NetBank opened its virtual doors five years ago last month, a time when skepticism about online-only enterprises had yet to give way to adoration of all things Internet-an environment that, thanks to hindsight, we now know would come to be described as "irrational exuberance."
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Through it all-skepticism, exuberance and market meltdown-NetBank's founders and managers remained stubbornly rational; in fact, some observers might criticize the thrift for being too conservative during its formative years.
"I tell people I'm old-fashioned enough to believe that running a business is about making a profit," says D.R. Grimes, NetBank's vice chairman and chief executive officer. "I suppose one of the things that is different about NetBank is that, from the beginning, we felt our goal must be to operate profitably."
The online bank is a wholly owned subsidiary of NetBank Inc., which was incorporated in Georgia in February 1996, opening for business on the Internet the following October. In the quarter ended June 30, 1998, NetBank reported a profit, and it has been profitable ever since. Grimes notes that profitability actually was achieved initially in March of that year.
Headquartered in Alpharetta, an Atlanta suburb, NetBank went after customers with aggressive-but not outlandishly high-interest rates on deposits, free checking and online bill payment, and the cheapest marketing strategy its managers felt could be effective. The latter took the form of Internet advertising and marketing alliances with Intuit (maker of Quicken financial software), AOL, the Microsoft Network, Yahoo and Ameritrade, among others.
Most of those early initiatives were funded by NetBank's initial public offering, which raised about $35 million in the summer of 1997.
The online institution received something of a birthday present last month, when Arlington, VA-based Friedman, Billings, Ramsey & Co. Inc. initiated coverage of holding company NetBank Inc.'s stock (NASDAQ: NTBK) with a "buy" rating. FBR noted that "NetBank is the largest federally insured bank operating exclusively on the Internet and has distinguished itself as the country's first profitable Internet-only bank."
More to the point, say the analysts at FBR, which makes a market in the stock, NetBank is likely to enjoy "substantial earnings growth" for the next several years.
Grimes, meanwhile, acknowledges that perhaps NetBank could have been growing faster than the approximately 150% rate its steady increase in deposits represented last year.
"But, you know, I think for most businesses it's difficult to grow by three *hundred* or four *hundred* or 500 percent a year and be profitable; and one of the reasons is that you have to spend most on customers when they are new. Over time, the cost of serving a customer goes down."
This year, he says, NetBank is likely to show overall growth in the 50% to 60% range, "and profitability will be better."
"We want to see that trend continue," adds the CEO. "We've been profitable, but we want to become more profitable, so we want to reduce our rate of growth down to about 50 percent. You just can't grow at a 200 percent rate and remain profitable for very long."
NetBank currently has about 230,000 accounts and expects to hit 240,000 by year's end. As a consumer bank, nearly all of its business is retail, with a very high percentage of checking accounts vs. savings. Grimes is quick to point to NetBank's turnover rate among checking accounts-less than 4%-"or about one-fifth the turnover rate you see in a traditional bank."
One of the greatest challenges facing NetBank since its inception, Grimes says, is the "almost infinite marketplace" it serves. The online institution, which has no branches, has customers in all 50 states and 20 foreign countries.
"As a practical matter, no company has had a market area equaling what you can reach on the Internet," Grimes says. "So many companies have faced this huge market and have had to decide not to grow as rapidly as they could because of an insistence on profitability. It requires patience."
As one might expect of an Internet-only bank, Grimes wants the company to be known for innovation and technological acumen in serving customers; yet here, too, he tempers his enthusiasm with practicality.
"We want to use technology to achieve efficiency in our operations and excellence in customer service," he says. "But, we have 230,000 accounts here, so you can't decide one day that this new standard is better and just change it."
This past spring, about two weeks after acquiring CompuBank, another Internet-only bank, NetBank Inc. announced that it agreed to purchase Market Street Mortgage, a subsidiary of Republic Bancorp Inc.
Based in Clearwater, FL, Market Street has offices in 11 states, according to Friedman, Billings, Ramsey & Co., and produced about $1.6 billion in mortgage originations last year. While observing that the purchase "strays from the company's pure Internet strategy by adding a brick-and-mortar" mortgage operation to its business model, the brokerage and investment firm views the acquisition favorably "because it will diversify the company's income stream and add a significant source of fee-based revenue."
Net loans make up more than 70% of NetBank's assets, FBR notes, although "historically, the company has purchased a large portion of its loans through secondary channels, as its infrastructure is more conducive to generating deposits than loans."
Grimes points to NetBank's new position as "the 38th largest mortgage company in America" as further evidence that the online thrift is a full-service institution.
And if the CEO avoids hyperbole, whether in talking with reporters or in running the bank, he is unapologetic in his enthusiasm about the future. Pointing to Jupiter Media Metrix estimates that 44 million households will bank online by 2005, up from 12.7 million at the end of last year, Grimes says NetBank is well positioned for strong growth in the future.
And while he may not have seen new figures from TowerGroup as yet, Grimes undoubtedly will rejoice in the Boston-based firm's latest research on e-banking. Early predictions of explosive growth in online financial services led to major disappointments, the TowerGroup analysts note in their new report, titled "Internet Banking in North America: Moving to Where the Action Will Be." Nonetheless, for banks that continue to expand the range of services they offer online and manage to do so with unerring reliability, the Internet continues to represent an extremely lucrative source of growth.
Already, TowerGroup researchers found, nearly 44 million households do a substantial portion of their banking through non-branch, or remote, channels. And moreover, nearly 60% of the 19 million U.S. households that are "deemed affluent" are primarily remote banking users.
Clearly, such numbers bode well for NetBank's next five years.
