NetBank, Inc. (NTBK)
Interview with:
Douglas Freeman, Chairman and CEO
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NetBank® (, the country's first commercially successful Internet bank.

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NetBank’s Triple Threat: A management team with hundreds of years of banking experience; a unique business model and a strong market position

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Bank Holding Company

NetBank, Inc.

11475 Great Oak Way, Ste. 100
Alpharetta, GA 30022
Phone: 770-343-6006

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Douglas Freeman
Chairman and
Chief Executive Officer

Interview conducted by:
Lynn Fosse
Senior Editor
May 2003

Bio of CEO:
Douglas K. Freeman, Chairman and Chief Executive Officer
Douglas (Doug) K. Freeman has served as Chief Executive Officer of NetBank, Inc. since April 2002, following the company’s acquisition of Resource Bancshares Mortgage Group, Inc. He was named Chairman of NetBank, Inc.’s Board of Directors in January 2003. He is leading the company’s effort to reengineer the traditional banking model to meet the needs of a rapidly changing consumer market. Previously, Freeman had served as Chief Executive Officer of Resource Bancshares for more than two years.

Freeman has more than 30 years of experience in the financial services industry. He has held senior-level positions at major regional and national institutions. These include President of the Consumer Finance Group at Bank of America; President of the Consumer Finance Division at NationsBank, N.A.; Chief Corporate Bank Executive and Chief Consumer Bank Executive at Barnett Bank; and Executive Vice President of Business Banking at Wells Fargo Bank.

Freeman serves on the advisory boards of the Bank Administration Institute and Consumer Bankers Association. He earned a Bachelor of Arts degree in Economics from Furman University and a Master of Business Administration degree from the University of South Carolina.

Company Profile:
NetBank, Inc. (Nasdaq: NTBK) operates with a revolutionary business model through a diverse group of complementary financial services businesses that leverage technology for more efficient and cost-effective delivery of services. Its major subsidiaries include NetBank® (, the country's first commercially successful Internet bank; RBMG, Inc., a wholesale mortgage lender that generates residential mortgages through a nationwide network of independent brokers and correspondent lenders; Market Street Mortgage Corporation, a retail residential mortgage lender that conducts business in 39 states; Meritage Mortgage Corporation, a wholesale mortgage lender that originates non-conforming residential mortgages through a nationwide network of independent brokers; Republic Leasing Company, Inc., a wholesale originator and servicer of commercial business equipment leases; and NetInsurance, Inc. (formerly known as RBMG Insurance Services, Inc.), an online insurance agency representing some of the nation's leading insurance companies. NetBank is a Member FDIC. NetBank, RBMG®, Market Street Mortgage® and Meritage® are Equal Housing Lenders.

All of the businesses compete on value and service by leveraging technology to reduce their operating costs and to support a range of convenient, automated services. NetBank operates without a branch infrastructure and uses the inherent cost savings to provide industry-leading deposit rates and free account services — including online bill payment and presentment, wireless account access and a nationwide ATM deposit-taking service. RBMG operates an online mortgage origination solution, known as eRBMG®, that allows its business partners to process mortgage loans electronically.

CEOCFOinterviews: Mr. Freeman, please tell us about recent changes at NetBank?

Mr. Freeman: “Many new things have happened in our company in the last few months. As of April 1, 2002, I became CEO with the acquisition of Resource Bancshares Mortgage Group. Over the past twelve months, we have re-engineered almost every component of our business.

We have done a lot to re-enforce the retail bank’s leading market position by adding additional functionality and ease-of-use to the online banking platform. Numerous new services have been introduced, including small business banking, more varied mortgage lending, indirect auto lending and insurance. And, we brought greater discipline and a more mathematically driven approach to routine bank management processes, especially in regard to asset-liability management.

The mortgage side of our business has also performed extremely well over the past twelve months. We have used the strength of the mortgage market and our performance to make strategic long-term investments. By developing new products and services, our production has tilted toward purchase business as opposed to refinance business, which literally dries up when interest rates rise. If you look at the business, it has been a work in progress for the last twelve months and we are very proud of the advancement we have made. During the first quarter of 2003, our mortgage production was fairly balanced between purchase and refinancings, while the industry as a whole averaged upward of 80% refinancings.”

CEOCFOinterviews: What about the transaction processing area?

Mr. Freeman: “The transaction processing business is one of the highest-growth, most profitable businesses that we have. This is where we actually do mortgage processing for small banks. We are their mortgage company so to speak. We have seen production out of this unit grow from $36 million in the second quarter of last year to $181 million in the first quarter of this year. That is unbelievable growth when you consider we started the business from scratch at the beginning of 2002.”

CEOCFOinterviews: What do you provide there that the banks can’t get elsewhere?

Mr. Freeman: “We provide a turnkey mortgage solution. If you are a small bank today, the mortgage business is so complicated. A number of the banks send their customers across the street to a competitor because the mortgage business is too complicated for them to do. Or, they do limited components of it. But, because they are so small and it is so complicated, they are not doing it effectively or efficiently. We go in and provide them services just as if they had a large national mortgage department that was part of their company. We do everything for that bank from helping their customers pick the right products through closing. Then depending on the institution’s strategy, we can either service the loan on their behalf or help them bundle and sell the asset into the capital markets."

CEOCFOinterviews: How is Internet banking working and is there much competition?

Mr. Freeman: “Internet banking is going very well. Unlike traditional, brick-and-mortar banks, we focus on serving a very select, well-defined market segment. Our customers tend to be time-starved professionals who prefer the value, convenience and control of managing their finances online. In the first quarter of this year, we added 10,000 customers, bringing our total number of customers to more than 162,000. This increase was coupled with a 46% annualized deposit growth rate. I can safely say that more and more customers everyday have elected to bank with us online. And, the deposit growth suggests that these customers are doing more of their banking with us. In terms of competition, we don’t see any new players out there today. The competition is generally large, brick-and-mortar banks that will never be able to duplicate our value proposition as long as they have to support their branch networks."

CEOCFOinterviews: Do you anticipate losing deposits when the stock market becomes a more viable option?

Mr. Freeman: “I suspect that some of the funds will flow back into the market when consumers get comfortable. But, I doubt it is going to be tomorrow. It is going to take a lot for the consumer to put all of his eggs back into one basket, if it ever happens. In the ’90s , it wasn’t  unheard of to talk to consumers who had 100% of their assets in the equity market. Today, they talk abut a balanced portfolio -- fixed income, bank deposits, equity and that of type of thing. My hypothesis is that funds don’t go back to the equity market entirely. A piece of it may. But, the bulk of it is going to stay in banking and fixed income products. Customers will simply pick the equity percentage that makes sense for their stage of life.”

CEOCFOinterviews: What are you doing with your Net Insurance affiliate?

Mr. Freeman: “We established this business in the last twelve months and are extremely excited about it. About thirty days ago, we brought up our online auto insurance offering. Customers can complete a simple form on our Web site and receive quotes from multiple providers within seconds. The customer can then purchase the policy that is right for them with the click of the mouse. Sales so far have exceeded our expectations. I think it is going to be a huge deal, particularly when you consider the fact that we are getting into the car lending business. When somebody buys a new car, it is a perfect opportunity to do auto insurance.

We are already using this approach with homeowner’s insurance. When someone is refinancing their house or buying a new house, it is a perfect opportunity for us to show them our insurance offerings. Our value proposition is that we do it all over the Internet and we have access to approximately thirty underwriters. So, we can bring back to the customer a very attractive rate both on their car and homeowner’s insurance. Although our insurance offerings are only available in select states right now, we plan to be nationwide by the end of the year.”

CEOCFOinterviews: Are there products or services that you would still like to add that are not currently available?

Mr. Freeman: “We have said publicly that we are very interested in the wealth management side of the business. It gets back to your earlier question about what happens when people become more comfortable with the equity markets. We believe there will be an increasing demand for online solutions that help technology-savvy people determine their appropriate asset allocation and investment strategy. We plan to provide the customer an integrated online approach to handling their finances, whether its fulfilling their day-to-day banking needs or their long-term investment goals."

CEOCFOinterviews: Do many of your banking customers take advantage of the other services?

Mr. Freeman: “The proof of the ‘pudding’ is in our numbers. We have a cross sell ratio of 1.6, which says that statistically 60% of our customers buy at least one more thing with us. Our goal is to get that 1.6 cross sell ratio substantially higher over the next few years. We will do that by selling products our customers want. If our customers are buying and financing cars and we aren’t doing car loans, it would be hard to get that business. If our customers are doing wealth management and we don’t have a complementary offering, then it is tough to get that business. It is the same thing with mortgages, second mortgages and credit cards. We are working hard to flesh out our product line so we can be a one-stop Internet shop for our customers.”

CEOCFOinterviews: How do you reach the small business community?

Mr. Freeman: “I’ve been banking small businesses for 15 years. At my old employer, Wells Fargo, we were the first in the nation to court the small business marketplace. We did it by having better products, better service delivery and local branch support. Many things have changed since then, large bank mergers have caused breakage and the turnover in branches today is very high. If you interview small business owners, they will say, ‘I know where my branch is. But, I don’t know who it is.’ Our value proposition to a large number of these small businesses is this: Do you really need the branch today? Do you really want to pay for it? Instead of paying for bricks-and-mortar that you don’t really use, wouldn’t you rather have an interest-bearing checking account with a more competitive fee structure? Our statistics show that 80% of small businesses use a PC and the Internet in their business. Even in its embryonic stage, our small business initiative arguably has as much potential as the consumer piece of our business did seven years ago when the bank first started.”

CEOCFOinterviews: Will you tell us about your financial intermediary role?

Mr. Freeman: “We run a very disciplined balance sheet management strategy. Instead of growing our balance sheet, we elect to sell the bulk of the loans that we generate into the capital markets. We pool and package those assets up for delivery into forward commitments with either Main Street or Wall Street investors. Unlike other institutions, balance sheet turnover is an important measurement of our operation. We turned over our balance sheet five times in the fourth quarter and four and a half times in the first quarter. This measurement shows how successful we are at generating and selling loans in a given period. The financial intermediary strategy allows us to be very capital-efficient. Plus, we don’t operate with near the interest rate or credit risk of a traditional institution since we are not holding assets long-term.”

CEOCFOinterviews: Please tell us about your earnings announcement?

Mr. Freeman: “We had arguably the best operating quarter in the history of the company. We made twenty-two cents a share, which matched the analysts’ consensus earnings estimate. We also made a strategic decision to invest a good part of current profitability into initiatives that will yield future benefit. For example, we paid off some long-term debt by selling some securities that we had. We began placing adjustable rate mortgages on the balance sheet of the bank instead of selling them into the capital markets and booking a gain on sale. These loans will help us improve our net interest margin or spread at the bank going forward. So, not only did we have the best operating quarter and make twenty-two cents, we actually paved the way for better results further down the road.”

CEOCFOinterviews: What are the challenges going forward?

Mr. Freeman: “We are running an operating model that very few banks have even thought of, much less executed. With that, brings a substantial amount of effort that one needs to devote to execution. We primarily use electronics and the Internet as a conduit for a lot of what we do. The Internet moves and changes itself very quickly and we have to have an ambulatory team that is able to stay on the tip of its toes and be able to move at light speed with the Internet. The two major risks to our company are as follows: staying on top of delivery system changes, and managing the execution of our strategy.”

CEOCFOinterviews: You were recently named Chairman at a time when many companies are separating that role from the role of CEO. What is your focus and function as Chairman?

Mr. Freeman: “I think it is important to note that I didn’t receive a salary increase for taking on the additional responsibility. It came to me as soon as we hit a specific earnings threshold, which we did in the fourth quarter. In terms of corporate governance, we have been substantially ahead of the game. Our board has a corporate governance committee that handles the segregation of board duties and internal management. The committee acts as a presiding director when the board is in executive session, and it handles board policies and ethics. As the only insider on the board, I am prohibited from serving on this committee as well as the compensation and audit committees. I think the role of chairman simply allows me to operate more effectively in keeping the company’s strategic vision in focus and helping the board get to where it needs to be.”

CEOCFOinterviews: Do you see more acquisitions down the line?

Mr. Freeman: “I think you are going to see us do a lot more things. There are a number of businesses that we would like to be in. We will communicate to the market what those are as soon as we get closer to understanding what and how we want to do it. I suspect that in some of the cases, we will pursue a small company that is synergistic with where we want to go and has the potential to be immediately accretive. There are also going to be businesses that we choose to build ourselves, like our new indirect auto lending business. We made our way into that business because there were a bunch of experienced auto lending professionals who had worked with me in the past and wanted to join our team. We will always be very opportunistic in what we do.”

CEOCFOinterviews: In closing, what should potential investors know about NetBank?

Mr. Freeman: “If I were an investor, I would look at this company and say ‘now that is a very unique model. It has a great market position. And, it still has tremendous growth potential.’ I challenge you to find a bank in the United States that grew deposits by 46% on an annualized basis in the first quarter. Or, one with 37% deposit growth last year. Investors looking at NetBank will see an innovative business model, impressive annual growth rates and, in my opinion, one of the best management teams in the industry. We have hundreds of years of banking experience sitting around our operating committee. We’re not a bunch of Internet people who don’t know banking. We’re bankers who know the Internet.”


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