Article

NetBank shifts strategy

Drop in profits provokes change.

January 22, 2007 by Tracy Kitten — Editor, AMC

  

Last year was a tough one for Alpharetta, Ga.-based NetBank Inc. The online bank-mortgage group hybrid, founded more than 10 years ago, is switching its gears to adjust under economic pressures.

 

During the first three quarters of 2006, NetBank reported net losses totaling $115.7 million, a negative $2.50 per share, compared to a net loss of $1 million, a negative 2 cent per share, in 2005.

 

Earlier in January, NetBank announced the private sale of 6.5 million shares of its common stock. The stock sold for $3.90 per share, bringing in $23.7 million.

 

That stock sale is expected to help pull the company back to profitability.

 

When NetBank reported its 3Q earnings in November, it blamed about half of its income losses on charges associated with reorganization - an effort NetBank spearheaded in October when it appointed its new chief executive, Steven Herbert.

 

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Herbert came in with a plan to refocus the company on its core competencies: banking and the conforming mortgage business. The plan in October was to return the company to profitability within three to six months. NetBank hasn't reported profits since 2004; in 2005, it broke even.

 

But the plan to return to a core competency leaves little room for NetBank's ATM and transaction processing subsidiary, Jackson, Miss.-based NetBank Payment Systems. Where NetBank's former head, Doug Freeman, saw NPS as a way to diversify NetBank, Herbert sees it as a complementary business, not a core one.

 

Where does NPS fit?

 

NetBank has openly said it will sell the ATM subsidiary, whose network comprises 8,337 ATMs, if the offer price is right. But Matthew Shepherd, NetBank's director of corporate communications, says the company is not going to be overzealous.

 

"There is real value there in the ATM business," Shepherd said. "We truly believe we will find a partner that values the whole (ATM) business. And, again, we are not deadest on selling it. We would only do so if it made sense."

 

The number of ATM transactions NPS processed during the third quarter actually increased 2.5 percent from 2Q. And revenue for the transaction-processing segment hit $5.5 million, up from $5.2 million the previous quarter.

 

But NPS reported a net loss because of a nearly $3 million increase in expenses from the previous quarter - expenses associated with restructuring.

 

Like the parent, NetBank, NPS too has been trimming the fat in an effort to operate more efficiently. Last year, NPS had a staff of 80; today it has a staff of 64.

 

"I think we're an extremely healthy business," said DeLone Wilson, president of NPS. "We have a nice-size portfolio; our revenue is extremely diversified throughout the portfolio, so there is not a lot of real risk of our revenue going away. And I think we have an opportunity to add terminals through organic means, now that we're getting better at managing our costs and attrition."

 

Wilson is one executive who is staying with the business. He says NPS is committed to not merely stabilizing but growing organically.

 

"We are still out there every day trying to grow the business through organic means," Wilson said. "But, obviously, when you're in this situation, you have to stabilize - when you have your company out there for possible sale."

 

Whatever NetBank decides to do with its ATM segment will likely be announced by April, when the six-month turnaround deadline bell starts to ring.   

 

The company's 4Q earnings calls is scheduled for Feb. 21 at 10 a.m.