (116                                 | )      | (424 | ) | (366 | ) |
| Leases                                                               |   | (1,313                                 | )      | (954                                 | )      | (2,755 | ) | (1,368 | ) |
| Home equity lines                                                    |   | (145                                   | )      | —                               |   | (433 | ) | (241 | ) |
| Consumer                                                             |   | —                                 |   | (130                                 | )      | (18 | ) | (195 | ) |
| Auto                                                                 |   | —                                 |   | —                               |   | — |   | (10 | ) |
| Recoveries:                                                          |   |                                   |   |                                 |   |   |   |   |   |
| Residential mortgages                                                |   | 12                                     |   | 31                                   |   | 102 |   | 61 |   |
| Leases                                                               |   | 473                                    |   | 293                                  |   | 987 |   | 293 |   |
| Home equity lines                                                    |   | 55                                     |   | 65                                   |   | 58 |   | 66 |   |
| Consumer                                                             |   | —                                 |   | 25                                   |   | — |   | 25 |   |
| Auto                                                                 |   | —                                 |   | —                               |   | — |   | — |   |
| Total charge-offs, net                                               |   | (996                                   | )      | (786                                 | )      | (2,483 | ) | (1,735 | ) |
| **Ending balance**                                                   |   | $                                      | 41,855 |                                 | $      | 53,471 |   | $ | 41,855 |   | $ | 53,471 |   |
|                                                                 |   |                                   |   |                                 |   |   |   |   |   |
| Allowance for credit losses as a percent of average loans and leases |   | 3.8                                    | %      | 3.7                                  | %      | 4.1 | % | 3.6 | % |

 

NetBank considers a loan or lease to be impaired when it is probablethat it will be unable to collect all amounts due according to the originalterms of the loan or lease agreement. NetBank measures impairment of a loan orlease on a loan-by-loan or lease-by-lease basis. Amounts of impaired loans thatare not probable of collection are charged-off immediately. NetBank had $2,728and $3,485 of real estate owned resulting from foreclosures at June 30, 2003 andDecember 31, 2002, respectively. NetBank had $4,947 and $4,988 of loans thatwere restructured as of June 30, 2003, and December 31, 2002, respectively.NetBank’s other real estate owned consists almost entirely of residentialproperties as a result of foreclosures.

 

**6.             FAIRVALUE AND IMPAIRMENT OF MORTGAGE SERVICING RIGHTS**

** **

For purposes of evaluating itsmortgage servicing rights portfolio for impairment, the Company disaggregatesits servicing portfolio into two primary segments: available for sale and heldfor sale.

 

The segment of the portfoliodesignated as available for sale is composed of servicing rights that werepurchased in bulk transactions or that were retained out of production pursuantto individual portfolio retention decisions. As of June 30, 2003, the Companyis retaining the majority of its conventional mortgage servicing rights.  The available for sale portfolio isdisaggregated for purposes of measuring potential impairments according todefined risk tranches. The Company has defined its risk tranches based uponinterest rate band and product type. With respect to each such risk tranche,the fair value thereof, which is based upon an internal 

 

10

----

 

analysis that considers currentmarket conditions, prevailing interest rates, prepayment speeds, default ratesand other relevant factors, is compared to amortized carrying values of themortgage servicing rights for purposes of measuring potential impairment. TheCompany uses Constant Maturity Swap rate (CMS) floors, Constant MaturityTreasury rate (CMT) floors and corridors, interest rate swap contracts,interest rate caps and forward purchase contracts on FNMA mortgage backedsecurities (FNMA TBA) to protect itself against interest rate and prepaymentrisk on its available for sale portfolio.

 

The segment of the portfoliodesignated as held for sale is composed of recently produced mortgage servicingrights that are scheduled for sale and have been allocated to specific forwardservicing sales contracts. The held for sale portfolio is disaggregated forpurposes of measuring possible impairments according to the specific forwardsales contracts to which allocated, which the Company has determined to be theappropriate approach to disaggregation by predominant risk characteristic forthis portfolio. For each such risk tranche, the fair value is based upon theallocated forward committed delivery price, which is compared to amortizedcarrying value for purposes of measuring potential impairment.

 

As of June 30, 2003, thefollowing amounts related to NetBank’s mortgage servicing rights portfolio:

 
|                         |   | **Available for  sale** |      | **Held for********sale** |   |
|------------------------------|--------|-------------------------|-----------|--------------------------|--------|
| UPB                          |   | $                       | 9,187,797 |                     | $      | 330,594 |   |
| Carrying Value               |   | $                       | 98,549    |                     | $      | 4,545 |   |
| Carrying Value / UPB         |   | 1.07                    | %         | 1.37                     | %      |
| Weighted average note rate   |   | 6.36                    | %         | 5.81                     | %      |
| Weighted average service fee |   | 0.35                    | %         | 0.38                     | %      |
| Net Basis as multiple        |   | 3.06                    |      | 3.61                     |   |

 

The following table summarizes changes in the impairment reserve forNetBank’s available for sale mortgage servicing rights:

 
| Balance as of January 1, 2003 |   | $      | 14,429 |   |
|-------------------------------|--------|--------|--------|--------|
| Impairment expense            |   | 14,175 |   |
| Balance as of June 30, 2003   |   | $      | 28,604 |   |

** **

**7.             DEPOSITS**

** **

The following table setsforth the dollar amount of deposits and weighted average interest rates in thevarious types of deposit programs offered by the Company:

 
|                                         |   | **As of June 30, 2003** |      | **As of December 31, 2002** |   |
|----------------------------------------------|--------|-------------------------|-----------|-----------------------------|--------|
|                                         |   | **Amount**              |      | **Percentage**              |   | **Weighted  average  interest rate** |   | **Amount** |   | **Percentage** |   | **Weighted  average  interest rate** |   |
| Non-interest bearing checking accounts       |   | $                       | 373,855   |                        | 15.2   | % | N/A |   | $ | 227,490 |   | 11.1 | % | N/A |   |
| Interest bearing:                            |   |                    |      |                        |   |   |   |   |   |   |   |   |   |
| Checking accounts                            |   | 195,336                 |      | 7.9                         | %      | 1.5 | % | 163,938 |   | 8.0 | % | 1.6 | % |
| Money market                                 |   | 1,146,300               |      | 46.5                        | %      | 2.0 | % | 811,873 |   | 39.7 | % | 2.3 | % |
| Certificate of deposit   under $100,000 |   | 637,754                 |      | 25.9                        | %      | 3.0 | % | 720,399 |   | 35.2 | % | 3.4 | % |
| Certificate of deposit   over $100,000  |   | 110,987                 |      | 4.5                         | %      | 3.0 | % | 121,222 |   | 6.0 | % | 3.4 | % |
| Total deposits                               |   | $                       | 2,464,232 |                        | 100.0  | % |   |   | $ | 2,044,922 |   | 100.0 | % |   |   |

 

11

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Accrued interest as of June 30,2003, related to checking, money market and certificates of deposit accountswas $88, $766 and $6,917, respectively. Accrued interest as of December 31,2002, related to checking, money market, and certificates of deposit accountswas $71, $512 and $9,318, respectively. At June 30, 2003, and December 31,2002, $661 and $641of overdrawn deposits were classified as loans,respectively.

 

**8.             BORROWINGS**

** **

A summary of borrowings and available borrowings, grouped by year ofmaturity, as of June 30, 2003 follows:

 
| **Type of  Borrowing**                   |   | **Year of Maturity**       |   | **Range of Stated  Interest Rates at  June 30, 2003** |      | **Principal Amount Outstanding at  June 30, 2003** |   |
|------------------------------------------|--------|----------------------------|--------|-------------------------------------------------------|-----------|----------------------------------------------------|--------|
| $100 million warehouse line of credit    |   | 2003                       |   | 2.40                                                  | %*        | $                                                  | 49,000 |   |
| $250 million master repurchase facility  |   | 2003                       |   | 2.58                                                  | %*        | 116,632                                            |   |
| $625 million FHLB warehouse line         |   | 2003                       |   | DRC  + 0.50                                           | %*        | 259,000                                            |   |
| $200 million master repurchase facility  |   | 2003                       |   | 2.41                                                  | %*        | 2,473                                              |   |
| FHLB advances                            |   | 2003                       |   | DRC                                                   |  *   | 285,100                                            |   |
| FHLB advances                            |   | 2003                       |   | 2.83                                                  | %         | 10,000                                             |   |
| FHLB advances                            |   | 2004                       |   | 2.31  - 4.45                                          | %         | 250,000                                            |   |
| Convertible subordinated notes           |   | 2004                       |   | 4.75                                                  | %         | 26,358                                             |   |
| FHLB advances                            |   | 2005                       |   | 6.02  - 7.41                                          | %         | 141,000                                            |   |
| FHLB advances                            |   | 2006                       |   | 5.63                                                  | %         | 40,000                                             |   |
| FHLB advances                            |   | 2009                       |   | 4.64                                                  | %         | 25,000                                             |   |
| NBI Trust I preferred securities         |   | 2032                       |   | LIBOR  + 3.35                                         | %*        | 4,382                                              |   |
| NBI Trust II preferred securities        |   | 2033                       |   | LIBOR  + 3.25                                         | %*        | 4,382                                              |   |
| $175  million master repurchase facility |   | N/A                        |   | 1.72                                                  | %         | 174,384                                            |   |
|                                     |   | Total                      |   | 1,387,711                                             |      |
|                                     |   | Less un-amortized discount |   | (145                                                  | )         |
|                                     |   | Total Debt                 |   | $                                                     | 1,387,566 |                                               |

 

----

* Indicates a variable rate

 

The majority of the Federal Home Loan Bank (“FHLB”) advances are fixedrate. Five advances, however, totaling $150,000 may be converted at the FHLB’soption to adjustable rate based on the three month floating LIBOR, and oneadvance is based to the daily rate credit (“DRC”).  The FHLB warehouseline is a $625,000 adjustable line of credit with a floating rate based on theDRC plus 50 basis points used to fund mortgages originated by Market Street andRBMG. All of the FHLB advances and the FHLB warehouse line are secured byinvestment securities or mortgage loans.  At June 30, 2003, NetBank hadpledged $316,430 of investment securities to the FHLB as collateral for variousFHLB advances.

 

Convertible Subordinated Notes(“Notes”) were originally issued for $115,000, in a public offering during theyear ended December 31, 1999.  The Notesmature on June 1, 2004 unless previously redeemed and bear interest at 4.75%payable semi-annually on June 1 and December 1 of each year beginning December1, 2000.  Holders of the Notes mayconvert any Notes or portions of the Notes into shares of NetBank’s commonstock at a conversion price of $35.67 per share, subject to adjustment.  This is equivalent to 28.0348 shares ofcommon stock per one thousand dollars of principal amount of the Notes.  NetBank may redeem the Notes, in whole or inpart, at any time at the declining redemption prices listed in the indentureplus accrued interest.  In the event ofa change of control, under certain circumstances holders of the Notes mayrequire NetBank to repurchase their Notes in whole or in part at a repurchaseprice of 100% of the principal amount plus accrued interest.  The Notes are unsecured and are subordinatedto all of NetBank’s existing and future “senior indebtedness,” as 

 

12

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defined in the indenturegoverning the Notes.  Subsequent to theJune 30, 2003, financial statements, all the subordinated notes were called atpar, and the remaining unamortized discount of $145 was written off.

 

During 2002, NetBank issued$4,382 of trust preferred securities in a private pooled transaction through anewly formed trust, NBI Trust I. The securities carry a variable rate and wereinitially priced at LIBOR plus 3.35% with a cap of 12.5% through January 2008.  Interest payments and the resetting of therate both occur on a quarterly basis. The securities are scheduled to mature inDecember 2032 and cannot be redeemed by NBI Trust I for a minimum of fiveyears. During 2003, NetBank issued an additional $4,382 of trusted preferredsecurities in a private pooled transaction through a newly formed trust, NBITrust II, under similar terms as the aforementioned mentioned securities.

 

Most of the revolving lines ofcredit, warehouse lines of credit (other than the FHLB warehouse line), themaster repurchase facilities and commercial paper conduit facility are securedby mortgage loans and are subject to restrictive covenants. The covenantsinclude certain minimum net worth requirements, minimum tangible net worth requirements,certain minimum financial ratios, maintenance of servicer eligibility forvarious government agencies, a minimum balance in the mortgage servicing rightsportfolio and certain minimum liquidity requirements, which are all defined inthe terms of the related debt agreements.  In addition, the covenantsrestrict the types of business activities in which the Company mayengage.  NetBank was in compliance, or obtained a waiver for anynon-compliance, with all debt covenants in place as of June 30, 2003. Although management anticipates complying with all current debt covenants,there can be no assurance that NetBank or its individual subsidiaries will beable to comply with all debt covenants in the future.  Failure to complycould result in the loss of the related financing. Short-term debt outstandingto third parties reached the highest level for the quarter ending June 30,2003, in May with an average monthly balance of $663 million.

 

**9.             NETINCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE**

** **

Basic and diluted net income (loss) per common and potential commonshare has been calculated based on the weighted average number of sharesoutstanding. The following schedule reconciles the numerator and denominator ofthe basic and diluted net income (loss) per common and potential common sharefor the three and six months ended June 30, 2003. For the three and six monthsended June 30, 2002, there is no difference in basic and diluted shares as theeffect of options outstanding to purchase common shares would be anti-dilutiveto the net loss for that period. The effect of convertible debt securitiesoutstanding has not been included in any of the periods presented because theassumed conversion of such securities would be anti-dilutive.

 
|                                                              |   | **Net Income  (Numerator)** |       | **Shares  (Denominator)** |       | **Per Share  Amount** |       |
|-------------------------------------------------------------------|--------|-----------------------------|------------|---------------------------|------------|-----------------------|------------|
| **Six months ended June 30, 2003**                                |   |                        | ** ** |                      | ** ** |                  | ** ** |
| Basic EPS                                                         |   | $                           | 24,915     |                      | 48,146     |                  | $          | 0.52 |   |
| Effect of dilutive securities - option to  purchase common shares |   | —                      |       | 554                       |       | (0.01                 | )          |
| Diluted EPS                                                       |   | $                           | 24,915     |                      | 48,700     |                  | $          | 0.51 |   |
|                                                              |   |                        |       |                      |       |                  |       |
| **Three months ended June 30, 2003**                              |   |                        | ** ** |                      | ** ** |                  | ** ** |
| Basic EPS                                                         |   | $                           | 14,213     |                      | 47,968     |                  | $          | 0.30 |   |
| Effect of dilutive securities - option to  purchase common shares |   | —                      |       | 671                       |       | (0.01                 | )          |
| Diluted EPS                                                       |   | $                           | 14,213     |                      | 48,639     |                  | $          | 0.29 |   |

 

13

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**10.          BUSINESSSEGMENTS**

** **

NetBank’s principal activities include retail banking and mortgagebanking.  The retail banking segment primarily consists of offeringconsumer banking products such as checking, money market, and certificates ofdeposit.  The retail bank primarilyinvests the funds generated through its consumer bank products in mortgageloans, investment securities and originated small business financing loans andleases.  The mortgage banking segment originates mortgage loans directlywith borrowers and purchases mortgage loans from correspondents and/or brokers.The mortgage banking segment packages or pools such loans either inclusive orexclusive of servicing rights for sale into the secondary market.  Additionally, the Company has variousstrategic initiatives including small business banking, personal financialplanning, dealer financial services and NetInsurance. These initiatives as wellas the revenues and expenses of the parent company are currently reported in theOther segment.

 

The accompanying segment dataincludes the results of Resource commencing April 1, 2002, reflecting the dateof acquisition. The 2002 tables include the effects of certaintransactions related to the acquisition of Resource, including restructuringthe investment portfolio in anticipation of the Resource transaction andcertain compensation charges related to changes in management as a result ofthe transaction.  The reader is directed to the management discussion andanalysis and results of operations included within this report for additionaldetail regarding comparability of period results.

 

The financial information foreach business segment reflects specific identifiable transactions or allocatedtransactions based on an internal allocation method. The measurement of theperformance of the business segments is based on the management structure ofNetBank and is not necessarily comparable with similar information from anyother financial institution. The information presented is also not necessarilyindicative of the segment’s operations if they were independent entities.

 
|                          |   | **For the three months ended June 30, 2003** |      |
|-------------------------------|--------|----------------------------------------------|-----------|
|                          |   | **Retail Banking**                           |      | **Mortgage  Banking** |   | **Other** |   | **Eliminations** |   | **Consolidated** |   |
| Interest income               |   | $                                            | 19,459    |   | $ | 30,832 |   | $ | 32 |   | $ | 18 |   | $ | 50,341 |   |
| Intersegment interest income  |   | 11,314                                       |      | 82 |   | 360 |   | (11,756 | ) | — |   |
| Total interest income         |   | 30,773                                       |      | 30,914 |   | 392 |   | (11,738 | ) | 50,341 |   |
| Interest expense              |   | 19,124                                       |      | 2,030 |   | 479 |   | — |   | 21,633 |   |
| Intersegment interest expense |   | 395                                          |      | 11,060 |   | 301 |   | (11,756 | ) | — |   |
| Total interest expense        |   | 19,519                                       |      | 13,090 |   | 780 |   | (11,756 | ) | 21,633 |   |
| Net interest income           |   | 11,254                                       |      | 17,824 |   | (388 | ) | 18 |   | 28,708 |   |
| Provision for credit losses   |   | 872                                          |      | 22 |   | — |   | — |   | 894 |   |
| Non-interest income           |   | 7,955                                        |      | 73,933 |   | (69 | ) | (1,265 | ) | 80,554 |   |
| Non-interest expense          |   | 20,693                                       |      | 63,200 |   | 2,092 |   | (52 | ) | 85,933 |   |
| Pretax income (loss)          |   | $                                            | (2,356    | ) | $ | 28,535 |   | $ | (2,549 | ) | $ | (1,195 | ) | $ | 22,435 |   |
|                          |   |                                         |      |   |   |   |   |   |   |   |   |
| Total assets                  |   | $                                            | 4,035,038 |   | $ | 2,811,400 |   | $ | 563,687 |   | $ | (2,899,700 | ) | $ | 4,510,425 |   |

** **

**14**

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** **
|                          |   | **For the three months ended June 30, 2002** |      |
|-------------------------------|--------|----------------------------------------------|-----------|
|                          |   | **Retail Banking**                           |      | **Mortgage  Banking** |   | **Other** |   | **Eliminations** |   | **Consolidated** |   |
| Interest income               |   | $                                            | 17,455    |   | $ | 18,766 |   | $ | 18 |   | $ | — |   | $ | 36,239 |   |
| Intersegment interest income  |   | 4,086                                        |      | — |   | 896 |   | (4,982 | ) | — |   |
| Total interest income         |   | 21,541                                       |      | 18,766 |   | 914 |   | (4,982 | ) | 36,239 |   |
| Interest expense              |   | 23,985                                       |      | 5,989 |   | 453 |   | — |   | 30,427 |   |
| Intersegment interest expense |   | —                                       |      | 4,086 |   | 896 |   | (4,982 | ) | — |   |
| Total interest expense        |   | 23,985                                       |      | 10,075 |   | 1,349 |   | (4,982 | ) | 30,427 |   |
| Net interest income           |   | (2,444                                       | )         | 8,691 |   | (435 | ) | — |   | 5,812 |   |
| Provision for credit losses   |   | 26,423                                       |      | — |   | (1 | ) | — |   | 26,422 |   |
| Non-interest income           |   | 683                                          |      | 40,574 |   | 482 |   | (436 | ) | 41,303 |   |
| Non-interest expense          |   | 25,133                                       |      | 44,027 |   | 2,313 |   | (436 | ) | 71,037 |   |
| Pretax income (loss)          |   | $                                            | (53,317   | ) | $ | 5,238 |   | $ | (2,265 | ) | $ | — |   | $ | (50,344 | ) |
|                          |   |                                         |      |   |   |   |   |   |   |   |   |
| Total assets                  |   | $                                            | 2,861,993 |   | $ | 887,547 |   | $ | 466,527 |   | $ | (625,644 | ) | $ | 3,590,423 |   |

 
|                          |   | **For the six months ended June 30, 2003** |      |
|-------------------------------|--------|--------------------------------------------|-----------|
|                          |   | **Retail Banking**                         |      | **Mortgage  Banking** |   | **Other** |   | **Eliminations** |   | **Consolidated** |   |
| Interest income               |   | $                                          | 38,959    |   | $ | 56,327 |   | $ | 32 |   | $ | 25 |   | $ | 95,343 |   |
| Intersegment interest income  |   | 19,823                                     |      | 82 |   | 866 |   | (20,771 | ) | — |   |
| Total interest income         |   | 58,782                                     |      | 56,409 |   | 898 |   | (20,746 | ) | 95,343 |   |
| Interest expense              |   | 38,551                                     |      | 3,690 |   | 891 |   | — |   | 43,132 |   |
| Intersegment interest expense |   | 880                                        |      | 19,281 |   | 610 |   | (20,771 | ) | — |   |
| Total interest expense        |   | 39,431                                     |      | 22,971 |   | 1,501 |   | (20,771 | ) | 43,132 |   |
| Net interest income           |   | 19,351                                     |      | 33,438 |   | (603 | ) | 25 |   | 52,211 |   |
| Provision for credit losses   |   | 1,721                                      |      | 41 |   | — |   | — |   | 1,762 |   |
| Non-interest income           |   | 17,512                                     |      | 134,465 |   | (67 | ) | (2,212 | ) | 149,698 |   |
| Non-interest expense          |   | 41,878                                     |      | 115,357 |   | 3,588 |   | (82 | ) | 160,741 |   |
| Pretax income (loss)          |   | $                                          | (6,736    | ) | $ | 52,505 |   | $ | (4,258 | ) | $ | (2,105 | ) | $ | 39,406 |   |
|                          |   |                                       |      |   |   |   |   |   |   |   |   |
| Total assets                  |   | $                                          | 4,035,038 |   | $ | 2,811,400 |   | $ | 563,687 |   | $ | (2,899,700 | ) | $ | 4,510,425 |   |

 
|                          |   | **For the six months ended June 30, 2002** |      |
|-------------------------------|--------|--------------------------------------------|-----------|
|                          |   | **Retail Banking**                         |      | **Mortgage  Banking** |   | **Other** |   | **Eliminations** |   | **Consolidated** |   |
| Interest income               |   | $                                          | 49,606    |   | $ | 23,386 |   | $ | 25 |   | $ | — |   | $ | 73,017 |   |
| Intersegment interest income  |   | 5,177                                      |      | — |   | 1,307 |   | (6,484 | ) | — |   |
| Total interest income         |   | 54,783                                     |      | 23,386 |   | 1,332 |   | (6,484 | ) | 73,017 |   |
| Interest expense              |   | 47,055                                     |      | 6,977 |   | 830 |   | — |   | 54,862 |   |
| Intersegment interest expense |   | 411                                        |      | 5,177 |   | 896 |   | (6,484 | ) | — |   |
| Total interest expense        |   | 47,466                                     |      | 12,154 |   | 1,726 |   | (6,484 | ) | 54,862 |   |
| Net interest income           |   | 7,317                                      |      | 11,232 |   | (394 | ) | — |   | 18,155 |   |
| Provision for credit losses   |   | 26,526                                     |      | — |   | — |   | — |   | 26,526 |   |
| Non-interest income           |   | 3,636                                      |      | 46,469 |   | 607 |   | (436 | ) | 50,276 |   |
| Non-interest expense          |   | 40,787                                     |      | 48,502 |   | 11,879 |   | (436 | ) | 100,732 |   |
| Pretax income (loss)          |   | $                                          | (56,360   | ) | $ | 9,199 |   | $ | (11,666 | ) | $ | — |   | $ | (58,827 | ) |
|                          |   |                                       |      |   |   |   |   |   |   |   |   |
| Total assets                  |   | $                                          | 2,861,993 |   | $ | 887,547 |   | $ | 466,527 |   | $ | (625,644 | ) | $ | 3,590,423 |   |

** **

**15**

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** **

**11.          LOSSCONTINGENCY**

** **

NetBank, FSB is involved in litigation with three insurance companieswho are sureties on some of NetBank, FSB’s commercial lease portfolios.NetBank, FSB has filed a claim for all principal and interest payments that arecurrently past due.  The unpaidprincipal balance totals $83,769. In accordance with the Office of ThriftSupervision requirements, the Company maintains an allowance for losses againstthis portfolio of $21,228.  The entireportfolio has been placed on non-accrual status pending outcome of thelitigation.  Since the CMC leaseportfolio was placed on non-accrual during the quarter ended March 31, 2002,the Company has not accrued and has not received approximately $2.1 million ofinterest income per quarter. Additionally, NetBank has incurred $321 and $472 of legal expensesrelated to this litigation for the three and six months ended June 30, 2003.

 

# **12.          GUARANTEES**

# ** **

The Company has issuedmortgage-backed securities under various programs sponsored by Ginnie Mae,Freddie Mac and Fannie Mae.  Inconnection with servicing mortgage-backed securities guaranteed by Ginnie Mae,Freddie Mac or Fannie Mae, the Company advances certain principal and interestpayments to security holders prior to their collection from specificmortgagors.  Additionally, the Companymust remit certain payments of property taxes and insurance premiums in advanceof collecting them from specific mortgagors and make certain payments ofattorney’s fees and other costs related to loans in foreclosure.  These amounts are included in servicingadvances under the caption due from servicers and investors in the accompanyingconsolidated balance sheets. Likewise, during the month that a mortgagor paysoff his/her mortgage, the Company must accept an interest payment from theborrower that is pro-rated to the date of payoff and pass through a fullmonth’s interest to the security holder. The Company includes its projection of the cost of such advances, lostinterest on mortgages that prepay, and the expense of unreimbursed attorney andother costs associated with foreclosure in its valuation of the servicingassets.

 

**In the ordinary course of business, the Company is exposedto liability under representations and warranties made to purchasers andinsurers of mortgage loans and the purchasers of servicing rights.  Under certain circumstances, the Company maybe required to repurchase mortgage loans or indemnify the purchasers of loansor servicing rights for losses if there has been a breach of representations orwarranties.  At June 30, 2003 andDecember 31, 2002, NetBank had $26,724 and $11,893 of reserves which representthe estimated fair value of its guarantees under these contracts.  For the six months ended June 30, 2003,NetBank repurchased $18,430 of loans, which is less than two-tenths of onepercent of production for the same period.**

** **

**In certain sales of whole loans and sales of servicing, theCompany is contractually obligated to refund to the purchaser, certain premiumspaid to the Company on the sale of loans or servicing rights if the mortgagorprepays the mortgage during a specified period of time (generally up to 120days after sale).  The Company hadreserves for its estimated obligation of $2,560 and $1,475 as of June 30, 2003,and December 31, 2002, respectively.**

** **

**Since NetBank is not the primary servicer for many of theloans or loans underlying the mortgage servicing rights it sells, it has noknowledge as to the current status of previously sold loans and mortgageservicing rights.  Accordingly, NetBankis unable to determine its maximum exposure under its representations andwarranties.  The maximum exposure underNetBank’s representations and warranties would be the outstanding principalbalance and any premium paid of all loans or mortgage servicing rights eversold by the company less any loans sold servicing released or any loansunderlying mortgage servicing rights that have already prepaid or defaultedwithout a breach of representations and warranties.**

** **

**16**

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** **

**PartI. Item 2**:   Management’sDiscussion and Analysis of Financial Condition and Results of Operations

** **

***Someof the statements in this report are forward–looking statements.Forward–looking statements include statements regarding the intent, belief orcurrent expectations of NetBank or its officers and directors and can beidentified by the use of forward–looking terms such as “may,” “will,” “should,”“believe,” “expect,” “anticipate,” “estimate,” “continue,” or comparableterminology. The Company’s actual results could differ materially from thoseanticipated from the forward–looking statements, depending on various importantfactors. These factors include a possible decline in asset quality, potentialdifficulties in integrating the Company’s operations across its multiple linesof business, the cyclical nature of the mortgage banking industry generally,the evolving nature of the market for internet banking and financial servicesgenerally, the possible adverse effects of unexpected changes in the interestrate environment, and increasing competition and regulatory changes. TheCompany’s 2002 Form 10-K filed with the Securities and Exchange Commission,contains additional details on these and other risks that are material tooperations. All forward–looking statements in this report are based oninformation available as of the date this report was filed with the SEC. TheCompany does not undertake to update any forward–looking statements that may bemade.***

** **

**General**

 

NetBank, Inc. is a savings andloan holding company that wholly owns the outstanding stock of NetBank®,(“NetBank, FSB”), a federal savings bank; Meritage Mortgage Corporation(“Meritage”), a wholesale non-conforming mortgage provider; MG ReinsuranceCompany (“MG Reinsurance”), a captive reinsurance company; NetInsurance, Inc.,(“NetInsurance”), a licensed insurance agency; and NB Partners, Inc., acorporation formed to be involved in strategic partnering opportunities.  NetBank, FSB also owns all of theoutstanding stock of Market Street Mortgage Corporation (“Market Street”), aretail mortgage company, and Resource Bancshares Mortgage Group, Inc.(“Resource”). Resource wholly owns RBMG, Inc. (“RBMG”), a wholesale mortgagebanking company, and Republic Leasing Company, Inc. (“Republic Leasing”), asmall ticket commercial financing company.

 

NetBank, Inc. acquired Resourceon March 31, 2002, and subsequently reorganized the holding company structureas described above based on operational, licensing and funding needs.Accordingly, the financial impact of Resource is included from the dates ofacquisition. The entire consolidated company is referred to herein as “NetBank”or  “the Company”.

 

All dollar figures arepresented in thousands (000s) except per share data unless otherwise noted.

 

# **FinancialCondition**

# ** **

*General.*During the six months ended June 30, 2003,the Company’s assets increased $1.0 billion or 28%. The increase was primarilydue to increases of $1.0 billion in loans held for sale and $292,603 in loanand lease receivables, partially offset by declines of $306,972 in investmentsecurities available for sale and $52,655 in cash and cash equivalents.  The increase in loans held for sale wasprimarily due to the $10.0 billion record level of production in the mortgagebanking segment outpacing the $8.4 billion record level of sales into thesecondary markets. The increase in loan and lease receivables is primarily dueto the retention of $0.5 billion of loans produced by the mortgage bankingsegment to be held for investment by the retail banking segment, offset in partby $0.2 billion of curtailments in loan and lease receivables.  The investment securities available for saleportfolio declined $306,972 as the Company chose to sell certain investmentsecurities and use some of the proceeds to pay off certain fixed-rate termadvances from the Federal Home Loan Bank (“FHLB”) which will more effectivelybalance its interest rate sensitivity and improve the net interest margin infuture periods.  Cash and cashequivalents declined by $52,655 primarily due to the Company more effectivelyusing its cash to support the increase in mortgage loan production.

 

17

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Additionally, during the sixmonths ended June 30, 2003, the Company’s other assets increased $31,086primarily due to the increase in fair value of the Company’s forward loancommitments and mortgage servicing rights hedges.  These derivatives are accounted for under SFAS No. 133, and assuch the change in fair value is recorded as other assets. This increase waspartially offset by a decline of $30,489 in due from servicers and investorsrelated to the Company replacing externally serviced loans with internallyoriginated and serviced loans.  Byinternally servicing its portfolio of loans and leases, NetBank will accelerateits cash receipts and allow the Company to expand its cross-selling efforts.

 

*Average balances.* The following table containsaverage balances for the periods indicated. Reference is made to the rate volume variance tables contained in theresults of operations section for additional detail of the Company’s averageinterest-earning assets and interest-bearing liabilities.

 
|                                            |   | **Three months ended********June 30,** |      | **Six months ended********June 30,** |   |
|-------------------------------------------------|--------|----------------------------------------|-----------|--------------------------------------|--------|
|                                            |   | **2003**                               |      | **2002**                             |   | **2003** |   | **2002** |   |
| Assets                                          |   |                                   |      |                                 |   |   |   |   |   |
| Interest-earning                                |   | $                                      | 3,679,617 |                                 | $      | 3,333,355 |   | $ | 3,472,020 |   | $ | 2,993,314 |   |
| Noninterest-earning                             |   | 471,417                                |      | 451,573                              |   | 451,835 |   | 613,892 |   |
| Total                                           |   | $                                      | 4,151,034 |                                 | $      | 3,784,928 |   | $ | 3,923,855 |   | $ | 3,607,206 |   |
|                                            |   |                                   |      |                                 |   |   |   |   |   |
| Liabilities and shareholders’ equity       |   |                                   |      |                                 |   |   |   |   |   |
| Interest-bearing                                |   | $                                      | 3,471,293 |                                 | $      | 3,140,878 |   | $ | 3,263,742 |   | $ | 2,785,664 |   |
| Noninterest-bearing                             |   | 266,464                                |      | 248,906                              |   | 250,732 |   | 472,962 |   |
| Total liabilities                               |   | 3,737,757                              |      | 3,389,784                            |   | 3,514,474 |   | 3,258,626 |   |
| Shareholders’ equity                       |   | 413,277                                |      | 395,144                              |   | 409,381 |   | 348,580 |   |
| Total liabilities and shareholders’ equity |   | $                                      | 4,151,034 |                                 | $      | 3,784,928 |   | $ | 3,923,855 |   | $ | 3,607,206 |   |

 

*Investment Securities.* During the six months ended June 30, 2003, the Company sold certain investmentsecurities at gains of $12,188.  NetBankused the proceeds to pay off certain fixed-rate term FHLB advances and reducedebt supporting the mortgage operations. The $12,188 of gains on the sales more than offset the $11,951 ofprepayment penalties incurred on the early extinguishments of the debt.  NetBank may continue to selectively sellinvestment securities in order to use the proceeds to better position its netinterest margin for the benefit of future periods.  Additionally, the Company recorded impairment charges of $794 ontwo variable rate, long-term corporate bonds. The bonds had traded under book value for an extended period of time dueto widening credit spreads.  Both bondscarry a Standard & Poor’s “A-” rating.

 

The following tables set forthcertain information relating to the Company’s available for sale securities atJune 30, 2003, and December 31, 2002:

 
| **As of June  30, 2003**           |   | **Amortized  cost** |    | **Unrealized  gains** |   | **Unrealized  losses** |   | **Estimated  fair value** |   |
|------------------------------------|--------|---------------------|---------|-----------------------|--------|------------------------|--------|---------------------------|--------|
| Mortgage  pool securities          |   | $                   | 58,233  |                  | $      | 1,448                  |   | $                         | 1      |   | $ | 59,680 |   |
| Collateralized mortgageobligations |   | 1,799               |    | 167                   |   | —                 |   | 1,966                     |   |
| U.S. government agencies           |   | 256,617             |    | 16,749                |   | —                 |   | 273,366                   |   |
| Corporate bonds                    |   | 8,892               |    | —                |   | —                 |   | 8,892                     |   |
| Habitat bonds and other            |   | 3,541               |    | 302                   |   | —                 |   | 3,843                     |   |
| Total                              |   | $                   | 329,082 |                  | $      | 18,666                 |   | $                         | 1      |   | $ | 347,747 |   |

 

18

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| **As of December 31, 2002**                |   | **Amortized  cost** |    | **Unrealized  gains** |   | **Unrealized  losses** |   | **Estimated  fair value** |   |
|--------------------------------------------|--------|---------------------|---------|-----------------------|--------|------------------------|--------|---------------------------|--------|
| Mortgage  pool securities                  |   | $                   | 121,868 |                  | $      | 3,222                  |   | $                         | — |   | $ | 125,090 |   |
| Collateralized mortgage   obligations |   | 8,774               |    | 159                   |   | 9                      |   | 8,924                     |   |
| U.S. government agencies                   |   | 493,159             |    | 15,079                |   | —                 |   | 508,238                   |   |
| Corporate bonds                            |   | 9,679               |    | —                |   | 971                    |   | 8,708                     |   |
| Habitat bonds and other                    |   | 3,511               |    | 248                   |   | —                 |   | 3,759                     |   |
| Total                                      |   | $                   | 636,991 |                  | $      | 18,708                 |   | $                         | 980    |   | $ | 654,719 |   |

 

*Loan and Lease Receivables.* NetBank is actively replacing its purchased loan and lease receivablesportfolio with internally originated loans and leases so it can capitalize oncross-selling opportunities, internally service the assets and more effectivelycontrol its credit and interest rate risk. The Company’s loan and leasereceivables grew by $292,603 for the six months ended June 30, 2003, as theCompany selectively retained $474,122 of ARM, second and jumbo mortgage loansto replace the runoff or sale of previously purchased loan and leasepools.  The Company expects to continueretaining the majority of the ARM, second and jumbo mortgage loans originatedby the mortgage banking segment.  Asillustrated in the following tables, the Company has increased its percentageof residential mortgage loans to total loans and leases to 69% as of June 30,2003, compared to 58% as of December 31, 2002.

 

*Asset Quality and Non-performing Assets.*The Company periodically reviews the performance of its loan and leasereceivables portfolio by reviewing charge-offs, delinquency statistics, andindustry statistics on a pool-by-pool basis for its purchased portfolio and anindividual basis for its originated loans and leases. If a decline in creditquality for a specific pool or individual loan or lease is noted, the Companyrecords additional allowance through a charge to the provision for creditlosses. The allowance for credit losses is maintained at a level estimated to beadequate to provide for probable losses in the loan and lease receivablesportfolio. The Company determines the adequacy of the allowance based uponreviews of individual loans and leases, recent loss experience, currenteconomic conditions, the risk characteristics of the various categories ofloans and leases and other pertinent factors. NetBank’s non-performing assets as a percentage of gross unpaidprincipal balance (UPB) improved from 9.3% to 7.1% for the six months endedJune 30, 2003, as the level of non-performing assets held constant relative toa $291,882 or 31% increase in gross UPB. This same measurement excluding the CMC lease portfolio reflects a dropfrom 0.4% to 0.3%.  As gross UPBcontinues to increase from the retention of residential mortgage loans, theCompany expects this ratio may continue to improve.

 

The following tables detailNetBank’s held for investment loan and lease portfolio, the associatedallowance for credit losses and non-performing assets:

 
|                       |   | **June 30, 2003** |      |
|----------------------------|--------|-------------------|-----------|
|                       |   | **Gross UPB**     |      | **Allocated  allowance** |   | **(1)  Non-  performing** |   | **Allowance /   NPA** |   | **NPA /********Gross UPB** |   |
| Residential mortgages      |   | $                 | 841,913   |   | $ | 9,684 |   | $ | 1,356 |   | 714.2 | % | 0.2 | % |
| Leases                     |   | 241,185           |      | 9,660 |   | 1,327 |   | 728.0 | % | 0.6 | % |
| Home equity lines          |   | 57,136            |      | 1,026 |   | 453 |   | 226.5 | % | 0.8 | % |
| Consumer                   |   | 2,547             |      | 256 |   | 1 |   | 25600.0 | % | 0.0 | % |
| Construction               |   | —            |      | — |   | — |   | n/a |   | n/a |   |
| Auto                       |   | 1                 |      | 1 |   | — |   | na |   | na |   |
| Loan and lease receivables |   | 1,142,782         |      | 20,627 |   | 3,137 |   | 657.5 | % | 0.3 | % |
| CMC leases (2)             |   | 83,769            |      | 21,228 |   | 83,769 |   | 25.3 | % | 100.0 | % |
| Loan and lease receivables |   | $                 | 1,226,551 |   | $ | 41,855 |   | $ | 86,906 |   | 48.2 | % | 7.1 | % |
|                            |        |                   |           |  |  |  |  |  |  |  |  |  |  |  |  |

 

19

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|                       |   | **December 31, 2002** |    |
|----------------------------|--------|-----------------------|---------|
|                       |   | **Gross UPB**         |    | **Allocated  allowance** |   | **(1)  Non-  performing** |   | **Allowance /   NPA** |   | **NPA /********Gross UPB** |   |
| Residential mortgages      |   | $                     | 545,120 |   | $ | 10,464 |   | $ | 1,851 |   | 565.3 | % | 0.3 | % |
| Leases                     |   | 221,507               |    | 9,009 |   | 1,405 |   | 641.2 | % | 0.6 | % |
| Home equity lines          |   | 82,051                |    | 1,659 |   | — |   | n/a |   | n/a |   |
| Consumer                   |   | 2,025                 |    | 216 |   | — |   | n/a |   | n/a |   |
| Construction               |   | 188                   |    | — |   | — |   | n/a |   | n/a |   |
| Auto                       |   | 9                     |    | — |   | — |   | n/a |   | n/a |   |
| Loan and lease receivables |   | 850,900               |    | 21,348 |   | 3,256 |   | 655.7 | % | 0.4 | % |
| CMC leases (2)             |   | 83,769                |    | 21,228 |   | 83,769 |   | 25.3 | % | 100.0 | % |
| Loan and lease receivables |   | $                     | 934,669 |   | $ | 42,576 |   | $ | 87,025 |   | 48.9 | % | 9.3 | % |
|                            |        |                       |         |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)            Non-performingassets (“NPA”) include all loans and leases that are 90 days or more delinquentor on non-accrual status. The tables above do not include $18,305 and $30,443of non-performing loans classified as held for sale as of June 30, 2003, andDecember 31, 2002, respectively. Since loans classified as held for sale arecarried at the lower of cost or market, the estimated losses that may occurhave already been recorded in both the balance sheet and statement ofoperations.

 

(2)            Thereader is directed to Part II Item 1Legal Proceedings contained within this report for additional detail regardingthe CMC lease portfolio and the associated litigation.

 

*Liabilities.* Totalliabilities for the six months ended June 30, 2003, increased $964,135.  This increase was due primarily to increasesof $419,310 in deposits, $470,101 in other borrowed funds and $74,136 in loansin process.  The increase in deposits isthe result of adding 10,294 new deposit customers and increasing the averageaccount balance to $11 from $9 during the six months ended June 30, 2003.  The increase in other borrowed funds wasnecessary to support the $1.0 billion increase in loans held for sale.  The increase in loans in process correlates tothe increase in production for the period. In April 2003, the Company completed its second trust preferredsecurities offering which also increased total liabilities by $4,382.

 

*Deposits.* As of June30, 2003, deposits represented 64% of total borrowed funds (including deposits,other borrowed funds, convertible subordinated notes and trust preferredsecurities) outstanding. FHLB advances, warehouse lines of credit andrepurchase agreements represented approximately 35%, and convertiblesubordinated debt and trust preferred securities represented less than 1%.  During the six months ended June 30, 2003,NetBank was able to increase its deposits and lower its cost of funds byreplacing $92,880 of higher cost certificates of deposits with $365,825 ofmoney market and interest-bearing checking accounts and $146,365 ofnon-interest bearing checking accounts. NetBank will continue to emphasize transactional accounts as its primarylong-term funding source.  Reference ismade to detailed deposit information contained within Note 5 of the Notes toConsolidated Financial Statements.

 

*Shareholders’ Equity.*  Total shareholders’ equity increased $18,738for the six months ended June 30, 2003. The increase is primarily due to a $22,978 increase in retained earningsresulting from $24,915 of net income, offset in part by the payment ofdividends of $1,937. Additional paid-in capital increased by $4,904 primarilyrelated to the tax benefit of non-qualified option exercises. Accumulated othercomprehensive income (OCI) increased $582 related to the change in fair valueof available for sale investment securities. These increases were partiallyoffset by a net $9,727 increase in treasury stock.  The increase in treasury stock was due to the repurchase of963,200 shares of common stock at a weighted average cost of $10.83 per shareoffset in part by the reissuance of 36,683 shares under the employee stockpurchase plan at an average cost of $8.59 and the reissuance of 45,000 sharesof restricted stock at an average cost of $8.62.  NetBank will continue to repurchase shares periodically in thepublic market or through private transactions.

 

20

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**Results of Operations – Three months endedJune 30, 2003, compared to the three months ended June 30, 2002**

 

*General.* Netincome for the three months ended June 30, 2003, was $14,213 or $0.29 pershare, compared to a net loss of $31,287 or ($0.64) per share, for the sameperiod in 2002.  The $31,287 net loss in2002 included approximately $59.9 million pre-tax, of charges associated withthe acquisition of Resource on March 31, 2002, and the subsequent repositioningof the Company’s balance sheet to reflect its financial intermediary strategy.The increase in net income for the three months ended June 30, 2003, comparedto the same period for 2002, in addition to the aforementioned charges, wasdriven by the strong performance of the mortgage banking segment as itcapitalized on record production and sales levels associated with the lowinterest rate environment. NetBank had mortgage production of $5.6 billion andsales of $4.5 billion for the three months ended June 30, 2003, compared toproduction of $2.9 billion and sales of $3.0 billion for the same period of2002.

 

*Interest Income*. NetBank’sinterest income for the three months ended June 30, 2003, was $50,341 comparedto $36,239 for the same period in 2002. Interest income for the 2002 period wasnegatively impacted by approximately $12,464 related to the impairment ofpremiums on purchased loan and lease pools that experienced acceleratedprepayments during the first half of 2002. As detailed in the following ratevolume variance table, NetBank lowered the average balance of its short-terminvestments, investment securities available for sale and loan and leasereceivables by $732,108 and increased the average balance of its loans held forsale by $1,078,370. This repositioning allowed the Company to earn long-termyields on a greater percentage of its interest-earning assets while effectivelyholding short-term held for sale assets. Utilization of this strategy limited NetBank’s decline in average yield,adjusted for the 2002 impairment, to 37 basis points compared to a 138basis-point decline in the average cost of funds.  As discussed in Note 11 of the Consolidated Financial Statementsincluded within this report, the Company has not accrued and has not receivedapproximately $2.1 million per quarter of interest related to the CMC leaseportfolio.  See Part II Item 1 LegalProceedings within this report for a more in depth discussion of the CMC leaseportfolio and associated litigation.

 

*Interest Expense*.Total interest expense for the three months ended June 30, 2003, was $21,633compared to $30,427 for the same period of 2002.  The $8,794 decline is primarily due to the 138 basis-pointreduction in the average cost of funds, offset in part by an increase of$330,415 in the average balance of interest-bearing liabilities. For the threemonths ended June 30, 2003, there was $12,534 in interest expense on deposits(including checking, money market and certificates of deposits) as compared to$14,009 for the three months ended June 30, 2002.  The $1,475 net decreasein interest expense on deposits was the result of a 110 basis-point decline inthe average rate paid on deposits resulting in a positive $4,680 rate variance,partially offset by a negative volume variance of $3,205 due to increasedaverage deposit balances of $600,658. For the three months ended June 30, 2003, interest expense on otherborrowed funds (including short-term debt, FHLB advances, trust preferred andconvertible subordinated debt) was $9,099 compared to $16,418 for the sameperiod of 2002.  The $7,319 decline ininterest expense related to other borrowed funds is the result of a 145basis-point decline in the average cost of funds coupled with a decline of$270,247 in the average outstanding balance. NetBank further reduced itsoverall cost of funds during the period by reallocating its sources of funds torely more heavily on deposits with an average cost of 217 basis points asopposed to other borrowed funds with an average cost of 314 basis points.

 

*Net Interest Income.*Netinterest income is determined by interest rate spread, which is the differencebetween the yields earned on interest-earning assets and the rates paid oninterest-bearing liabilities, and the relative amounts of interest-earningassets and interest-bearing liabilities. Net interest income was $28,708, or3.12% of average interest-earning assets for the three months ended June 30,2003, compared to $5,812, or 0.70% of average interest-earning assets for thethree months ended June 30, 2002.

 

The following table details the relative interest rates and averagebalances of NetBank’s interest-earning assets and interest-bearing liabilitiesfor the three months ended June 30, 2003 and 2002:

 

21

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| **Average Balance** |      | **Average Yield**** ****/ Rate** |   |      |   | **Interest** |   |                               |   | **Variance********Attributable to**            |   |
|---------------------|-----------|---------------------------------------|--------|-----------|--------|--------------|--------|------------------------------------|--------|------------------------------------------------|--------|
| **2003**            |      | **2002**                              |   | **2003**  |   | **2002**     |   |                               |   | **2003**                                       |   | **2002** |   | **Variance** |   | **Rate** |   | **Volume (3)** |   |
|                |      |                                  |   |      |   |         |   | **Interest-earning assets:**       |   |                                           |   |   |   |   |   |   |   |   |   |
| $                   | 34,956    |                                  | $      | 109,842   |   | 1.00         | %      | 3.02                               | %      | Short-term  investments                        |   | $ | 87 |   | $ | 829 |   | $ | (742 | ) | $ | (556 | ) | $ | (186 | ) |
| 538,897             |      | 857,861                               |   | 3.97      | %      | 3.74         | %      | Investment securities (1)          |   | 5,351                                          |   | 8,030 |   | (2,679 | ) | 488 |   | (3,167 | ) |
| 2,004,439           |      | 926,069                               |   | 6.27      | %      | 7.41         | %      | Loans held for sale (2)            |   | 31,417                                         |   | 17,165 |   | 14,252 |   | (2,650 | ) | 16,902 |   |
| 1,101,325           |      | 1,439,583                             |   | 4.90      | %      | 2.84         | %      | Loans and leases receivable (2)    |   | 13,486                                         |   | 10,215 |   | 3,271 |   | 7,413 |   | (4,142 | ) |
| 3,679,617           |      | 3,333,355                             |   | 5.47      | %      | 4.35         | %      | Total interest-earning assets      |   | 50,341                                         |   | 36,239 |   | 14,102 |   | 4,695 |   | 9,407 |   |
|                |      |                                  |   |      |   |         |   |                               |   |                                           |   |   |   |   |   |   |   |   |   |
|                |      |                                  |   |      |   |         |   | **Interest-bearing liabilities:**  |   |                                           |   |   |   |   |   |   |   |   |   |
| 183,766             |      | 144,138                               |   | 1.55      | %      | 1.69         | %      | Checking accounts                  |   | 711                                            |   | 608 |   | 103 |   | (50 | ) | 153 |   |
| 1,079,564           |      | 631,719                               |   | 2.14      | %      | 2.39         | %      | Money market                       |   | 5,786                                          |   | 3,771 |   | 2,015 |   | (385 | ) | 2,400 |   |
| 1,048,696           |      | 935,511                               |   | 2.30      | %      | 4.12         | %      | Certificates of deposit            |   | 6,037                                          |   | 9,630 |   | (3,593 | ) | (4,245 | ) | 652 |   |
| 595,846             |      | 772,249                               |   | 2.08      | %      | 3.43         | %      | Short-term debt                    |   | 3,099                                          |   | 6,627 |   | (3,528 | ) | (2,611 | ) | (917 | ) |
| 528,737             |      | 629,945                               |   | 4.23      | %      | 6.01         | %      | FHLB advances                      |   | 5,590                                          |   | 9,463 |   | (3,873 | ) | (2,803 | ) | (1,070 | ) |
| 8,326               |      | —                                |   | 4.66      | %      | 0.00         | %      | Trust preferred securities         |   | 97                                             |   | — |   | 97 |   | — |   | 97 |   |
| 26,358              |      | 27,316                                |   | 4.75      | %      | 4.80         | %      | Convertible subordinate debt       |   | 313                                            |   | 328 |   | (15 | ) | (4 | ) | (11 | ) |
| 3,471,293           |      | 3,140,878                             |   | 2.49      | %      | 3.87         | %      | Total interest-bearing liabilities |   | 21,633                                         |   | 30,427 |   | (8,794 | ) | (10,098 | ) | 1,304 |   |
|                |      |                                  |   |      |   |         |   |                               |   |                                           |   |   |   |   |   |   |   |   |   |
| —              |      | —                                |   | 2.98      | %      | 0.47         | %      | Net interest margin                |   | 28,708                                         |   | 5,812 |   | 22,896 |   | 14,793 |   | 8,103 |   |
| 208,324             |      | 192,477                               |   | 0.14      | %      | 0.22         | %      | Interest free sources              |   | —                                         |   | — |   | — |   | — |   | — |   |
| $                   | 3,679,617 |                                  | $      | 3,333,355 |   | 3.12         | %      | 0.70                               | %      | Net interest income to interest-earning assets |   | $ | 28,708 |   | $ | 5,812 |   | $ | 22,896 |   | $ | 14,793 |   | $ | 8,103 |   |

 

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(1) Based on amortized cost; changes in fair value are not considered.

(2) No separate treatment has been made for non-accrual loans.

(3) Variances attributable to the rate and volume mix are included inthe volume variances.

 

*Provision for Credit Losses.* The provision for credit losses was $894 for the three months ended June 30,2003, compared to $26,422 for the same period of 2002.  The 2002 figure contained $20,102 ofprovision specifically for the CMC lease portfolio.  Reference is made to the asset quality and non-performing assetssection in the financial condition section contained within this report foradditional detail concerning the determination of provision expense related tomaintaining the proper level of allowance for credit losses.

 

*Non-interest Income.* Non-interest income increased $39,251 to $80,554 for the three months endedJune 30, 2003, compared to $41,303 for the same period of2002.  Non-interest income during the 2002 period was negativelyimpacted by $5,312 due to the effects of purchase accounting related toResource’s pre-existing inventory of held for sale mortgages. Gains on sales ofmortgage loans and mortgage servicing rights accounted for $30,120 of theperiod over period increase, which was primarily due to the $1.8 billionincrease in sales of mortgage loans period over period.  Additionally, there was a $6,834 increase ingains (losses) on sales of investment securities as the Company sold certaininvestment securities for gains of $5,855 compared to losses of $1,772 on salesin the corresponding period of 2002. Current period gains of $5,855 were offsetin part by an impairment charge of $794 on two variable, long-term corporatebonds. The bonds had traded under book value for an extended period of time dueto widening credit spreads.  Both bondscarry a Standard & Poor’s “A-” rating. Other income increased $2,418 to $3,416 for the three months ended June30, 2003, compared to $998 for the comparable period of 2002.  Other income for the three months ended June30, 2003, consisted of $998 of gains associated with fair value adjustments forassets accounted for under SFAS No. 133, $852 of revenues from MG Reinsurance,$488 of revenues from Republic Leasing and $1,078 of ancillary fees and income.

 

*Non-interest Expense.* Non-interest expense includes all operating expenses such as salaries andbenefits, marketing and general and administrative expenses.  Non-interest expense increased by $14,896 to$85,933 for the three months ended June 30, 2003, from $71,037 for the threemonths ended June 30, 2002.  The largestpart of the increase was in impairment and amortization of mortgage servicingrights, which totaled $17,534, an 

 

22

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increase of $10,030 period overperiod.  This large increase was due tothe considerable decline in long-term mortgage interest rates causing actualand forecasted prepayments to significantly accelerate. Additionally, duringthe quarter ended June 30, 2003, the Company incurred $5,975 of prepaymentpenalties on the early extinguishments of certain fixed-rate FHLB advancescompared to prepayment penalties of $2,493 in the same period of 2002.  Non-interest expenses for the three monthsended June 30, 2002, included approximately $6,609 of charges associated withthe acquisition and integration of Resource.

 

# ***Retail Bank Operations***

# ** **

The table below provides anoverview of the results of operations for the retail bank segment:

 
|                                                                                              |   | **Three months ended********June 30,** |   |
|---------------------------------------------------------------------------------------------------|--------|----------------------------------------|--------|
|                                                                                              |   |                                   |
|                                                                                              |   | **2003**                               |   | **2002** |   | **Change** |   |
| Net  interest income                                                                              |   | $                                      | 11,254 |   | $ | (2,444 | ) | $ | 13,698 |   |
| Provision for credit losses                                                                       |   | (872                                   | )      | (26,423 | ) | 25,551 |   |
| Net interest income after provision for credit losses                                             |   | 10,382                                 |   | (28,867 | ) | 39,249 |   |
| Gains on sales of loans                                                                           |   | (187                                   | )      | (1,465 | ) | 1,278 |   |
| Service charges and fees                                                                          |   | 3,080                                  |   | 3,920 |   | (840 | ) |
| Total revenues                                                                                    |   | 13,275                                 |   | (26,412 | ) | 39,687 |   |
|                                                                                              |   |                                   |   |   |   |   |   |
| Non-interest expenses                                                                             |   | 14,718                                 |   | 22,640 |   | (7,922 | ) |
| Pre-tax loss before gains on securities                                                           |   | (1,443                                 | )      | (49,052 | ) | 47,609 |   |
| Gains (losses) on sales of securities, net of prepayment penalties on  the extinguishment of debt |   | (913                                   | )      | (4,265 | ) | 3,352 |   |
| Pre-tax loss                                                                                      |   | $                                      | (2,356 | ) | $ | (53,317 | ) | $ | 50,961 |   |

 

Note: Gains on investment securities and prepayment penalties on theextinguishment of debt  have been netted for comparability purposes.

 

The net pre-tax loss for the retail banking segment improved from$53,317 for the three months ended June 30, 2002, to $2,356 for the threemonths ended June 30, 2003.  Thethree-month period of 2002 included $20,102 and $657 of charges forestablishing reserves and writing down premiums, respectively, associated withthe CMC lease portfolio. Net interest income for the 2003 period is lower thanwould be expected due to the retail bank lending a large portion of its fundsat warehouse rates to the mortgage banking operations to support its recordproduction levels. The 2002 period also included an additional $32.5 million ofcharges related to the repositioning of the retail bank’s operations andbalance sheet after the acquisition of Resource on March 31, 2002, as part ofNetBank’s financial intermediary strategy. As the retail bank reallocates itsportfolio to include more long-term investments, primarily single-family firstmortgage loans, as opposed to providing relatively lower rate short-termwarehouse lines of credit, the retail bank’s results should significantlyimprove.

 

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*Mortgage Banking*

 

The following table highlights the mortgage banking segment productionand sales activities:

 
|                                     |   | **Three months ended June 30,** |      |
|------------------------------------------|--------|---------------------------------|-----------|
|                                     |   | **2003**                        |      | **2002** |   | **Change** |   |
| **Mortgage loan production:**            |   |                            |      |   |   |   |   |
| Retail                                   |   | $                               | 935,447   |   | $ | 507,769 |   | $ | 427,678 |   |
| Correspondent                            |   | 2,528,184                       |      | 1,292,354 |   | 1,235,830 |   |
| Wholesale/broker                         |   | 1,451,884                       |      | 588,297 |   | 863,587 |   |
| RMS                                      |   | 177,674                         |      | 36,218 |   | 141,456 |   |
| Total agency-eligible                    |   | 5,093,189                       |      | 2,424,638 |   | 2,668,551 |   |
| Nonconforming                            |   | 508,341                         |      | 474,554 |   | 33,787 |   |
| Total                                    |   | $                               | 5,601,530 |   | $ | 2,899,192 |   | $ | 2,702,338 |   |
|                                     |   |                            |      |   |   |   |   |
| **Mortgage loan sales:**                 |   |                            |      |   |   |   |   |
| Conforming or agency-eligible sales      |   | $                               | 3,978,644 |   | $ | 2,484,049 |   | $ | 1,494,595 |   |
| Non-conforming sales                     |   | 505,151                         |      | 496,911 |   | 8,240 |   |
| Total                                    |   | $                               | 4,483,795 |   | $ | 2,980,960 |   | $ | 1,502,835 |   |
|                                     |   |                            |      |   |   |   |   |
| Production revenues                      |   | $                               | 91,735    |   | $ | 49,265 |   | $ | 42,470 |   |
| Production expenses                      |   | 63,200                          |      | 44,027 |   | 19,173 |   |
| Pre-tax margin                           |   | $                               | 28,535    |   | $ | 5,238 |   | $ | 23,297 |   |
|                                     |   |                            |      |   |   |   |   |
| Production revenues in bps to sales      |   | 205                             |      | 165 |   | 40 |   |
| Production expenses in bps to production |   | 113                             |      | 152 |   | (39 | ) |
| Net production margin in bps             |   | 92                              |      | 13 |   | 79 |   |

 

For the three months ended June30, 2003, the mortgage banking segment posted a record pre-tax margin of $28,535compared to $5,238 for the same period of 2002. The increase in pre-tax marginfor the three months ended June 30, 2003, compared with the same period of 2002relates primarily to record mortgage loan production of $5.6 billion and recordsales of $4.5 billion during the 2003 period compared to production of $2.9billion and sales of $3.0 billion for the 2002 period. The mortgage bankingsegment reached record production and sales levels in both the conforming andnon-conforming channels during the 2003 period. Additionally, during the threemonths ended June 30, 2003, pricing pressures eased as industry pipelinesneared full capacity resulting in a 40 bps increase in production revenues.Production expenses decreased by 39 bps period over period.  The decline in expenses was partiallyoff-set by an increase in impairment and amortization charges of $10,030 or 18bps.  Net of this increase, productionexpenses would have declined by 57 bps as the mortgage banking segment was ableto better leverage its fixed costs against higher production levels.

 

*Other Segment*

 

Forthe three months ended June 30, 2003, the other segment recorded a pre-tax lossof $2,549 compared to a pre-tax loss of $2,265 for the same period of2002.  The loss includes NetBank’s strategicinitiatives and holding company expenses, including dealer financial services,NetInsurance, NetBank, Inc., Resource Bancshares Mortgage Group, Inc. andNetBank Partners.

 

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**Results of Operations – Six months ended June30, 2003, compared to the six months ended June 30, 2002**

 

*General.* Netincome for the six months ended June 30, 2003, was a record $24,915 or $0.51per share, compared to a net loss of $36,925 or ($0.94) per share for the sameperiod of 2002.  The 2002 loss included$10.1 million pre-tax, of acquisition and severance charges and $59.9 millionpre-tax, of charges associated with the integration and repositioning of theCompany’s balance sheet as NetBank implemented its financial intermediarystrategy following its acquisition of Resource in March 2002.  Additionally, the prior period net loss onlyincludes the operating results of Resource for the three months ended June 30,2002, since its acquisition was not completed until March 31, 2002.  The record net income for the six monthsended June 30, 2003, was primarily driven by the strong performance of themortgage banking segment as it capitalized on record production of $10.0billion and record sales of $8.4 billion compared to $3.4 billion of productionand $3.5 billion of sales for the same period in 2002. The low interest rateenvironment and the addition of Resource’s mortgage banking operations fueledthe increase in production and sales.

 

*Interest Income*. NetBank’sinterest income for the six months ended June 30, 2003, was $95,343 compared to$73,017 for the same period in 2002. Interest income for the 2002 period wasnegatively impacted by approximately $12,464 related to the impairment ofpremiums on purchased loan pools that had experienced accelerated prepaymentsin early 2002. As detailed in the following rate volume variance table, NetBanklowered the average balance of its short-term investments, investmentsecurities available for sale and loan and lease receivables by $751,133 andincreased the average balance of its loans held for sale by $1,229,839. Thisrepositioning allowed the Company to earn higher long-term yields on a greaterpercentage of its interest-earning assets while effectively holding short-termheld for sale assets.  Utilization ofthis strategy limited NetBank’s decline in average yield, adjusted for the 2002impairment, to 22 basis points compared to a 130 basis-point decline in theaverage cost of funds.  As discussed inNote 11 of the Consolidated Financial Statements included within this report,the Company has not accrued and has not received approximately $2.1 million perquarter of interest related to the CMC lease portfolio.  See Part II Item 1 Legal Proceedings withinthis report for a more in depth discussion of the CMC lease portfolio andassociated litigation.

 

*Interest Expense*.Total interest expense for the six months ended June 30, 2003, was $43,132compared to $54,862 for the same period of 2002.  The $11,730 decline is primarily due to the 130 basis-pointreduction in the average cost of funds, offset in part by an increase of$478,078 in the average balance of interest-bearing liabilities. For the sixmonths ended June 30, 2003, there was $24,980 of interest expense on deposits(including checking, money market and certificates of deposits) compared to$27,783 for the six months ended June 30, 2002.  The $2,803 net decreasein interest expense on deposits was the result of a 112 basis-point decline inthe average rate paid on deposits resulting in a positive $9,002 rate variance,partially offset by a negative volume variance of $6,199 due to an increase inaverage deposit balances of $560,232. For the six months ended June 30, 2003, interest expense on otherborrowed funds (including short-term debt, FHLB advances, trust preferred andconvertible subordinated debt) was $18,152 compared to $27,079 for the sameperiod of 2002.  The net $8,927 declinein interest expense related to other borrowed funds is the result of a 131basis-point decline in the average cost of funds coupled with a favorablevolume variance of $82,154 in the average outstanding balance. NetBank furtherreduced its overall cost of funds during the period by reallocating its sourcesof funds to rely more heavily on deposits with an average cost of 227 basispoints as opposed to other borrowed funds with an average cost of 341 basispoints.

 

*Net Interest Income.*Netinterest income is determined by interest rate spread, which is the differencebetween the yields earned on interest-earning assets and the rates paid oninterest-bearing liabilities, and the relative amounts of interest-earningassets and interest-bearing liabilities. Net interest income was $52,211, or3.01% of average interest-earning assets for the six months ended June 30,2003, compared to $18,155, or 1.21% of average interest-earning assets for thesix months ended June 30, 2002.

 

25

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The following table details therelative interest rates and average balances of NetBank’s interest-earningassets and interest-bearing liabilities for the six months ended June 30, 2003,and 2002:

 
| **Average Balance** |      | **Average Yield********/   Rate** |   |      |   | **Interest** |   |                               |   | **Variance attributable to**                   |   |
|---------------------|-----------|-----------------------------------|--------|-----------|--------|--------------|--------|------------------------------------|--------|------------------------------------------------|--------|
| **2003**            |      | **2002**                          |   | **2003**  |   | **2002**     |   |                               |   | **2003**                                       |   | **2002** |   | **Variance** |   | **Rate** |   | **Volume (3)** |   |
|                |      |                              |   |      |   |         |   | **Interest-earning assets:**       |   |                                           |   |   |   |   |   |   |   |   |   |
| $                   | 36,315    |                              | $      | 154,373   |   | 1.21         | %      | 2.13                               | %      | Short-term  investments                        |   | $ | 219 |   | $ | 1,642 |   | $ | (1,423 | ) | $ | (711 | ) | $ | (712 | ) |
| 604,790             |      | 788,070                           |   | 3.96      | %      | 4.17         | %      | Investment securities (1)          |   | 11,960                                         |   | 16,433 |   | (4,473 | ) | (849 | ) | (3,624 | ) |
| 1,808,947           |      | 579,108                           |   | 6.39      | %      | 7.52         | %      | Loans held for sale (2)            |   | 57,785                                         |   | 21,785 |   | 36,000 |   | (3,286 | ) | 39,286 |   |
| 1,021,968           |      | 1,471,763                         |   | 4.97      | %      | 4.51         | %      | Loans and leases receivable (2)    |   | 25,379                                         |   | 33,157 |   | (7,778 | ) | 3,392 |   | (11,170 | ) |
| 3,472,020           |      | 2,993,314                         |   | 5.49      | %      | 4.88         | %      | Total interest-earning assets      |   | 95,343                                         |   | 73,017 |   | 22,326 |   | (1,454 | ) | 23,780 |   |
|                |      |                              |   |      |   |         |   |                               |   |                                           |   |   |   |   |   |   |   |   |   |
|                |      |                              |   |      |   |         |   | **Interest-bearing liabilities:**  |   |                                           |   |   |   |   |   |   |   |   |   |
| 175,946             |      | 138,554                           |   | 1.55      | %      | 1.66         | %      | Checking accounts                  |   | 1,361                                          |   | 1,149 |   | 212 |   | (77 | ) | 289 |   |
| 992,384             |      | 595,656                           |   | 2.19      | %      | 2.74         | %      | Money market                       |   | 10,885                                         |   | 8,173 |   | 2,712 |   | (1,640 | ) | 4,352 |   |
| 1,030,846           |      | 904,734                           |   | 2.47      | %      | 4.08         | %      | Certificates of deposit            |   | 12,734                                         |   | 18,461 |   | (5,727 | ) | (7,285 | ) | 1,558 |   |
| 465,763             |      | 456,421                           |   | 2.16      | %      | 3.34         | %      | Short-term debt                    |   | 5,019                                          |   | 7,615 |   | (2,596 | ) | (2,697 | ) | 101 |   |
| 564,958             |      | 662,983                           |   | 4.36      | %      | 5.67         | %      | FHLB advances                      |   | 12,311                                         |   | 18,812 |   | (6,501 | ) | (4,365 | ) | (2,136 | ) |
| 6,354               |      | —                            |   | 4.69      | %      | 0.00         | %      | Trust Preferred                    |   | 149                                            |   | — |   | 149 |   | — |   | 149 |   |
| 27,491              |      | 27,316                            |   | 4.90      | %      | 4.77         | %      | Convertible subordinate debt       |   | 673                                            |   | 652 |   | 21 |   | 17 |   | 4 |   |
| 3,263,742           |      | 2,785,664                         |   | 2.64      | %      | 3.94         | %      | Total interest-bearing liabilities |   | 43,132                                         |   | 54,862 |   | (11,730 | ) | (16,047 | ) | 4,317 |   |
|                |      |                              |   |      |   |         |   |                               |   |                                           |   |   |   |   |   |   |   |   |   |
| —              |      | —                            |   | 2.85      | %      | 0.94         | %      | Net interest margin                |   | 52,211                                         |   | 18,155 |   | 34,056 |   | 14,593 |   | 19,463 |   |
| 208,278             |      | 207,650                           |   | 0.16      | %      | 0.27         | %      | Interest free sources              |   | —                                         |   | — |   | — |   | — |   | — |   |
| $                   | 3,472,020 |                              | $      | 2,993,314 |   | 3.01         | %      | 1.21                               | %      | Net interest income to interest-earning assets |   | $ | 52,211 |   | $ | 18,155 |   | $ | 34,056 |   | $ | 14,593 |   | $ | 19,463 |   |
|                     |           |                                   |        |           |        |              |        |                                    |        |                                                |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1) Based on amortized cost; changes in fair value are not considered.

(2) No separate treatment has been made for non-accrual loans.

(3) Variances attributable to the rate and volume mix are included inthe volume variances.

 

*Provision for Credit Losses.* The provision for credit losses was $1,762 for the six months ended June 30,2003, compared to $26,526 for the same period of 2002.  The 2002 figure contained $20,102 ofprovision specifically for the CMC lease portfolio.  See Part II Item 1 Legal Proceedings within this report for amore in depth discussion of the CMC lease portfolio and associated litigation.Reference is made to the asset quality and non-performing assets subsection inthe Financial Condition section contained within this report for additionaldetail related to the determination of provision expense for maintaining theproper level of allowance for credit losses.

 

*Non-interest Income.* Non-interest income increased $99,422 to $149,698 for the six months ended June30, 2003, compared to $50,276 for the six months ended June 30, 2002.  Ofthis increase, gains on sales of mortgage loans and mortgage servicing rightsaccounted for $73,370, of which $38,696 is attributable to the mortgagesubsidiaries from the acquisition of Resource on March 31, 2002, which were notincluded in the comparable period of 2002. The mortgage subsidiaries’ improved results were attributable to a lowerinterest rate environment resulting in higher production and more favorablepricing conditions.  Service charges andfees increased by $7,820 to $23,778 for the six months ended June 30, 2003,from $15,958 in the same period of 2002. $7,826 of the increase is attributableto the addition of Resource’s mortgage servicing operations. The Companyrecorded $12,188 of gains on investment securities as certain investmentsecurities were sold during the six months ended June 30, 2003, compared to aloss of $1,857 on the sale of certain investment securities during the sameperiod in 2002. Current period gains of $12,188 were offset in part by animpairment charge of $794 on two variable, long-term corporate bonds.  The bonds had traded under book value for anextended period of time due to widening credit spreads.  Both bonds carry a Standard & Poor’s“A-” rating. Other income was $5,979 for the six months ended June 30, 2003,compared to $998 for the comparable 2002 period. Other income consisted of$1,895 of gains associated with fair value adjustments for assets accounted forunder SFAS 

 

26

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No. 133, $1,181 of revenues fromMG Reinsurance, $984 of revenues from Republic Leasing and $1,919 of ancillaryfees and income.

 

*Non-interest Expense.* Non-interest expense includes all operating expenses such as salaries andbenefits, marketing and general and administrative expenses.  Non-interest expense increased by $60,009 to$160,741 for the six months ended June 30, 2003, from $100,732 for the sixmonths ended June 30, 2002.  The$160,741 of non-interest expense for the six months ended June 30, 2003,includes $43,984 of non-interest expense associated with operations acquired aspart of the Resource acquisition, which were not included in the comparableperiod of 2002. The $100,732 of non-interest expense for the period ended June30, 2002, includes $10,085 of acquisition and severance costs and $6,609 ofintegration and repositioning charges associated with the acquisition ofResource on March 31, 2002. Additionally, during the six months ended June 30,2003, the Company incurred $11,951 of prepayment penalties on the early extinguishmentsof fixed-rate FHLB advances, compared to $2,493 of prepayment penalties duringthe six months ended June 30, 2002.  Ona comparable basis, non-interest expense increased $23,261 for the six monthsended June 30, 2003, compared to the same period of 2002.  The majority of the increase is due to the$10,419 increase in impairment and amortization of mortgage servicing rightsand the $8,523 increase in salaries and wages. The high level of refinance activity during the first six months of2003, associated with the low interest rate environment, drove the increase inamortization and impairment of mortgage servicing rights.  The increase in salaries and wages wasprimarily driven by the $2.9 billion, on a comparable basis, increase inproduction during the six months ended June 30, 2003 compared to the sameperiod of 2002.

 

# ***Retail Bank Operations***

# ** **

The table below provides anoverview of the results of operations for the retail bank segment:

 
|                                                                                              |   | **Six months ended********June 30,** |   |
|---------------------------------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                                              |   |                                 |
|                                                                                              |   | **2003**                             |   | **2002** |   | **Change** |   |
| Net  interest income                                                                              |   | $                                    | 19,351 |   | $ | 7,317 |   | $ | 12,034 |   |
| Provision for credit losses                                                                       |   | (1,721                               | )      | (26,526 | ) | 24,805 |   |
| Net interest income after provision for credit losses                                             |   | 17,630                               |   | (19,209 | ) | 36,839 |   |
| Losses on sales of loans                                                                          |   | (4                                   | )      | (1,465 | ) | 1,461 |   |
| Service charges and fees                                                                          |   | 6,122                                |   | 6,958 |   | (836 | ) |
| Total revenues                                                                                    |   | 23,748                               |   | (13,716 | ) | 37,464 |   |
|                                                                                              |   |                                 |   |   |   |   |   |
| Non-interest expenses                                                                             |   | 29,927                               |   | 38,294 |   | (8,367 | ) |
| Pre-tax loss before gains on securities                                                           |   | (6,179                               | )      | (52,010 | ) | 45,831 |   |
| Gains (losses) on sales of securities, net of prepayment penalties on  the extinguishment of debt |   | (557                                 | )      | (4,350 | ) | 3,793 |   |
| Pre-tax loss                                                                                      |   | $                                    | (6,736 | ) | $ | (56,360 | ) | $ | 49,624 |   |

 

Note: Gains on investment securities and prepayment penalties on theextinguishment of debt  have been netted for comparability purposes.

 

Net interest income increased $12,034 for the six months ended June 30,2003, to $19,351, compared to $7,317 for the six months ended June 30, 2002.Net interest income for the 2002 period was negatively impacted byapproximately $12,464 related to the impairment of premiums on purchased loanpools that had experienced accelerated prepayments in early 2002. Net interestincome for the 2003 period is lower than would be expected due to the retailbank lending a large portion of its funds at warehouse rates to the mortgagebanking operations to support its record production levels.  As the retail bank reallocates its portfolioto include more long-term 

 

27

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investments, primarily single-family first mortgage loans, as opposedto providing relatively lower rate short-term warehouse lines of credit, itsinterest income should significantly improve. The 2002 provision for credit losses included $20,102 of provisionspecifically for the CMC lease portfolio. See Part II Item 1 Legal Proceedings within this report for a more indepth discussion of the CMC lease portfolio and associated litigation.  While non-interest expense declined $8,367period over period, the 2002 period included approximately $7,494 of chargesassociated with the integration of Resources leasing operations and therepositioning of the segment to align with the Company’s financial intermediarystrategy. The 2003 period includes $1,760 of expenses associated with theleasing operations, which would not have been included in the 2002 period.Adjusted for these two items, non-interest expenses declined by $2,633 periodover period.  This decline is primarilydue to a decrease of $2,996 in external loan servicing fees.  NetBank now internally services the majorityof its loans and leases.

 

*Mortgage Banking*

 

The following table highlights the mortgage banking segment productionand sales activities:

 
|                                     |   | **Six months ended June 30,** |      |
|------------------------------------------|--------|-------------------------------|-----------|
|                                     |   | **2003**                      |      | **2002** |   | **Change** |   |
| **Mortgage loan production:**            |   |                          |      |   |   |   |   |
| Retail                                   |   | $                             | 1,610,096 |   | $ | 1,007,428 |   | $ | 602,668 |   |
| Correspondent                            |   | 4,395,939                     |      | 1,292,354 |   | 3,103,585 |   |
| Wholesale/broker                         |   | 2,627,735                     |      | 588,297 |   | 2,039,438 |   |
| RMS                                      |   | 358,942                       |      | 36,218 |   | 322,724 |   |
| Total agency-eligible                    |   | 8,992,712                     |      | 2,924,297 |   | 6,068,415 |   |
| Nonconforming                            |   | 966,241                       |      | 474,554 |   | 491,687 |   |
| Total                                    |   | $                             | 9,958,953 |   | $ | 3,398,851 |   | $ | 6,560,102 |   |
|                                     |   |                          |      |   |   |   |   |
| **Mortgage loan sales:**                 |   |                          |      |   |   |   |   |
| Conforming or agency-eligible sales      |   | $                             | 7,427,729 |   | $ | 3,012,057 |   | $ | 4,415,672 |   |
| Non-conforming sales                     |   | 987,513                       |      | 496,911 |   | 490,602 |   |
| Total                                    |   | $                             | 8,415,242 |   | $ | 3,508,968 |   | $ | 4,906,274 |   |
|                                     |   |                          |      |   |   |   |   |
| Production revenues                      |   | $                             | 167,862   |   | $ | 57,701 |   | $ | 110,161 |   |
| Production expenses                      |   | 115,357                       |      | 48,502 |   | 66,855 |   |
| Pre-tax margin                           |   | $                             | 52,505    |   | $ | 9,199 |   | $ | 43,306 |   |
|                                     |   |                          |      |   |   |   |   |
| Production revenues in bps to sales      |   | 199                           |      | 164 |   | 35 |   |
| Production expenses in bps to production |   | 116                           |      | 143 |   | (27 | ) |
| Net production margin in bps             |   | 83                            |      | 21 |   | 62 |   |

 

For the six months ended June 30, 2003, the mortgage banking segmenthad a record pre-tax margin of $52,505, compared to $9,199 for the six monthsended June 30, 2002.  The $43,306increase is driven primarily by increases of $6.5 billion in production and$4.9 billion in sales and the addition of Resource’s mortgage operations onMarch 31, 2002, which would only be included in three of the six months duringthe 2002 period.  Additionally, asindustry pipelines approached capacity during the 2003 period pricing pressureseased resulting in a 35 basis-point increase in production revenues.

 

28

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*Other Segment*

 

For the six months ended June 30, 2003, theother segment recorded a pre-tax loss of $4,258 compared to a pre-tax loss of$11,666 for the same period of 2002. The loss includes NetBank’s strategic initiatives and holding companyexpenses, including dealer financial services, NetInsurance, NetBank, Inc.,Resource Bancshares Mortgage Group, Inc. and NetBank Partners.  The 2002 loss included numerous chargesassociated with the acquisition of Resource on March 31, 2002.

 

###### **Critical Accounting Policies**

###### ** **

As indicated in NetBank’sAnnual Report on Form 10-K for the year ended December 31, 2002, NetBank hasidentified its policies for the valuation of its mortgage servicing rights andthe maintenance of its allowance for credit losses as being its most criticalaccounting policies. These policies require management to make judgments,estimates and assumptions concerning future events, which materially underpinthe current period accounting for these items. Given the effect such judgments,estimates and assumptions can have on NetBank’s balance sheet and statement ofoperations, these policies are regularly reviewed by management, the Company’saudit committee and the Company’s independent auditor. Management believes thatgiven current information, its judgments, estimates and assumptions used inthese policies are appropriate. For further information regarding NetBank’scritical accounting policies, refer to its Annual Report on Form 10-K for theyear ended December 31, 2002.

 

# **Liquidity andCapital Resources**

# ** **

*Liquidity.*NetBank’sliquidity, represented by cash and cash equivalents, is a product of itsoperating, investing, and financing activities. NetBank’s primary sources offunds are deposits, borrowings, prepayments and maturities of outstandingloans, sales of loans, sales or maturities of investment securities and othershort-term investments, and funds provided from operations. While scheduledloan payments and maturing investment securities and short-term investments arerelatively predictable sources of funds, deposit flows and loan prepayments aregreatly influenced by general interest rates, economic conditions, andcompetition. NetBank can use cash generated through the retail deposit market,its traditional funding source, to offset the cash utilized in investingactivities. NetBank’s available for sale securities and short-terminterest-earning assets can also be used to provide liquidity for lending andother operational requirements.  For thesix months ended June 30, 2003, NetBank had negative cash flow of $52,655compared to positive cash flow of $142,360 for the same period of 2002. The netcash out flow primarily related to the $1.0 billion increase in loans held forsale.  The increase in loans held for sale was primarily due to the $10.0billion record level of production in the mortgage banking segment outpacingthe $8.4 billion record level of sales into the secondary markets. TheCompany expects this situation to reverse once the velocity of loan sales exceedsthat of production. Cash flows for the six months ended June 30, 2002, wereunusually high related to the accumulation of cash in anticipation of settlingResource’s pre-existing lines of credit after its acquisition. As an additionalsource of funds, NetBank had available under existing lines of creditagreements $0.7 billion at June 30, 2003, (see Note 8 of the consolidatedfinancial statements included as part of this report for additional details ofthe available lines of credit).  As ofJune 30, 2003, NetBank had commitments to fund mortgage loans of $3.4 billion,unused home equity lines of credit of $77,058 and commercial financingcommitments of $1,351.

 

TheCompany uses deposits as its principal source of funds.  For the six months ended June 30, 2003,deposits increased by $419,310 to $2.5 billion from $2.0 billion as of December31, 2002. NetBank’s deposit products include checking, money market accountsand certificates of deposit accounts. Deposit account terms vary, with theprincipal differences being the minimum balance required, the time periods thefunds must remain on deposit and the interest rate. NetBank is competitive inthe types of accounts, services and ranges of interest rates offered on depositproducts. Although market demand generally dictates which deposit maturitiesand rates will be accepted by the public, NetBank intends to continue topromote checking, money market and certificates of deposit to the extentpossible consistent with asset and liability management goals.  Additionally, NetBank 

 

29

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increasedits other borrowed funds, which include FHLB advances, repurchase agreementsand warehouse lines of credit, by $470,101 during the six months ended June 30,2003.  This increase was primarily tosupport the $1.0 billion increase in loans held for sale as a result of recordmortgage loan production.  The Companyalso raised approximately $4,382 as a result of its second trust preferredsecurities offering completed in April 2003.

 

*Capital Resources.*  NetBank and NetBank, FSB are subject tovarious regulatory capital requirements administered by the federal bankingagencies. Failure of either company to meet minimum capital requirements caninitiate certain mandatory and possibly additional discretionary actions byregulators that, if undertaken, could have a direct material effect onNetBank’s consolidated financial statements. Under capital adequacy guidelinesand the regulatory framework for prompt corrective action, NetBank, FSB mustmeet specific capital guidelines that involve quantitative measures of NetBank,FSB’s assets, liabilities, and certain off-balance sheet items as calculatedunder regulatory accounting practices. NetBank, FSB’s capital amounts andclassifications are also subject to qualitative judgments by the regulatorsabout components, risk weightings and other factors. In addition, underregulatory guidelines, NetBank, FSB may not pay a dividend to NetBank, Inc. ifdoing so would cause NetBank, FSB to be less than adequately capitalized, asdefined below. During the quarter ended June 30, 2003, NetBank’s Board ofDirectors declared a dividend in the amount of $.02 to shareholders of recordon July 31, 2003. The dividend will be paid on September 15, 2003. As of July31, 2003, the Company had authorization to repurchase up to 4 million shares ofthe Company’s outstanding common stock, of which 2,412,300 shares have beenrepurchased at an average price of $10.23 per share.

 

Quantitative measures established by regulation to ensure capitaladequacy require NetBank, FSB to maintain minimum amounts and ratios as setforth in the following table. NetBank, FSB’s regulatory agency, the Office ofThrift Supervision (“OTS”), requires NetBank, FSB to maintain minimum ratios oftangible capital to tangible assets of 1.5%, core capital to tangible assets of4.0% and total capital to risk-weighted assets of 8.0%. Additionally, NetBank,Inc., since its acquisition of Resource on March 31, 2002, has a side letteragreement with the OTS which requires NetBank, Inc. to maintain a minimum 10%total capital to total assets and NetBank, FSB to maintain 6% core capital and12% total risk-based capital ratios. The 10% total capital minimum was amendedduring the three months ended June 30, 2003, to allow the minimum capital heldagainst forward sold conforming mortgages be the greater of 5% or $50,000 andin no event allow the total capital to total assets to fall below 8%. As ofJune 30, 2003, NetBank, FSB was categorized as Well Capitalized as indicated inthe following table; however, primarily due to the $1.0 billion increase inloans held for sale, NetBank, FSB failed to meet the 12% total risk-basedcapital requirement. The Company has notified the OTS of this deficiency andintends to cure it as soon as possible. The following table presents information related to NetBank,FSB alongwith capital requirements mandated by the OTS:

 
|                                     |   | **Actual** |    | **For capital adequacy  purposes** |   | **To be categorized as Well  Capitalized under prompt  corrective action plan** |   |
|------------------------------------------|--------|------------|---------|------------------------------------|--------|---------------------------------------------------------------------------------|--------|
|                                     |   | **Amount** |    | **Ratio**                          |   | **Amount**                                                                      |   | **Ratio** |   | **Amount** |   | **Ratio** |   |
| **June 30, 2003**                        |   |       |    |                               |   |                                                                            |   |   |   |   |   |   |   |
| Total capital (to risk-weighted assets)  |   | $          | 304,946 |                               | 10.84  | %                                                                               | $      | 224,996 |   | 8.00 | % | $ | 281,315 |   | 10.00 | % |
| Core capital (to tangible assets)        |   | $          | 261,284 |                               | 6.18   | %                                                                               | $      | 169,092 |   | 4.00 | % | $ | 211,395 |   | 5.00 | % |
| Tangible capital (to tangible assets)    |   | $          | 261,284 |                               | 6.18   | %                                                                               | $      | 63,418 |   | 1.50 | % | N/A |   | N/A |   |
| Tier I capital (to risk-weighted assets) |   | $          | 261,284 |                               | 9.29   | %                                                                               | N/A    |   | N/A |   | $ | 168,752 |   | 6.00 | % |
| **December 31, 2002**                    |   |       |    |                               |   |                                                                            |   |   |   |   |   |   |   |
| Total capital (to risk-weighted assets)  |   | $          | 270,732 |                               | 15.42  | %                                                                               | $      | 140,447 |   | 8.00 | % | $ | 175,572 |   | 10.00 | % |
| Core capital (to tangible assets)        |   | $          | 240,725 |                               | 7.47   | %                                                                               | $      | 129,104 |   | 4.00 | % | $ | 161,128 |   | 5.00 | % |
| Tangible capital (to tangible assets)    |   | $          | 240,725 |                               | 7.47   | %                                                                               | $      | 48,338 |   | 1.50 | % | N/A |   | N/A |   |
| Tier I capital (to risk-weighted assets) |   | $          | 240,725 |                               | 13.71  | %                                                                               | N/A    |   | N/A |   | $ | 105,350 |   | 6.00 | % |

 

In addition, Market Street,RBMG, Republic and Meritage are required to maintain minimum amounts of networth to maintain their approved status with certain government agencies,investors and lenders.  Failure to meetthese requirements could have a material impact on the consolidated results ofNetBank. Other than the 

 

30

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side letter deficiency asdescribed previously, at June 30, 2003, all of the capital requirements placedupon NetBank and its subsidiaries were met, and there have been no subsequentevents that would lead management to believe that continued compliance wouldnot be met in the future.

# ** **

# **PartI. Item 3**:Quantitative and Qualitative Disclosures about Market Risk

# ** **

*Interest Rate Sensitivity.*TheCompany measures interest rate sensitivity as the difference between amounts ofinterest–earning assets and interest–bearing liabilities that mature, reprice,or repay within a given period of time. The difference, or the interest ratesensitivity “gap,” provides an indication of the extent to which aninstitution’s interest rate spread will be affected by changes in interestrates. A gap is considered positive when the amount of interest-rate sensitiveassets exceeds the amount of interest-rate sensitive liabilities and isconsidered negative when the amount of interest-rate sensitive liabilitiesexceeds the amount of interest-rate sensitive assets. In a rising rateenvironment, an institution with a positive gap would see an increase in netinterest income, where an institution with a negative gap would see a decrease.During a period of falling interest rates the reverse is true. The followingtable sets forth the interest rate sensitivity of the Company’s assets andliabilities as of June 30, 2003:

 
|                                                                       |   | **Less than  Three Months**                  |      | **Over three  months through  one year** |   | **Over one  year through  five years** |   | **Over five  years and  insensitive** |      | **Total** |   |
|----------------------------------------------------------------------------|--------|----------------------------------------------|-----------|------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|-----------|-----------|--------|
|                                                                       |   | **Term to Repricing, Repayment or Maturity** |      |
| Interest-Earning Assets:                                                   |   |                                         |      |                                     |   |                                   |   |                                  |      |      |   |
| Cash and cash equivalents                                                  |   | $                                            | 34,236    |                                     | $      | —                                 |   | $                                     | —    |      | $      | — |   | $ | 34,236 |   |
| Federal funds sold                                                         |   | 24,674                                       |      | —                                   |   | —                                 |   | —                                |      | 24,674    |   |
| Investment securities                                                      |   | 10,628                                       |      | 16,652                                   |   | 22,856                                 |   | 297,611                               |      | 347,747   |   |
| Stock of Federal Home Loan Bank of Atlanta                                 |   | 50,505                                       |      | —                                   |   | —                                 |   | —                                |      | 50,505    |   |
| Loans held for sale                                                        |   | 2,527,302                                    |      | —                                   |   | —                                 |   | —                                |      | 2,527,302 |   |
| Loan and lease receivables                                                 |   | 219,483                                      |      | 354,952                                  |   | 521,692                                |   | 88,569                                |      | 1,184,696 |   |
| Total interest-earning assets                                              |   | 2,866,828                                    |      | 371,604                                  |   | 544,548                                |   | 386,180                               |      | 4,169,160 |   |
| Non interest-earning assets                                                |   | —                                       |      | —                                   |   | —                                 |   | 341,265                               |      | 341,265   |   |
| Total assets                                                               |   | $                                            | 2,866,828 |                                     | $      | 371,604                                |   | $                                     | 544,548   |      | $      | 727,445 |   | $ | 4,510,425 |   |
|                                                                       |   |                                         |      |                                     |   |                                   |   |                                  |      |      |   |
| Interest-Bearing Liabilities:                                              |   |                                         |      |                                     |   |                                   |   |                                  |      |      |   |
| Interest-bearing deposits                                                  |   | $                                            | 183,256   |                                     | $      | 1,022,289                              |   | $                                     | 707,720   |      | $      | 177,112 |   | $ | 2,090,377 |   |
| Convertible subordinated debt                                              |   | 26,213                                       |      | —                                   |   | —                                 |   | —                                |      | 26,213    |   |
| Trust preferred securities                                                 |   | 8,764                                        |      | —                                   |   | —                                 |   | —                                |      | 8,764     |   |
| Other borrowed funds                                                       |   | 976,589                                      |      | 10,000                                   |   | 366,000                                |   | —                                |      | 1,352,589 |   |
| Total interest-bearing liabilities                                         |   | 1,194,822                                    |      | 1,032,289                                |   | 1,073,720                              |   | 177,112                               |      | 3,477,943 |   |
| Interest-free deposits                                                     |   | —                                       |      | —                                   |   | —                                 |   | 373,855                               |      | 373,855   |   |
| Other interest-free liabilities and equity                                 |   | —                                       |      | —                                   |   | —                                 |   | 658,627                               |      | 658,627   |   |
| Total liabilities and equity                                               |   | $                                            | 1,194,822 |                                     | $      | 1,032,289                              |   | $                                     | 1,073,720 |      | $      | 1,209,594 |   | $ | 4,510,425 |   |
|                                                                       |   |                                         |      |                                     |   |                                   |   |                                  |      |      |   |
| Net interest rate sensitivity gap                                          |   | $                                            | 1,672,006 |                                     | $      | (660,685                               | )      | $                                     | (529,172  | )         | $      | 209,068 |   | $ | 691,217 |   |
| Cumulative gap                                                             |   | $                                            | 1,672,006 |                                     | $      | 1,011,321                              |   | $                                     | 482,149   |      | $      | 691,217 |   | N/A |   |
| Net interest rate sensitivity gap as a percent of interest-earning  assets |   | 58.32                                        | %         | (177.79                                  | )%     | (97.18                                 | )%     | 54.14                                 | %         | 16.58     | %      |
| Cumulative gap as a percent of cumulative interest-earning assets          |   | 58.32                                        | %         | 31.23                                    | %      | 12.75                                  | %      | 16.58                                 | %         | N/A       |   |

 

31

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As the table above displays,over the next 12 months $1,011,321 more interest-earning assets thaninterest-bearing liabilities are projected to reprice at least once, indicatingan asset sensitive position. Gap analysis, however, is only one tool thatmanagement uses to measure rate sensitivity. The interest rate sensitive position displayed above is somewhatexaggerated by the current high level of loans held for sale.  The Company would expect this position tomoderate over the next few quarters as sales of loans held for sale begin tooutpace production resulting in a lower balance of interest rate sensitiveassets.

 

*Market Risk.*NetBank’s principal businesses are retail banking and the origination andpurchase of mortgage loans.  Thesebusinesses are funded by customer deposits and, to the extent necessary, otherborrowed funds. Consequently, a significant portion of NetBank’s assets andliabilities are monetary in nature and fluctuations in interest rates willaffect NetBank’s future net interest income and cash flows. This interest raterisk is NetBank’s primary market risk exposure. For the six months ended June30, 2003, the only derivative financial instruments that NetBank entered intowere associated with hedging activities related to the portfolio of mortgageloans held for sale, the pipeline of mortgage loans for which the interest ratehas been locked, the owned mortgage servicing rights portfolio and the mortgageservicing rights which NetBank intends to retain associated with the pipelineof mortgage loans for which the interest rate has already been locked. NetBankhas no market risk-sensitive instruments held for trading purposes. NetBank’sexposure to market risk is reviewed on a regular basis by NetBank’s management.

 

NetBank, FSB, like other banks,measures interest rate risk based on Net Portfolio Value (“NPV”) analysis.  NPV equals the present value of expected netcash flows from existing assets minus the present value of expected net cashflows from existing liabilities. A NPV ratio is determined by dividing NPV bythe present value of assets. The following table sets forth the estimatedpercentage change in NetBank, FSB’s NPV ratios as of June 30, 2003, andDecember 31, 2002, assuming rate shocks of +300 to -100 basis points:

 

##### ** **

##### **Limits and current NPVratios for NetBank, FSB**

 

| **Rate shock********(in basis points)** |   | **As of  6/30/2003** |   | **As of  12/31/2002** |   | **Minimum as of  12/31/2002** |   |
|-----------------------------------------|--------|----------------------|--------|-----------------------|--------|-------------------------------|--------|
| **+300**                                |   | 7.54                 | %      | 9.60                  | %      | 4.00                          | %      |
| **+200**                                |   | 7.76                 | %      | 9.74                  | %      | 6.00                          | %      |
| **+100**                                |   | 8.00                 | %      | 9.81                  | %      | 6.00                          | %      |
| **Flat**                                |   | 7.91                 | %      | 9.31                  | %      | 6.00                          | %      |
| **-100**                                |   | 7.82                 | %      | 9.47                  | %      | 6.00                          | %      |

 

Computation of prospectiveeffects of hypothetical rate changes is based on many assumptions, includingrelative levels of market interest rates, loan prepayments and deposit decay.They should not be relied upon as indicative of actual results. Further, thecomputations do not contemplate certain actions management could undertake inresponse to changes in interest rates.

 

**Part I.Item 4****:  Controls andProcedures**

 

As of the end of the periodcovered by this report, the Company carried out an evaluation, under thesupervision and with the participation of the Company’s management, includingthe Company’s Chief Executive Officer and Chief Financial Executive, of theeffectiveness of the design and operation of the Company’s disclosure controlsand procedures pursuant to the Exchange Act Rule 13a-15.  Based upon that evaluation, the Company’sChief Executive Officer and Chief Financial Executive concluded that theCompany’s disclosure controls and procedures are effective in timely alertingthem to material information relating to the Company (including itsconsolidated subsidiaries) that is required to be in the Company’s periodicfilings with the Securities and Exchange Commission.  There have been no significant changes in the Company’s internalcontrols or, to the 

 

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Company’s knowledge, in otherfactors that could significantly affect those internal controls subsequent tothe date the Company carried out its evaluation, and there have been nocorrective actions with respect to significant deficiencies and materialweaknesses.

 

**PartII. Item 1****:  LegalProceedings**

 

Illinois UnionInsurance Co. v. Commercial Money Center, Inc., et al., Case No.CV-01-0685-KJD-RJJ (District Court of Nevada) andrelated cases now pending in *In re Commercial Money Center, Inc. Equipment LeaseLitigation in the United States District Court for the Northern District ofOhio, Eastern Division, MDL Case No. 1:02-CV-16000*, and thepending bankruptcy proceedings of Commercial Money Center, Inc.

 

As reported in previousfilings, NetBank, FSB, filed a complaint in January 2002 against CommercialMoney Center, Inc. (“CMC”), the originator, seller, and subservicer ofequipment leases purchased by NetBank, FSB, and Illinois Union InsuranceCompany (“Illinois Union”), Safeco Insurance Company of America (“Safeco”), andRoyal Indemnity Company (“Royal,” with Illinois Union, Safeco and Royal,collectively, referred to as the “Sureties”), the insurance companies thatissued surety bonds and insurance policies guaranteeing payment of the incomestream from the leases and that also served as master servicers of theleases.  The NetBank, FSB action allegesseveral claims, including claims for breach of contract, fraud, and bad faith,and seeks, among other things, payment under and enforcement of surety bondsand insurance policies issued by the insurance and surety companies.  TheJudicial Panel on Multi-District Litigation has consolidated the actionsinvolving NetBank, FSB with more than 35 other cases pending around the countryinvolving other banks and financial institutions that were seeking to enforcesurety bonds and insurance policies relating to leases sold by CMC.  The consolidation will result in allpre-trial activity being held in the United States District Court for theNorthern District of Ohio (the “MDL Court”).

 

As reported in previousfilings, NetBank, FSB has joined with the other claimants in a motion forjudgment on the pleadings, which motion is currently pending before the MDLCourt.  Meanwhile, discovery isproceeding in the action.  The Companybelieves that based on the overall facts and circumstances, the defensesasserted by the Sureties will fail as a matter of law and that NetBank, FSBwill ultimately prevail on its claims.

 

Also, as reported in previousfilings, on May 30, 2002, CMC filed for bankruptcy protection in the UnitedStates Bankruptcy Court for the Southern District of Florida.  The Florida Bankruptcy Court ordered thatall collections by the servicers and sub-servicers under the leases be paid inescrow to the bankruptcy trustee pending final resolution of rights to thosecollections.  On September 18, 2002,that bankruptcy proceeding was transferred to the United States BankruptcyCourt for the Southern District of California and is not part of theconsolidation of cases in Ohio. On February 5, 2003, NetBank and the bankruptcytrustee (the “Trustee”) entered into a proposed settlement agreement, subjectto Bankruptcy Court approval, that would have settled and resolved all of theCMC bankruptcy estate’s claims against NetBank, FSB.  On February 19, 2003, the Trustee in the bankruptcy action fileda motion with the Bankruptcy Court requesting approval of the settlementagreement.  However, the Trusteesubsequently entered into a competing agreement with Royal.

 

On June 11, 2003, theCalifornia Bankruptcy Court approved an amended settlement agreement (the“Amended NetBank Agreement”) among NetBank, FSB, Lakeland Bank and theTrustee.  The Amended NetBank Agreementresolves all claims of the Trustee with respect to the lease payments that wereguaranteed by surety bonds and insurance policies issued by Safeco and IllinoisUnion, as well as all claims related to the surety bonds and insurancepolicies.  The Amended NetBank Agreementdid not settle the Trustee’s alleged claims relating to the lease payments thatwere guaranteed with surety bonds issued by Royal or its claim related to thosespecific bonds.  These claims are basedon the Trustee’s assertion that NetBank, FSB’s interests in the leases were notproperly perfected and that Royal could avoid those interests, as well asNetBank, FSB’s interests in the related surety bonds, under the BankruptcyCode.  NetBank, FSB disputes theseclaims, but 

 

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contends that, in any event, itwas the responsibility of CMC, as well as the Sureties to make sure thatNetBank, FSB’s interests were properly perfected.

 

TheCompany believes that the approval of the Amended NetBank Agreement enhancesits position in the separate proceeding now before the MDL Court since theagreement resolves any conflicts previously presented by the Trustee’sassertion of claims relating to the Safeco and Illinois Union leases and suretybonds.  NetBank, FSB intends to seekrecovery against the Sureties for the amounts paid pursuant to the bankruptcysettlement.

 

Inaddition to approving the Amended NetBank Agreement, the California BankruptcyCourt approved a settlement agreement between the Trustee and Royal (the“Amended Royal Agreement’).  Under theAmended Royal Agreement, Royal has agreed, among other things, to fundlitigation by the Trustee against NetBank, FSB to avoid its interests in theleases that were guaranteed by surety bonds issued by Royal, as well asNetBank, FSB’s interests in the surety bonds themselves.  NetBank, FSB intends to vigorously defendthese claims and to pursue recovery from Royal for all damages suffered andcosts incurred as a result of Royal’s financing of these claims.

 

In addition, NetBank, FSBintends to vigorously pursue its claims against the insurance companies,including any potential losses associated with the claims brought by the Trusteeagainst NetBank, FSB, and has sought leave to supplement its complaint againstRoyal Indemnity Company to add claims relating to Royal’s attempt to undermineNetBank, FSB’s interests in the leases and surety bonds, including claims forbreach of contract, breach of fiduciary duty, and tortious interference withcontract.  At this time, we are unableto express an opinion as to the likelihood of loss, or the amount or range ofpotential loss, with regard to this matter.

 

Clayton v.Commercial Money Center, Inc., Case No. BC 253169 (CA Sup, Ct., Los AngelesCounty)

 

On June 27, 2001, severallessees of equipment leased from CMC filed suit in Los Angeles Superior Courtagainst CMC and several John Doe defendants alleging that the leases violatedCalifornia usury laws, the California Financial Code, and the California UnfairBusiness Practices Act.  The plaintiffsare seeking to rescind or reform their obligations under the leases and areseeking to recover statutory damages and attorney’s fees.  The plaintiffs amended their complaint toname NetBank, FSB, several other investor banks, and several surety companiesas co-defendants in the action.  AfterCMC filed for bankruptcy, the action was removed to the bankruptcy court in theCentral District of California, but the plaintiffs have subsequently agreed towithdraw their claims against CMC and were successful in their motion to remandthe case back to state court.  NetBank,FSB intends to vigorously defend the case and to pursue recovery against SafecoInsurance Company, Royal Indemnity Company, and Illinois Union InsuranceCompany for any damages and costs incurred in this case. At this time, we areunable to express an opinion as to the likelihood of loss, or the amount orrange of potential loss, with regard to this matter.

 

*inter*stateNetBank v. NetBank, Inc. and NetBank, Case No. 1:01-CV-1324(JBS) (District ofNew Jersey)

 

On June 27, 2001, the Companywas served with a complaint for a declaratory judgment filed by interStateNetBank in the District of New Jersey challenging the “NETBANK®” servicemark.  The Company answered and counterclaimed for trademark infringementon July 13, 2001.  Discovery was stayed pending a ruling on interStateNetBank’s November 19, 2001 motion for summary judgment, which claimedthat “NETBANK” is generic for all banking services delivered over theInternet.  On September 22, 2002, theDistrict Court ruled that “NETBANK” is generic but did not cancel the Company’sexisting service mark registration.  TheCompany filed a motion for reconsideration of the District Court’s decision,which was denied by order of the court filed on June 23, 2003.  The Court has now set a preliminarydiscovery schedule.  The Company intendsto vigorously defend against interState NetBank’s challenge of the “NETBANK®”service mark and will continue to pursue its counterclaims for trademarkinfringement and unfair competition in the case. In addition, the Company mayappeal the District Court’s decision that “NETBANK” is generic.  While there is a possibility of a finaladverse outcome for the Company on one or more of its claims, at this stage ofthe matter, we cannot 

 

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fairly determine the likelihoodof a final, adverse outcome.  However, in the event of a final, adverseoutcome, it is unlikely that there would be a monetary loss aside from the lossin value of the intellectual property rights in the NETBANK® registration.

 

**PartII. Item 2****:  Changes inSecurities and Use of Proceeds**

 

**None**

 

**PartII. Item 3****:  DefaultsUpon Senior Securities**

 

**None**

 

**PartII. Item 4**:  Submission of Matters to a Vote of SecurityHolders

** **

On April 24, 2003, NetBank held its Annual Meeting of Shareholders at which the following actions were taken:

 

Approved the proposal to elect the director nominees named below:

 
| Robin C. Kelton:       | For:  38,551,526  Withheld: 348,752   |
|------------------------|-------------------------------------------------|
|                   |                                            |
| Thomas H. Muller, Jr.: | For:  37,561,587  Withheld: 1,338,691 |
|                   |                                            |
| David W. Johnson, Jr.: | For:  30,516,124  Withheld: 8,384,154 |

 

Approved a proposal to ratify Ernst & Young LLP as NetBank’s independent auditors:

 

For: 38,297,839 Against:593,159  Abstain:  9,280

 

**Part II.Item 5**:  Other Information

** **

**None**

** **

**PartII. Item 6****:  Exhibits andReports on Form 8-K**

 
| (a)    |   | Exhibits             |
|--------|--------|----------------------|
|   |   |
|   |   | 31.1                 | Chief  Executive Officer’s certification under Section 302 of the Sarbanes-Oxley Act |
|   |   |                 |   |
|   |   | 31.2                 | Chief  Financial Executive’s certification under Section 302 of the Sarbanes-Oxley  Act |
|   |   |                 |   |
|   |   | 32                   | Certifications  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|   |   |
| (b)    |   | Reports on  Form 8-K |
|   |   |
|   | i.     |                 | NetBank  filed a Current Report on Form 8-K on April 2, 2003, updating the discussion  related to Illinois Union Insuarnce Co. V. Commercial Money Center, Inc. et  al. and related cases now pending in In re Commercial Money Center, Inc.  Equipment Lease Litigation in the United States District Court for the  Northern District of Ohio, Eastern Division, MDL Case No. 1:02-CV-16000, and  the pending bankruptcy proceedings of Commercial Money Center, Inc. |
|   |   |                 |   |
|   | ii.    |                 | NetBank  filed a Current Report on Form 8-K on April 10, 2003, announcing the  completion of an issuance of $4.25 million in trust preferred securities. |
|   |   |                 |   |
|   | iii.   |                 | NetBank  filed a Current Report on Form 8-K on April 23, 2003, furnishing information  to be provided by management to various interested parties. |
|        |        |                      |  |  |  |

 

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|   | iv.    |   | NetBank  filed a Current Report on Form 8-K on May 13, 2003, furnishing information to  be provided by management to various interested parties.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|--------|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | v.     |   | NetBank  filed a Current Report on Form 8-K on June 11, 2003, updating the discussion  of NetBank’s prior disclosure relating to the pending bankruptcy proceedings  of Commercial Money Center, Inc. and Commercial Servicing Corporation,  Case No. 02-09721-H7, (United States Bankruptcy Court, Southern District  of California  (the “Bankruptcy  Proceedings”), as well as the proceedings in Illinois Union Insurance Co. v.  Commercial Money Center, Inc., et al., Case No.  CV-0685-KJD-RRJ (District Court of  Nevada), and related cases now pending in In re Commercial Money  Center, Inc. Equipment Lease  Litigation in the United States District Court for the Northern District of  Ohio, Eastern Division, MDL Case  No. 1:02-CV-16000  (the “MDL Proceeding”). The Bankruptcy Proceedings are related to, but  distinct from, the MDL Proceedings. |

#### ** **

#### **SIGNATURE**

#### ** **

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|                   | NETBANK, INC. |
|------------------------|---------------|
|                   |          |
|                   | By:           | /s/ Steven F. Herbert |
|                   |          | Steven F. Herbert |
|                   |          |   |
| Dated: August 14, 2003 |          | *Chief Financial  Executive and  Chief Accounting Officer* |

 

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