WASHINGTON — The Office of Thrift Supervision announced Friday that it had closed NetBank and appointed the Federal Deposit Insurance Corp. as the receiver for the $2.5 billion-asset Alpharetta, Ga., thrift.
The failure was the FDIC’s biggest since the end of the savings and loan crisis 14 years ago and the first since turmoil in the subprime mortgage industry took center stage this winter.
NetBank, which had a high mortgage exposure and could not complete efforts to sell nonperforming units, was shut because of “early payment defaults on loans sold, weak underwriting, poor documentation, a lack of proper controls, and failed business strategies,” the OTS said.
Last year it issued a formal enforcement action directing NetBank “to correct its operating deficiencies and enhance its capital position,” the agency said. “While the institution continued to operate in excess of minimum capital standards, the actions taken to address these problems were unsuccessful, and it became clear that high operating expenses, combined with continuing losses, were jeopardizing the institution’s viability.”
FDIC and OTS officials stressed the failure did not signal broader problems among banks and thrifts.
“This is really an isolated situation,” said Kevin Petrasic, an OTS spokesman. “What was going on at this institution is not something that’s going on at any of our other institutions.”
NetBank’s problems “went beyond subprime,” Mr. Petrasic said. The thrift operated smoothly as an Internet bank, but it could not maintain its growth when expanding into a mortgage banking operation, he said. “They just did not get a handle on the loans that they were making,” he said.
The agency said it shut the thrift, which specialized in Internet banking, after its efforts to sell itself to EverBank Financial Corp. fell through last week.
“The institution had no remaining prospects for raising capital and achieving profitability,” the agency said. “Accordingly, the OTS exercised its authority under the Home Owners’ Loan Act to appoint the FDIC as receiver of the institution.”
NetBank Inc., the thrift’s parent company, also said Friday it was filing for bankruptcy.
The FDIC estimated the cost of the thrift failure to the Deposit Insurance Fund at $110 million. NetBank’s $1.5 billion of insured deposits were assumed by ING Bank FSB of Wilmington, Del., which also will buy $724 million of NetBank’s assets.
ING paid a 1% premium on the insured deposits it assumed. That transaction did not include about $744 million of NetBank’s brokered deposits, for which the FDIC will pay brokers their insured amounts, or about $109 million in 1,500 deposit accounts that exceeded the insurance limit.
In addition, the FDIC said it would pay NetBank’s depositors half of their uninsured balances immediately.
“Customers of NetBank should have confidence and security knowing that they will have access to their insured funds in a timely and orderly manner,” FDIC Chairman Sheila Bair said in a press release.
Industry representatives also rushed to say problems at NetBank were isolated. “It’s a sad day for NetBank, but insured depositors should know that their money is safe,” said Ed Yingling, president of the American Bankers Association. “It’s important to remember that the banking industry is extremely healthy and profitable.”
David Barr, an FDIC spokesman, said institutions were still sufficiently capitalized to withstand weaknesses.
“Earnings are good, bank capital is close to historically high levels, and banks have strong reserves for loan losses,” Mr. Barr said.
NetBank’s problems began before the credit crisis. Its holding company, NetBank Inc., retained a high loan exposure after purchasing mortgage subsidiaries in 2001 and 2002. Challenged on the origination side, the company endured losses over several quarters. It lost $11 million in the first quarter of last year.
Under pressure from regulators, the company began to shed units. In the past year it has divested the lending subsidiary Meritage Mortgage, closed a banking software unit, and sold some loans held by Beacon Credit Services, a vehicle-financing subsidiary.
But what would have been the thrift’s true savior, a planned sale of its Internet banking division to EverBank, disappeared after the Jacksonville, Fla., company walked away from the transaction. EverBank said that NetBank did not meet certain conditions. The deal fell apart even though parts of it had already closed.
In July, EverBank assumed responsibility for NetBank’s $3.2 billion mortgage servicing portfolio.
At the end of the second quarter the dollar value of NetBank loans 30 to 89 days past due rose 157% from a year earlier, to $39 million. Delinquent mortgages alone rose 238%, to $29 million.
NetBank was the largest failure since Western FSB of Marina Del Ray, Calif., was closed in June 1993 with $3.8 billion of assets and was then managed by the old Resolution Trust Corp. (For the FDIC, it is the largest failure handled since December, 1992, when Meritor Savings Bank of Philadelphia failed with $4.1 billion of assets and $2.9 billion of deposits.)
The last failure comparable in size to NetBank’s was the failure of Superior Bank of Hinsdale, Ill., in July 2001 with $2.3 billion of assets and $1.6 billion of deposits. That failure cost the FDIC $428 million and led to congressional hearings and scrutiny of regulators over whether the agency could have done more to prevent it.
Recently the FDIC has not had to clean up many failures. The February failure of the $15 million-asset Metropolitan Savings Bank in Pittsburgh was the agency’s only resolution in more than three years. NetBank also is the first institution with over $1 billion of assets to fail since 2002.
