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**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10–Q**

| **QUARTERLY REPORT PURSUANT TO SECTION  13 OR 15()  OF THE SECURITIES EXCHANGE ACT OF 1934** |
|----------------------------------------------------------------------------------------------|

 

| **For the Quarter Ended June 30, 2001** |
|-----------------------------------------|
|                                    |
| **Commission File No. 0–22361**    |

**NETBANK, INC.**

(Exactname of registrant as specified in its charter)

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|                                      |                                     |
|-------------------------------------------|------------------------------------------|
| **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)                              |

Registrant'stelephone number, including area code: **(770) 343–6006**

             Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15() of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. YES ý  NO o

             Indicatethe number of shares outstanding of each of the issuer's classes of commonstock, as of the latest practicable date:

| **Class**                     | **Shares Outstanding At August 8, 2001** |
|-------------------------------|------------------------------------------|
| Common  Stock, par value $.01 | 30,267,699                               |

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**NETBANK, INC.****INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

| Condensed  consolidated balance sheets as of June 30, 2001 and as of December 31,  2000                |   |
|------------------------------------------------------------------------------------------------------------------|--------|
| Condensed  consolidated statements of operations for the three and six months ended  June 30, 2001 and 2000 |   |
| Condensed  consolidated statement of shareholders' equity from December 31, 2000 toJune 30, 2001       |   |
| Condensed  consolidated statements of cash flows for the six months ended June 30,  2001and 2000            |   |
| Notes  to condensed consolidated financial statements                                                            |   |

**NETBANK, INC.CONDENSED CONSOLIDATED BALANCESHEETS(in 000's except share amounts)**

|                                                                                                            | **June 30,**                    |   | **December 31,** |   |
|-----------------------------------------------------------------------------------------------------------------|---------------------------------|--------|-----------------------|--------|
|                                                                                                            | **2001**                        |   | **2000**              |   |
|                                                                                                            | ****                            |   | ****                  |   |
| **ASSETS**                                                                                                      |                            |   |                  |   |
| Cash and cash equivalents:                                                                                      |                            |   |                  |   |
|                                                                                                            | Cash and due from banks         | $      | 12,178                |   | $ | 4,733 |   |
|                                                                                                            | Federal funds sold              | 59,872 |                  | 7,225  |   |
|                                                                                                                 |                                 |   |                       |   |
|                                                                                                            | Total cash and cash equivalents | 72,050 |                  | 11,958 |   |
| Investment securities available for sale-At fair value  (amortized cost of $375,820 and $389,443, respectively) | 378,014                         |   | 388,910               |   |
| Stock of Federal Home Loan Bank of Atlanta-At cost                                                              | 30,225                          |   | 26,450                |   |
| Loans receivable held for sale                                                                                  | 219,737                         |   | -                     |   |
| Loans receivable-Net of allowance for loan losses of  $16,069 and $13,421, respectively                         | 1,331,163                       |   | 1,363,784             |   |
| Accrued interest receivable                                                                                     | 6,670                           |   | 6,952                 |   |
| Furniture, equipment and capitalized software-Net                                                               | 11,084                          |   | 8,755                 |   |
| Goodwill — Net                                                                                             | 17,700                          |   | -                     |   |
| Derivatives                                                                                                     | 1,728                           |   | -                     |   |
| Due from servicers                                                                                              | 68,964                          |   | 27,367                |   |
| Other assets                                                                                                    | 23,278                          |   | 8,514                 |   |
|                                                                                                            |                                 |   |                       |   |
|                                                                                                            | Total assets                    | $      | 2,160,613             |   | $ | 1,842,690 |   |
|                                                                                                            |                            |        |                  |        |   |

 

| **LIABILITIES AND SHAREHOLDERS' EQUITY**                                   |                                                                                                                  |      |      |      |
|----------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------|-----------|-----------|-----------|
| Liabilities:                                                               |                                                                                                                  |      |      |      |
|                                                                       | Deposits                                                                                                              | $         | 1,223,499 |      | $ | 980,752 |   |
|                                                                       | Other borrowed funds                                                                                                  | 609,492   |      | 564,171   |   |
|                                                                       | Convertible subordinated debt                                                                                         | 26,839    |      | 26,755    |   |
|                                                                       | Accrued interest payable                                                                                              | 19,761    |      | 17,154    |   |
|                                                                       | Accounts payable and accrued liabilities                                                                              | 16,032    |      | 3,251     |   |
|                                                                       |                                                                                                                  |           |      |           |   |
|                                                                       | Total liabilities                                                                                                     | 1,895,623 |      | 1,592,083 |   |
| 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,  31,737,869 and 30,012,680  shares  issued, respectively) | 317       |      | 300       |   |
| Additional paid–in capital                                            | 267,005                                                                                                               |      | 251,579   |      |
| Retained earnings                                                          | 8,264                                                                                                                 |      | 6,688     |      |
| Accumulated other comprehensive income (loss), net of  tax                 | 1,446                                                                                                                 |      | (352      | )         |
| Treasury stock, at cost (1,490,065 and  926,500 shares, respectively) | (12,042                                                                                                               | )         | (7,608    | )         |
|                                                                       |                                                                                                                       |      |           |      |
| Total shareholders' equity                                                 | 264,990                                                                                                               |      | 250,607   |      |
|                                                                       |                                                                                                                       |      |           |      |
| Total liabilities and shareholders' equity                                 | $                                                                                                                     | 2,160,613 |      | $         | 1,842,690 |   |
|                                                                       |                                                                                                                       |      |           |      |

Seenotes to condensed consolidated financial statements.

**NETBANK, INC.****CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS****(in 000's except per share amounts)**

|                                                                                                             | **2001**                        |   | **2000**             |   | **2001** |   | **2000** |   |
|------------------------------------------------------------------------------------------------------------------|---------------------------------|--------|----------------------|--------|----------|--------|----------|--------|
|                                                                                                             | ****                            |   | ****                 |   | ****     |   | ****     |   |
|                                                                                                             | **Three months Ended**          |   | **Six months Ended** |   |
|                                                                                                             | **June 30,**                    |   | **June 30,**         |   |
|                                                                                                             |                                 |   |                      |   |
| Interest income:                                                                                                 |                            |   |                 |   |     |   |     |   |
|                                                                                                             | Loans                           | $      | 26,435               |   | $        | 19,056 |     | $      | 54,280 |   | $ | 35,092 |   |
|                                                                                                             | Investment securities           | 7,288  |                 | 7,726  |     | 14,782 |     | 15,201 |   |
|                                                                                                             | Short–term investments     | 895    |                 | 164    |     | 1,457  |     | 367    |   |
|                                                                                                             |                            |        |                 |        |     |        |     |        |   |
|                                                                                                             | Total interest income:          | 34,618 |                 | 26,946 |     | 70,519 |     | 50,660 |   |
| Interest expense:                                                                                                |                            |   |                 |   |     |   |     |   |
|                                                                                                             | Deposits                        | 15,209 |                 | 11,014 |     | 30,602 |     | 20,504 |   |
|                                                                                                             | Other borrowed funds            | 8,610  |                 | 7,104  |     | 18,344 |     | 12,380 |   |
|                                                                                                             |                            |        |                 |        |     |        |     |        |   |
|                                                                                                             | Total interest expense          | 23,819 |                 | 18,118 |     | 48,946 |     | 32,884 |   |
|                                                                                                             |                            |        |                 |        |     |        |     |        |   |
| Net interest income                                                                                              | 10,799                          |   | 8,828                |   | 21,573   |   | 17,776   |   |
| Provision for loan losses                                                                                        | 126                             |   | 96                   |   | 170      |   | 278      |   |
|                                                                                                                  |                                 |   |                      |   |          |   |          |   |
| Net interest income after provision for loan losses                                                              | 10,673                          |   | 8,732                |   | 21,403   |   | 17,498   |   |
| Non–interest income                                                                                         | 3,289                           |   | 531                  |   | 5,997    |   | 872      |   |
| Non–interest expense:                                                                                       |                            |   |                 |   |     |   |     |   |
|                                                                                                             | Salaries and benefits           | 2,236  |                 | 1,330  |     | 4,170  |     | 3,008  |   |
|                                                                                                             | Customer service                | 3,607  |                 | 1,438  |     | 7,070  |     | 3,723  |   |
|                                                                                                             | Loan servicing                  | 1,403  |                 | 961    |     | 2,727  |     | 702    |   |
|                                                                                                             | Marketing                       | 972    |                 | 4,017  |     | 2,655  |     | 6,854  |   |
|                                                                                                             | Data processing                 | 1,644  |                 | 596    |     | 3,033  |     | 1,182  |   |
|                                                                                                             | Depreciation and amortization   | 1,389  |                 | 573    |     | 2,476  |     | 1,088  |   |
|                                                                                                             | Office expenses                 | 383    |                 | 225    |     | 705    |     | 329    |   |
|                                                                                                             | Occupancy                       | 215    |                 | 172    |     | 397    |     | 358    |   |
|                                                                                                             | Travel and entertainment        | 83     |                 | 234    |     | 192    |     | 344    |   |
|                                                                                                             | Other                           | 775    |                 | 337    |     | 1,432  |     | 1,248  |   |
|                                                                                                                  |                                 |   |                      |   |          |   |          |   |
|                                                                                                             | Total non–interest expense | 12,707 |                 | 9,883  |     | 24,857 |     | 18,836 |   |
|                                                                                                                  |                                 |   |                      |   |          |   |          |   |
| Income (loss) before income taxes and extraordinary  gain                                                        | 1,255                           |   | (620                 | )      | 2,543    |   | (466     | )      |
| Income tax (expense) benefit                                                                                     | (476                            | )      | 210                  |   | (967     | )      | 158      |   |
|                                                                                                             |                                 |   |                      |   |          |   |          |   |
|                                                                                                                  |                            |   |                 |   |     |   |     |   |
| Income (loss) before extraordinary gain                                                                          | 779                             |   | (410                 | )      | 1,576    |   | (308     | )      |
|                                                                                                             |                                 |   |                      |   |          |   |          |   |
| Extraordinary gain on early extinguishment of debt, net  of tax                                                  | -                               |   | 2,620                |   | -        |   | 7,140    |   |
|                                                                                                             |                                 |   |                      |   |          |   |          |   |
|                                                                                                                  |                            |   |                 |   |     |   |     |   |
|                                                                                                             | Net income                      | $      | 779                  |   | $        | 2,210  |     | $      | 1,576 |   | $ | 6,832 |   |
|                                                                                                             |                            |        |                 |        |     |        |     |        |   |
|                                                                                                                  |                            |   |                 |   |     |   |     |   |
| Basic and diluted net income (loss) before  extraordinary gain per common and potential common share outstanding | $                               | 0.03   |                 | $      | (0.01    | )      | $        | 0.05   |   | $ | (0.01 | ) |
| Net income per common and potential common share  outstanding:                                                   |                            |   |                 |   |     |   |     |   |
|                                                                                                             | Basic                           | $      | 0.03                 |   | $        | 0.07   |     | $      | 0.05 |   | $ | 0.23 |   |
|                                                                                                             | Diluted                         | $      | 0.03                 |   | $        | 0.07   |     | $      | 0.05 |   | $ | 0.22 |   |
| Weighted average common and potential common shares  outstanding:                                                |                            |   |                 |   |     |   |     |   |
|                                                                                                             | Basic                           | 28,563 |                 | 29,878 |     | 28,722 |     | 29,724 |   |
|                                                                                                             | Diluted                         | 29,174 |                 | 30,731 |     | 29,303 |     | 30,686 |   |

Seenotes to condensed consolidated financial statements.

**NETBANK, INC.****CONDENSEDCONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY****(in 000's)**

|                                | **Common  Shares**                                                                                     |   | **Common  Stock  ($.01 par)** |   | **Additional  Paid-in  Capital** |   | **Retained****Earnings** |   | **Accumulated  Other  Comprehensive  Income  (Loss)** |   | **Treasury  Stock at  Cost** |   | **Total** |   |
|--------------------------------|--------------------------------------------------------------------------------------------------------|--------|-------------------------------|--------|----------------------------------|--------|--------------------------|--------|-------------------------------------------------------|--------|------------------------------|--------|-----------|--------|
|                           |                                                                                                        |   |                               |   |                                  |   |                          |   |                                                       |   |                              |   |           |   |
| Balance-December 31, 2000 | 30,013                                                                                                 |   | $                             | 300    |                             | $      | 251,579                  |   | $                                                     | 6,688  |                         | $      | (352)     |   | $ | (7,608) |   | $ | 250,607 |   |
|                           | Comprehensive income:                                                                                  |   |                          |   |                             |   |                     |   |                                                  |   |                         |   |      |   |   |
|                           | Net income for six months ended June 30, 2001                                                     | -      |                          | -      |                             | -      |                     | 1,576  |                                                  | -      |                         | -      |      | 1,576  |   |
|                           | Unrealized gain on securities, net of taxes and  reclassification adjustment                           | -      |                          | -      |                             | -      |                     | -      |                                                  | 1,798  |                         | -      |      | 1,798  |   |
|                           |                                                                                                   |   |                          |   |                             |   |                     |   |                                                  |   |                         |   |      |        |   |
|                           | Comprehensive income                                                                                   |   |                          |   |                             |   |                     |   |                                                  |   |                         |   |      | 3,374  |   |
|                           | Purchase of shares of common stock for treasury (1,490  shares held in treasury at June 30, 2001) | -      |                          | -      |                             | -      |                     | -      |                                                  | -      |                         | (4,434 | )         | (4,434 | ) |
|                           |                                                                                                   |   |                          |   |                             |   |                     |   |                                                  |   |                         |   |      |   |   |
|                           | Issuance of stock in conjunction with acquisition                                                      | 1,689  |                          | 17     |                             | 15,115 |                     | -      |                                                  | -      |                         | -      |      | 15,132 |   |
|                           | Exercise of stock options                                                                              | 36     |                          | -      |                             | 311    |                     | -      |                                                  | -      |                         | -      |      | 311    |   |
|                           |                                                                                                   |        |                          |        |                             |        |                     |        |                                                  |        |                         |        |      |        |   |
| Balance-June 30, 2001          | 31,738                                                                                                 |   | $                             | 317    |                             | $      | 267,005                  |   | $                                                     | 8,264  |                         | $      | 1,446     |   | $ | (12,042 | ) | $ | 264,990 |   |
|                           |                                                                                                        |   |                               |   |                                  |   |                          |   |                                                       |   |                              |   |           |   |

Seenotes to condensed consolidated financial statements.**NETBANK, INC.CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS(in 000's) **Six months Ended June 30,**  ****  **2001** **2000**  **** **** Operating activities:    Net income$1,576 $6,832 Adjustments to reconcile net income to net cash used in  operating activities:     Net accretion of discounts on investment securities(3,088)(899) Amortization of premiums on purchased loans8,291 1,812  Provision for loan losses169 278  Depreciation and amortization1,389 1,257  Loss on disposal of fixed assets- 13  Extraordinary gain on debt extinguishment- (10,825) Amortization of debt discount84 278 Changes in assets and liabilities, net of effects of  acquisitions:     Decrease (increase) in accrued interest receivable1,169 (191) Increase in other assets(212,165)(15,628) Loans originated for sale(14,476)(31,195) Proceeds from sale of loans14,144 33,395  Increase in accrued interest payable2,607 5,092  Increase in accounts payable and accrued liabilities3,488 4,183      Net cash used in operating activities(196,812)(5,595)Investing activities:     Purchases of securities available for sale(179,969)(45,040) Purchase of Federal Home Loan Bank stock(3,775)(7,250) Principal repayments on investment securities43,707 39,465  Sales and maturities of securities available for sale152,973    Net cash acquired in business combination10,430    Origination and purchase of loans(287,264)(351,582) Principal payments on loans309,156 95,882  Capital expenditures(1,807)(2,666)     Net cash provided by (used in) investing activities43,451 (271,191)Financing activities:     Increase in deposits242,747 154,532  Net proceeds from the issuance of common stock311 -  Proceeds from other borrowed funds360,129 397,228  Repayments of other borrowed funds(385,300)(243,239) Repurchase of convertible subordinated notes- (28,303) Purchase of treasury stock(4,434)(3,373)     Net cash provided by financing activities213,453 276,845     Net increase in cash and cash equivalents60,092 59 Cash and cash equivalents:     Beginning of period11,958 13,643      End of period$72,050 $13,702     Supplemental disclosures of cash flow information:    Cash paid during the period for interest$46,339 $27,937 Cash paid during the period for income taxes$1,060 $506 Non-cash investing and financing activities:         Issuance of common stock for repurchase of convertible  subordinated notes- $8,342 Issuance of common stock in conjunction with business  combination$15,132 -      Fair value of assets acquired$267,086 - Liabilities assumed(247,157)- Stock issued in transaction15,132 - Remaining purchase liability(797)-     Cash paid for business$4,000 -     
Seenotes to condensed consolidated financial statements.

**NETBANK, INC.NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

**1.**          **ORGANIZATIONAND BASIS OF PRESENTATION**

             NetBank, Inc.is a bank holding company that wholly owns the outstanding stock of NetBank,FSB, a federal savings bank and its wholly owned subsidiary Market StreetMortgage Corporation (“Market Street”), a mortgage company, as well as NetBankPartners, LLC, a partnership involved in strategic partnering opportunities,and NB Partners, Inc. (“NB Partners”) a corporation involved in strategicpartnering opportunities, jointly (“NetBank”).

             In theopinion of management, the unaudited condensed consolidated financialstatements included herein reflect all adjustments, consisting only of normalrecurring accruals, which are necessary for the fair statement of the resultsfor 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 shouldbe read in conjunction with the financial statements and notes thereto,included in NetBank's Form 10-K filed with the SEC for the year endedDecember 31, 2000 and NetBank's Form 10-Q for the quarter ended March31, 2001. The results of operations for the interim periods reported herein arenot necessarily indicative of results to be expected for the full year. Certain2000 amounts have been reclassified for comparability with 2001 amounts.

**2.          ACQUISITION**

                           OnJune 29, 2001, NetBank, Inc. acquired all of the outstanding stock of MarketStreet pursuant to an agreement (the “Agreement”) dated April 15, 2001 andamended as of June 29, 2001 among NetBank, Net Interim, Inc., RepublicBank, Republic Bancorp, Inc. (“Republic”) and certain shareholders of MarketStreet.  The consideration paid atclosing consisted of 1,689,000 shares of NetBank common stock valued at $8.96per share and cash of $4.0 million.  Anadditional $0.8 million liability has been recorded for cash consideration tobe paid after financial statements reflecting certain post-closing adjustmentshave been delivered and mutually agreed upon.

The acquisition was accounted for as apurchase and approximately $17.7 million in goodwill was recorded. Amortizationfor 2001 will be based on a 25 year life. Amortization of goodwill willdiscontinue January 1, 2002 with NetBank’s adoption of SFAS No. 142,"Goodwill and Other Intangible Assets" (see Note 3).  Pro-forma financial information assuming thetransaction had occurred as of January 1, 2000 and January 1, 2001 follows:
    Six  Months Ended  June 30, 2001 Six  Months Ended  June 30, 2000    Net interest income$23,962 $18,224 Income (loss) before  extraordinary gain$4,062 $(1,434)Net income$4,062 $5,706 Basic and diluted  income (loss) before extraordinary gain per common and common equivalent  share$0.14   $(0.05)Basic and diluted net  income per common and common equivalent share$0.14 $0.19 
 

The shares of NetBank common stock issuedin the acquisition were issued in a private placement.  NetBank has agreed to use its best effortsto register those shares on or before September 27, 2001, with Republicthereafter being entitled to sell that portion of its shares exceeding 5% ofNetBank’s then outstanding common stock. Republic will be precluded from selling any shares in excess of thispermitted amount until June 29, 2002.

**3.          ACCOUNTING POLICIES**

             Referenceis made to the accounting policies of NetBank described in the notes to financialstatements contained in NetBank's Form 10-K for the year endedDecember 31, 2000 and Form 10-Q for the three months ended March 31, 2001.The Company has followed those policies in preparing this report.

*New accounting pronouncements-*

In September 2000, the FASB issued SFASNo. 140,  “Accounting for Transfers andServicing of Financial Assets and Extinguishment of Liabilities” (“SFAS140”).  SFAS 140 revises the standardsfor accounting for securitizations and other transfers of financial assets andcollateral and requires certain disclosures. SFAS 140 is effective fortransfers and servicing of financial assets and extinguishments of liabilitiesoccurring after March 31, 2001. The adoption of  SFAS 140 did not have an impact on NetBank’s financial statements.

In July 2001, the FASB issued SFAS No.141, "Business Combinations" ("SFAS 141").  SFAS 141 requires the purchase method ofaccounting for business combinations initiated after June 30, 2001 and eliminatesthe pooling-of-interests method.

In July 2001, the FASB issued SFAS No.142, "Goodwill and Other Intangible Assets" (“SFAS 142”). SFAS 142changes the accounting for goodwill from an amortization method to an annualimpairment test. Amortization of goodwill, including goodwill recorded in pastbusiness combinations, will cease upon adoption of this statement. NetBank willimplement SFAS 142 on January 1, 2002.

 

**4.          LOANS**

             Duringthe three months ended June 30, 2001, NetBank purchased the following loanpools (in 000's):
**Types of  Loans Purchased****Principal Amount** **Premium****Amount** **Range  of Stated Interest Rates**    First mortgages$54,602 $539 7.6%Second mortgages87,846 3,547 9.7%Commercial participations27,701 - 7.8-8%      Total$170,149 $4,086         
 

             Ananalysis of the allowance for loan losses for the three and six months endedJune 30, 2001 follows (in 000's):
  For  the  Three Months Ended  June 30, 2001  For  the  Six Months Ended  June 30, 2001      Balance-beginning of period$14,954 $13,421  Allowance recorded in connection with purchase of loan  pools1,752 3,628  Provision for loan losses126 170  Loans charged off, net of recoveries(763)(1,150)    Balance-end of period$16,069 $16,069    
**5.          BORROWINGS**

             AtJune 30, 2001, NetBank’s borrowings consisted primarily of various advances anda warehouse line from the Federal Home Loan Bank (“FHLB”) and the remainingprincipal outstanding from our convertible subordinated notes (the “Notes”).     Other than one adjustable rate$25,000,000 advance that matures in 2001 and the warehouse line, all of theadvances are fixed rate; however, eight advances totaling $255,000,000 may beconverted to adjustable rate based on the three month floating LIBOR.  The FHLB warehouse line is a $250,000,000adjustable line of credit with a floating rate based on  the federal funds rate plus 25 basis pointsused to fund mortgages originated by Market Street. All of NetBank’s borrowings are secured by NetBank's investment securitiesor mortgage loans except for the convertible subordinated notes, which areunsecured.

A summary of borrowings, grouped by yearof maturity, as of June 30, 2001 follows (in 000’s):
**Type of Borrowing****Year of Maturity** **Range of Stated****Interest Rates** **Principal Amount** ******** **** **** Reverse repurchase agreement2001 3.96%$5,000 FHLB advances2001 6.47%44,000 Adjustable rate FHLB advance2001 3.95%25,000 FHLB advances2003 6.88-7.17%60,000 Convertible subordinated notes2004 4.75%27,316 FHLB advances2004 5.92-6.03%105,000 FHLB advances2005 6.02-7.41%150,000 FHLB advances2006 5.63%100,000 FHLB advances2007 7.50%25,000 FHLB advances2009 4.64%25,000 FHLB warehouse lineVarious 4.55%70,492         Total 636,808    Less unamortized discount  477         Total debt $636,331       
** **

 

**6.          NET INCOME PER COMMON AND COMMONEQUIVALENT SHARE**

             Basicand diluted net income per common and potential common share have beencalculated based on the weighted average number of shares outstanding. Thefollowing schedule reconciles the numerator and denominator of the basic anddiluted net income per common and potential common shares (in 000's except pershare amounts). The effect of convertible debt securities outstanding has notbeen included as the assumed conversion of such securities would be anti–dilutiveto earnings per share for the three and six months ended June 30, 2000 and2001.
 **Net****Income****(Numerator)** **Shares****(Denominator)** **Per Share****Amount**  **** **** ****    **2001**      ****   Three Months Ended June 30:      Basic EPS$779 28,563 $0.03 Effect of dilutive securities–options to purchase  common shares  611       Diluted EPS$779 29,174 $0.03     Six Months Ended June 30:      Basic EPS$1,576 28,722 $0.05 Effect of dilutive securities–options to purchase  common shares  581       Diluted EPS$1,576 29,303 $0.05            **Net  Income (Numerator)** **Shares  (Denominator)** **Per Share****Amount**** ** **** **** ****    **2000**                Three Months Ended June 30:      Basic EPS$2,210 29,878 $0.07 Effect of dilutive securities–options to purchase  common shares  853       Diluted EPS$2,210 30,731 $0.07    Six Months Ended June 30:      Basic EPS$6,832 29,724 $0.23 Effect of dilutive securities–options to purchase  common shares  962       Diluted EPS$6,832 30,686 $0.22     
 

**7.          SHAREHOLDERS' EQUITY**

             Inconjunction with a stock repurchase program announced during the year endedDecember 31, 2000, NetBank continued acquiring shares of its common stockduring the three months ended June 30, 2001. NetBank purchased 191,000 and654,000 shares of its common stock during the three and six months ended June30, 2001, respectively, at an aggregate cost of $865,000 and $4,434,000,respectively, bringing the total number of shares held in treasury to 1,490,000at an aggregate cost of $12,042,000.

**8.          DERIVATIVES**

             NetBankenters into forward delivery commitments through its wholly-owned subsidiary,Market Street, to protect against changes in the fair value of Market Street’sshort-term commitments to fund mortgage loan applications in process (“thepipeline”) and mortgage loans held for sale (“the warehouse”) due tofluctuations in interest rates.  Theseforward commitments are designated as fair value hedges under SFAS No. 133,“Accounting for Derivative Instruments and Hedging Activities”.  As such, these forward commitments arerecorded at fair value on the balance sheet. NetBank is generally not exposed to significant losses nor does itexpect to realize significant gains related to the pipeline or warehouse due tochanges in interest rates, net of gains or losses on related hedge positions.

 

**NETBANK, INC.****MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS**

             *Some of thestatements in this report are forward–looking statements. Forward–lookingstatements include statements regarding the intent, belief or currentexpectations of NetBank or its officers and directors  and can be identified by the use of forward–looking termssuch as "may," "will," "should," "believe,""expect," "anticipate," "estimate,""continue," or comparable terminology. Our actual results coulddiffer materially from those anticipated from the forward–lookingstatements, depending on various important factors. These factors include apossible decline in asset quality, potential difficulties in integrating ouroperations with those of companies we acquire, the evolving nature of the market for internet banking and financialservices generally, the possible adverse effects of unexpected changes in theinterest rate environment, and increasing competition and regulatory changes.The section headed "Risk Factors" in our prospectus datedJune 3, 1999 contains additional details on these and other risks that arematerial to our operations. All forward–looking statements in this reportare based on information available to us as of the date this report was filedwith the SEC. We do not undertake to update any forward–lookingstatements that may be made by us or on our behalf in this prospectus or otherwise.*

             *General-*NetBank, Inc. is a bank holding company that wholly owns the outstandingstock of NetBank, FSB, its wholly owned subsidiary, Market Street MortgageCorporation (“Market Street”), NetBank Partners, LLC (“NetBank Partners”), andNB Partners, Inc. (“NB Partners”), jointly (“NetBank”).  NetBank, FSB is a federal savings bank andits subsidiary, Market Street is a mortgage company which was acquiredeffective June 29, 2001.  NetBankPartners is a partnership involved in strategic partnering opportunities and NBPartners is a corporation established during the three months ended June 30,2001 which is also involved in strategic partnering opportunities.  As of June30, 2001, NetBank had  232,000 accountsand $1.2 billion in deposits.

             *FinancialCondition-*Our assets were $2.2 billion at June 30, 2001 compared to$1.8 billion at December 31, 2000. The increase of $318 millionfrom December 31, 2000 to June 30, 2001 was primarily the result of theacquisition of all of Market Street’s loans held for sale of $219.7 millionoffset by a decrease in NetBank’s loan portfolio of $32.6 million  due to scheduled paydowns as well asprepayments due to increased refinancing activity in a declining rateenvironment.  Management postponed theacquisition of loan pools during the second quarter as most liquid assets wereaccumulated in anticipation of being used for Market Street’s post-closeestimated funding needs, accounting for the $60.1 million increase in cash andcash equivalents from December 31, 2000 to June 30, 2001.  In addition, other assets increased $75.8million primarily due to the addition of $17.7 million in goodwill related toMarket Street, timing differences in collecting amounts due from outsideservicers of our loan portfolio, as well as the addition of the core depositintangible and acquisition costs recorded in conjunction with the Compubanktransaction.  Customer depositsincreased $167.0 million from internal growth and an additional $75.7 milliondue to the purchase of 57,000 customer deposit accounts from Compubank duringthe three months ended March 31, 2001.

             Totalliabilities increased $303.5 million to $1.9 billion at June 30, 2001 from$1.6 billion at December 31, 2000 primarily due to the growth of ourdeposit portfolio internally of $167.0 million as well as anadditional  $75.7 million increasedue to 57,000 accounts acquired from Compubank. During the six months endedJune 30, 2001, NetBank paid off three advances totaling $95 million andobtained one new advance from the FHLB for $100 million. In addition, MarketStreet had $70.4 million outstanding under a warehouse line agreement with theFHLB at June 30, 2001.  During the sixmonths ended June 30, 2001, NetBank entered into reverse repurchase agreementstotaling $260.1 million and repaid reverse repurchase agreements totaling$290.3 million.

             Totalshareholders' equity increased $14.4 million from December 31, 2000to June 30, 2001 primarily due to $15.1 million of capital paid in as a resultof 1,689,000 shares of stock issued in conjunction with the Market Streettransaction offset by the repurchase of 564,000 shares of our common stock fortreasury at an aggregate cost of $4,434,000. The repurchases were part of a program begun during 2000 that authorizedNetBank to purchase up to 1,000,000 common shares from time to time on the openmarket at price levels NetBank deems attractive. During the six months endedJune 30, 2001, NetBank’s Board of Directors authorized an additional 1,000,000common shares for repurchase under the program.  In addition, shareholders’ equity further increased due to theaddition of earnings for the six months ended June 30, 2001 of $1.6 million andan increase in unrealized gains on our securities portfolio of $1.8 million,net of tax.

             *Liquidity and Capital Resources *NetBank'sliquidity, represented by cash and cash equivalents, is a product of itsoperating, investing, and financial activities. NetBank's primary sources offunds are deposits, borrowings, prepayments and maturities of outstanding loans,sales of loans, maturities of investment securities and other short-terminvestments, and funds provided from operations. While scheduled loan paymentsand maturing investment securities and short-term investments are relativelypredictable sources of funds, deposit flows and loan prepayments are greatlyinfluenced by general interest rates, economic conditions, and competition.NetBank invests excess funds in overnight deposits and other short-terminterest–earning assets. NetBank can use cash generated through theretail deposit market, its traditional funding source, to offset the cashutilized in investing activities. NetBank's available for sale securities andshort-term interest–earning assets can also be used to provide liquidityfor lending and other operational requirements. As an additional source offunds, NetBank had availability under existing line of credit agreementstotaling $263.0 million at June 30, 2001.

             NetBankis required by Office of Thrift Supervision regulations to maintain tangiblecapital equal to at least 1.5% of tangible assets, core capital equal to atleast 3.0% of tangible assets, and total capital equal to at least 8.0% ofrisk-weighted assets. To be categorized as "well capitalized" under aprompt corrective action plan, NetBank must maintain minimum Tier I, core, andtotal capital ratios of at least 6%, 5%, and 10%, respectively. NetBankexceeded such requirements with Tier I, core and total capital ratios of 11.9%,17.6%, and 18.9%,  respectively, at June30, 2001.

**InterestRate Sensitivity**

             Wemeasure interest rate sensitivity as the difference between amounts of interest–earningassets and interest–bearing liabilities that mature, reprice, or repaywithin a given period of time. The difference, or the interest rate sensitivity"gap," provides an indication of the extent to which an institution'sinterest rate spread will be affected by changes in interest rates. A gap isconsidered positive when the amount of interest-rate sensitive assets exceedsthe amount of interest-rate sensitive liabilities and is considered negativewhen the amount of interest-rate sensitive liabilities exceeds the amount ofinterest-rate sensitive assets. In a rising interest rate environment, aninstitution with a positive gap would be in a better position than aninstitution with a negative gap to invest in higher yielding assets or have itsasset yields adjusted upward, which would result in the yield on its assetsincreasing at a faster pace than the cost of its interest–bearingliabilities. During a period of falling interest rates, however, an institutionwith a positive gap would tend to have its assets maturing at a faster ratethan one with a negative gap, which would tend to reduce or restrain the growthof its net interest income.

             Thefollowing table sets forth the interest rate sensitivity of our assets andliabilities as of June 30, 2001 (in 000's):

 
 **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$12,178 $- $- $- $12,178  Federal funds sold59,872 - - - 59,872  Investment securities67,898 42,864 150,450 116,802 378,014  Stock of Federal Home Loan Bank of Atlanta30,225 - - - 30,225  Loans held for sale- - - 219,737 219,737  Loans receivable389,382 287,833 555,304 98,644 1,331,163  Total interest–earning assets:559,555 330,697 705,754 435,183 2,031,189 Non interest–earning assets- - - 129,424 129,424       Total assets$559,555 $330,697 $705,754 $564,607 $2,160,613                  Interest–Bearing Liabilities:           Interest–bearing deposits$245,179 $775,431 $60,346 $127,185 $1,208,141  Convertible subordinated debt- - 26,839 - 26,839  Other borrowed funds100,492 64,000 395,000 50,000 609,492  Total interest–bearing liabilities:345,671 839,431 482,185 177,185 1,844,472 Interest–free deposits- - - 15,358 15,358 Other interest–free liabilities and equity- - - 300,783 300,783       Total liabilities and equity$345,671 839,431 $482,185 $493,326 $2,160,613       Net interest rate sensitivity gap$213,884 $(508,734)$223,569 $257,998 $186,717 Cumulative gap$213,884 $(294,850)$(71,281)$186,717 - Net interest rate sensitivity gap as a percent of  interest–earning assets38.22%(153.84%)31.68%59.28%9.19%Cumulative gap as a percent of cumulative interest–earning  assets38.22%(33.12%)(4.47%)9.19%- 
** **

 

**MarketRisk**

             Ourprincipal business is the originating and purchasing of loans funded bycustomer deposits and, to the extent necessary, other borrowed funds.Consequently, a significant portion of our assets and liabilities are monetaryin nature and fluctuations in interest rates, specifically the prime rate, willaffect our future net interest income and cash flows. This interest rate riskis our primary market risk exposure. The only derivative financial instrumentsthat we enter into are short-term forward commitments related to loanoriginations at our mortgage origination subsidiary, Market Street . We have nomarket risk-sensitive instruments held for trading purposes. Our exposure tomarket risk is reviewed on a regular basis by our management.

             NetBankmeasures interest rate risk based on Net Portfolio Value ("NPV")analysis. NPV equals the present value of expected net cash flows from existingassets minus the present value of expected net cash flows from existingliabilities. An NPV ratio is determined by dividing NPV by the present value ofassets. The board of directors manages NetBank's interest rate risk byestablishing limits for the minimum acceptable NPV ratio over a series ofhypothetical interest rate scenarios or "rate shocks". As of June 30,2001, NetBank's estimated NPV ratios were within these board-approved limits.The following table sets forth the estimated percentage change in NetBank's NPVratio as of June 30, 2001 assuming rate shocks of +300 to -300 basis points:

**Limits and Current NPV Ratios**
**Rate Shock****(in basis points)****Board Limits****(Minimum****NPV Ratios)** **Estimated****6/30/01****NPV Ratios**   +3004.0%10.2%+2006.0%11.2%+1006.0%11.9%Flat6.0%12.6%-1006.0%12.6%-2006.0%12.5%-3006.0%12.3%
                           Computationof prospective effects of hypothetical rate changes is based on manyassumptions, including relative levels of market interest rates, loanprepayments and deposit decay. They should not be relied upon as indicative ofactual results. Further, the computations do not contemplate certain actionsmanagement could undertake in response to changes in interest rates.

*InvestmentSecurities.*  The following tables set forth certaininformation relating to our available-for-sale securities at June 30, 2001and December 31, 2000:
 **Amortized****Cost** **Unrealized****Gains** **Unrealized  Losses** **Estimated  Fair****Value**  **** **** **** ****  **Gross**  ****  **June 30, 2001**  ****          Mortgage pool securities$120,647 $730 $68 $121,309 Collateralized mortgage obligations164,348 1,626 597 165,377 U.S. government agencies77,377 542 86 77,833 Corporate bonds9,659 23 10 9,672 Habitat bonds and other3,789 34 - 3,823       Total$375,820 $2,955 $761 $378,014               **Amortized****Cost** **Unrealized****Gains** **Unrealized****Losses** **Estimated  Fair****Value**** ** ****** ******** ******** ******** ** **Gross**** **  ****  **December 31, 2000**  **** Mortgage pool securities$1,221 $12 $- $1,233 Collateralized mortgage obligations212,487 1,298 1,579 212,206 Unites States government agencies162,370 - 284 162,086 Corporate bonds9,652 26 6 9,672 Habitat bonds and other3,713 - - 3,713                $389,443 $1,336 $1,869 $388,910      
* *
* 

*LoanPortfolio Composition.*  The following table sets forth thecomposition of our loan portfolio by type of loan as of June 30, 2001 andDecember 31, 2000:
 **June 30,****2001** **December 31,****2000**  **** **** Residential mortgages$838,464 62.2%$863,340 62.7%Home equity lines185,989 13.8 243,657 17.7 Commercial mortgages182,882 13.6 160,510 11.7 Leases93,813 7.0 104,743 7.6 Construction43,124 3.2 1,533 0.1 Consumer2,516 0.2 2,404 0.1 Auto444 0.0 1,018 0.1       Total1,347,232 100.0%1,377,205 100.0%                 Less allowance for loan losses16,069   13,421           Total$1,331,163   $1,363,784           
             *AssetQuality and Non-performing Assets-*As of June 30, 2001 andDecember 31, 2000 NetBank had $2.5 million and $1.0 million loans onnon-accrual status, which includes all loans past due 90 days ormore.  During the three months endedJune 30, 2001 and 2000, we had no restructured loans.

*Deposits.*  The followingtable sets forth the dollar amount of deposits and weighted average interestrates in the various types of deposit programs offered by us at June 30, 2001and December 31, 2000:
 **Amount** **Percentage** **Weighted****Average****Interest****Rate** **Amount** **Percentage** **Weighted****Average  Interest  Rate**          **June 30, 2001**   **December 31, 2000**       ****  Non-interest bearing checking accounts$15,358 1.3%N/A $15,123 1.5%N/A Interest bearing:             Checking accounts127,271 10.3 2.1%69,013 7.0 3.1% Money market366,002 29.9 4.3%268,005 27.3 6.0% Certificate of deposit under $100,000599,028 49.0 5.6%528,618 53.9 6.8%Certificate of deposit over $100,000115,840 9.5 5.6%99,993 10.3 6.8%         Total deposits$1,223,499 100.0%  $980,752 100.0%           
**Results ofOperations**

             *As theclosing of the Market Street transaction did not occur until June 29, 2001,NetBank’s  results of operations forboth the three months and six months ended June 30, 2001 do not reflect theoperations of Market Street.  Inaddition, NetBank Partners had no operations during the six months ended June30, 2001.  As such, the followingdiscussion relates to the operations of NetBank, NetBank Inc. and NB Partners.*

***Three Months EndedJune 30, 2001 Compared to Three Months Ended June 30, 2000***

*General.*  Income beforeextraordinary gain for the three months ended June 30, 2001 amounted to$0.8 million, an increase of $1.2 million compared to a $0.4 millionloss for the three months ended June 30, 2000. The primary reason for theincrease was due to lower marketing expenditures as NetBank slowed its growthrate in exchange for higher profitability during the three months ended June30, 2001.  In conjunction with a programto repurchase some of our convertible subordinated notes outstanding during thethree months ended June 30, 2000, NetBank realized significant extraordinarygains on the early extinguishment of debt and reinvested those gains inmarketing programs, accelerated product offerings,  and related infrastructure. During the three months ended June 30, 2001, we spent less on marketingand continued to carefully manage non-interest expense, while at the same timesupporting over twice as many accounts as compared with the three months endedJune 30, 2000. The increase in accounts from 104,000 at June 30, 2000 to232,000 at June 30, 2001 was due to internal growth as well as the conversionof approximately 50,000 former Compubank accounts during the three months endedJune 30, 2001.  In addition, incomebefore extraordinary gain was also positively impacted by a $2.8 millionincrease in fee income for the three months ended June 30, 2001 as comparedwith the three months ended June 30, 2000. Net interest margin for the three months ended June 30, 2001 wasapproximately 2.3%, comparable with the three months ended June 30, 2000 at2.4%.  Overall net income decreased from$2.2 million to $0.8 million due to the fact that net income for the threemonths ended June 30, 2000 included a $2.6 million extraordinary gain onearly extinguishment of debt.

*InterestIncome.*  Interest income related to our loan andinvestment portfolio for the three months ended June 30, 2001 was$34.6 million compared to $26.9 million for the three months endedJune 30, 2000. The increase in interest income was a result of the growth ofour loan portfolio of $298 million from June 30, 2000 to June 30, 2001,compounded by an increase in the average yield on loans from 7.7% for the threemonths ended June 30, 2000 to 7.9% for the three months ended June 30, 2001. Inaddition, the investment portfolio decreased slightly from $420.8 millionat June 30, 2000 to $378.0 million at June 30, 2001 as most liquid assetswere accumulated in anticipation of being used for Market Street’s post-closeestimated funding needs.  The yield onthe investment portfolio also declined from 7.2% for the three months endedJune 30, 2000 to 6.4% for the three months ended June 30, 2001 due to adeclining rate environment.

*InterestExpense.*  For the three months ended June 30, 2001,$15.2 million in interest expense on deposits was recorded compared to$11.0 million for the three months ended June 30, 2000 as a result of ourincrease in customer deposits from $808.4 million at June 30, 2000 to $1.2billion at June 30, 2001. That increase was offset by a decrease in the averageinterest rate paid on deposits from 5.8% for the three months ended June 30,2000 to 5.1% for the three months ended June 30, 2001. Interest expenseassociated with other borrowed funds increased $1.5 million from $7.1million for the three months ended June 30, 2000 to $8.6 million for thethree months ended June 30, 2001 due to the addition of several new advancesfrom the FHLB, offset by a decrease in interest expense related to ourconvertible subordinated notes which we began repurchasing during the threemonths ended March 31, 2000.

*NetInterest Income.*  Net interest income is determined by ourinterest rate spread, which is the difference between the yields earned on ourinterest–earning assets and the rates paid on our interest–bearingliabilities, and the relative amounts of interest–earning assets and interest–bearingliabilities. Net interest income was $10.8 million, or 2.3% of averageinterest earning assets  for the threemonths ended June 30, 2001 compared to $8.8 million, or 2.4% of averageinterest earning assets for the three months ended June 30, 2000. The increasein net interest income resulted from the increase in the amount of loans anddeposits from June 30, 2000 to June 30, 2001. The decrease in interest marginwas the result of higher cost of funds during the three months ended June 30,2001 as compared with the three months ended June 30, 2000.

*Provisionfor Loan Losses.*  In connection with the purchase of loanportfolios, we assess the inherent loss in the portfolios and record thenecessary allowance by adjusting the premium associated with each portfolio.During the three months ended June 30, 2001, we recorded $1.8 million asan addition to premiums related to allowance for loan losses for loanspurchased during the quarter. In addition, we also recorded a provision forloan losses of $0.1 million related primarily to originated loans and declinein credit quality associated with one specific pool of fixed second mortgagesand one specific pool of automobile loans. This compares to a provision of $0.1million recorded during the three months ended June 30, 2000. We periodicallyreview the performance of our loan portfolio by reviewing chargeoffs,delinquency statistics, and industry statistics on a pool-by-pool basis for ourpurchased portfolio and a loan-by-loan basis for our originated loans. If adecline in credit quality for a specific pool or a loan is noted, we record anadditional allowance through a charge to the provision for loan losses. Theallowance for loan losses is maintained at a level estimated to be adequate toprovide for probable losses in the loan portfolio. We determine the adequacy ofthe allowance based upon reviews of individual loans, recent loss experience,current economic conditions, the risk characteristics of the various categoriesof loans and other pertinent factors.

*Non-interestIncome.*  For the three months ended June 30, 2001, werecorded approximately $3.3 million in non-interest income compared to $0.5million recorded during the three months ended June 30, 2000. The primarycomponent of this increase was the introduction of new fees on customer depositaccounts during the fourth quarter of 2000 and continuing through the firstquarter of 2001.  Deposit and loan feesaccounted for $2.8 million, or 85% of the $3.3 million in non-interest incomerecorded during the three months ended June 30, 2001.  The other $0.5 million, or 15% related to gains on securitiessold during the three months ended June 30, 2001 as we disposed of certainsecurities identified as having a high prepayment risk.   In addition, during the three months endedJune 30, 2001, NetBank, Inc formed a new subsidiary, NB Partners that signed anagreement with Dundee Bancorp Inc.,which gives Toronto-based Dundee Bancorp the exclusive right to sell bankingproducts and services using limited NetBank trademarks in Canada through atrust company subsidiary. NB Partners received an annual licensing fee which isbeing amortized over twelve months and minority ownership in the new DundeeBancorp subsidiary.

*Non-interestExpenses.*  Non-interest expenses include all operatingexpenses including salaries and benefits, marketing, general and administrativeexpenses (excluding interest expense, provision for loan losses and incometaxes). Non-interest expense increased 28.6%, or $2.8 million, for the threemonths ended June 30, 2001 as compared with the three months ended June 30,2000 as the number of customer accounts increased over twofold from 104,000 atJune 30, 2000 to 232,000 at June 30, 2001 which includes the conversion ofapproximately 50,000 former Compubank accounts during the quarter. The largestincreases in non–interest expense occurred in customer service ($2.2million), loan servicing ($0.4 million), data processing ($1.0 million) anddepreciation and amortization ($0.8 million), offset by a decrease in marketingexpenditures ($3.0 million).  Customerservice and data processing increased due to variable expenses associated withthe addition of new customer accounts and other expenses related to the conversionof the 50,000 former Compubank accounts. Customer service was also impacted bylarger cash item losses during the three months ended June 30, 2001 than thoseincurred during the three months ended June 30, 2000 due to the increased sizeof the deposit portfolio.  Loanservicing increased due to the continued expansion of our loan portfolio.Depreciation and amortization increased due to larger amortization expenseassociated with larger capitalized software costs as compared with the balanceat June 30, 2000.  Marketingexpenditures returned to a more normalized amount as compared with the the sameperiod last year when we had substantially increased our marketing expendituresin conjunction with the recognition of an extraordinary gain on the earlyextinguishment of debt.

***Six Months Ended June 30,2001 Compared to Six Months Ended June 30, 2000***

*General.* Income before extraordinary gain for the six monthsended June 30, 2001 amounted to $1.6 million, an increase of$1.9 million compared to a $0.3 million loss for the six months ended June30, 2000. The primary reason for the increase was due to lower marketingexpenditures as NetBank slowed its growth rate in exchange for higherprofitability during the six months ended June 30, 2001.  In conjunction with a program to repurchasesome of our convertible subordinated notes outstanding during the six monthsended June 30, 2000, NetBank realized significant extraordinary gains on theearly extinguishment of debt and reinvested those gains in marketing programs,accelerated product offerings, and related infrastructure.  During the six months ended June 30, 2001,we spent less on marketing and continued to carefully manage non-interestexpense, while at the same time supporting over twice as many accounts as comparedwith the six months ended June 30, 2000. The increase in accounts from 104,000at June 30, 2000 to 232,000 at June 30, 2001 was due to internal growth as wellas the conversion of 50,000 former Compubank accounts during the six monthsended June 30, 2001.  In addition,income before extraordinary gain was also positively impacted by a $5.1 millionincrease in fee income for the six months ended June 30, 2001 as compared withthe six months ended June 30, 2000.  Netinterest margin for the six months ended June 30, 2001 was approximately 2.3%,as compared with 2.6% for the six months ended June 30, 2000 due primarily tohigher cost of funds.   Overall netincome decreased from $6.8 million to $1.6 million due to the fact that netincome for the six months ended June 30, 2000 included a $7.1 millionextraordinary gain on early extinguishment of debt.

*InterestIncome.*  Interest income related to our loan andinvestment portfolio for the six months ended June 30, 2001 was$70.5 million compared to $50.7 million for the six months endedJune 30, 2000. The increase in interest income was a result of the growthof our loan portfolio of $298.0 million from June 30, 2000 toJune 30, 2001, compounded by an increase in the average yield on loansfrom  7.6% for the six months endedJune 30, 2000 to    8.1% for thesix months ended June 30, 2001. In addition, the investment portfoliodecreased slightly from $420.8 million at June 30, 2000 to$378.0 million at June 30, 2001 as most liquid assets were accumulated inanticipation of being used for Market Street’s post-close estimated fundingneeds.  The yield on the investmentportfolio was 7.2% for the six months ended June 30, 2000 as compared with6.6% for the six months ended June 30, 2001.
**InterestExpense.*  For the six months ended June 30, 2001,$30.6 million in interest expense on deposits was recorded compared to$20.5 million for the six months ended June 30, 2000 as a result ofour increase in customer deposits from $808.4 million at June 30,2000 to $1.2 billion at June 30, 2001. The average interest rate paid ondeposits decreased slightly from 5.7% for the six months ended June 30,2000 to 5.6% for the six months ended June 30, 2001. Interest expenseassociated with other borrowed funds increased $6.0 million from$12.4 million for the six months ended June 30, 2000 to$18.3 million for the six months ended June 30, 2001 due to theaddition of several new advances from the FHLB offset by a decrease in interestexpense related to our convertible subordinated notes which we began repurchasingduring the three months ended March 31, 2000.

*NetInterest Income.*  Net interest income is determined by ourinterest rate spread, which is the difference between the yields earned on ourinterest–earning assets and the rates paid on our interest–bearingliabilities, and the relative amounts of interest–earning assets andinterest–bearing liabilities. Net interest income was $21.6 million,or 2.3% of average interest earning assets for the six months ended June 30,2001 compared to $17.8 million, or 2.6% of average interest earning assetsfor the six months ended June 30, 2000. The increase in net interest incomeresulted from the increase in the amount of loans and deposits from June 30,2000 to June 30, 2001. The decrease in interest margin was the result of highercost of funds during the six months ended June 30, 2001 as compared with thesix months ended June 30, 2000.

*Provisionfor Loan Losses.*  In connection with the purchase of loanportfolios, we assess the inherent loss in the portfolios and record the necessaryallowance by adjusting the premium associated with each portfolio. During thesix months ended June 30, 2001, we recorded $3.7 million as anaddition to premiums related to allowance for loan losses for loans purchasedduring the period. In addition, we also recorded a provision for loan losses of$0.2 million as compared with $0.3 million recorded during the sixmonths ended June 30, 2000 related primarily to originated loans anddeclines in credit quality associated with one specific pool of fixed secondmortgages and one specific pool of automobile loans. We periodically review theperformance of our loan portfolio by reviewing chargeoffs, delinquencystatistics, and industry statistics on a pool by pool basis for our purchasedportfolio and a loan by loan basis for our originated loans. If a decline incredit quality for a specific pool or a loan is noted, we record an additionalallowance through a charge to the provision for loan losses. The allowance forloan losses is maintained at a level estimated to be adequate to provide forprobable losses in the loan portfolio. We determine the adequacy of theallowance based upon reviews of individual loans, recent loss experience,current economic conditions, the risk characteristics of the various categoriesof loans and other pertinent factors.

*Non–interestIncome.*  For the six months ended June 30, 2001, werecorded approximately $6.0 million in non-interest income compared to $0.9million recorded during the six months ended June 30, 2000. The primarycomponent of this increase was the introduction of new fees on customer depositaccounts during the fourth quarter of 2000 and continuing through the firstquarter of 2001.  Deposit and loan feesaccounted for $4.5 million, or 75% of the $6.0 million in non-interest incomerecorded during the three months ended June 30, 2001.  The other $1.5 million, or 25% related to gains on securitiessold during the six months ended June 30, 2001 as we disposed of certain securitiesidentified as having a high prepayment risk. In addition, during the six monthsended June 30, 2001, NetBank, Inc formed a new subsidiary, NB Partners thatsigned an agreement with Dundee Bancorp Inc.,which gives Toronto-based Dundee Bancorp the exclusive right to sell bankingproducts and services using limited NetBank trademarks in Canada through atrust company subsidiary. NB Partners received an annual licensing fee which isbeing amortized over twelve months and minority ownership in the new DundeeBancorp subsidiary.

*Non–interestExpenses.*  Non-interest expenses include all operatingexpenses including salaries and benefits, marketing, general and administrativeexpenses (excluding interest expense, provision for loan losses and incometaxes). Non-interest expense increased 32.0%, or $6.0 million, for the sixmonths ended June 30, 2001 as compared with the six months ended June 30, 2000as the number of customer accounts increased over twofold from 104,000 at June30, 2000 to 232,000 at June 30, 2001 which includes the conversion of approximately50,000 former Compubank accounts during the quarter. The largest increases innon–interest expense occurred in customer service ($3.3 million), loanservicing ($2.0 million), data processing ($1.9 million) and depreciation andamortization ($1.4 million), offset by a decrease in marketing expenditures($4.2 million).  Customer service anddata processing increased due to variable expenses associated with the additionof new customer accounts and other expenses related to the conversion of the50,000 former Compubank accounts. Customer service was also impacted by largercash item losses during the six months ended June 30, 2001 than those incurredduring the six months ended June 30, 2000 due to the increased size of thedeposit portfolio.  Loan servicingincreased due to the continued expansion of our loan portfolio. Depreciationand amortization increased due to larger amortization expense associated withlarger capitalized software costs as compared with the balance at June 30,2000.  Marketing expenditures returnedto a more normalized amount as compared with the the same period last year whenwe had substantially increased our marketing expenditures in conjunction withthe recognition of an extraordinary gain on the early extinguishment of debt.

**Submissionof Matters to a Vote of Shareholders**

             OnApril 26, 2001, NetBank, Inc. held its annual meeting of shareholders atwhich the following actions were taken:
**Election of Directors for a Term  Expiring in 2004**    **Votes For** **Votes Witheld**       D.R. Grimes    21,697,284 532,636 T. Stephen Johnson.    22,171,390 58,530 Mack I. Whittle, Jr.    22,180,614 49,306 Michael R. Fitzgerald    21,701,343 528,577           **Votes For** **Votes Against** **Abstentions** **Broker Non-Votes**** **     Ratification of Deloitte & Touche LLP as Independent Auditors22,181,222 26,425 22,273             **Votes For** **Votes Against** **Abstentions** **Broker Non-Votes**** **     Approval of the NetBank, Inc. Employee Stock Purchase  Plan21,956,720 239,857 33,343                     
**EXHIBITS AND REPORTS ON FORM 8-K**

(a)         Exhibits

             None

(b)        Currentreports on Form 8(k) were filed April 30, 2001 and July 13, 2001 relating toour acquisition of Market Street.

**SIGNATURE**

             Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
 NETBANK, INC.  By:/s/ Laura P. Moon  **  Laura  P. Moon  *Chief Accounting Officer*
Dated: August 14, 2001****