NetBank Inc. fell into the red in the fourth quarter as it established a reserve for nonperforming leases and two of its three businesses lost money, executives said Wednesday.
Doug Freeman, who became NetBank's chief executive in April 2002, blamed the previous management's strategy of buying assets from other companies rather than originating loans.
NetBank, of Alpharetta, Ga., set aside $29 million before taxes to cover potential losses in lease receivables. The reserve, amounting to 38 cents a share after taxes, essentially wiped out the company's quarterly operating profit.
NetBank reported a net loss of $17.7 million, versus net income of $10 million, or 21 cents a share, a year earlier.
Net income for the year fell 92%, to $4.2 million, or 9 cents a share.
Of its three main businesses - banking, mortgages (which it calls "financial intermediary"), and transaction processing - only the last was profitable in the fourth quarter.
NetBank has been developing the processing operations to provide a steady income stream that will offset the cyclicality of mortgage lending.
The need for the reserve stemmed from deals in 1999 and 2000, when NetBank bought leases from Commercial Money Center Inc. (which has since filed for bankruptcy protection).
NetBank stopped receiving payments on the leases in December 2001, and in the first quarter of 2002 it sued the insurers that had guaranteed them.
NetBank said in a December regulatory filing that it would create the reserve because two other buyers of CMC lease receivables had settled with the insurers.
In its earnings announcement Wednesday, NetBank said it is still confident of recovering the investment.
"The CMC decision did adversely affect our company's book value," Mr. Freeman said in a conference call with analysts. But "we can work through this decline in the coming quarters," he said.
In a subsequent phone interview with American Banker, Mr. Freeman, who is also chairman, said that NetBank had the connection with CMC because of the former approach of buying loans rather than generating them through new sales.
NetBank no longer buys loans, so "we don't see any more CMCs on our horizon," he said. "We wish this one was over."
Though banking was not profitable, the business narrowed its full-year pretax loss to $11 million in 2004, from $61 million in 2003. Excluding the charge, the segment would have had a $17.9 million pretax profit for 2004.
Gwenn Bezard, a research director at AITE Group LLC of Boston, said NetBank's three distinct business lines may be stunting its long-term growth, even though the focus does help overcome revenue slumps.
"They have a strategy that is too much like the big banks," which can handle substantially different operations, Mr. Bezard said. NetBank does not "have the scale to make it pay off."
The diversity is "at odds with very successful strategies," he said.
Mr. Bezard cited ING Group NV of Amsterdam, whose Web bank initially offers just one thing, a savings account, in the nine countries in which it operates.
The Dutch company has offered additional products in each market only when it "started to get some traction," he said.
