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Wednesday, July 26, 2006

Solely Internet Banking Woes: NetBank Stinks Up the Room

Offering higher CD deposit rates than most and not having banking branches has its costs.

NetBank (NTBK) disclosed much wider preliminary losses than expected, and the company lowered guidance. What is puzzling is why the stock is only down about 6%.

Regardless of if this is an ONLINE bank as opposed to bricks and mortar, this is a crummy story. Banks are not supposed to lose money. It doesn't matter if these guys are the Holy Grail model of Internet banking or not. A money-losing bank just doesn't make sense.

This customer data shows a 5th consecutive month of declining numbers on customers. It posted June 30 customer numbers yesterday at a total of 275,632; broken down as 26,574 business and 249,058 retail. The business customers peaked in November 2005 at 28,013 and the retail customers peaked in January 2006 at 257,982. You don't even want to know what the mortgage numbers show you.

What is even worse is that their ATM's are even lower on both a proprietary ATM basis and a third-party owned basis. Now that is just ludicrous. Did they pick such low traffic areas that no one used them? ATM's are just a pure cash-cow. About the only time anyone turns away from an ATM is if the ATM charges $2.50 or more for a transaction that isn't part of you bank, and even then most just bite the bullet and take out the money anyway.

The company said in their SEC filing that they have grown and showed increasing metrics, but it just doesn't look that way. The spreadsheet is tiny and that may be part of it, but that is also bothersome. If these guys are going to continue showing shoddy internal numbers like this then they really need to switch to quarterly numbers. That way the bad news will only be every 3 months instead of every month.

About the only saving grace here may be that the company was "on the list" of potential buyout candidates IF the excessive valuations ever came in to reasonable levels that a financial institution could stomach an acquisition of it. It never made it onto our BAIT SHOP because of valuations and prospects, and at current levels it will remain off it.

Over the last year the stock has slid from $10 to just under $6.00 now. It was almost as high as $12 two years ago, and was over $15 back in 2002. Stock prices are not any implication of value, and that is the issue. It COULD be feasible that with a small market cap of $272 million that someone may just go ahead and pay up for the depositors and customers, but this would likely be fought by shareholders that have been LONG AND WRONG for the time being. Financial companies do not like to buy money-losers either, as that hurts their comparative multiples and performance measures to peers.

We’ll have to go pick these numbers apart further, but they need a feasibility consultant in a serious way. Something is just wrong, no matter how you cut it. The latest available balance sheet before these losses would put this company under its book value and under its net tangible assets, but that is BEFORE this negative news. It is possible that someone would look at them for that reason, but if they are going to lose money this year and only have a small earnings number in 2008, then using the “old” book value may be irrelevant as gold to a dead man. Traders are likely comparing this data to the March 31 balance sheet, and that may be the only thing keeping this one from dropping further.

Another problem here may be that they truly compete against every financial institution now. What bank and credit union doesn’t offer every online service you would use? Only the tiny community centers presumably.


NetBank CDs below show the comparative data as to why having higher rates can hurt you.

NetBank CDs Rate APY*
6-Month CD 4.93% 5.05%
1-Year CD 5.31% 5.45%
18-Month CD 5.10% 5.23%
2-Year CD 5.35% 5.50%
3-Year CD 5.13% 5.26%
4-Year CD 5.14% 5.27%
5-Year CD 5.19% 5.33%
Nation Avg** Rate APY*
6-Month CD 3.41% 3.47%
1-Year CD 3.73% 3.80%
2-Year CD 3.87% 3.94%
3-Year CD 3.86% 3.94%
5-Year CD 3.93% 4.01%

Jon C. Ogg
July 26, 2006
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