NetBank Inc. said it lost money last year because of stiff competition in its mortgage business, and it expects those problems to continue this quarter.
The Atlanta company announced Monday that it had lost $180,000 in 2005, compared with a $4.2 million profit a year earlier.
For the fourth quarter, NetBank posted net income of $895,000, or 2 cents a share, compared with a net loss of $17.7 million, or 38 cents a share, for the fourth quarter of 2004.
The biggest drag on earnings was NetBank’s mortgage business, which lost $7.8 million before taxes in the fourth quarter. Steven F. Herbert, the company’s chief finance executive, said in a conference call with analysts that price competition for nonconforming mortgages was severe last quarter and has hardly improved this quarter.
“Pricing is better,” he said. “It has moderated from irresponsible to just irrational.”
He also told analysts that their first-quarter earnings forecasts for NetBank — ranging from a loss of a penny a share to an 8-cent profit — are “probably a little too optimistic.”
Analysts said on the call that NetBank’s retail banking business could face similar pricing pressure. For example, ING Bank FSB, a unit of ING Group NV of Amsterdam, has long offered a high-yield Internet-only savings account, and last year Emigrant Bancorp of New York and HSBC Holdings PLC’s U.S. subsidiary launched similar depository products with similarly high yields.
Howard P. Milstein, Emigrant’s president, chief executive, and co-chairman, has said he plans to offer higher rates than any of his competitors. One of the ways he can do so is to save money on marketing by advertising on the sides of buildings he owns.
Douglas K. Freeman, NetBank’s chairman and chief executive, told analysts that his competitors are “paying up for liquidity, substantially above what we could justify paying, to grow their franchise.”
However, he also said that NetBank’s 3-year-old diversification strategy, which is meant to offset such dismal earnings in a single business line, is still working. (Besides its mortgage and banking businesses, NetBank also has a transaction processing unit.)
“The vision we laid out for the company three years ago is absolutely the right one,” he said on the call.
Mr. Freeman said his Internet banking competitors offer better deposit rates than NetBank. “If a customer only cares about price, chances are pretty good there are other places they can go and get a better price.”
But NetBank’s strategy is based on more than just interest rates, he said. “If you need any kind of service, or you’d like help getting money into and out of the bank, they don’t offer that.”
For example, NetBank and HSBC permit customers to withdraw money through automated teller machines, but ING and Emigrant do not. NetBank also lets customers send deposits overnight to the bank for free through United Parcel Service Inc.’s stores through a service it calls QuickPost.
NetBank introduced QuickPost last March, and said in August that 22% of the deposits it received by mail — and 32% of the funds — came through QuickPost.
“We don’t intend to be a product player,” Mr. Freeman said. “We intend to be a distribution conduit player.”
Samuel Caldwell, a research analyst and vice president with Keefe, Bruyette & Woods Inc., said NetBank’s fourth-quarter earnings were “significantly worse” than its earnings from previous quarters, in large part because strong competition is driving down mortgage prices.
The management team is “doing all the right things, all the things that they can, given the businesses that they’re in,” he said. “It’s just a tough environment.”
Mr. Caldwell predicted that, given the cyclical nature of the mortgage industry, it would be at least six months before there is any significant improvement in the online banking company’s mortgage unit. He also said NetBank is “getting squeezed from both sides,” because it is also facing pricing pressure in online banking.
