**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

 

**FORM 10-Q**

 

| **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15() OF THE SECURITIES EXCHANGE ACT OF 1934** |
|---------------------------------------------------------------------------------------------|
|                                                                                        |
| **For the Quarter Ended June 30, 2002**                                                     |
|                                                                                        |
| **Commission File No. 0-22361**                                                             |

 

**NETBANK, INC.**

(Exact name of registrant as specified in its charter)

 

| **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 by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15() of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  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 August 9, 2002** |
|------------------------------|--------|------------------------------------------|
| Common Stock, par value $.01 |   | 49,778,298                               |

 

 

----

 

**Part I. Item 1.**

**NETBANK, INC.**

**INDEXTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

|                                                                                                                                                  | Page |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------|
| Condensed consolidated balance sheets as of  June 30, 2002 and as of December 31, 2000                                                           | 3    |
| Condensed consolidated statements of  operations for the three and six months ended June 30, 2002 and 2001                                            | 4    |
| Condensed consolidated statements of  shareholders’ equity from December 31, 2000 to June 30, 2002 and  December 31, 2001 to June 30,  2002 | 5    |
| Condensed consolidated statements of cash  flows for the six months ended June 30, 2002and  2001                                                      | 6    |
| Notes to condensed consolidated financial  statements                                                                                                 | 7    |

 

2

----

 

NETBANK, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in 000’s except share amounts)

 
|                                                                                                                              |   | **June 30  2002** |      | **December 31,  2001** |   |
|-----------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|-----------|-----------------------------|--------|
|                                                                                                                              |   | **(unaudited)**   |      |                        |   |
| **ASSETS**                                                                                                                        |   |              |      |                        |   |
| Cash and cash  equivalents:                                                                                                       |   |              |      |                        |   |
| Cash and due  from banks                                                                                                          |   | $                 | 45,522    |                        | $      | 17,562 |   |
| Federal funds  sold                                                                                                               |   | 119,185           |      | 4,785                       |   |
| Total cash and  cash equivalents                                                                                                  |   | 164,707           |      | 22,347                      |   |
| Investment  securities available for sale-At fair value (amortized cost of $728,336 and  $855,967, respectively)                  |   | 734,045           |      | 850,079                     |   |
| Stock of  Federal Home Loan Bank of Atlanta-At cost                                                                               |   | 40,595            |      | 55,539                      |   |
| Mortgage loans  receivable held for sale-Net of allowance for loan losses of $11,941 and $31,  respectively                       |   | 928,003           |      | 295,529                     |   |
| Commercial  loans receivable held for sale-Net of allowance for losses of $4,182                                                  |   | 191,579           |      | —                      |   |
| Loans and  leases receivable-Net of allowance for loan and lease losses of $53,375 and  $22,865, respectively                     |   | 1,134,871         |      | 1,489,521                   |   |
| Mortgage and  lease servicing rights-Net                                                                                          |   | 106,803           |      | 2,271                       |   |
| Accrued  interest receivable                                                                                                      |   | 18,052            |      | 10,804                      |   |
| Furniture,  equipment and capitalized software-Net                                                                                |   | 47,060            |      | 12,210                      |   |
| Goodwill and  other intangibles - Net                                                                                             |   | 42,379            |      | 26,932                      |   |
| Due from  servicers and investors                                                                                                 |   | 103,437           |      | 82,386                      |   |
| Other assets                                                                                                                      |   | 78,892            |      | 31,915                      |   |
| Total assets                                                                                                                      |   | $                 | 3,590,423 |                        | $      | 2,879,533 |   |
| **LIABILITIES AND  SHAREHOLDERS’ EQUITY**                                                                                    |   |              |      |                        |   |
|                                                                                                                              |   |              |      |                        |   |
| Liabilities:                                                                                                                      |   |              |      |                        |   |
| Deposits                                                                                                                          |   | $                 | 1,787,683 |                        | $      | 1,493,819 |   |
| Other borrowed  funds                                                                                                             |   | 1,175,613         |      | 1,011,985                   |   |
| Convertible  subordinated debt                                                                                                    |   | 27,007            |      | 26,923                      |   |
| Accrued  interest payable                                                                                                         |   | 16,615            |      | 16,632                      |   |
| Loans in  process                                                                                                                 |   | 47,836            |      | 33,632                      |   |
| Accounts  payable and accrued liabilities                                                                                         |   | 150,782           |      | 41,088                      |   |
| Total  liabilities                                                                                                                |   | 3,205,536         |      | 2,624,079                   |   |
| 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, 52,480,191 and 31,751,369 shares issued, respectively) |   | 525               |      | 318                         |   |
| Additional  paid-in capital                                                                                                       |   | 425,697           |      | 267,004                     |   |
| Retained  deficit earnings                                                                                                        |   | (23,636)          |      | 13,289                      |   |
| Accumulated  other comprehensive income (loss), net of tax                                                                        |   | 3,543             |      | (3,648                      | )      |
| Treasury stock, at cost (2,703,053 and  2,736,870 shares, respectively)                                                           |   | (21,242)          |      | (21,509                     | )      |
| Total  shareholders’ equity                                                                                                  |   | 384,887           |      | 255,454                     |   |
| Total  liabilities and shareholders’ equity                                                                                  |   | $                 | 3,590,423 |                        | $      | 2,879,533 |   |
|                                                                                                                                   |        |                   |           |                             |        |  |  |  |  |

 

See notes to condensed consolidated financial statements.

 

3

----

 

**NETBANK, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(unaudited and in000’s except per share amounts)**

 
|                                                                  |   | **Three months Ended  June 30,** |       | **Six months Ended  June 30,** |       |
|-----------------------------------------------------------------------|--------|----------------------------------|------------|--------------------------------|------------|
|                                                                  |   | **2002**                         |       | **2001**                       |       | **2002** |   | **2001** | ** ** |
| Interest  income:                                                     |   |                             | ** ** |                           | ** ** |   | ** ** |   | ** ** |
| Loans                                                                 |   | $                                | 26,582     |                           | $          | 26,435 |   | $ | 54,144 |   | $ | 54,280 |   |
| Investment  securities                                                |   | 8,030                            |       | 7,288                          |       | 16,433 |   | 14,782 |   |
| Short-term  investments                                               |   | 1,627                            |       | 895                            |       | 2,440 |   | 1,457 |   |
| Total interest  income                                                |   | 36,239                           |       | 34,618                         |       | 73,017 |   | 70,519 |   |
|                                                                  |   |                             |       |                           |       |   |   |   |   |
| Interest  expense:                                                    |   |                             |       |                           |       |   |   |   |   |
| Deposits                                                              |   | 14,009                           |       | 15,209                         |       | 27,783 |   | 30,602 |   |
| Other borrowed  funds                                                 |   | 18,911                           |       | 8,610                          |       | 29,572 |   | 18,344 |   |
| Total interest  expense                                               |   | 32,920                           |       | 23,819                         |       | 57,355 |   | 48,946 |   |
|                                                                  |   |                             |       |                           |       |   |   |   |   |
| Net interest  income                                                  |   | 3,319                            |       | 10,799                         |       | 15,662 |   | 21,573 |   |
|                                                                  |   |                             |       |                           |       |   |   |   |   |
| Provision for  loan and lease losses                                  |   | 31,290                           |       | 126                            |       | 31,394 |   | 170 |   |
|                                                                  |   |                             |       |                           |       |   |   |   |   |
| Net interest  (loss) income after provision for losses                |   | (27,971                          | )          | 10,673                         |       | (15,732 | ) | 21,403 |   |
|                                                                  |   |                             |       |                           |       |   |   |   |   |
| Non-interest  income:                                                 |   |                             |       |                           |       |   |   |   |   |
| Service charges  and fees                                             |   | 12,573                           |       | 2,808                          |       | 15,958 |   | 4,508 |   |
| Gains on sales  of mortgage loans and servicing rights                |   | 34,372                           |       | —                         |       | 40,045 |   | — |   |
| Other income                                                          |   | 998                              |       | —                         |       | 998 |   | — |   |
| (Losses) gains  on sales of securities                                |   | (1,772                           | )          | 481                            |       | (1,857 | ) | 1,489 |   |
| Total  non-interest income                                            |   | 46,171                           |       | 3,289                          |       | 55,144 |   | 5,997 |   |
|                                                                  |   |                             |       |                           |       |   |   |   |   |
| Non-interest  expense:                                                |   |                             |       |                           |       |   |   |   |   |
| Salaries and  benefits                                                |   | 28,053                           |       | 2,236                          |       | 33,683 |   | 4,170 |   |
| Customer  service                                                     |   | 3,535                            |       | 3,607                          |       | 6,773 |   | 7,070 |   |
| Loan servicing                                                        |   | 2,114                            |       | 1,403                          |       | 4,157 |   | 2,727 |   |
| Marketing                                                             |   | 1,718                            |       | 972                            |       | 3,285 |   | 2,655 |   |
| Data processing                                                       |   | 3,445                            |       | 1,644                          |       | 5,811 |   | 3,033 |   |
| Depreciation  and amortization                                        |   | 6,301                            |       | 1,389                          |       | 8,216 |   | 2,476 |   |
| Amortization  and impairment of MSR                                   |   | 7,504                            |       | —                         |       | 7,504 |   | — |   |
| Office expenses                                                       |   | 3,015                            |       | 383                            |       | 3,676 |   | 705 |   |
| Occupancy                                                             |   | 5,878                            |       | 215                            |       | 6,848 |   | 397 |   |
| Travel and  entertainment                                             |   | 1,028                            |       | 83                             |       | 1,170 |   | 192 |   |
| Other                                                                 |   | 5,953                            |       | 775                            |       | 7,031 |   | 1,432 |   |
| Non-recurring  acquisition & severance                            |   | —                           |       | —                         |       | 10,085 |   | — |   |
| Total  non-interest expense                                           |   | 68,544                           |       | 12,707                         |       | 98,239 |   | 24,857 |   |
| (Loss) income  before income taxes                                    |   | (50,344                          | )          | 1,255                          |       | (58,827 | ) | 2,543 |   |
| Income tax  benefit (expense)                                         |   | 19,057                           |       | (476                           | )          | 21,902 |   | (967 | ) |
| Net (loss)  income                                                    |   | $                                | (31,287    | )                              | $          | 779 |   | $ | (36,925 | ) | $ | 1,576 |   |
| Net (loss)  income per common and potential common share outstanding: |   |                             |       |                           |       |   |   |   |   |
| Basic                                                                 |   | $                                | (0.64      | )                              | $          | 0.03 |   | $ | (0.94 | ) | $ | 0.05 |   |
| Diluted                                                               |   | $                                | (0.64      | )                              | $          | 0.03 |   | $ | (0.94 | ) | $ | 0.05 |   |
|                                                                  |   |                             |       |                           |       |   |   |   |   |
| Weighted  average common and potential common shares outstanding:     |   |                             |       |                           |       |   |   |   |   |
| Basic                                                                 |   | 49,248                           |       | 28,563                         |       | 39,299 |   | 28,722 |   |
| Diluted                                                               |   | 49,248                           |       | 29,174                         |       | 39,299 |   | 29,303 |   |

 

See notes to condensed consolidated financial statements.

 

4

----

 

**NETBANK, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**

**(unaudited and in000’s)**

 
|                                                                                               |   | **Common  Shares** |   | **Common  Stock ($.01 par)** |   | **Additional  Paid-in Capital** |   | **Treasury  Stock at Cost** |   | **Retained  Earnings** |    | **Accumulated  Other Comprehensive Income (Loss)** |   | **Total** |   |
|----------------------------------------------------------------------------------------------------|--------|--------------------|--------|------------------------------|--------|---------------------------------|--------|-----------------------------|--------|------------------------|---------|----------------------------------------------------|--------|-----------|--------|
| Balance-December 31,  2000                                                                    |   | 30,013             |   | $                            | 300    |                            | $      | 251,579                     |   | $                      | (7,608  | )                                                  | $      | 6,688     |   | $ | (352 | ) | $ | 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                     |   | $                      | (12,042 | )                                                  | $      | 8,264     |   | $ | 1,446 |   | $ | 264,990 |   |

 
|                                                                                                         |   | **Common Shares** |   | **Common Stock ($.01 par)** |   | **Additional Paid-in Capital** |   | **Treasury Stock at Cost** |   | **Retained Deficit** |    | **Accumulated Other Comprehensive Income (Loss)** |   | **Total** |   |
|--------------------------------------------------------------------------------------------------------------|--------|-------------------|--------|-----------------------------|--------|--------------------------------|--------|----------------------------|--------|----------------------|---------|---------------------------------------------------|--------|-----------|--------|
| Balance-December 31, 2001                                                                               |   | 31,751            |   | $                           | 318    |                           | $      | 267,004                    |   | $                    | (21,509 | )                                                 | $      | 13,289    |   | $ | (3,648 | ) | $ | 255,454 |   |
| Comprehensive  loss:                                                                                         |   |              |   |                        |   |                           |   |                       |   |                 |    |                                              |   |      |   |
| Net loss for  six months ended June 30, 2002                                                                 |   | —            |   | —                      |   | —                         |   | —                     |   | (36,925              | )       | —                                            |   | (36,925   | )      |
| Unrealized gain  on securities, net of taxes and reclassification adjustment                                 |   | —            |   | —                      |   | —                         |   | —                     |   | —               |    | 7,191                                             |   | 7,191     |   |
| Comprehensive  loss                                                                                          |   |              |   |                        |   |                           |   |                       |   |                 |    |                                              |   | (29,734   | )      |
| Reissuance of  shares of common stock held in treasury (2,703,053 shares held in treasury at  June 30, 2002) |   | —            |   | —                      |   | —                         |   | 267                        |   | —               |    | —                                            |   | 267       |   |
| Issuance of  stock in conjunction with acquisition of Resource Bancshares Mortgage Group,  Inc.              |   | 19,717            |   | 197                         |   | 155,365                        |   | —                     |   | —               |    | —                                            |   | 155,562   |   |
| Exercise of  stock options                                                                                   |   | 1,012             |   | 10                          |   | 3,328                          |   | —                     |   | —               |    | —                                            |   | 3,338     |   |
| Balance-June  30, 2002                                                                                       |   | 52,480            |   | $                           | 525    |                           | $      | 425,697                    |   | $                    | (21,242 | )                                                 | $      | (23,636   | )      | $ | 3,543 |   | $ | 384,887 |   |

 

See notes to condensed consolidated financial statements

 

5

----

 

**NETBANK, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

 
| **(unaudited and in 000’s)**                                                                    |   | **Six months Ended   June 30,** |      |
|------------------------------------------------------------------------------------------------------|--------|--------------------------------------|-----------|
|                                                                                                 |   | **2002**                             |      | **2001** |   |
| Operating activities:                                                                                |   |                                 |      |   |   |
| Net (loss)  income                                                                                   |   | $                                    | (36,925   | ) | $ | 1,576 |   |
| Adjustments to  reconcile net (loss) income to net cash provided by (used in) operating  activities: |   |                                 |      |   |   |
| Depreciation  and amortization                                                                       |   | 34,870                               |      | 9,764 |   |
| Loss on sales  of securities available for sale                                                      |   | 1,857                                |      | — |   |
| Net accretion  of discounts on investment securities                                                 |   | (816                                 | )         | (3,088 | ) |
| Origination of  mortgage loans held for sale                                                         |   | (3,398,653                           | )         | (14,476 | ) |
| Proceeds from  sale of mortgage loans held for sale                                                  |   | 3,561,194                            |      | 14,144 |   |
| Net gain on  sale of mortgage loans and servicing rights                                             |   | (40,045                              | )         | — |   |
| Capitalization  of mortgage servicing rights                                                         |   | (59,946                              | )         | — |   |
| Proceeds from sale  of mortgage servicing rights                                                     |   | 78,159                               |      | — |   |
| Provision for  loan losses                                                                           |   | 31,394                               |      | 170 |   |
| Change in  assets and liabilities which provide (use) cash:                                          |   |                                 |      |   |   |
| (Increase)  decrease in accrued interest receivable                                                  |   | (5,056                               | )         | 1,169 |   |
| Decrease  (increase) in other assets, due from servicers and intangibles                             |   | 18,612                               |      | (212,166 | ) |
| (Decrease)  increase in accrued interest payable                                                     |   | (1,288                               | )         | 2,607 |   |
| Increase in  accounts payable and accrued liabilities                                                |   | 9,003                                |      | 3,488 |   |
| Increase in  loans in process                                                                        |   | 14,204                               |      | — |   |
| Net cash  provided by (used in) operating activities                                                 |   | 206,564                              |      | (196,812 | ) |
|                                                                                                 |   |                                 |      |   |   |
| **Investing  activities:**                                                                           |   |                                 |      |   |   |
| Purchase of  securities available for sale                                                           |   | (1,527,914                           | )         | (179,969 | ) |
| Principal  repayments on investment securities                                                       |   | 166,428                              |      | 43,707 |   |
| Sales and maturities  of securities available for sale                                               |   | 1,483,670                            |      | 152,973 |   |
| Sale (purchase)  of Federal Home Loan Bank stock, net                                                |   | 14,944                               |      | (3,775 | ) |
| Origination and purchase of loans                                                                    |   | (255,152                             | )         | (287,264 | ) |
| Principal repayments on loans                                                                        |   | 391,140                              |      | 309,156 |   |
| Capital expenditures                                                                                 |   | (10,211                              | )         | (1,807 | ) |
| Net cash  acquired in business combination                                                           |   | 29,762                               |      | 10,430 |   |
| Net cash used  in investing activities                                                               |   | 292,667                              |      | 43,451 |   |
|                                                                                                 |   |                                 |      |   |   |
| **Financing  activities:**                                                                           |   |                                 |      |   |   |
| Increase in  Deposits                                                                                |   | 293,864                              |      | 242,747 |   |
| Proceeds from  borrowed funds                                                                        |   | 3,903,446                            |      | 360,129 |   |
| Repayments of  borrowed funds                                                                        |   | (4,557,786                           | )         | (385,300 | ) |
| Net Proceeds  from issuance of common stock                                                          |   | —                               |      | 311 |   |
| Exercise of  stock options                                                                           |   | 3,338                                |      | — |   |
| Net issuance  (purchase) of treasury stock                                                           |   | 267                                  |      | (4,434 | ) |
| Net cash (used  in) provided by financing activities                                                 |   | (356,871                             | )         | 213,453 |   |
| Net increase in  cash                                                                                |   | 142,360                              |      | 60,092 |   |
| Cash at  beginning of period                                                                         |   | 22,347                               |      | 11,958 |   |
| Cash at end of  period                                                                               |   | $                                    | 164,707   |   | $ | 72,050 |   |
|                                                                                                 |   |                                 |      |   |   |
| Supplemental  disclosures of cash flow information:                                                  |   |                                 |      |   |   |
| Cash paid  during the period for interest                                                            |   | $                                    | 57,372    |   | $ | 46,339 |   |
| Cash paid  during the period for income taxes                                                        |   | $                                    | 883       |   | $ | 1,060 |   |
|                                                                                                 |   |                                 |      |   |   |
| Non-cash  investing and financing activities:                                                        |   |                                 |      |   |   |
| Fair value of  assets acquired                                                                       |   | $                                    | 1,075,492 |   | $ | 267,086 |   |
| Liabilities  assumed                                                                                 |   | (919,930                             | )         | (247,157 | ) |
| Stock issued in  transaction                                                                         |   | (155,562                             | )         | (15,132 | ) |
| Remaining  purchase liability                                                                        |   | —                               |      | (797 | ) |
| Cash paid for  business                                                                              |   | $                                    | —    |   | $ | 4,000 |   |

 

See notes to condensedconsolidated financial statements.

 

6

----

 

**NETBANK, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**June 30, 2002  (unaudited)**

 

**1.****                                      ORGANIZATION AND BASIS OF PRESENTATION**

 

NetBank, Inc.is a thrift holding company that wholly owns the outstanding stock of NetBank(“NetBank, FSB”), a federal savings bank; Meritage Mortgage Corporation(“Meritage”), a wholesale nonconforming mortgage provider; MG ReinsuranceCompany (“MG Reinsurance”), a captive reinsurance company; RBMG InsuranceServices, Inc., (“RBMG Insurance”); and NB Partners, Inc., a corporationestablished for strategic partnering opportunities.  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 equipment leasingcompany.  NetBank, Inc. acquiredResource on March 31, 2002 and subsequently reorganized the holding companystructure as described above based on operational, licensing and funding needs.The entire consolidated company is referred to herein as “NetBank” or  “the Company”.

 

In the opinion of management, the unaudited condensed consolidatedfinancial statements included herein reflect all adjustments, consisting onlyof normal recurring accruals, which are necessary for the fair statement of theresults for the interim periods presented. Certain information and footnotedisclosures normally included in financial statements have been condensed oromitted pursuant to applicable rules and regulations of the Securities andExchange Commission (“SEC”). The financial statements included herein should beread in conjunction with the financial statements and notes thereto, includedin NetBank’s Form 10-K filed with the SEC for the year endedDecember 31, 2001. The results of operations for the interim periodsreported herein are not necessarily indicative of results to be expected forthe full year. Certain 2001 amounts have been reclassified for comparabilitywith 2002 amounts.  All dollar amountsare presented in thousands (000s) unless otherwise indicated.

 

**2.****                                      ACCOUNTING POLICIES**

 

Reference ismade to the accounting policies of NetBank described in the notes to financialstatements contained in NetBank’s Form 10-K for the year endedDecember 31, 2001. The Company has followed those policies in preparingthis report.  In addition, NetBank adopted the following newpronouncements during the six months ended June 30, 2002: Effective January 1, 2002, the Company adopted SFAS No. 141,“Business Combinations” (“SFAS 141”) and SFAS No. 142, “Goodwill andOther Intangible Assets” (“SFAS 142”). SFAS 141 requires all businesscombinations initiated after June 30, 2001 to be accounted for using thepurchase method of accounting. SFAS 142 changes the accounting forgoodwill and other intangible assets. Based on the adoption, goodwill is nolonger being amortized and is subject to an annual impairment test.  Theeffect of the adoption on NetBank’s financial statements for the six monthsended June 30, 2002 was a reduction of amortization expense of$197.  The Company will complete an impairment test annually and willrecord an impairment charge if any impairment is indicated.

 

EffectiveJanuary 1, 2002, NetBank adopted SFAS No. 144, *Accounting for the Impairment ofLong-Lived Assets,* which addresses accounting for and reporting ofthe impairment or disposal of long-lived assets. The adoption of SFASNo. 144 did not have an impact on the Company’s results of operations,financial position, or cash flows.

 

*Significant Estimates*

In preparingthe financial statements, management is required to make estimates based onavailable information that can affect the reported amounts of assets,liabilities and disclosures as of the balance sheet dates and revenues andexpenses for the related periods.  Such estimates relate principally tothe Company’s allowance for foreclosure losses and repurchased loans, theallowance for lease losses, the allowance for loan losses, and the unamortizedpremiums on loans and leases held for investment.  Additionally, estimatesconcerning the fair values of mortgage loans held for sale, lease receivables,servicing rights, servicing hedges and the Company’s other hedging instrumentsare all relevant to ensuring that leases and mortgage loans are carried at thelower of cost or market and that potential impairments of servicing rights arerecognized, if required.  Because of the inherent uncertainties associatedwith any estimation process and due to possible future changes in the marketand economic conditions that will affect fair values, it is possible thatactual future results in realization of the underlying assets and liabilitiescould differ significantly from the amounts reflected as of the balance sheetdate.

 

In addition, the Companyadopted the following new policies as of March 31, 2002 as a result of itsacquisition of Resource:

 

*Interest Rate Lock Commitments*

Interest ratelock commitments are measured by the change in value from the date of rate lockto the balance sheet date and are recorded as assets or liabilities on thebalance sheet.

 

7

----

 

*Lease Receivables*

Leasereceivables consist of direct finance equipment leases which are carried at thelower of aggregate cost or market value.  Interest income is recognizedmonthly based on the net lease outstanding balance.  Residuals arerecognized monthly based on the estimated end-of-lease value and are includedas an adjustment to interest income.

 

**3.             ACQUISITION**

 

OnMarch 31, 2002, NetBank consummated its acquisition of Resource pursuantto an Agreement and Plan of Merger dated November 18, 2001 among NetBank,Palmetto Acquisition Corp. (“Merger Sub”) and Resource providing for the mergerof Merger Sub with and into Resource, with Resource surviving the merger. Inthe merger, NetBank issued 1.1382 shares of NetBank common stock in exchangefor each outstanding share of Resource common stock, equivalent to 19,716,358shares of common stock plus cash in lieu of fractional shares.  The transaction was accounted for as apurchase, and a total of $18.1 million of goodwill has been recorded.  At March 31, 2002 the Company had recorded$14.8 million of goodwill, which was subsequently increased during the threemonths ended June 30, 2002 by an additional $3.3 million.  This increase was due to the followingpre-acquisition contingencies: 1) $2.4 million for specific loan lossallowances; 2) $0.4 million for unrecoverable servicing advances; 3) $0.8million for other comprehensive income related to Resource’s retirement planand 4) less $0.3 million of other compensation related to Resource’s incentivestock option plan.

 

On June 29,2001, NetBank, Inc. acquired all of the outstanding stock of Market Streetpursuant to an agreement (the “Agreement”) dated April 15, 2001 and amended asof June 29, 2001 among NetBank, Net Interim, Inc., Republic Bank, RepublicBancorp, Inc. (“Republic”) and certain shareholders of Market Street.  The consideration paid consisted of1,689,000 shares of NetBank common stock valued at $8.96 per share and cash of$6.1 million.  The acquisition wasaccounted for as a purchase, and approximately $20.1 million in goodwill,including transaction costs, was recorded.

 

Pro-formafinancial information assuming both the acquisition of Market Street andResource had occurred as of January 1, 2002 and January 1, 2001 follows ($ in000s):

 
|                                                               |   | **Six Months  Ended  June 30,  2002** |    | **Six Months  Ended  June 30,  2001** |   |
|--------------------------------------------------------------------|--------|---------------------------------------|---------|---------------------------------------|--------|
| Net interest income                                                |   | $                                     | 24,969  |                                  | $      | 31,414 |   |
| Net loss                                                           |   | $                                     | (51,575 | )                                     | $      | (1,076 | ) |
| Basic and diluted net loss per common and  common equivalent share |   | $                                     | (1.05   | )                                     | $      | (0.02 | ) |

 

**4.             LOANS**

 

During the three months endedJune 30, 2002, NetBank purchased the following loan pools ($s in 000’s):

 

| **Types of Loans Purchased** |   | **Principal  Amount** |   | **Range of  Stated Interest Rates** |   |
|------------------------------|--------|-----------------------|--------|-------------------------------------|--------|
| Second mortgages             |   | $                     | 5,716  |                                | 8.39   | % |
| Leases                       |   | 16,069                |   | 7.00                                | %      |
| Commercial loans             |   | 25,000                |   | 6.25                                | %      |
|                         |   | $                     | 46,785 |                                |   |   |

 

8

----

 

Ananalysis of the allowance for loan losses for the three and six months endedJune 30, 2002 follows ($ in 000’s):

 
|                                                          |   | **For the  three  Months Ended  June 30, 2002** |   | **For the  six   Months Ended   June 30, 2002** |   |
|---------------------------------------------------------------|--------|-------------------------------------------------|--------|-------------------------------------------------|--------|
| Balance-beginning of period                                   |   | $                                               | 42,425 |                                            | $      | 22,865 |   |
| Allowance recorded in connection with  purchase of loan pools |   | 95                                              |   | 7,257                                           |   |
| Provision for loan losses                                     |   | 31,290                                          |   | 31,394                                          |   |
| Loans charged off, net of recoveries                          |   | (7,284                                          | )      | (8,205                                          | )      |
| Acquired allowance in connection with  Resource               |   | 2,972                                           |   | 16,187                                          |   |
| Balance-end of period                                         |   | $                                               | 69,498 |                                            | $      | 69,498 |   |

 

**5.****                                      Borrowings**

 

A summary of borrowings, grouped by year of maturity, as of June 30,2002 follows ($ in 000’s):

 
| **Type of  Borrowing**                    |   | **Year of  Maturity**      |   | **Range of Stated  Interest Rates at   June 30, 2002** |   | **Principal  Amount Outstanding at   June 30, 2002** |      |
|-------------------------------------------|--------|----------------------------|--------|--------------------------------------------------------|--------|------------------------------------------------------|-----------|
|                                      |   |                       |   |                                                   |   |                                                 |      |
| $ 75 million warehouse line  of credit    |   | 2002                       |   | 3.23                                                   | %*     | $                                                    | 74,331    |   |
| $ 300 master repurchase  facility         |   | 2002                       |   | 3.10                                                   | %*     | 132,919                                              |      |
| $ 10 million unsecured line  of credit    |   | 2002                       |   | —                                                 | *      | —                                               |      |
| FHLB advances                             |   | 2002                       |   | 2.03-2.15                                              | %      | 75,000                                               |      |
| FHLB warehouse line                       |   | 2003                       |   | 2.77                                                   | %*     | 91,906                                               |      |
| $ 200 million master  repurchase facility |   | 2003                       |   | 3.10                                                   | %*     | 3,151                                                |      |
| FHLB advances                             |   | 2003                       |   | 2.50-4.67                                              | %      | 140,000                                              |      |
| FHLB advances                             |   | 2004                       |   | 4.45-6.03                                              | %      | 205,000                                              |      |
| Convertible subordinated notes            |   | 2004                       |   | 4.75                                                   | %      | 27,316                                               |      |
| FHLB advances                             |   | 2005                       |   | 6.02-7.41                                              | %      | 150,000                                              |      |
| PRC                                       |   | 2006                       |   | 5.63                                                   | %      | 80,000                                               |      |
| FHLB advances                             |   | 2007                       |   | 7.50                                                   | %      | 25,000                                               |      |
| FHLB advances                             |   | 2009                       |   | 4.64                                                   | %      | 25,000                                               |      |
| $ 175 million master  repurchase facility |   | N/A                        |   | 2.13                                                   | %*     | 173,306                                              |      |
|                                      |   | Total                      |   |                                                   |   | 1,202,929                                            |      |
|                                      |   | Less  unamortized discount |   | (309                                                   | )      |
|                                      |   | Total debt                 |   |                                                   |   | $                                                    | 1,202,620 |   |

 

----

* Indicates a variable rate

 

All of theFHLB advances are fixed rate; however, eight advances totaling $255,000 may beconverted at the FHLB’s option to adjustable rate based on the three monthfloating LIBOR.  The FHLB warehouse line is a $250,000 adjustable line ofcredit with a floating rate based on the DRC rate plus 50 basis points used tofund mortgages originated by Market Street. Allof the FHLB advances and the FHLB warehouse line are secured by investmentsecurities or mortgage loans.  The convertible subordinated notes areunsecured.

 

Most of the revolving lines of credit, warehouse lines of credit (otherthan the FHLB warehouse line), the master repurchase facilities and commercialpaper conduit facility are secured by mortgage loans and are subject torestrictive covenants, such as minimum net worth requirements; minimum tangiblenet worth requirements; certain minimum financial ratios, all asdefined in the terms of the related debt agreements; maintenance of servicereligibility for various government agencies; a minimum balance in the mortgageservicing rights portfolio, and certain minimum liquidity requirements. The covenants also limit dividends distributions and stock repurchases. In addition, the covenants restrict business activities to those related to themortgage banking and lending business and the servicing of mortgageloans.  NetBank was in compliance with all debt covenants in place as ofJune 30, 2002.  Although management anticipates continued compliance withcurrent debt covenants, there can be no assurance that NetBank or itsindividual subsidiaries will be able to continue to comply with the debtcovenants.  Failure to comply could result in the loss of the relatedfinancing.

 

9

----

 

**6.****                                      NET LOSS PER COMMON AND COMMON EQUIVALENT SHARE**

 

Basic and diluted net loss per common and potential common share has beencalculated based on the weighted average number of shares outstanding. Thefollowing schedule reconciles the numerator and denominator of the basic anddiluted net loss per common and potential common share (in 000’s except pershare amounts) for the three and six months ended June 30, 2001.  For the three and six months ended June 30,2002, there is no difference in basic and diluted shares as the effect ofoptions outstanding to purchase common shares would be anti-dilutive to the netloss for that period. The effect of convertible debt securities outstanding hasnot been included for the three and six months ended June 30, 2001, as theassumed conversion of such securities would be anti–dilutive to earningsper share for that period.

 
|                                                             |   | **Net Income (Numerator)** |       | **Shares (Denominator)** |       | **Per Share****Amount** |       |
|------------------------------------------------------------------|--------|----------------------------|------------|--------------------------|------------|-------------------------|------------|
|                                                             |   |                       |       |                     |       |                    |       |
| Three Months  Ended June 30, 2001:                               |   |                       |       |                     |       |                    |       |
| 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, 2001:                                 |   |                       |       |                     |       |                    |       |
| 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 |   |

 

**7.****                                      SHAREHOLDERS’EQUITY**

 

*Common Stock* – AtJune 30, 2002 and December 31, 2001 there were 52,480,191 and 31,751,369,respectively, shares of NetBank common stock issued.  The 20,728,822 increase in shares is from 19,716,358 sharesissued in conjunction with the purchase of Resource and 1,012,464 of optionexercises.

 

*Additional Paid-in Capital*– During the six months ended June 30, 2002 the Company increased paid-incapital by $158,693 due to the acquisition of Resource that accounted for$155,365.  Option exercises accountedfor the remaining $3,328.

 

*Retained Earnings* –During the six months ended June 30, 2002 the Company had a net loss of$36,925, which decreased retained earnings to a deficit of $(23,636) at June30, 2002.

 

*Accumulated Other Comprehensive Income(“OCI”)* - At June 30, 2002 the Company had $3,543 ofOCI, an increase of $7,191 from December 31, 2001.  The change is due to increases in the fair market value of theinvestment securities available for sale.

 

*Treasury Stock* – AtJune 30, 2002 the Company had 2,703,053 shares of treasury stock compared to2,736,870 at December 31, 2001.  The33,817 change is due to the reissuance of shares related to the Company’semployee stock purchase plan.

 

**8.****                                      DERIVATIVES**

 

During thequarter ended June 30, 2002, NetBank entered into forward delivery commitmentsthrough its wholly owned subsidiaries, RBMG and Market Street, to protectagainst changes in the fair value of short-term commitments to fund mortgageloan applications in process (“the pipeline”) and mortgage loans held for sale(“the warehouse”) due to fluctuations in interest rates.  These forward commitments are designated asfair value hedges under SFAS No. 133, “Accounting for Derivative Instrumentsand Hedging Activities”.  As such, theseforward commitments are recorded at fair value on the balance sheet with anoffset to mortgage loans held for sale for the effective portion of the hedge.The ineffective portion of the hedge is recorded as a gain (loss) in thestatement of operations. NetBank is generally not exposed to significant lossesnor does it expect to realize significant gains related to the pipeline orwarehouse due to changes in interest rates, net of gains or losses on relatedhedge positions.

 

10

----

 

NetBank uses variousderivatives, including Constant Maturity Treasury rate (CMT) floors, ConstantMaturity Swap (CMS) floors, and forward purchase contracts on FNMA mortgagebacked securities (FNMA TBA) to protect itself against interest rate andprepayment risk on its available-for-sale servicing portfolio.  These are designated as fair value hedgesunder SFAS No. 133 throughout the quarter ended June 30, 2002.

 

**9.****                                      BUSINESSSEGMENTS**

 

NetBank,Inc.’s principal activities include retail banking and mortgage banking. The retail banking segment primarily consists of the offering of consumerbanking products such as checking, money market, and certificates of depositand the purchase of bulk loan portfolios.  The mortgage banking segmenteither originates mortgage loans or purchases mortgage loans fromcorrespondents and/or brokers and packages pools of such loans either inclusiveor exclusive of servicing rights for sale into the secondary market. Sincethe acquisition of Resource was completed on March 31, 2002, the six-monthmortgage banking segment includes Resource’s results of operations for only thethree months ended June 30, 2002.

 

The six-monthtable includes the effects of certain transactions related to theacquisition of Resource on March 31, 2002 including the impact of purchaseaccounting, repositioning of the investment portfolio in anticipation of thetransaction and certain compensation charges related to changes in managementas a result of the transaction.

 

The financialinformation for each business segment reflects specific identifiabletransactions or allocated transactions based on an internal allocation method.The measurement of the performance of the business segments is based on themanagement structure of NetBank, Inc. and is not necessarily comparable withsimilar information from any other financial institution. The informationpresented is also not necessarily indicative of the segment’s operations ifthey were independent entities.

 

Since Resourceand Market Street were not acquired as of the periods presented comparativeinformation is not relevant.  For thethree and six months ended June 30, 2001 the retail banking segment was theCompany’s only segment of operations.

 
|                       |   | **For the  Three Months Ended June 30, 2002** |      |
|----------------------------|--------|-----------------------------------------------|-----------|
| **($s in thousands)**      |   | **Retail  Banking**                           |      | **Mortgage  Banking** |   | **Other** |   | **Eliminations** |   | **Consolidated** |   |
| Net interest income        |   | $                                             | (4,937    | ) | $ | 8,691 |   | $ | (435 | ) | $ | — |   | $ | 3,319 |   |
| Provision for loan losses  |   | $                                             | 27,888    |   | $ | 3,402 |   | $ | — |   | $ | — |   | $ | 31,290 |   |
| Non-interest income        |   | $                                             | 2,148     |   | $ | 43,976 |   | $ | 483 |   | $ | (436 | ) | $ | 46,171 |   |
| Non-interest expense       |   | $                                             | 22,640    |   | $ | 44,027 |   | $ | 2,313 |   | $ | (436 | ) | $ | 68,544 |   |
| Income before income taxes |   | $                                             | (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, 2002** | ** ** |
|----------------------------|--------|---------------------------------------------|------------|
| **($s in  thousands)**     |   | **Retail  Banking**                         | ** ** | **Mortgage  Banking** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Net interest income        |   | $                                           | 4,824      |   | $ | 11,232 |   | $ | (394 | ) | $ | — |   | $ | 15,662 |   |
| Provision for loan losses  |   | $                                           | 27,991     |   | $ | 3,403 |   | $ | — |   | $ | — |   | $ | 31,394 |   |
| Non-interest income        |   | $                                           | 5,101      |   | $ | 49,871 |   | $ | 608 |   | $ | (436 | ) | $ | 55,144 |   |
| Non-interest expense       |   | $                                           | 38,294     |   | $ | 48,502 |   | $ | 11,879 |   | $ | (436 | ) | $ | 98,239 |   |
| Income before income taxes |   | $                                           | (56,360    | ) | $ | 9,198 |   | $ | (11,665 | ) | $ | — |   | $ | (58,827 | ) |
| Total assets               |   | $                                           | 2,861,993  |   | $ | 887,547 |   | $ | 466,527 |   | $ | (625,644 | ) | $ | 3,590,423 |   |

 

**10.****                               LOSSCONTINGENCY**

 

NetBank, FSBis involved in litigation with three insurance companies who are sureties onsome of NetBank, FSB’s commercial lease portfolios.  NetBank, FSB has filed a claim for $16.2 million in principal andinterest payments that are currently past due. The unpaid principal and unpaid interest balances total $83.8 millionand $1.4 million, respectively.  Theentire portfolio has been placed on non-accrual status pending outcome of thelitigation.  Approximately $2.1 millionand $3.3 million of interest was not received or accrued during the three andsix months ended June 30, 2002, respectively. Management believes after consultation with legal counsel, that NetBank,FSB has substantive basis for its claims.

 

11

----

 

**11.****                               MortgageServicing Rights**

 

For purposesof evaluating its mortgage servicing rights portfolio for impairment, theCompany disaggregates its portfolio into two primary segments: available-for-sale and held-for-sale.

 

The segment ofthe portfolio designated as available-for-sale is composed of servicing rightsthat were purchased in bulk transactions or that were retained out ofproduction pursuant to individual portfolio retention decisions.  Theavailable-for-sale portfolio is disaggregated for purposes of measuringpotential impairments according to defined risk tranches.  The Company hasdefined its risk tranches based upon interest rate band and product type. With respect to each such risk tranche, the fair value thereof, which is basedupon an internal analysis that considers current market conditions, prevailinginterest, prepayment speed and default rates and other relevant factors, iscompared to amortized carrying values of the mortgage servicing rights forpurposes of measuring potential impairment.  The Company uses ConstantMaturity Treasury rate (CMT) floors, Constant Maturity Swap rate (CMS) floorsand forward purchase contracts on FNMA mortgage backed securities (FNMA TBA) toprotect itself against interest and prepayment risk on its available-for-saleportfolio.

 

The segment ofthe portfolio designated as held-for-sale is composed of recently producedservicing rights that are scheduled for sale and have been allocated tospecific forward servicing sales contracts.  The held-for-sale portfoliois disaggregated for purposes of measuring possible impairments according tothe specific forward sales contracts to which allocated, which the Company hasdetermined to be the appropriate approach to disaggregation by predominant riskcharacteristic for this portfolio segment.  For each such risk tranche,the fair value is based upon the allocated forward committed delivery price,which is compared to amortized carrying value for purposes of measuringpotential impairment.

 
| **As of June  30, 2002** |   |
|--------------------------|--------|
| **($in 000s)**           |   | **UPB** |   | **Fair Value** |   | **Fair Value  / UPB** |   | **Net  Carrying Value** |   | **Net  Carrying Value / UPB** |   | **WTG note  rate** |   | **WTG  service fee** |   | **Net Basis  as multiple** |   |
| Held-for-Sale            |   | $ | 2,189,788 |   | $ | 50,812 |   | 2.32 | % | $ | 49,570 |   | 2.26 | % | 6.88 | % | 0.43 | % | 5.33 |   |
| Available-for-Sale       |   | $ | 3,768,030 |   | $ | 64,848 |   | 1.72 | % | $ | 55,878 |   | 1.48 | % | 7.36 | % | 0.43 | % | 3.44 |   |
|                     |   | b |   | a |   | a / b = c |   | d |   | d / b = e |   |   |   | f |   | e / f |   |

 

12

----

 

**12.               ****“Executive Supplemental Retirement Plan" and"Director Supplemental Retirement Plan."**

The Company has adopted an “ExecutiveSupplemental Retirement Plan" and a "Director Supplemental RetirementPlan” for key members of senior management and the board of directors.  Each Plan provides for an annual benefitpayable at normal retirement (age 65) targeted at 40% of final compensationprojected at an assumed 4% salary progression rate.  Actual total benefits payable under the Plan are dependant on an indexedretirement benefit formula, which accrues benefits equal to the aggregateafter-tax income of associated life insurance contracts less the Company'stax-effected cost of funds for that plan year. While benefits are guaranteed until the respective participant’sprojected mortality, the total lifetime benefit is indexed to the performanceof the insurance contract.  Therefore,benefits under the Plan are ultimately dependent on the performance of theinsurance contracts and are not guaranteed by the Company. 

The Company has financed the contractsthrough the purchase of bank-owned life insurance, (BOLI), which is anticipatedto fully finance the projected benefit payout after retirement.  The total amount invested in BOLI for thePlan to date and the corresponding cash surrender value at June 30, 2002 was$11.5 million and $12.5 million, respectively. The associated obligationexpense incurred in connection with the Plan was $ 1.1 million for the firstquarter of 2002. The first six months of expense was higher than normal due tothe accelerated vesting under the plan for four participants who terminatedearly as a result of the recent merger. The income derived from policy appreciation was $ 0.3 million as of June30, 2002.

                Inconnection with the Plan, the Company has also entered into Life InsuranceEndorsement Method Split Dollar Agreements (the "Agreements") withthe individuals covered under the Plan. Under the Agreements, the Companyshares 80% of death benefits over and above the cash surrender value (the netat risk death benefit) with the designated beneficiaries of the planparticipants under life insurance contracts referenced in the Plan. TheCompany, as owner of the policies, retains a 20% interest in the net at risklife proceeds and a 100% interest in the cash surrender value of the policies.

                The Plan alsocontains provisions for change of control, as defined, which allow theparticipants to retain benefits, subject to certain conditions, under the Planin the event of a change in control. Because the Plan was designed to retainthe future services of key executives, no benefits are payable under the Planuntil age 65 and the amount of those benefits will be determined based upon theindividual participants vesting schedule.

13

----

 

**Part 1. Item 2:   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND 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 bythe use of forward-looking terms such as “may,” “will,” “should,” “believe,”“expect,” “anticipate,” “estimate,” “continue,” or comparable terminology. TheCompany’s actual results could differ materially from those anticipated fromthe forward-looking statements, depending on various important factors. Thesefactors include a possible decline in asset quality, potential difficulties inintegrating the Company’s operations with those of companies acquired, thecyclical nature of the mortgage banking industry generally, the evolving natureof the market for internet banking and financial services generally, thepossible adverse effects of unexpected changes in the interest rateenvironment, and increasing competition and regulatory changes. The sectionheaded “Risk Factors” in the Company’s prospectus dated January 14, 2002contains 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 bank holding company thatwholly owns the outstanding stock of NetBank (“NetBank, FSB”), a federalsavings bank; Meritage Mortgage Corporation (“Meritage”), a wholesalenonconforming mortgage provider; MG Reinsurance Company (“MG Reinsurance”), acaptive reinsurance company; RBMG Insurance Services, Inc., (“RBMG Insurance”);and NB Partners, Inc., a corporation established for strategic partneringopportunities.  NetBank, FSB also ownsall of the outstanding stock of Market Street Mortgage Corporation (“MarketStreet”), a retail mortgage company, and Resource Bancshares Mortgage Group,Inc. (“Resource”). Resource wholly owns RBMG, Inc.(“RBMG”), a wholesalemortgage banking company, and Republic Leasing Company, Inc. (“RepublicLeasing”), a small ticket equipment leasing company.  NetBank, Inc. acquired Resource on March 31, 2002 andsubsequently reorganized the holding company structure as described above basedon operational, licensing and funding needs. The entire consolidated company isreferred to herein as “NetBank” or  “theCompany”.  As of June 30, 2002, NetBankhad approximately 226,000 accounts and $1.8 billion in deposits.

 

| **($ in  000s, except per share)**         |   | **At or for  the three  months ended  June 30, 2002** |      | **At or for  the three  months ended  June 30, 2001** |   | **At or for  the six  months ended   June 30, 2002** |   | **At or for  the six  months ended  June 30, 2001** |      |
|--------------------------------------------|--------|-------------------------------------------------------|-----------|-------------------------------------------------------|--------|------------------------------------------------------|--------|-----------------------------------------------------|-----------|
| **Summary Financial Data:**                |   |                                                  |      |                                                  |   |                                                 |   |                                                |      |
| Net interest income                        |   | $                                                     | 3,319     |                                                  | $      | 10,799                                               |   | $                                                   | 15,662    |   | $ | 21,573 |   |
| Provision for loan and lease losses        |   | $                                                     | 31,290    |                                                  | $      | 126                                                  |   | $                                                   | 31,394    |   | $ | 170 |   |
| Non-interest income                        |   | $                                                     | 46,171    |                                                  | $      | 3,289                                                |   | $                                                   | 55,144    |   | $ | 5,997 |   |
| Non-interest expense                       |   | $                                                     | 68,544    |                                                  | $      | 12,707                                               |   | $                                                   | 98,239    |   | $ | 24,857 |   |
| Net (loss) income                          |   | $                                                     | (31,287   | )                                                     | $      | 779                                                  |   | $                                                   | (36,925   | ) | $ | 1,576 |   |
| Net (loss) income per common share         |   | $                                                     | (0.64     | )                                                     | $      | 0.03                                                 |   | $                                                   | (0.94     | ) | $ | 0.05 |   |
| Net (loss) income per common diluted share |   | $                                                     | (0.64     | )                                                     | $      | 0.03                                                 |   | $                                                   | (0.94     | ) | $ | 0.05 |   |
| Average assets                             |   | $                                                     | 3,784,928 |                                                  | $      | 2,197,417                                            |   | $                                                   | 3,483,129 |   | $ | 2,209,873 |   |
| Average liabilities                        |   | $                                                     | 3,389,784 |                                                  | $      | 1,948,830                                            |   | $                                                   | 3,134,549 |   | $ | 1,961,364 |   |
| Average shareholders’ equity          |   | $                                                     | 395,144   |                                                  | $      | 248,587                                              |   | $                                                   | 348,580   |   | $ | 248,509 |   |
| Return on average assets                   |   | -3.31                                                 | %         | 0.14                                                  | %      | -2.12                                                | %      | 0.14                                                | %         |
| Return on average equity                   |   | -31.67                                                | %         | 1.25                                                  | %      | -21.19                                               | %      | 1.27                                                | %         |
| Net interest margin                        |   | 0.16                                                  | %         | 2.29                                                  | %      | 0.76                                                 | %      | 2.29                                                | %         |

 

**Financial Condition***-*The Company’sassets were $3.6 billion at June 30, 2002 compared to $2.9 billion atDecember 31, 2001. The increase of $0.7 billion from December 31,2001 to June 30, 2002 was primarily due to the acquisition of Resource on March31, 2002 which added $1.1 billion in total assets, including $756 million inmortgage loans receivable held for sale, $20 million in lease receivables, $129million in mortgage servicing rights, $30 million in cash, and $149 million infurniture and equipment, miscellaneous receivables, and other assets. During the six months ended June 30, 2002, NetBank began a process ofrepositioning its balance sheet to reflect the change in strategy as a resultof the acquisition of Resource.  The repositioning primarily consisted ofliquidating a large portion of the investment securities portfolio availablefor sale (approximately $511 million in total).  The Company used the resulting proceeds in the second quarter to paydown pre-existing Resource lines of credit, approximately $427 million, and tofund the purchase or origination of mortgage loans by Resource and MarketStreet.  During the first six months of2002 the Company’s cash and cash 

 

14

----

 

equivalentsincreased $142 million.  This increaseincludes the aforementioned $30 million acquired from the Resource acquisition,approximately $12 million deposited by Resource for escrow deposits it holds asthe primary servicer for its mortgages held for sale and its mortgage servicingrights portfolio and due to the Company holding more cash to facilitate thefunding of its mortgage operations. Investment securities declined $116 million for the six months endedJune 30, 2002 as a result of the previously discussed repositioning of theCompany’s balance sheet. The Company’s loan and lease receivables declined by$355 million primarily as a result of the sale of $33 million of commercialloans which are considered non-core assets, the reclassification of $192 millionof commercial loans portfolio as held for sale, $85 million in principalrepayments net of purchases and $46 million of additional provision, premiumimpairment and amortization. The Company’s investment in stock of the FederalHome Loan Bank of Atlanta also decreased $15 million as the Company redeemedstock related to FHLB advances paid down during the six months ended June 30,2002.  All of the following itemsincreased for the six months ending June 30, 2002 primarily as a result of theacquisition of Resource; mortgage loans held for sale by $632 million, mortgageservicing rights by $105 million, accrued interest receivable by $7 million,furniture & equipment and capitalized software by $35 million, due fromservicers and investors by $21 million and other assets by $47 million.

 

*InvestmentSecurities.* The following tables set forth certain information relating to the Company’savailable-for-sale securities at June 30, 2002 and December 31, 2001:($s in 000s)

 
|                                 |   | **Amortized****Cost** |    | **Unrealized****Gains** |   | **Unrealized  Losses** |   | **Estimated  Fair  Value** |   |
|--------------------------------------|--------|-----------------------|---------|-------------------------|--------|------------------------|--------|----------------------------|--------|
|                                 |   | **June 30, 2002**     |    |
| Mortgage pool securities             |   | $                     | 148,952 |                    | $      | 1,811                  |   | $                          | — |   | $ | 150,763 |   |
| Collateralized mortgage  obligations |   | 15,209                |    | 154                     |   | 58                     |   | 15,305                     |   |
| U.S. government agencies             |   | 551,057               |    | 4,844                   |   | 318                    |   | 555,583                    |   |
| Corporate bonds                      |   | 9,673                 |    | —                  |   | 831                    |   | 8,842                      |   |
| Habitat bonds and other              |   | 3,445                 |    | 107                     |   | —                 |   | 3,552                      |   |
|                                 |   |                  |    |                    |   |                   |   |                       |   |
| Total                                |   | $                     | 728,336 |                    | $      | 6,916                  |   | $                          | 1,207  |   | $ | 734,045 |   |

 
|                                 |   | **Amortized****Cost** |    | **Unrealized****Gains** |   | **Unrealized  Losses** |   | **Estimated  Fair  Value** |   |
|--------------------------------------|--------|-----------------------|---------|-------------------------|--------|------------------------|--------|----------------------------|--------|
|                                 |   | **December 31, 2001** |    |
| Mortgage pool securities             |   | $                     | 596,675 |                    | $      | 345                    |   | $                          | 5,374  |   | $ | 591,646 |   |
| Collateralized mortgage  obligations |   | 185,768               |    | 513                     |   | 1,261                  |   | 185,020                    |   |
| Unites States government  agencies   |   | 60,000                |    | 834                     |   | —                 |   | 60,834                     |   |
| Corporate bonds                      |   | 9,666                 |    | —                  |   | 1,006                  |   | 8,660                      |   |
| Habitat bonds and other              |   | 3,858                 |    | 61                      |   | —                 |   | 3,919                      |   |
|                                 |   |                  |    |                    |   |                   |   |                       |   |
| Total                                |   | $                     | 855,967 |                    | $      | 1,753                  |   | $                          | 7,641  |   | $ | 850,079 |   |

* *

*Loan PortfolioComposition.* The following table sets forth the composition of our loan and lease portfolio,including loans receivable held for sale, by type of loan as of June 30,2002 and December 31, 2001: ($s in 000s)

|                                      |   | **As of  June 30, 2002** |      | **As of  December 31, 2001** |   |
|-------------------------------------------|--------|--------------------------|-----------|------------------------------|--------|
| **($ in 000s)**                           |   | **Amount**               |      | **% of total**               |   | **Amount** |   | **% of total** | ** ** |
| Residential  mortgages                    |   | $                        | 755,868   |                         | 32.5   | % | $ | 977,768 |   | 54.1 | % |
| Residential mortgages held for  sale      |   | 939,944                  |      | 40.5                         |   | 295,560 |   | 16.3 |   |
| Commercial loans held for sale            |   | 195,761                  |      | 8.4                          |   | — |   | — |   |
| Commercial loans                          |   | —                   |      | —                       |   | 231,739 |   | 12.8 |   |
| Leases                                    |   | 322,298                  |      | 13.9                         |   | 150,918 |   | 8.3 |   |
| Home equity lines of credit               |   | 107,901                  |      | 4.6                          |   | 140,806 |   | 7.8 |   |
| Consumer                                  |   | 1,921                    |      | 0.1                          |   | 10,747 |   | 0.7 |   |
| Construction                              |   | 196                      |      | —                       |   | 197 |   | — |   |
| Auto                                      |   | 62                       |      | —                       |   | 211 |   | — |   |
| Total                                     |   | 2,323,951                |      | 100.0                        | %      | 1,807,946 |   | 100.0 | % |
|                                      |   |                     |      |                         |   |   |   |   |   |
| Less allowance for loan and  lease losses |   | 69,498                   |      |                         |   | 22,896 |   |   |   |
| Total                                     |   | $                        | 2,254,453 |                         |   |   | $ | 1,785,050 |   |   |   |

 

15

----

 

*Asset Qualityand Non-performing Assets-*As of June 30, 2002 and December 31, 2001 NetBank had $92.2 millionand $3.2 million loans on non-accrual status, which includes all loans past due90 days or more.  Of the $92.2 million on non-accrual status at June30, 2002, $83.8 million related to one portfolio of commercial leases which areguaranteed by three insurance companies acting as sureties under the terms of therelated sales and servicing agreements.  NetBank is currently involved inlitigation with each of those three insurance companies and is optimistic aboutthe ultimate recovery of amounts due under the terms of the sales and servicingagreements; however, until the matter is resolved, management has placed theentire balance of the portfolio on a non-accrual status.  During the threemonths ended June 30, 2002 there were $0.4 million of restructured loans. As of June 30, 2002 and December 31, 2001, NetBank had $2.7 million and $0.07million in other real estate owned.

 

Allocation of the allowance for loan and lease losses as of June 30,2002 and December 31, 2001:

 

|                                |   | **As of  June 30, 2002** |   | **As of  December 31, 2001** |   |
|-------------------------------------|--------|--------------------------|--------|------------------------------|--------|
| **($ in 000s)**                     |   | **Amount**               |   | **% of total**               |   | **Amount** |   | **% of total** | ** ** |
| Residential mortgages               |   | $                        | 19,858 |                         | 28.6   | % | $ | 14,463 |   | 63.2 | % |
| Residential mortgages held for sale |   | 11,941                   |   | 17.2                         |   | 31 |   | 0.1 |   |
| Home equity lines of credit         |   | 1,926                    |   | 2.8                          |   | 1,714 |   | 7.5 |   |
| Commercial loans                    |   | 4,182                    |   | 6.0                          |   | 3,291 |   | 14.4 |   |
| Leases                              |   | 31,425                   |   | 45.2                         |   | 3,331 |   | 14.5 |   |
| Consumer                            |   | 50                       |   | 0.1                          |   | 50 |   | 0.2 |   |
| Construction                        |   | 108                      |   | 0.1                          |   | — |   | 0.0 |   |
| Auto                                |   | 8                        |   | 0.0                          |   | 16 |   | 0.1 |   |
| Total                               |   | $                        | 69,498 |                         | 100.0  | % | $ | 22,896 |   | 100 | % |

 

*Deposits.*  The following table sets forth the dollaramount of deposits and weighted average interest rates in the various types ofdeposit programs offered by the Company at June 30, 2002 and December 31,2001:

 
|                                    |   | **Amount**        |      | **Percentage**        |   | **Weighted  Average****Interest  Rate** |   | **Amount** |   | **Percentage** |   | **Weighted  Average  Interest  Rate** |   |
|-----------------------------------------|--------|-------------------|-----------|-----------------------|--------|-----------------------------------------|--------|------------|--------|----------------|--------|---------------------------------------|--------|
|                                    |   | **June 30, 2002** |      | **December 31, 2001** |   |
| Non-interest bearing checking  accounts |   | $                 | 30,344    |                  | 1.7    | %                                       | N/A    |       | $      | 26,858         |   | 1.8                                   | %      | N/A |   |
| Interest bearing:                       |   |              |      |                  |   |                                    |   |       |   |           |   |                                  |   |
| Checking accounts                       |   | 156,120           |      | 8.7                   |   | 1.64                                    | %      | 131,887    |   | 8.8            |   | 1.8                                   | %      |
| Money market                            |   | 650,775           |      | 36.4                  |   | 2.74                                    | %      | 492,424    |   | 33.0           |   | 3.7                                   | %      |
| Certificate of deposit under  $100,000  |   | 720,607           |      | 40.3                  |   | 3.66                                    | %      | 724,328    |   | 48.5           |   | 5.8                                   | %      |
| Certificate of deposit over  $100,000   |   | 229,837           |      | 12.9                  |   | 3.66                                    | %      | 118,322    |   | 7.9            |   | 5.8                                   | %      |
| Total deposits                          |   | $                 | 1,787,683 |                  | 100.0  | %                                       |   |       | $      | 1,493,819      |   | 100.0                                 | %      |   |   |

 

*Total liabilities*

 

Totalliabilities for the six months ended June 30, 2002 increased $581 millionprimarily due to an increase in deposits of $294 million and the acquisition ofResource, which added $917 million of liabilities at March 31, 2002.   During the six months ended June 30, 2002the Company repositioned its investment portfolio to facilitate the pay down ofapproximately $428 million in pre-existing Resource lines of credit and to paydown $220 million of FHLB advances to NetBank, FSB.  The restructuring and corresponding pay down of debt resulted ina net increase of $164 million in other borrowed funds for the six monthsending June 30, 2002.  Accounts payableand accrued liabilities increased $110 million during the six months ended June30, 2002 primarily related to liabilities assumed as a result of theacquisition of Resource.  Totalliabilities decreased by $368 million during the three months ended June 30,2002.  This decline is primarily due tothe proceeds resulting from the repositioning of the Company’s investmentportfolio being used to pay down approximately $428 million in Resource linesof credit.  The overall decline inliabilities was offset by an increase in deposits of $55 million (3%) for thethree months ended June 30, 2002. Accrued interest, loans in process and accounts payable and accruedliabilities declined by $2 million for the three months ended June 30, 2002.

 

16

----

*Shareholders’ equity*

 

Shareholders’equity increased $129 million for the six months ended June 30, 2002.  This increase is primarily a result of theissuance of $156 million in new equity issued to effect the purchase ofResource, offset by a $37 million decrease in retained earnings as a result ofa loss for the six months ended June 30, 2002.

 

**Results of Operations– Six months ended June 30, 2002 compared to the six months ended June 30, 2001**

* *

*General.*  Net loss for the six months ended June 30,2002 was $36.9 million, or $(0.94) per share, compared with net income of $1.6million, or $0.05 per share, for the six months ended June 30, 2001.  Thesignificant decline in net income was the result of $73.8 million, pre-tax (or$43.6 million, after-tax) of non-operating expenses, merger related transactioncosts and charges related to the strategic repositioning of the Company’sbalance sheet following the acquisition of Resource on March 31,2002. These charges consist of the following on a pre-tax basis: 1)allowance for lease losses for the delinquent surety-wrapped business equipmentleases ($20.1 million), see note 10 of the Condensed Consolidated FinancialStatements for additional detail; 2) write down of premiums associated withhigher prepayment experience due to the decline in interest rates and theCompany’s expectation of continued lower rates going forward ($12.5 million);3) non-recurring acquisition and severance costs ($10.1 million); 4)restructuring of the Company’s investment portfolio into shorter-terminvestments, mainly Fed funds sold and agency discount notes, to facilitate thepayoff of existing Resource lines of credit following the acquisition and theongoing funding of the newly acquired mortgage operations ($6.7 million); 5)the impact of purchase accounting adjustments on the sale of loans that were inprocess or inventory at Resource as of March 31, 2002, that were appropriatelymarked to fair value as a result the acquisition ($5.0 million); 6) write downof core deposit intangibles related to purchased deposits from Compubank ($2.5million); 7) prepayment penalties incurred for paying off higher rate termadvances from the Federal Home Loan Bank of Atlanta ($2.5 million); 8)consolidation of leased office space ($2.0 million); 9) write down to estimatedmarket value of commercial loans determined to be non-core assets ($1.8million) and 10) $2.8 million of various other severance and repositioningcharges.  The statement of operationswas also negatively impacted by $3.3 million pre-tax as a result of placing oneportfolio of commercial leases that is the subject of litigation (see Note 10to the Company’s Condensed Consolidated Financial Statements) on non-accrualstatus during the six months ended June 30, 2002.  The Company does not foresee having any additional charges inassociation with the acquisition of Resource or due to the repositioning of theCompany’s balance sheet and operations.

 

*Interest Income.*  Interest income related to our loans,leases, and investment portfolio for the six months ended June 30, 2002 was$73.0 million compared to $70.5 million for the six months ended June 30,2001. The slight increase in interest income was a result of higher averagebalances in the investment portfolio from June 30, 2001 to June 30, 2002,offset by a decrease in the average yield on investments and loans.  Investmentyield declined from 6.6% for the six months ended June 30, 2001 to 5.1% for thesix months ended June 30, 2002 as management shortened the duration of theinvestment portfolio in anticipation of the Resource merger through the sale ofhigher yielding assets and the reinvestment of the proceeds in federal fundssold and discount agency notes. Yield was further negatively impacted by theoverall decline in interest rates from period to period.  Yields on loanand lease receivables declined from 8.1% for the six months ended June 30, 2001to 4.4% for the six months ended June 30, 2002 as a result of the writedown of loan premiums of $12.5 million due to prepayments accelerating in adeclining rate environment, non-accrual status of delinquent surety-wrapped businessequipment leases of $3.3 million and the adjustable portfolio re-pricingdownward. Loan yields on mortgage loan receivables held for sale were 6.6%positively impacting the six months ended June 30, 2002 from the acquisitionsof Resource and Market Street, which were not included in the comparablesix-month period.

* *

*Interest Expense.*  Interest expense increased by $8.4 millionto $57.4 million for the six months ended June 30, 2002 compared to $48.9million for the six months ended June 30, 2001.  This increase is primarily due to higher average interest-bearingliabilities offset in part by lower average cost of funds.  Interest expense on deposits was $27.8million compared to $30.6 million for the six months ended June 30,2001.  The net decrease in interest expense on deposits was the result ofan increase in customer deposit balances from $1.2 billion at June 30,2002 to $1.8 billion at June 30, 2001, offset by a decrease in the averageinterest rate paid on deposits from 5.6% for the six months ended June 30, 2001to 3.4% for the six months ended June 30, 2002. Interest expense associatedwith other borrowed funds and the convertible subordinated debt increased $11.3million from $18.3 million for the six months ended June 30, 2001 to $29.6 millionfor the six months ended June 30, 2002 due to the addition of $475.6 million ofseveral new revolving lines of credit, warehouse lines of credit, masterrepurchase facilities, a commercial paper conduit facility all secured bymortgage loans from the acquisition of Resource. In addition, advances fromFHLB increased by $90.5 million for the six months ended June 30, 2002 ascompared to June 30, 2001. Average rates on other borrowed funds increased from4.6% for the six months ended June 30, 2001 to 5.2% for the six months endedJune 30, 2002. The increase in average rates was negatively impacted bynon-operating charges and expenses related to prepayment penalties of  $2.5 million on certain high rate termadvances from Federal Home Loan Bank that were paid in repositioning thebalance sheet.

 

Netinterest income is determined by interest rate spread, which is the differencebetween the yields earned on interest-earning assets and rates paid oninterest-bearing liabilities, and the relative amounts of interest-earningassets and interest-bearing liabilities. Net interest income was $15.7 million,or 0.8% of average interest earning assets for the six months ended June 30,2002 compared to $21.6 million, or 2.3% of average interest earning assetsfor the six months ended June 30, 2001. The decrease in net 

 

17

----

 

interestincome resulted primarily from the repositioning charges of $14.9 million thatwere previously discussed in both the interest income and interest expensesection above and the increase in non-accrual leases as also discussed above inthe interest income section.

 
| **As of and  for the six months ended June 30, 2002** | ** ** |
|-------------------------------------------------------|------------|
| **Average  Balance**                                  | ** ** | **Average  Yield  / Rate** | ** ** |   | ** ** | **Interest** | ** ** |   | ** ** | **Variance  attributable  to** | ** ** |
| **2002**                                              |       | **2001** |   | **2002** |   | **2001** |   | **($s in  000s)** |   | **2002** |   | **2001** |   | **Variance** |   | **Rate** |   | **Volume*** | ** ** |
|                                                  |       |   |   |   |   |   |   | **Interest-earning  assets:** |   |   |   |   |   |   |   |   |   |   |   |
| $                                                     | 154,373    |   | $ | 90,824 |   | 1.90 | % | 3.21 | % | Short-term investments |   | $ | 1,469 |   | $ | 1,457 |   | $ | 12 |   | $ | (593 | ) | $ | 605 |   |
| 788,070                                               |       | 451,046 |   | 5.10 | % | 6.55 | % | Investment securities (1) |   | 20,079 |   | 14,782 |   | 5,297 |   | (3,290 | ) | 8,587 |   |
| 579,108                                               |       | — |   | 6.58 | % | 0.00 | % | Mortgage loans receivable held for sale(2) |   | 19,046 |   | — |   | 19,046 |   | — |   | 19,046 |   |
| 1,471,763                                             |       | 1,345,225 |   | 4.41 | % | 8.07 | % | Loan and lease receivable (2) |   | 32,423 |   | 54,280 |   | (21,857 | ) | (24,645 | ) | 2,788 |   |
| 2,993,314                                             |       | 1,887,095 |   | 4.88 | % | 7.47 | % | Total interest-earning assets |   | 73,017 |   | 70,519 |   | 2,498 |   | (28,528 | ) | 31,026 |   |
| 489,815                                               |       | 322,778 |   |   |   |   |   | Non-interest-earning assets |   |   |   |   |   |   |   |   |   |   |   |
| 3,483,129                                             |       | 2,209,873 |   |   |   |   |   | Total assets |   |   |   |   |   |   |   |   |   |   |   |
|                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                  |       |   |   |   |   |   |   | **Interest-bearing  liabilities:** |   |   |   |   |   |   |   |   |   |   |   |
| 138,554                                               |       | 114,877 |   | 1.66 | % | 1.88 | % | Checking accounts |   | 1,149 |   | 1,080 |   |   | 69 |   |   | (127 | ) |   | 196 |   |
| 595,656                                               |       | 314,316 |   | 2.74 | % | 4.88 | % | Money market |   | 8,173 |   | 7,670 |   | 503 |   | (3,357 | ) | 3,860 |   |
| 904,734                                               |       | 660,979 |   | 4.08 | % | 6.61 | % | Certificates of deposit |   | 18,461 |   | 21,852 |   | (3,391 | ) | (8,365 | ) | 4,974 |   |
| 1,119,404                                             |       | 771,222 |   | 5.17 | % | 4.59 | % | Other borrowed funds |   | 28,920 |   | 17,692 |   | 11,228 |   | 2,233 |   | 8,995 |   |
| 27,316                                                |       | 27,316 |   | 4.77 | % | 4.77 | % | Convertible subordinate debt |   | 652 |   | 652 |   | — |   | — |   | — |   |
| 2,785,664                                             |       | 1,888,710 |   | 4.12 | % | 5.18 | % | Total interest-bearing liabilities |   | 57,355 |   | 48,946 |   | 8,409 |   | (9,616 | ) | 18,025 |   |
| 348,885                                               |       | 72,654 |   |   |   |   |   | Non-interest-bearing liabilities |   |   |   |   |   |   |   |   |   |   |   |
| 3,134,549                                             |       | 1,961,364 |   |   |   |   |   | Total liabilities |   |   |   |   |   |   |   |   |   |   |   |
| 348,580                                               |       | 248,509 |   |   |   |   |   | Shareholders’ equity |   |   |   |   |   |   |   |   |   |   |   |
| $                                                     | 3,483,129  |   | $ | 2,209,873 |   |   |   |   |   | Total liabilities and shareholders' equity |   |   |   |   |   |   |   |   |   |   |   |
|                                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                  |       |   |   |   |   |   |   | Net interest earnings |   | $ | 15,662 |   | $ | 21,573 |   | $ | (5,911 | ) | $ | (18,912 | ) | $ | 13,001 |   |
|                                                  |       |   |   | 0.76% |   | 2.29 | % | Net yield on interest-earning assets(3) |   |   |   |   |   |   |   |   |   |   |   |

 

----

|   |                                                                 | (1) Based on  amortized cost; changes in fair value are not considered. |   |
|--------|----------------------------------------------------------------------|-------------------------------------------------------------------------|--------|
|   | (2) No  separate treatment has been made for non-accrual loans.      |                                                                    |
|   | (3) Net  interest income divided by average interest-earning assets. |                                                                    |

 

*Provision for Loanand Lease Losses.* The Company periodically reviews the performance of its loan portfolio byreviewing chargeoffs, delinquency statistics, and industry statistics on apool-by-pool basis for its purchased portfolio and a loan-by-loan basis for itsoriginated loans. If a decline in credit quality for a specific pool or a loanis noted, the Company records an additional allowance through a charge to theprovision for loan losses. The allowance for loan losses is maintained at alevel estimated to be adequate to provide for inherent losses in the loanportfolio. The Company determines the adequacy of the allowance based uponreviews of individual loans, recent loss experience, current economicconditions, the risk characteristics of the various categories of loans andother pertinent factors.  During the sixmonths ended June 30, 2002 the Company increased its allowance for loan lossesfrom $22.9 million to $69.5 million, an increase of $46.6 million.  This increase is primarily due to threefactors: 1) the establishment of an additional allowance for commercial leasesof $20.1 million, as discussed in Note 10 of the Company’s CondensedConsolidated Financial Statements; 2) the Company acquired $16.2 million ofallowance in conjunction with its acquisition of Resource on March 31, 2002 and3) an additional $6.6 million of allowance recorded for the Company’s secondmortgage portfolio.

 

*Non-interest Income.*  For the six months ended June 30, 2002 theCompany recorded $55.1 million of non-interest income compared to $6.0 millionfor the same period of 2001.  Thisincrease is primarily due to gain on sales of mortgage loans of $39.0 milliongenerated by the Company’s mortgage subsidiaries, RBMG, Meritage and MarketStreet which were not included in the Company’s 2001 results.  Service charges and fees increased to $16.0million from $4.5 million for the periods ending June 30, 2002 and 2001,respectively, also due to the acquisitions of the mortgage subsidiaries. TheCompany recorded a charge of $1.9 million compared to income of $1.5 millionrelated to gain (loss) on sales of securities. There was $1.0 million of other income for the period ended June 30,2002.  Other income primarily consistsof the revenues from MG Reinsurance, a captive reinsurance company acquired aspart of the acquisition of Resource on March 31, 2002.

 

18

----

 

*Non-interestExpense.* Non-interest expense includes all operating expenses such as salaries andbenefits, marketing and general and administrative expenses, excluding interestexpense, provision for loan losses and income taxes. Non-interest expenseincreased by $73.4 million for the six months ended June 30, 2002 compared tothe six months ended June 30, 2001. $50.5 million of the increase relates tothe addition of Resource and Market Street’s non-interest expense, as Resourceand Market Street were not acquired until March 31, 2002 and June 29, 2001,respectively. In addition, for the six months ended June 30, 2002, non-interestexpense includes $10.1 million of non-recurring compensation-related chargesdue to payouts under employment agreements triggered by changes in managementas a result of the acquisition of Resource.  There were also $6.8 millionof repositioning charges incurred during the six months ended June 30, 2002including $1.8 million of severance, $2.5 million related to the write down ofdeposit intangibles associated with the acquisition of deposits from Compubankin 2001, $1.9 million charge for the consolidation of corporate office leasedspace and $0.6 million of other repositioning charges.  Net of theaddition of the new subsidiaries, transaction costs related to the acquisitionof Resource and the strategic repositioning charges, the Company’s non-interestexpenses increased $4.8 million related to the overall growth of the bankingoperations which include, $2.0 million in salary and wages, $1.0 millionincrease in data processing expense, $0.7 million increase in depreciation andamortization, $0.6 million increase in customer service and $0.5 million ofother increases.

 

**Results of Operations– Three months ended June 30, 2002 compared to the three months ended June 30,2001**

* *

*General.*  Net loss for the three months ended June30, 2002 was $31.3 million, or $(0.64) per share, compared with net income of$0.8 million, or $0.03 per share, for the three months ended June 30,2001.  The significant decline in net income was the result of $59.9million, pre-tax (or $37.3 million, after-tax) of charges related to thestrategic repositioning of the Company’s balance sheet following theacquisition of Resource on March 31, 2002. These charges consist of thefollowing on a pre-tax basis: 1) allowance for lease losses for the delinquentsurety-wrapped business equipment leases ($20.1 million), see note 10 of theCondensed Consolidated Financial Statements for additional detail; 2) writedown of premiums associated with higher prepayment experience due to thedecline in interest rates and the Company’s expectation of continued low ratesgoing forward ($12.5 million); 3) additional allowances for loan and lease lossesfor the Company’s portfolio of HELOCs and second mortgage loans ($7.6 million);4) the impact of purchase accounting adjustments on the sale of loans that werein process or inventory at Resource as of March 31, 2002, that wereappropriately marked to fair value as a result the acquisition ($5.0 million);5) restructuring of the Company’s investment portfolio into shorter-terminvestments, mainly Fed funds sold and agency discount notes, to facilitate thepayoff of existing Resource lines of credit following the acquisition and theongoing funding of the newly acquired mortgage operations ($2.9 million); 6)prepayment penalties incurred for paying off higher rate term advances from theFederal Home Loan Bank of Atlanta ($2.5 million); 7) write down of core depositintangibles related to purchased deposits from Compubank ($2.5 million); 8)consolidation of leased office space at the corporate headquarters ($2.0million); 9) write down to estimated fair market value of commercial loansdetermined to be non-core assets ($1.8 million) and 10) $2.8 million of variousother severance and repositioning charges. Additionally, the statement of operations was negatively impacted by$2.5 million pre-tax as a result of one portfolio of commercial leases that isthe subject of litigation (see Note 10 to the Company’s Condensed ConsolidatedFinancial Statements) being on non-accrual status during the three months endedJune 30, 2002.

 

*Interest Income.*  Interest income related to the Company'sloans, leases, and investment portfolio for the three months ended June 30,2002 was $36.2 million compared to $34.6 million for the three monthsended June 30, 2001. The slight increase in interest income was a result ofhigher average balances in the Company’s earning assets from June 30, 2001 toJune 30, 2002, offset by a decrease in the average yield on earning assets duethe write down of premiums associated with higher than expectedprepayments.  The yield on the investment securities portfolio declinedfrom 6.4% for the three months ended June 30, 2001 to 4.9% for the three monthsended June 30, 2002 as management shortened the duration in anticipation of theResource merger through the sale of higher yielding (longer term) assets andthe reinvestment of the proceeds in federal funds sold and discount agencynotes. Yield was further negatively impacted by the overall decline in interestrates from period to period.  Loan yields on loan and lease receivablesdeclined from 7.9% for the three months ended June 30, 2001 to 2.6% forthe three months ended June 30, 2002 as a result of the write down of loanpremiums of $12.5 million, non-accrual status of delinquent surety-wrappedbusiness equipment leases of $2.5 million, and the adjustable portfoliore-pricing downward and prepayments accelerating in a declining rateenvironment. Loan yields on mortgages held for sale were 6.7%, positivelyimpacting the three months ended June 30, 2002 from the previous acquisitionsof Resource and Market Street as compared to the three months ended June 30,2001.

* *

*Interest Expense.*  Total interest expense for the three monthsended June 30, 2002 increased by $9.1 million from $23.8 million to $32.9million primarily due to higher average balances of interest bearingliabilities related to the additions of Resource and Market Street.  For the three months ended June 30, 2002there was $14.0 million in interest expense on deposits as compared to$15.2 million for the three months ended June 30, 2001.  The netdecrease in interest expense on deposits was the result of an increase incustomer deposit balances from $1.2 billion at June 30, 2001 to $1.8billion at June 30, 2002, offset by a decrease in the average interest ratepaid on deposits from 5.1% for the three months ended June 30, 2001 to 3.3% forthe three months ended June 30, 2002. Interest expense associated with otherborrowed funds increased $10.3 million from $8.6 million for the three monthsended June 30, 2001 to $18.9 million for the three months ended June 30, 2002due to the addition of $475.6 million of several new revolving lines of credit,warehouse lines of credit, master repurchase facilities, a commercial paperconduit facility all secured by mortgage loans from the acquisition ofResource.  In addition, advances fromFHLB increased by $90.5 million for the three months ended June 30, 2002 ascompared to June 30, 2001. Average rates 

 

19

----

 

on otherborrowed funds increased from 4.6% for the three months ended June 30, 2001 to5.3% for the six months ended June 30, 2002. The increase in average rates wasnegatively impacted by non-operating charges and expenses related to prepaymentpenalties of  $2.5 million on certainhigh rate term advances from Federal Home Loan Bank that were repaid early inrepositioning the balance sheet.

* *

*Net InterestIncome. *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 $3.3 million,or 0.2% of average interest-earning assets for the three months ended June 30,2002 compared to $10.8 million, or 2.3% of average interest-earning assetsfor the three months ended June 30, 2001. The decrease in net interest incomeresulted primarily from the repositioning charges of $14.9 million that werepreviously discussed in both the interest income and interest expense section aboveand the increase in non-accrual leases as discussed above in the interestincome sections.

 
| **As of and  for the three months ended June 30, 2002** |      |
|---------------------------------------------------------|-----------|
| **Average  Balance**                                    |      | **Average  Yield /  Rate** |   |   |   | **Interest** |   |   |   | **Variance  attributable to** | ** ** |
| **2002**                                                |      | **2001** |   | **2002** |   | **2001** |   | **($s in 000s)** |   | **2002** |   | **2001** |   | **Variance** |   | **Rate** |   | **Volume*** | ** ** |
|                                                    |      |   |   |   |   |   |   | **Interest-earning  assets:** |   |   |   |   |   |   |   |   |   |   |   |
| $                                                       | 109,842   |   | $ | 114,647 |   | 2.39 | % | 3.12 | % | Short-term investments |   | $ | 656 |   | $ | 895 |   | $ | (239 | ) | $ | (210 | ) | $ | (29 | ) |
| 857,861                                                 |      | 455,381 |   | 4.93 | % | 6.40 | % | Investment securities(1) |   | 10,583 |   | 7,288 |   | 3,295 |   | (1,670 | ) | 4,965 |   |
| 926,069                                                 |      | — |   | 6.70 | % | 0.00 | % | Mortgage loans receivable(2) |   | 15,518 |   | — |   | 15,518 |   | — |   | 15,518 |   |
| 1,439,583                                               |      | 1,342,617 |   | 2.63 | % | 7.88 | % | Loan and leases receivable(2) |   | 9,482 |   | 26,435 |   | (16,953 | ) | (17,592 | ) | 639 |   |
| 3,333,355                                               |      | 1,912,645 |   | 4.35 | % | 7.24 | % | Total interest-earning assets |   | 36,239 |   | 34,618 |   | 1,621 |   | (19,472 | ) | 21,093 |   |
| 451,573                                                 |      | 284,772 |   | s |   |   |   | Non-interest-earning assets |   |   |   |   |   |   |   |   |   |   |   |
| 3,784,928                                               |      | 2,197,417 |   | s |   |   |   | Total Asset |   |   |   |   |   |   |   |   |   |   |   |
|                                                    |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                    |      |   |   |   |   |   |   | **Interest-bearing  liabilities:** |   |   |   |   |   |   |   |   |   |   |   |
| 144,138                                                 |      | 156,059 |   | 1.68 | % | 1.50 | % | Checking accounts |   | 607 |   | 587 |   | 20 |   | 70 |   | (50 | ) |
| 631,719                                                 |      | 336,116 |   | 2.39 | % | 4.50 | % | Money market |   | 3,771 |   | 3,785 |   | (14 | ) | (1,779 | ) | 1,765 |   |
| 935,511                                                 |      | 679,702 |   | 4.12 | % | 6.38 | % | Certificates of deposit |   | 9,630 |   | 10,837 |   | (1,207 | ) | (3,840 | ) | 2,633 |   |
| 1,402,194                                               |      | 724,000 |   | 5.30 | % | 4.58 | % | Other borrowed funds |   | 18,584 |   | 8,282 |   | 10,302 |   | 1,314 |   | 8,988 |   |
| 27,316                                                  |      | 27,316 |   | 4.80 | % | 4.80 | % | Convertible subordinate debt |   | 328 |   | 328 |   | — |   | — |   | — |   |
| 3,140,878                                               |      | 1,923,193 |   | 4.19 | % | 4.95 | % | Total interest-bearing liabilities |   | 32,920 |   | 23,819 |   | 9,101 |   | (4,235 | ) | 13,336 |   |
| 248,906                                                 |      | 25,637 |   |   |   |   |   | Non-interest-bearing liabilities |   |   |   |   |   |   |   |   |   |   |   |
| 3,389,784                                               |      | 1,948,830 |   |   |   |   |   | Total liabilities |   |   |   |   |   |   |   |   |   |   |   |
| 395,144                                                 |      | 248,587 |   |   |   |   |   | Shareholders’ equity |   |   |   |   |   |   |   |   |   |   |   |
| $                                                       | 3,784,928 |   | $ | 2,197,417 |   |   |   |   |   | Total liabilities and shareholders' equity |   |   |   |   |   |   |   |   |   |   |   |
|                                                    |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                    |      |   |   |   |   |   |   | Net interest earnings |   | $ | 3,319 |   | $ | 10,799 |   | $ | (7,480 | ) | $ | (15,237 | ) | $ | 7,757 |   |
|                                                    |      |   |   | 0.16% |   | 2.29 | % | Net yield on interest-earning assets (3) |   |   |   |   |   |   |   |   |   |   |   |

 

----

|   |                                                                 | (1) Based on  amortized cost; changes in fair value are not considered. |   |
|--------|----------------------------------------------------------------------|-------------------------------------------------------------------------|--------|
|   | (2) No  separate treatment has been made for non-accrual loans.      |                                                                    |
|   | (3) Net  interest income divided by average interest-earning assets. |                                                                    |

 

*Provision for LoanLosses.*  TheCompany periodically reviews the performance of its loan portfolio by reviewingchargeoffs, delinquency statistics, and industry statistics on a pool-by-poolbasis for its purchased portfolio and a loan-by-loan basis for its originatedloans. If a decline in credit quality for a specific pool or a loan is noted,the Company records an additional allowance through a charge to the provisionfor loan losses. The allowance for loan losses is maintained at a levelestimated to be adequate to provide for inherent losses in the loan portfolio.The Company determines the adequacy of the allowance based upon reviews ofindividual loans, recent loss experience, current economic conditions, the riskcharacteristics of the various categories of loans and other pertinentfactors.  During the three months endedJune 30, 2002 the Company increased its allowance for loan losses from $42.4million to $69.5 million, an increase of $27.1 million.  This increase was primarily due to theestablishment of an allowance for commercial leases of $20.1 million, asdiscussed in note 10 of the Company’s Condensed Consolidated FinancialStatements, $6.6 million of allowance recorded for the Company’s secondmortgage portfolio and $3.0 million of allowance recorded as a pre-acquisitioncontingency associated with the purchase of Resource on March 31, 2002.

 

20

----

 

*Non-interest Income.*  For the three months ended June 30, 2002,the Company recorded approximately $46.1 million in non-interest incomecompared to $3.3 million during the three months ended June 30,2001.  Gain on sales of mortgage loans accounted for $33.4 million or72% of total non-interest income as a result of the acquisition of Resource andMarket Street.  Service charges and feesincreased to $12.6 million from $2.8 million, an increase of $9.8 millionprimarily a result of the additions of Resource and Market Street, which werenot included in the three months ending June 30, 2001. Gain on sales ofmortgage servicing rights and other income accounted for $2.0 million.  Other income primarily consists of the revenuesfrom MG Reinsurance, a captive reinsurance company acquired as part of theacquisition of Resource on March 31, 2002. The Company experienced a loss onsales of securities of $1.8 million for the three months ended June 30, 2002from the sale of investments it considered non-core compared to a gain of $0.5million for the same period of 2001.

* *

*Non-interestExpense.* Non-interest expense includes all operating expenses such as salaries andbenefits, marketing, general and administrative expenses, excluding interestexpense, provision for loan losses and income taxes.  Non-interest expense increased from $12.7 million for the threemonths ended June 30, 2001 to $68.5 million for the three months ended June 30,2002, an increase of $55.8 million. $46.0 million or 82% of this increase was due to the addition ofResource and Market Street’s non-interest expense, as Resource and MarketStreet were not acquired until March 31, 2002 and June 29, 2001,respectively.  There were $6.8 millionof repositioning charges incurred during the three months ended June 30, 2002including $1.8 million of severance, $2.5 million related to the write down ofdeposit intangibles associated with the acquisition of deposits from Compubankin 2001, a $1.9 million charge for the consolidation of corporate office leasedspace and $0.6 million of other repositioning charges.  Net of theaddition of the new subsidiaries and the repositioning items, the Company’snon-interest expenses increased $2.0 million related to the overall growth ofthe banking operations which included $0.8 million in salary and wages, $0.7million in loan servicing due to the increased costs associated with servicingleases compared to loans, a $0.4 million increase in data processing expenseand $0.1 million of other increases.

 

#### **BusinessSegments**

 

NetBank,Inc.’s principal activities include retail banking and mortgage banking. The retail banking segment primarily consists of the offering of consumerbanking products such as checking, money market, and certificates of depositand the purchase of bulk loan portfolios.  The mortgage banking segmenteither originates mortgage loans or purchases mortgage loans fromcorrespondents and/or brokers and packages pools of such loans either inclusiveor exclusive of servicing rights for sale into the secondary market. Sincethe acquisition of Resource was completed on March 31, 2002, the six-monthmortgage banking segment includes Resource’s results of operations for only thethree months ended June 30, 2002.

 

The six-monthtable includes the effects of certain transactions related to theacquisition of Resource on March 31, 2002 including the impact of purchaseaccounting, repositioning of the investment portfolio in anticipation of thetransaction and certain compensation charges related to changes in management asa result of the transaction.

 

The financialinformation for each business segment reflects specific identifiabletransactions or allocated transactions based on an internal allocation method.The measurement of the performance of the business segments is based on themanagement structure of NetBank, Inc. and is not necessarily comparable withsimilar information from any other financial institution. The informationpresented is also not necessarily indicative of the segment’s operations ifthey were independent entities.

 
|                       |   | **For the  Three Months Ended June 30, 2002** |      |
|----------------------------|--------|-----------------------------------------------|-----------|
| **($s in  thousands)**     |   | **Retail  Banking**                           |      | **Mortgage  Banking** |   | **Other** |   | **Eliminations** |   | **Consolidated** |   |
| Net interest (loss) income |   | $                                             | (4,937    | ) | $ | 8,691 |   | $ | (435 | ) | $ | — |   | $ | 3,319 |   |
| Provision for loan losses  |   | $                                             | 27,888    |   | $ | 3,402 |   | $ | — |   | $ | — |   | $ | 31,290 |   |
| Non-interest income        |   | $                                             | 2,148     |   | $ | 43,976 |   | $ | 483 |   | $ | (436 | ) | $ | 46,171 |   |
| Non-interest expense       |   | $                                             | 22,640    |   | $ | 44,027 |   | $ | 2,313 |   | $ | (436 | ) | $ | 68,544 |   |
| Income before income taxes |   | $                                             | (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, 2002** | ** ** |
|----------------------------|--------|---------------------------------------------|------------|
| **($s in  thousands)**     |   | **Retail  Banking**                         |       | **Mortgage  Banking** |   | **Other** |   | **Eliminations** |   | **Consolidated** | ** ** |
| Net interest income        |   | $                                           | 4,824      |   | $ | 11,232 |   | $ | (394 | ) | $ | — |   | $ | 15,662 |   |
| Provision for loan losses  |   | $                                           | 27,991     |   | $ | 3,403 |   | $ | — |   | $ | — |   | $ | 31,394 |   |
| Non-interest income        |   | $                                           | 5,101      |   | $ | 49,871 |   | $ | 608 |   | $ | (436 | ) | $ | 55,144 |   |
| Non-interest expense       |   | $                                           | 38,294     |   | $ | 48,502 |   | $ | 11,879 |   | $ | (436 | ) | $ | 98,239 |   |
| Income before income taxes |   | $                                           | (56,360    | ) | $ | 9,198 |   | $ | (11,665 | ) | $ | — |   | $ | (58,827 | ) |
| Total assets               |   | $                                           | 2,861,993  |   | $ | 887,547 |   | $ | 466,527 |   | $ | (625,644 | ) | $ | 3,590,423 |   |

 

21

----

 

***RetailBank Operations***

 

The company made tremendous progress during the three months ended June30, 2002 in repositioning its balance sheet to accommodate its expandedmortgage banking business. The table below provides an overview of the resultsof operation for the bank.  Net interestincome declined $15.7 million from $10.8 million to $(4.9) million for thethree months ended June 30, 2002 compared to the three months ended June 30,2001 primarily due to the write down of premiums in response to the rapidprepayments experienced on loan pools associated with the current low rateenvironment and the Company’s anticipation of low rates throughout theremainder of the year as more fully discussed in the results of operationssection. Additionally, the three months ended June 30, 2002 was negativelyimpacted by the non-accrual status of $83.8 million of leases, as discussed in more detail in Note 10 to theCompany’s Condensed Consolidated Financial Statements.  Service charges increased by $1.1 millionfrom the quarter ended June 30, 2001 to June 30, 2002 related to increasedrevenue in the retail bank’s leasing operation. This was coupled with increasedexpenses of $10.0 million from the quarters ended June 30, 2002 to June 30,2001 related to the non-operating expenses and charges recorded of $6.8million. Deposits at June 30, 2002 totaled $1.8 billion, with total accounts at226,000.

 

| **($ in  000s)**                          |   | **For the  Quarter ended  June 30, 2002** |    | **For the  Quarter ended  June 30, 2001** |   | **Change** |   |
|-------------------------------------------|--------|-------------------------------------------|---------|-------------------------------------------|--------|------------|--------|
|                                      |   |                                      |    |                                      |   |       |   |
| Net interest income                       |   | $                                         | (4,937  | )                                         | $      | 10,799     |   | $ | (15,736 | ) |
| Provision for loan losses                 |   | (27,888                                   | )       | (126                                      | )      | (27,762    | )      |
| Service charges and fees                  |   | 3,920                                     |    | 2,808                                     |   | 1,112      |   |
| Total revenues                            |   | (28,905                                   | )       | 13,481                                    |   | (42,386    | )      |
|                                      |   |                                      |    |                                      |   |       |   |
| Total expenses                            |   | 22,640                                    |    | 12,707                                    |   | 9,933      |   |
| Pre-tax income before gains on securities |   | (51,545                                   | )       | 774                                       |   | (52,319    | )      |
| Gain (Loss) on securities sales           |   | (1,772                                    | )       | 481                                       |   | (2,253     | )      |
| Pre-tax income                            |   | $                                         | (53,317 | )                                         | $      | 1,255      |   | $ | (54,572 | ) |

** **

The company made tremendous progress during the six months ended June30, 2002 in repositioning its balance sheet to accommodate its expandedmortgage lending business. The table below provides an overview of the resultsof operation for the bank. Net interest income declined $16.7 million from$21.6 million to $4.8 million for the six months ended June 30, 2002 comparedto the six months ended June 30, 2001 primarily due to the write down ofpremiums in response to the rapid prepayments experienced on loan poolsassociated with the current low rate environment and the Company’s anticipationof low rates throughout the remainder of the year as more fully discussed inthe results of operations section. Additionally, the six months ended June 30, 2002 was negatively impactedby the non-accrual status of  $83.8million of leases, as discussed in more detail in Note 10 to the Company’sCondensed Consolidated Financial Statements. Service charges increased by $2.5 million from the six months ended June30, 2001 to June 30, 2002 related to increased revenue in the retail bank’sleasing operation. This was coupled with increased expenses of $13.4 millionfrom the six months ended June 30, 2001 to June 30, 2002 related to charges of$7.5 million associated with repositioning of the Company’s balance sheet toreflect a focus on the mortgage banking operations.  Deposits at June 30, 2002 totaled $1.8 billion, with totalaccounts at 226,000.

** **

| **($   in 000s)**                    |   | **For the  Six months ended  June 30, 2002** |    | **For the  Six months ended  June 30, 2001** |   | **Change** |   |
|-------------------------------------------|--------|----------------------------------------------|---------|----------------------------------------------|--------|------------|--------|
| Net interest income                       |   | $                                            | 4,824   |                                         | $      | 21,573     |   | $ | (16,749 | ) |
| Provision for loan losses                 |   | (27,991                                      | )       | (170                                         | )      | (27,821    | )      |
| Service charges and fees                  |   | 6,958                                        |    | 4,508                                        |   | 2,450      |   |
| Total revenues                            |   | (16,209                                      | )       | 25,911                                       |   | (42,120    | )      |
|                                      |   |                                         |    |                                         |   |       |   |
| Total expenses                            |   | 38,294                                       |    | 24,857                                       |   | 13,437     |   |
| Pre-tax income before gains on securities |   | (54,503                                      | )       | 1,054                                        |   | (55,557    | )      |
| Gain (loss) on securities sales           |   | (1,857                                       | )       | 1,489                                        |   | (3,346     | )      |
| Pre-tax income                            |   | $                                            | (56,360 | )                                            | $      | 2,543      |   | $ | (58,903 | ) |

# * *

22

----

 

*Mortgage Banking*

 

Thefollowing highlights the mortgage production and sales activities for the threeand six month periods ended June 30, 2002 and 2001:

 
|                     |   | **For the  Quarter Ended  June 30,** |      | **For the  Six Months Ended  June 30,** |   |
|--------------------------|--------|--------------------------------------|-----------|-----------------------------------------|--------|
|                     |   | **2002**                             |      | **2001**                                |   | **2002** |   | **2001** | ** ** |
|                     |   |                                 |      |                                    |   |   |   |   |   |
| **Production Activity:** |   |                                 |      |                                    |   |   |   |   |   |
| Retail                   |   | $                                    | 507,769   |                                    | $      | — |   | $ | 1,007,443 |   | $ | — |   |
| Correspondent            |   | 1,292,354                            |      | —                                  |   | 1,292,354 |   | — |   |
| Wholesale                |   | 624,515                              |      | —                                  |   | 624,515 |   | — |   |
| Total agency-eligible    |   | 2,424,638                            |      | —                                  |   | 2,924,312 |   | — |   |
| Non-conforming           |   | 474,554                              |      | —                                  |   | 474,554 |   | — |   |
| Total                    |   | $                                    | 2,899,192 |                                    | $      | — |   | $ | 3,398,866 |   | $ | — |   |
|                     |   |                                 |      |                                    |   |   |   |   |   |
| **Sales Activity:**      |   | $                                    | 2,980,960 |                                    | $      | — |   | $ | 3,508,968 |   | $ | — |   |

 

The increasein production and sales activities in 2002 compared with 2001 relates to theacquisition of Market Street Mortgage Corporation and Resource BancsharesMortgage Group, Inc. at June 29, 2001 and March 31, 2002, respectively.

 

The followinghighlights the mortgage loan production and sales-related revenue and expensesfor the three and six month periods ended June 30, 2002 and 2001:

 
|                                              |   | **For the  Quarter Ended  June 30,** |   | **For the  Six Months Ended  June 30,** |   |
|---------------------------------------------------|--------|--------------------------------------|--------|-----------------------------------------|--------|
|                                              |   | **2002**                             |   | **2001**                                |   | **2002** |   | **2001** | ** ** |
|                                              |   |                                 |   |                                    |   |   |   |   |   |
| Production revenues                               |   | $                                    | 42,107 |                                    | $      | — |   | $ | 50,543 |   | $ | — |   |
|                                              |   |                                 |   |                                    |   |   |   |   |   |
| Production expenses                               |   | 32,178                               |   | —                                  |   | 36,654 |   | — |   |
| Pre-tax profit                                    |   | $                                    | 9,929  |                                    | $      | — |   | $ | 13,889 |   | $ | — |   |
|                                              |   |                                 |   |                                    |   |   |   |   |   |
| Production revenues in bps of sales               |   | 141.25                               |   | —                                  |   | 144.04 |   | — |   |
|                                              |   |                                 |   |                                    |   |   |   |   |   |
| Production expenses in bps of principal  produced |   | 110.99                               |   | —                                  |   | 107.84 |   | — |   |
|                                              |   |                                 |   |                                    |   |   |   |   |   |
| Net production margin in bps                      |   | 30.26                                |   | —                                  |   | 36.20 |   | — |   |

 

23

----

 

The increasein the production revenues and expenses in 2002 compared with 2001 relates tothe acquisition of Market Street Mortgage Corporation and Resource BancsharesMortgage Group, Inc. at June 29, 2001 and March 31, 2002, respectively.

 

The following summarizes the resultsof servicing operations for the quarter and six months ended June 30, 2002 and2001:

 

The increasein the production revenues and expenses in 2002 compared with 2001 relates tothe acquisition of Market Street Mortgage Corporation and Resource BancsharesMortgage Group, Inc. at June 29, 2001 and March 31, 2002, respectively.

 

The following summarizes theresults of servicing operations for the quarter and six months ended June 30,2002 and 2001:

 

 
|                                |   | **For the  Quarter Ended** |   | **For the  Six Months Ended** |   |
|-------------------------------------|--------|----------------------------|--------|-------------------------------|--------|
|                                |   | **June 30,**               |   | **June 30,**                  |   |
|                                |   | **2002**                   |   | **2001**                      |   | **2002** |   | **2001** |   |
| **($ in  000s)**                    |   |                       |   |                          |   |   |   |   |   |
| Servicing revenue                   |   | $                          | 6,614  |                          | $      | — |   | $ | 6,614 |   | $ | — |   |
|                                |   |                       |   |                          |   |   |   |   |   |
| Servicing expenses:                 |   |                       |   |                          |   |   |   |   |   |
| Operating expenses                  |   | 4,343                      |   | —                        |   | 4,343 |   | — |   |
| Amortization and impairment of MSRs |   | 4,155                      |   | —                        |   | 4,155 |   | — |   |
| Total servicing expenses            |   | 8,498                      |   | —                        |   | 8,498 |   | — |   |
|                                |   |                       |   |                          |   |   |   |   |   |
| Pre-tax servicing margin            |   | (1,884                     | )      |                          |   | (1,884 | ) |   |   |
|                                |   |                       |   |                          |   |   |   |   |   |
| Gain on sale of MSRs                |   | 983                        |   | —                        |   | 983 |   | — |   |
| Net hedge results                   |   | (3,789                     | )      | —                        |   | (3,789 | ) | — |   |
| Pre-tax income                      |   | $                          | (4,690 | )                             | $      | — |   | $ | (4,690 | ) | $ | — |   |

 

The increasein servicing revenues and expenses in 2002 when compared to 2001 relates to theacquisition of Resource Bancshares Mortgage Group, Inc. at March 31, 2002.   The loss in the servicing operations resultedprimarily from impairment adjustments, net of hedge results, related to theCompany’s investment in mortgage servicing rights.  Mortgage servicing values went down during the quarter related tocurrent and anticipated high levels of prepayments related to the current, lowinterest rate economic environment.

 

**Liquidity and CapitalResources**

 

NetBank’s liquidity, represented by cash and cash equivalents, is aproduct of its operating, investing, and financial activities. NetBank’sprimary sources of funds are deposits, borrowings, prepayments and maturitiesof outstanding loans, sales of loans, maturities of investment securities andother short-term investments, and funds provided from operations. Whilescheduled loan payments and maturing investment securities and short-terminvestments are relatively predictable sources of funds, deposit flows and loanprepayments are greatly influenced by general interest rates, economicconditions, and competition. NetBank invests excess funds in overnight depositsand other short-term interest-earning assets. NetBank can use cash generatedthrough the retail deposit market, its traditional funding source, to offsetthe cash utilized in investing activities. NetBank’s available for salesecurities and short-term interest-earning assets can also be used to provideliquidity for lending and other operational requirements. As an additionalsource of funds, NetBank had availability under existing lines of creditagreements totaling $1.0 billion at June 30, 2002.

 
|                                       |   | **Actual** |    | **For  capital adequacy  purposes** |   | **To be  categorized as  Well Capitalized  under prompt  corrective action plan** |   |
|--------------------------------------------|--------|------------|---------|-------------------------------------|--------|-----------------------------------------------------------------------------------|--------|
| **($ in  000s)**                           |   | **Amount** |    | **Ratio**                           |   | **Amount**                                                                        |   | **Ratio** |   | **Amount** |   | **Ratio** | ** ** |
| **At June 30, 2002**                       |   |       |    |                                |   |                                                                              |   |   |   |   |   |   |   |
| Total capital (to risk-weighted assets)    |   | $          | 247,219 |                                | 12.86  | %                                                                                 | $      | 153,813 |   | 8.00 | % | $ | 192,239 |   | 10.00 | % |
| Core capital (to adjusted tangible assets) |   | $          | 223,567 |                                | 6.82   | %                                                                                 | $      | 131,032 |   | 4.00 | % | $ | 163,905 |   | 5.00 | % |
| Tangible capital (to tangible assets)      |   | $          | 223,567 |                                | 6.79   | %                                                                                 | $      | 49,389 |   | 1.50 | % | N/A |   | N/A |   |
| Tier I capital (to risk-weighted assets)   |   | $          | 223,567 |                                | 11.63  | %                                                                                 | N/A    |   | N/A |   | $ | 115,340 |   | 6.00 | % |
| **At December 31, 2001**                   |   |       |    |                                |   |                                                                              |   |   |   |   |   |   |   |
| Total capital (to risk-weighted assets)    |   | $          | 220,982 |                                | 14.64  | %                                                                                 | $      | 120,775 |   | 8.00 | % | $ | 150,969 |   | 10.00 | % |
| Core capital (to adjusted tangible assets) |   | $          | 202,061 |                                | 7.10   | %                                                                                 | $      | 113,847 |   | 4.00 | % | $ | 142,309 |   | 5.00 | % |
| Tangible capital (to tangible assets)      |   | $          | 202,061 |                                | 7.10   | %                                                                                 | $      | 42,693 |   | 1.50 | % | N/A |   | N/A |   |
| Tier I capital (to risk-weighted assets)   |   | $          | 202,061 |                                | 13.38  | %                                                                                 | N/A    |   | N/A |   | $ | 90,581 |   | 6.00 | % |

 

24

----

 

**PartI. Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

*Interest RateSensitivity*******-**We measure interest rate sensitivity as thedifference between amounts of interest–earning assets and interest–bearingliabilities that mature, reprice, or repay within a given period of time. Thedifference, or the interest rate sensitivity “gap,” provides an indication ofthe extent to which an institution’s interest rate spread will be affected bychanges in interest rates. A gap is considered positive when the amount ofinterest-rate sensitive assets exceeds the amount of interest-rate sensitiveliabilities and is considered negative when the amount of interest-ratesensitive liabilities exceeds the amount of interest-rate sensitive assets. Ina rising rate environment, an institution with a positive gap would see anincrease in net interest income, where an institution with a negative gap wouldsee a decrease. During a period of falling interest rates the reverse is true.

 

The following table sets forth the interest rate sensitivity of ourassets and liabilities as of June 30, 2002:

 
|                                                                       |   | **Less than  Three  Months**                  |       | **Over three  months  through one  year** |   | **Over one  year through  five years** |   | **Over five  years and  insensitive** |      | **Total** |   |
|----------------------------------------------------------------------------|--------|-----------------------------------------------|------------|-------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|-----------|-----------|--------|
| **($ in the 000s)**                                                        |   | **Term to  Repricing, Repayment or Maturity** | ** ** |
| Interest-Earning Assets:                                                   |   |                                          |       |                                      |   |                                   |   |                                  |      |      |   |
| Cash and cash equivalents                                                  |   | $                                             | 45,522     |                                      | $      | —                                 |   | $                                     | —    |      | $      | — |   | $ | 45,522 |   |
| Federal funds sold                                                         |   | 119,185                                       |       | —                                    |   | —                                 |   | —                                |      | 119,185   |   |
| Investment securities                                                      |   | 99,006                                        |       | 34,106                                    |   | 548,239                                |   | 52,694                                |      | 734,045   |   |
| Stock of Federal Home Loan Bank of Atlanta                                 |   | 40,595                                        |       | —                                    |   | —                                 |   | —                                |      | 40,595    |   |
| Loans held for sale*                                                       |   | 928,003                                       |       | —                                    |   | —                                 |   | —                                |      | 928,003   |   |
| Loans receivable                                                           |   | 277,031                                       |       | 359,079                                   |   | 648,035                                |   | 42,305                                |      | 1,326,450 |   |
| Total interest-earning assets                                              |   | 1,509,342                                     |       | 393,185                                   |   | 1,196,274                              |   | 94,999                                |      | 3,193,800 |   |
| Non interest-earning assets                                                |   | —                                        |       | —                                    |   | —                                 |   | 396,623                               |      | 396,623   |   |
| Total assets                                                               |   | $                                             | 1,509,342  |                                      | $      | 393,185                                |   | $                                     | 1,196,274 |      | $      | 491,622 |   | $ | 3,590,423 |   |
|                                                                       |   |                                          |       |                                      |   |                                   |   |                                  |      |      |   |
| Interest-Bearing Liabilities:                                              |   |                                          |       |                                      |   |                                   |   |                                  |      |      |   |
| Interest-bearing deposits                                                  |   | $                                             | 271,532    |                                      | $      | 876,130                                |   | $                                     | 453,348   |      | $      | 151,814 |   | $ | 1,752,824 |   |
| Convertible subordinated debt                                              |   | —                                        |       | —                                    |   | 27,007                                 |   | —                                |      | 27,007    |   |
| Other borrowed funds                                                       |   | 530,613                                       |       | 70,000                                    |   | 550,000                                |   | 25,000                                |      | 1,175,613 |   |
| Total interest-bearing liabilities                                         |   | 802,145                                       |       | 946,130                                   |   | 1,030,355                              |   | 176,814                               |      | 2,955,444 |   |
| Interest-free deposits                                                     |   | —                                        |       | —                                    |   | —                                 |   | 34,859                                |      | 34,859    |   |
| Other interest-free liabilities and equity                                 |   | —                                        |       | —                                    |   | —                                 |   | 600,120                               |      | 600,120   |   |
| Total liabilities and equity                                               |   | $                                             | 802,145    |                                      | $      | 946,130                                |   | $                                     | 1,030,355 |      | $      | 811,793 |   | $ | 3,590,423 |   |
|                                                                       |   |                                          |       |                                      |   |                                   |   |                                  |      |      |   |
| Net interest rate sensitivity gap                                          |   | $                                             | 707,197    |                                      | $      | (552,945                               | )      | $                                     | 165,919   |      | $      |  

(81,815 | ) | $ | 238,356 |   |
| Cumulative gap                                                             |   | $                                             | 707,197    |                                      | $      | 154,252                                |   | $                                     | 320,171   |      | $      | 238,356 |   | N/A |   |
| Net interest rate sensitivity gap as a  percent of interest-earning assets |   | 46.85                                         | %          | (140.63                                   | )%     | 13.87                                  | %      | (86.12                                | )%        | 7.46      | %      |
| Cumulative gap as a percent of cumulative  interest-earning assets         |   | 46.85                                         | %          | 8.11                                      | %      | 10.33                                  | %      | 7.46                                  | %         | N/A       |   |
|                                                                            |        |                                               |            |                                           |        |                                        |        |                                       |           |           |        |  |  |  |  |  |  |  |  |

 

----

* Themajority of loans held for sale have long-term yields, however, they areclassified as less than three months due to forward sale contracts.

 

25

----

* *

*Market Risk -*The Company’s principal business is originatingand purchasing of loans funded by customer deposits and, to the extentnecessary, other borrowed funds. Consequently, a significant portion of ourassets and liabilities are monetary in nature and fluctuations in interestrates will affect our future net interest income and cash flows. This interestrate risk is our primary market risk exposure. During the three months endedJune 30, 2002, the only derivative financial instruments that we entered intowere short-term forward commitments related to loan originations and servicingassets at our mortgage origination subsidiaries. We have no marketrisk-sensitive instruments held for trading purposes. Our exposure to marketrisk is reviewed on a regular basis by our management.

 

The Company measures interest rate risk based on Net Portfolio Value (“NPV”)analysis.  NPV equals the present valueof expected net cash flows from existing assets minus the present value ofexpected net cash flows from existing liabilities. A NPV ratio is determined bydividing NPV by the present value of assets. The following table sets forth theestimated percentage change in NetBank NPV ratio as of June 30, 2002 assumingrate shocks of +300 to -200 basis points:

 

**Limitsand Current NPV Ratios for NetBank, FSB**

 

| **Rate Shock  (in basis points)** |   | **6/30/02  NPV Ratios for  NetBank, Inc.** |   | **6/30/02  NPV Ratios for  NetBank, FSB** |   |
|-----------------------------------|--------|--------------------------------------------|--------|-------------------------------------------|--------|
| +300                              |   | 10.52                                      | %      | 7.55                                      | %      |
| +200                              |   | 10.79                                      | %      | 7.87                                      | %      |
| +100                              |   | 11.09                                      | %      | 8.23                                      | %      |
| Flat                              |   | 11.21                                      | %      | 8.37                                      | %      |
| -100                              |   | 11.18                                      | %      | 8.36                                      | %      |
| -200                              |   | 12.18                                      | %      | 9.49                                      | %      |

 

Computation of prospective effects of hypothetical rate changes isbased on many assumptions, including relative levels of market interest rates,loan prepayments and deposit decay. They should not be relied upon asindicative of actual results. Further, the computations do not contemplatecertain actions management could undertake in response to changes in interestrates.

 

**Part II.  OTHER INFORMATION**

 

#### **Part II. Item 1: LEGAL PROCEEDINGS**

 

Lindhe etal.v. NetBank, Inc. and CompuBank, N.A., C.A. No.C01-0822R (Western District of Washington)

 

On June 4,2001, NetBank, Inc. was served with a class action complaint filed by PerMartin Lindhe and ShellyRae Norbeck in the United States District Court for theWestern District of Washington.  The complaint alleged violations of thefederal Expedited Funds Availability Act, and state law claims of breach ofcontract, breach of common law duties, and conversion arising from theCompany’s acquisition of deposit accounts from CompuBank, N.A.  On June 5,2002, the Court entered a Final Order and Judgment approving a classsettlement.  The time for appeal of thesettlement has expired and all payments and other actions required by the FinalOrder and Judgment have been completed. The total payments to class members and class counsel under the terms ofthe settlement were approximately $200,000.

 

Illinois UnionInsurance Co. v. Commercial Money Center, Inc., et al., Case No. CV-01-0685-KJD-RJJ (District Court of Nevada)

 

On December 3,2001, NetBank, FSB was served with a complaint filed by Illinois UnionInsurance Company in the United States District Court for the District ofNevada.  The complaint seeks rescission of certain insurance policiesrelating to leases purchased by NetBank, FSB and restitution and recovery ofany benefits paid to NetBank, FSB.  NetBank, FSB has filed a motion todismiss the complaint, which is currently pending with the Nevada court.  NetBank, FSB, in turn, has filed a separateaction in the United States District Court for the Northern District of Georgiaagainst Commercial Money Center, Inc. (“CMC”), the originator, seller, andsubservicer of the leases, and Illinois Union, Safeco Insurance Company ofAmerica, and Royal Indemnity Company, the insurance companies that issuedsurety bonds and insurance policies guaranteeing payment of the income streamfrom the leases and that also served as master servicer of the leases.  The NetBank action alleges claims for breachof contract, fraud, and bad faith, and seeks, among other things, payment underand enforcement of performance bonds and insurance policies issued by theinsurance and surety companies.  The Georgia case has been transferred tothe District of Nevada and will likely be consolidated with the Nevada 

 

26

----

 

action brought by IllinoisUnion.  A motion is currently pendingwith the Judicial Panel on Multi-District Litigation to consolidate the actionbrought by NetBank, FSB with several other cases pending around the countryinvolving other investors who are seeking to enforce surety bonds and insurancepolicies relating to leases sold by CMC. In the meantime, CMC has filed for bankruptcy protection in the UnitedStates Bankruptcy Court for the Southern District of Florida.  NetBank, FSB intends to vigorously pursueits claims against the insurance companies. At this time, we are unable to express an opinion as to the likelihoodof loss, or the amount or range of potential loss, with regard to this matter.

 

In reCommercial Money Center, Inc./Clayton v. Commercial Money Center, Inc.,Case No 02-24068 BKC RBR (Bankr. C.D. CA)

 

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 recently amended theircomplaint to name NetBank, FSB, several other investor banks, and severalsurety companies as co-defendants in the action.  After CMC filed for bankruptcy, Royal Indemnity Company removedthe action to the bankruptcy court in the Central District of California, andthe plaintiffs have a filed a motion to remand the case back to statecourt.  The motion is scheduled to beheard by the bankruptcy court on September 11, 2002, but has tentatively ruledthat the case should be remanded to state court.  NetBank, FSB intends to vigorously defend the case and to pursuerecovery against Safeco Insurance Company, Royal Indemnity Company, andIllinois Union Insurance Company for any damages and costs incurred in thiscase. At this time, we are unable to express an opinion as to the likelihood ofloss, or the amount or range of potential loss, with regard to this matter.

 

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

 

On June 27,2001, the Company was served with a complaint for a declaratory judgment filedby *inter*StateNetBank in the District of New Jersey challenging the “NETBANK®” servicemark.  The Company answered and counterclaimed for trademark infringementon July 13, 2001.  Factual discovery had been scheduled throughJanuary 31, 2002, with expert discovery to have been completed byApril 30, 2002.  Discovery was stayed pending a ruling on *inter*StateNetBank’s November 19, 2001 motion for summary judgment, which claimedthat “NETBANK” is generic for all banking services delivered over the Internet.The Company is awaiting a ruling on the motion, which it anticipates will bedenied. The Company also is requesting that the stay of discovery be lifted.

 

The Companyintends to vigorously defend against *inter*State NetBank’s challenge of the“NETBANK®” service mark and will pursue its counterclaims for trademarkinfringement, cyberpiracy and unfair competition. While there is a possibilityof an adverse outcome for the Company, at this stage of the matter, we cannotfairly determine the likelihood of an adverse outcome.  However, in theevent of an adverse outcome, it is unlikely that there would be a monetary lossaside from the loss in value of the intellectual property rights in theNETBANK® registration.

 

NetBank, Inc.and NetBank v. The RiverBank, Case No. 1:00-CV-2154 CC(Northern District of Georgia)

 

The Companyhas received a consent judgement as part of the settlement of this case reachedin a conference with the magistrate judge in Minnesota on May 6, 2002.  The case is more fully described in theCompany’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002.

** **

The Company has also sent numerous letters to other entities thatappear to be infringing the Company’s rights in the NETBANK® service markand variations of that mark.  The letters demand that the entitiesimmediately cease and desist from any such infringing activities.  If the entities refuse to cease the infringement,the Company intends to file additional lawsuits similar to those that havealready been filed.  Given the fact thatthe NETBANK® registration has reached incontestable status, itscancellation is unlikely.  For thisreason, future litigation to enforce trademark rights will not be reported.

 

#### **Part II.  Item 4:  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

On May 23, 2002, NetBank held its AnnualMeeting of Shareholders at which the following actions were taken:

 

Approved the proposal to elect the directornominees named below:

 

Ward H. Clegg:                      For: 39,226,290   Withheld: 169,017

 

J. Stephen Heard:                  For: 39,059,365   Withheld: 335,942

 

27

----

 

W. James Stokes:                  For: 39,226,537   Withheld: 168,770

 

Douglas K. Freeman:            For: 32,648,978   Withheld: 6,746,329

 

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

 

For: 38,558,545 Against: 812,223   Abstain: 24,539

 

Disapproved a proposal for the amendment tothe articles of incorporation, which required a “for” vote of the majority ofshares issued and outstanding:

 

For: 23,707,332  Against: 3,921,942  Abstain:  73,238  Broker non-votes: 11,692,795

** **

**Part II. Item 6: EXHIBITS AND REPORTS ON FORM 8-K**

 

(a)           Exhibits

 
| 10.1 |   | Employment  agreement by and between Theodore Brauch and NetBank, Inc. dated April 1,  2002.   |
|------|--------|------------------------------------------------------------------------------------------------|
| 10.2 |   | Employment  agreement by and between Gerald W. McCoy and NetBank, Inc. dated April 1,  2002.   |
| 10.3 |   | Employment  agreement by and between Steven F. Herbert and NetBank, Inc. dated April 1,  2002. |
| 10.4 |   | Employment  agreement by and between Charles E. Mapson and NetBank, Inc. dated April 1,  2002. |
| 10.5 |   | Employment  agreement by and between William M. Ross and NetBank, Inc. dated April 1,  2002.   |
| 99.1 |   | Certification by Chief Executive Officer  and Chief Financial Executive                        |

 

(b)           Reports on Form 8-K

(i)                                     Wefiled a Current Report on Form 8-K on April 8, 2002, as amended on June 13,2002, and June 14, 2002, reporting the pro forma financial statementsconcerning the acquisition of Resource Bancshares Mortgage Group, Inc., whichwas consummated on March 31, 2002.

 

**SIGNATURE**

 

Pursuant to the requirements of theSecurities Exchange Act of 1934, the registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized.

 
|              | NETBANK, INC.               |
|-------------------|-----------------------------|
|              | By:                         | /s/ Steven F. Herbert |   |
|              | Steven F. Herbert           |
|              | *Chief Financial Executive* |
|              |                        |
| Dated: 08/14/2002 |                        |

 

28

----