Two of the three businesses that until recently sustained NetBank Inc. stumbled in the second quarter, sending income 40% below the year-earlier level, the Atlanta company said Wednesday.
Transaction processing, which along with banking sustained it in the first quarter after the mortgage business slipped, moved into the red in the second. In all, the company earned $8.5 million, or 18 cents a share.
Though transaction processing revenue rose 4%, to $6.9 million, that figure was eclipsed by $8 million of expenses, mostly tied to expansion in automated teller machines. The company added 1,513 of them during the quarter, and the transaction unit lost a total of $1.1 million, after a pretax gain of $172,000 in the first quarter.
But in an interview, chairman and chief executive Doug Freeman insisted that “the big thing to look at in the transaction processing side is the revenue growth.”
Though the company is still spending heavily to add ATMs, revenue is growing steadily, he said. Transaction processing will provide “a third of our revenue in the next four to seven years,” he said.
As for NetBank’s mortgage business, “we’re about where we want to be” and are making no changes despite the industrywide slowdown, Mr. Freeman said.
The banking unit was the standout for NetBank in the second quarter, contributing 36% of total income.
Legal expenses rose in the quarter, to $2.7 million, because of ongoing litigation over the company’s investment in the now-bankrupt lender Commercial Money Center Inc.
Mr. Freeman said Wednesday in an earnings call with analysts that he is confident of a favorable ruling and hopes to recover more than $110 million plus damages — which he refused to estimate. “I prefer not to get into the legal prediction business,” he said.
Income is likely to be flat in the current quarter, which will nevertheless be “a bit more challenging,” Mr. Freeman said.
Gwenn Bezard, a senior analyst for the Boston market research firm Celent Communications LLC, said that NetBank may not be able to improve its performance with its current business model.
“NetBank has been trying over the last few years to create a mix of businesses and position itself with a very specific model,” Mr. Bezard said. Though this has been profitable, the strategy is beginning to show its limitations, he said.
The company proved in the first quarter that its growing ATM network can be profitable. NetBank’s 6,994 machines constitute the nation’s second-largest bank-operated ATM network, the company says.
But Mr. Bezard noted that there are 350,000 ATMs nationwide, and that 40% of them are not owned by banks.
“It’s a decent business, but in the U.S. it’s very competitive,” he said. “It’s quite saturated, and you have to make acquisitions if you want it to grow.”
Because NetBank has no branches, an extensive ATM network is an especially critical element in maintaining needed physical contact with customers.
Mr. Bezard said NetBank needs to create a special niche to prosper. Some Internet and direct banks abroad have done so, he said.
For example, IY Bank Co. Ltd. in Japan, a unit of Ito-Yokado Co., the country’s second-largest retailer, “is making over 90% of its profits by providing an ATM network to other banks,” Mr. Bezard said. It has done this by being “one of the first to provide ATMs in convenience stores,” he said. “Before that it was unknown.”
In the United Kingdom, Tesco Personal Finance, which is owned by the supermarket giant Tesco PLC and Royal Bank of Scotland Group PLC, found its niche by letting customers buy banking products in the checkout line, Mr. Bezard said. The bank had 4 million customer accounts at the end of 2003, but regulations would prevent a similar model from working in the United States.
Can NetBank create a similarly successful niche? “That would be a million-dollar answer,” Mr. Bezard said.
