Online Bank NetBank Folds and ING Bank Will Acquire $1.5 Billion of Its Deposits

Implications: NetBank, with total assets of $2.5 billion and $2.3 billion in total deposits as of 6.30.07, was closed on 9.28.07 by the Office of Thrift Supervision (OTS) and the FDIC was named receiver by the OTS of NetBank's assets. The FDIC's Board approved the acquisition of the insured deposits of NetBank by ING Bank. NetBank was an Internet bank without any physical branches and depositors of NetBank will automatically become depositors of ING Bank. ING Bank has agreed to assume $1.5 billion of the failed bank's insured deposits for a 1% premium and will purchase $724 million of NetBank's assets. NetBank also had approximately $744 million in brokered deposits and the FDIC will pay the brokers directly for the amount of their insured funds. The FDIC will retain the remaining $1.1 billion in assets for disposition in the future, including NetBank's Leasing Division. EverBank entered into a Loan Purchase Agreement with the FDIC to purchase about $700 million of mortgages held by NetBank.

Analysis: NetBank was shutdown by the Office of Thrift Supervision (OTS) on 9.28.07 and under the supervision of the OTS, the FDIC has been charged with disposition of NetBank's total assets and deposits, as a result of NetBank folding. NetBank was touted as the Internet revolution whose online only financial services operation was going to make traditional banks obsolete. However, NetBank sustained significant losses in 2006 in the subprime market, which led to its unraveling. NetBank is the second FDIC-insured bank to fail in 2007. The FDIC Deposit Insurance Fund covered the insured deposits of depositors of NetBank and the estimated costs to the Fund was $110 million.

1.  Effective on 10.1.07, customers of NetBank was able to access their insured deposits via the Internet and will continue to utilize NetBank's website to transact business. NetBank's Business Finance will continue operations post shutdown

2.  The NetBank failure is the largest since 1993 and is the first bank failure tied to trouble in the subprime market. NetBank had high exposure to the subprime mortgage market and could not sell its non-performing units

NetBank's failure is viewed as a "isolated" incident, however, NetBank's failure was primarily due to early payment defaults on loans sold, weak underwriting, poor documentation, a lack of sufficient controls and failed business strategies. Perhaps ING Bank may salvage the NetBank brand or start its own Internet revolution.