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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

For the Fiscal Year Ended December 31, 2001

or

For the transition period from                              to                             

Commission file number 0-22361

NetBank, Inc.
(Exact Name of Registrant as Specified in Its Charter)

(770) 343-6006
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None.

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 par value
Preferred Share Purchase Rights
(Title of Class)

        Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for past 90 days. Yes ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    o

        Aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, computed by reference to the closing price of such common equity as of March 14, 2002: $442,817,614.

        Number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 29,020,094 shares of Common Stock at March 8, 2002.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the Registrant's Proxy Statement for the Annual Meeting of Shareholders, scheduled to be held on May 23, 2002, are incorporated by reference into Part III.

PART I

ITEM 1. BUSINESS

Overview

        NetBank, Inc. is a bank holding company that wholly owns the outstanding stock of NetBank, FSB, a federal savings bank, and its wholly owned subsidiary, Market Street Mortgage Corporation ("Market Street"), a mortgage company, as well as NetBank Partners, LLP ("NetBank Partners"), a partnership involved in strategic partnering opportunities, and NB Partners, Inc. ("NB Partners") a corporation involved in strategic partnering opportunities (jointly "NetBank"). As of December 31, 2001, NetBank had $2.9 billion in assets and served customers in all 50 states and 20 foreign countries.

        We have agreed to acquire Resource Bancshares Mortgage Group, Inc. ("RBMG"), a wholesale mortgage banking company focused on the purchase, sale and servicing of residential, single-family first mortgage loans through a nationwide network of mortgage brokers and correspondent banks. The shareholders of NetBank and RBMG approved the transaction on February 28, 2002. The transaction is expected to close during the first quarter of 2002.

        We share the operational cost savings of our branchless business model with customers through attractive interest rates on deposit accounts and reduced- or no-fee banking services. Our unique, Internet-based operating strategy has allowed us to experience rapid growth. During 2001, our customer accounts grew from 162,000 to 245,000, deposits grew from $980.8 million to $1.5 billion and total assets grew from $1.8 billion to $2.9 billion. During 2001, we added an average of 6,900 net customer accounts per month.

The NetBank Solution

        As the first federally-insured bank to operate solely on the Internet, we believe we have a first mover advantage relative to on-line banks with less extensive market presence and less established operating histories. In addition, we believe we have a competitive cost advantage over traditional banks. We also believe our established position in the marketplace provides us with a competitive advantage in view of the lead time required for new competitors to obtain a charter and start an Internet bank. We intend to continue to capitalize on this advantage by aggressively seeking new customers and expanding our product and service offerings to further build market share.

        Our customer demographics parallel those of the general Internet population and illustrate our appeal to households with relatively high incomes. According to Experian's Insource consumer database, as of December 31, 2001, our customers had an average age of 43 and a median annual household income in excess of $50,000. We are ideally positioned to participate in the rapid growth of the Internet and on-line banking based on our:

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Attractive Interest Rates and Low Fees.  Our operating costs are generally lower than those of traditional "bricks and mortar" banks because we do not require a traditional branch network to generate deposits and conduct operations. We pass our savings in operating costs on to customers by offering attractive interest rates and low fees in order to generate deposits without sacrificing profit margins. We believe our unique business model differentiates NetBank from traditional banks offering Internet banking services because traditional banks frequently offset the incremental expense of their Internet banking services by charging additional fees or imposing minimum account balances.

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Convenience and Ease of Access.  We believe we provide customers with a higher level of convenience than can be achieved in a traditional bank branch or through PC-based home banking. The Internet allows our customers to conduct banking activities on a real-time, 7-day-a-week, 24-hour-a-day basis from any PC, wherever located, using a secure Web browser. In addition, our Web site is designed to be user-friendly and to expedite customer transactions with NetBank. Many common transactions including check reorders, account transfers, and reviews of cancelled checks are fully automated and can be completed over the Web at the customer's convenience.



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Broad Selection of Products and Services.  We offer a broad array of products and services that customers would typically expect from a traditional bank including checking and money market accounts, certificates of deposit, IRA's, debit cards, credit cards, mortgage loans, automobile and motorcycle loans, securities brokerage services, foreign currency and traveler's checks, and home equity lines as well as some innovative services specifically designed to leverage our internet capabilities- electronic bill payment and presentment, eStatements, on-line check imaging, wireless account access, and account consolidation services.



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High-Quality Service and Customer Satisfaction.  We continually seek ways to enhance customer satisfaction. During the year ended December 31, 2001, we launched a redesigned Web site and hired an outside consulting firm to audit and test our site and customer care program. These initiatives follow a number of customer service enhancements and new product offerings introduced during 2000 under NetBank eCare(TM), an ongoing customer care strategy. In an effort to serve the needs of our customers, we offer services such as electronic bill payment and presentment and ATM cards without service charges. We also emphasize responsive, courteous customer service and utilize a fully-trained dedicated staff that responds to inquiries from existing and potential customers and processes new accounts. Our customers can access account data and information regarding products and services 24 hours a day and can reach our customer service representatives by telephone, e-mail, or on-line chat. We strive for the highest level of customer satisfaction and believe the significant growth in our customer base illustrates our ability to meet our customers' needs.



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Advanced Security.  A significant barrier to on-line financial transactions has been the secure transmission of confidential information over public networks. We use sophisticated technology to provide what we believe to be among the most advanced security measures currently available in the Internet banking industry. All banking transactions are encrypted and all transactions are routed from the Internet server through a "firewall" that limits access to the NetBank server. Our systems automatically detect attempts by third parties to access other users' accounts and feature a high degree of physical security, secure modem access, service continuity and transaction monitoring.

Growth Strategy

        Our objective is to become the leading provider of a full range of on-line financial services. We intend to accomplish this objective by implementing the following strategies:

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Leverage Low Cost Structure.  Our operating costs are generally lower than those of traditional "bricks and mortar" banks because we do not require a traditional branch network to generate deposits and conduct operations. This is demonstrated by our low ratio of 2001 non-interest expenses (exclusive of Market Street's non-interest expense) to average earning assets of 2.5% compared to 3.8% for commercial banks with $1.0 billion to $10.0 billion in assets, as reported by the FDIC Institution Directory. Excluding marketing costs, our ratio of 2001 non-interest expenses (exclusive of Market Street's non-interest expense) to average earning assets was 2.2%. Additionally, our ratio of total assets per full-time equivalent employee was $20.7 million as of

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December 31, 2001 compared to $3.3 million for commercial banks with $1.0 billion to $10.0 billion in assets, based on data provided by the FDIC Institution Directory. We pass our operating cost savings on to customers by offering more attractive interest rates on deposit accounts and lower fees than those offered generally by traditional banks. We believe this strategy attracts deposits without sacrificing profit margins. We intend to continue to leverage the fixed-cost aspect of our branchless business model to enhance profitability.

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Generate Non-interest Income Through Cross-Marketing Initiatives.  During the fourth quarter of 2000 and continuing through the first six months of 2001, we introduced certain fees intended to encourage our existing customers to take advantage of on-line, less costly services and customer self-service tools that currently exist on our Web site. To generate additional non-interest income and enhance customer loyalty, we cross-market a variety of non-deposit products. We offer credit cards, mortgage loans, securities brokerage services and other non-interest income-generating products. We offer these products to existing and potential depositors through various marketing techniques, such as our Web site, e-mail, on-line advertising, targeted e-mail advertisements, and retail mortgage branches. This strategy enables us to generate additional earning assets and fee income from a growing customer base. The acquisition of Market Street also significantly increased the amount of non-interest income recorded during the year ended December 31, 2001 as Market Street records fee income related to the sale of mortgage loans and servicing rights. We anticipate that fee income will continue to be an increasing portion of our revenues with the acquisition of RBMG, which is anticipated to close during the first quarter of 2002.



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Maintain High Asset Quality.  Our loan portfolio strategy is to maintain a conservative loan mix consisting primarily of loans secured by residential mortgages with an emphasis on high credit quality. Prudent management of our high quality loan portfolio also has contributed to our profitability. We've invested primarily in single-family residential loans that carry adjustable rates. This helps us manage our interest rate risk and our past-due rate, which is approximately one-half of the industry rate, reflects the quality of our portfolio. Prior to the acquisition of Market Street on June 29, 2001, our strategy had been to purchase bulk loan pools rather than originate our own loans. Beginning with the acquisition of Market Street, we began a more hybrid strategy. While we continue to purchase loans through bulk purchases to diversify our portfolio, originating and selling first mortgage loans through Market Street has allowed us to generate fee income and reduce our exposure related to prepayments during periods of declining interest rates. We believe our acquisition of RBMG will further enable us to diversify our income stream. We also emphasize a conservative securities investment strategy by investing in federal funds, U.S. treasury securities, and other high-quality securities including United States agency obligations, mortgage pool securities, collateralized mortgage obligations, and investment grade corporate bonds. See "Lending and Investment Activities."



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Build National Brand Awareness Through Increased Marketing Efforts.  Our marketing strategy is designed to build national brand awareness and grow our customer base. The strategy includes targeted online and offline advertising, developing strategic partnerships that will enhance our product and service offerings, cross-sales marketing initiatives to existing customers and aggressive public relations activities. Our affinity alliances have become an important part of expanding our market reach. Our strategy is to continue to leverage these types of relationships to gain customers and additional financial services. In addition, we work with nationally known advertising and public relations agencies to build national awareness of the NetBank® name through a variety of marketing initiatives. These initiatives include aggressive media relations efforts; expanded online and offline advertising initiatives; advertisement on targeted financial sites or the finance areas of high-traffic sites, such as MSN Money Central, Yahoo! Finance, Bankrate.com, and Motley Fool; and the pursuit of strategic alliances. Our experience indicates that by focusing our marketing efforts, we can heighten brand awareness of NetBank® on a

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national scale, significantly increase our customer base, and significantly reduce our account acquisition costs. See "Marketing."

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Offer a Broad Array of Products and Services.  Our objective is to attract customers seeking to combine the convenience of Internet banking with the broad array of products and services typically offered by traditional banks. Now that we have introduced a full array of both traditional and innovative products and services, we plan to focus on fully integrating Market Street and RBMG's loan products into our on-line offerings in 2002. The goal is to make our customers' NetBank deposit accounts the cornerstone of managing all of their personal financial services through NetBank—their mortgages, investments, credit card accounts, and insurance policies. Some of the products we have already developed, such as account consolidation, and the marketing structure that we have developed to cross-sell other NetBank products will facilitate the integration of both Market Street and RBMG's lending products into our on-line product offerings. In addition we will continue to focus on improving the profitability of each individual customer through aggressive cross-selling techniques and fees designed to encourage customers to take advantage of self-service tools on our Web site, which make customer service less labor intensive and less expensive. We will also continue to explore affinity alliances and targeted marketing opportunities that propel customers to NetBank in a cost-effective manner and add additional services for our customers. See "Products and Services" and "Marketing."



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Hybrid Approach to Operational Functions.  To enhance the flexibility and scalability of our operations, we take a hybrid approach to technology by outsourcing certain principal operational functions to leading service providers such as Fiserv, BISYS and CheckFree. Fiserv provides a secure server for the electronic banking software licensed to us by Edify Corporation. CheckFree provides electronic bill payment systems for us and BISYS processes our transactions and interfaces with FISERV's secure server. In each of these relationships, we benefit from the service provider's expertise and economies of scale while retaining the flexibility to take advantage of changes in available technology without affecting customer service. We can also respond easily to growth because these third-party service providers have the capacity to process a high volume of transactions. In addition, we have substantial internal technology resources so that we are able to find the best technology solution at the appropriate time. The combination of in-house and outsourced resources enables us to deliver products more rapidly and we are not dependent on one individual or partner.

Products and Services

        Account Activity.    Customers can access NetBank through any Internet service provider by means of an acceptable secure Web browser. In doing so, customers can apply for loans, review account activity, enter transactions into an on-line account register, pay bills electronically, conduct brokerage transactions, receive statements electronically or by mail and print bank statement reports from any PC with a secure Web browser, regardless of its location. To open a new account, customers complete the on-line enrollment form on our Web site, print their signature card and mail it to us along with their deposit. Customers can make deposits into an open account at NetBank via direct deposit programs, by transferring funds between NetBank accounts, by wire transfer, by mail or through 18,000 remote deposit-taking ATM terminals through our partnership with the MAC ATM network. No teller line is maintained, however, and we do not have a physical branch system. Customers can also make withdrawals and have access to their accounts at ATMs that are affiliated with the Cirrus, STAR, NYCE, Armed Forces Financial networks and the MAC network. We do not charge our own fee for ATM usage, but the operator of the ATM generally imposes fees.

        Deposit Products and Services.    In order to build our banking customer base, we offer a variety of deposit products at attractive interest rates. We are able to offer attractive interest rates as a result of our low operating costs. We also attract customers by offering convenient services such as free

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electronic bill payment, overdraft protection and ATM cards. Our deposit products and services include:

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Deposit Products.  We offer two types of interest-bearing checking accounts: a money market account and 6-, 12-, 18-, 30-, or 60-month certificates of deposit to taxable and IRA depositors. We have consistently offered interest rates on our deposit accounts that are higher than the national average.



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Bill Payment Service.  Through services provided by CheckFree, customers can pay their bills on-line through electronic funds transfer or a written draft prepared and sent to the creditor. We do not charge a fee for this service.



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Bill Presentment Service.  Through services provided by CheckFree, customers can have their bills delivered electronically to their NetBank account. We do not charge a fee for this service.



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Overdraft Protection.  Overdraft protection is available to all interest checking customers who qualify. Customers with interest checking accounts may apply for overdraft protection on-line for amounts up to $1,000. If a customer has both a money market and an interest checking account, we can establish overdraft protection between those accounts.



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ATM Cards.  Each customer automatically receives a free ATM card when he or she opens an account. Customers can access their accounts at ATMs affiliated with the Cirrus, HONOR/STAR, NYCE, and Armed Forces Financial networks and the MAC network. The MAC network also allows remote deposit-taking at 18,000 of its 60,000 ATMs. We do not charge our own fee for ATM usage, but the operator of the ATM generally imposes fees.



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eStatements.  eStatements are generated automatically as part of the standard statement cycle on checking, money market and certificate of deposit accounts. Customers may view eStatements after logging into their accounts. They can print these statements to their own printers or save them indefinitely on their personal computers as PDF files. Customers may opt in or out of receiving paper statements online.



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On-line check imaging.  On-line images of cancelled checks are available to customers 24-hours a day. Customers may view cancelled check images after logging into their accounts. They can print these statements to their own printers or save them indefinitely on their personal computers as PDF files.

        Lending Programs.    To generate fee income and provide a convenient service to our customers, we offer on-line loans and credit cards as described below.

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Mortgage Loans.  Through our subsidiary, Market Street, we originate conventional and government, fixed and adjustable residential mortgage loans for our own portfolio as well as for sale in the secondary market. We currently offer home equity lines and second mortgages on our Web site through PNC Bank Corp. ("PNC"). In addition, during 2001, we entered into a partnership with HomeSide Lending, Inc. that has enabled us to expand our scope of lending products. Both of these co-branded online mortgage offerings provide significant benefits over traditional and other on-line lending solutions. See "Lending and Investment Activities."



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Automobile and Motorcycle Loans.  Loans are available for new and used vehicles, lease buyouts or refinancing of existing loans. Benefits of the new service include loan responses within 15 minutes during set business hours, a check approved up to a specific amount that a consumer can make payable to a dealership or individual, access to funds as early as the next day, and a locked-in interest rate good for 45 days.



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Credit Cards.  We offer our customers Visa credit cards issued by First USA for no annual fee. First USA carries the credit card loans on its books and we have an income-sharing arrangement

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with First USA. Customers can apply for these credit cards on-line. The cards prominently display the NetBank® logo with the Visa emblem appearing in the lower right corner of the card.

        Non-Banking Financial Services.    To serve as a sole source for the financial services needs of Internet users and to generate additional non-interest income, we offer a full range of non-banking financial services designed to attract and retain customers. These services currently include:

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Account Consolidation Services.  From their own NetBank account, our customers can now manage their accounts at other institutions. They are able to review balances and transaction histories on these accounts as well as transfer funds into their NetBank account. We believe this is one of the most important services we have ever introduced—it truly transforms our site into a one-stop destination for financial services.



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Wireless Account Access.  NetBank customers can receive account information over digital phones, WAP phones and Palm VII personal data assistants. This allows them to review balances or transaction histories on their checking or money market accounts on demand.



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Securities Brokerage Services.  We have contracted with Ameritrade Holding Corp., through its AmeriVest subsidiary, a discount broker, to provide our customers with access to a full line of financial services and investment products. We have a fee-sharing agreement with AmeriVest. Customers can purchase securities without writing checks to their brokers, as trading fees are automatically deducted from their NetBank checking or money market accounts. Investment proceeds are automatically deposited into the customer's NetBank deposit account. Customers enjoy 24-hour on-line access, real-time quotes, low commissions and a professional brokerage staff.



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Insurance Products.  Insurance.com, a Fidelity investments affiliate, gives our customers access to resources they need to organize personalized, self-directed insurance plans. Customers have 24-hour access to Insurance.com's information, quotes and sales via a co-branded web site. In exchange for the referral, NetBank receives a fee.



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Foreign currency or traveler's checks.  Consumers may order foreign currency or traveler's checks in a specific currency and receive them overnight or by two-day delivery. There is a $200 minimum and $1,500 maximum per order and no service fee assessed. Orders over $500 are sent via two-day delivery at no cost. Currently, there are more than 75 different currencies and 7 foreign currency travelers' checks available for purchase. Orders can be paid for using a Visa or MasterCard® credit or debit card, including NetBank's Visa Check Card.



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Visa TravelMoney.  Visa TravelMoney, a pre-paid debit card that is accepted at more than 627,000 ATMs worldwide, represents a good alternative for consumers who do not have a bank ATM or debit card or prefer not to use their bank cards abroad. The Visa TravelMoney card is loaded in U.S. dollars, up to a maximum amount of $1,500. Consumers can use the card to withdraw cash in local currencies at ATMs on the Visa or Plus(R) networks. The card is PIN-protected and can be replaced overnight if lost or stolen. There is a $300 minimum purchase amount and a $15 activation fee per card, which includes three free withdrawals.

        Future Products and Services.    Now that we have introduced a full array of both traditional and innovative products and services, we plan to focus on fully integrating Market Street and RBMG's loan products into our on-line offerings in 2002. The goal is to make our customers' NetBank deposit accounts the cornerstone of managing all of their personal financial services through NetBank—their mortgages, investments, credit card account, and insurance policies. Some of the products we have already developed, such as account consolidation, and the marketing structure that we have developed to cross-sell other NetBank products will facilitate the integration of both Market Street and RBMG's existing products, as well as new lending products we plan to introduce next year.

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Lending and Investment Activities

        Our loan portfolio strategy is to maintain a conservative loan mix consisting of home mortgage, home equity, consumer, commercial real estate loans, and commercial leases with an emphasis on high credit quality. During 2002, we plan to fully integrate both Market Street and RBMG's existing, as well as future, lending products into our on-line service offerings. We build our loan portfolio in the following ways:

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Bulk Loan and Lease Purchases.  We acquire most of our loans by purchasing packages of specific types of loans, such as mortgage, home equity and commercial real estate, with each package consisting of loans with similar characteristics including, interest rates and asset quality. We are party to a "flow" arrangement with Republic Leasing, a subsidiary of RBMG, where we make recurring monthly purchases of commercial leases. We also purchase portions of commercial loan pools, with the seller retaining a portion of the loans to decrease our risk. As of December 31, 2001, purchased loans accounted for $1.1 billion, or 67.9%, of our loan portfolio.



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Participations.  We act as a participating lender in commercial real estate loans with various banks in the United States. As of December 31, 2001, participations accounted for $229.3 million, or 12.9%, of our loan portfolio.



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Direct Origination.  Through our subsidiary, Market Street, we originate conventional and government, fixed and adjustable residential mortgage loans for our own portfolio as well as for sale in the secondary market. We currently offer home equity lines and second mortgages on our Web site through PNC Bank Corp. ("PNC"). PNC performs the back office processing of these loans using our established credit criteria. In addition, during 2001, we entered into a partnership with HomeSide Lending, Inc., which has enabled us to expand our scope of lending products. Applications received directly through our Web site are processed and closed by HomeSide Lending, Inc. in return for a portion of the loan origination fee. Both of these co-branded online mortgage offerings provide significant benefits over traditional and other on-line lending solutions including on-line loan approval within 10 minutes, a loan application that requires 50 percent less information than traditional applications, customized pricing to meet individual needs, approvals on home loans before or after applicants select a home to purchase and the ability to choose the closing date. Since acquiring Market Street on June 29, 2001 we have originated $1.3 billion in residential mortgages. Approximately 70% of the $1.3 billion originated related to purchases of new homes and 30% related to refinancings. Of those loans originated, $295.6 million are held for sale by Market Street as of December 31, 2001. We expect the amount of originated loans to increase substantially during 2002 as we integrate Market Street and RBMG's lending products into our on-line service offerings.

        Our loan committee establishes underwriting standards and criteria for our loan portfolio and monitors the portfolio on an ongoing basis. The loan committee applies the same underwriting standards to all of our loans, regardless of how they are originated. We have also retained an outside consulting firm to assist the loan committee in its review of the loan portfolio and to conduct due diligence on purchased loans.

        In addition to loans, we invest deposit funds in various investment securities. Our philosophy of high credit quality also guides our investment decisions. Our securities portfolio is comprised of federal funds sold, high-quality securities including United States agency obligations, mortgage pool securities, collateralized mortgage obligations, and investment grade corporate bonds. In addition, we are authorized to invest in U.S. Treasury securities.

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Customer Satisfaction

        We continually seek ways to enhance customer satisfaction. Offering our customers a high level of customer service is a top priority of ours and we believe that it is critical to our success. In an effort to serve the needs of our customers, we offer services such as account consolidation, electronic bill payment and presentment and ATM cards without service charges. Our customers can access account data and information regarding products and services 24 hours a day and can reach our customer service representatives by telephone, e-mail, or on-line chat.

        During the year ended December 31, 2001, we launched a redesigned Web site and hired an outside consulting firm to audit and test our site and customer care program. These initiatives follow a number of customer service enhancements and new product offerings introduced during 2000 under NetBank eCare(TM), an ongoing customer care strategy to provide multiple means of access to account information and convenient, easy- to-use self-service features for conducting routine online banking activities.

        We currently employ 82 individuals, representing 58% of our Alpharetta, GA staff, who are dedicated to directly supporting customers. In addition, we contract with an outside call center to handle simple customer inquiries and requests. We have also invested in technology and implemented new procedures to continually improve the quality and responsiveness of our customer service. In addition, we continually update our user-friendly Web site with a goal of achieving customer self-support.

Marketing

        The goal of our marketing strategy is to make NetBank® the leading brand in the Internet financial services market. Our marketing strategy is designed to grow our customer base and includes targeted online and offline advertising, developing strategic partnerships that will enhance our product and service offerings, cross-sales marketing initiatives to existing customers and aggressive public relations activities. During the year ended December 31, 2001, we applied $6.2 million to our marketing program, a 52.8% reduction compared to $13.1 million in marketing expense applied during the year ended December 31, 2000. Account applications, however, increased 7.4% from 163,000 applications during the year ended December 31, 2000 to 175,000 applications during the year ended December 31, 2001. The primary reason for this efficiency has been our focus on affinity alliances and pay-for-performance marketing relationships. Our strategy is to continue to build upon these types of relationships to gain customers and additional financial services. In addition, we purchased approximately 50,000 accounts from Compubank during the year ended December 31, 2001. The premium paid for those accounts was capitalized as a core deposit intangible and did not impact marketing expense.

        Strategic Partnerships.    Our affinity alliances have become an important part of expanding our market reach. For example, our alliance with Ameritrade provides reciprocal services for customers of both companies. NetBank offers banking services to Ameritrade's more than one million brokerage customers and Ameritrade Holding Corporation, through its AmeriVest subsidiary, offers brokerage services to NetBank's rapidly growing customer base. This alliance enables NetBank to market to a huge community of financially active on-line consumers who tend to maintain high balances and desire greater control over their accounts.

        Another example of a powerful strategic partnership is our alliance with Intuit, which puts the NetBank brand in front of every Quicken 2002 user via a NetBank icon and message installed onto the user's desktop. With one click on the NetBank icon, potential customers are transported through their Internet connection to the NetBank site where they have an opportunity to fund an account and receive a one-time cash bonus.

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        During 2001, we announced a pay-for performance marketing partnership with Tupperware to sell co-branded financial services to Tupperware employees, registered Tupperware sales consultants and their customers; another partnership with Federated Department Stores, Inc. where Federated will market certain NetBank banking products and services to its more than 20 million active proprietary credit card holders through a co-branded NetBank Web site; and an agreement with Six Continents Hotels to promote NetBank checking accounts to more than ten million members of Six Continents Hotels' frequent guest program. Members will receive a bonus of up to 10,000 Priority Club points when they open and fund a new NetBank account. Alliances with companies such as these helped to drive customers to NetBank during the year ended December 31, 2001. In fact, 21% of our account applications during that time were the result of affinity alliances. Of those affinity alliances, 77% were pay-for funded account type relationships. Our strategy is to continue to build upon these types of relationships to gain customers, add additional financial services for our customers and continue to drive down account acquisition costs.

        In addition, we continually seek to form product and marketing alliances with other Internet financial services providers such as AmeriVest, and Insurance.com to broaden our product and service offerings and attract a broader customer base. During the year ended December 31, 2001, we signed agreements with PeopleFirst.com, the country's largest online vehicle lender, to offer auto and motorcycle loans through our Web site and with Thomas Cook Currency Services, a division of the Travelex Group, to sell foreign currency, travelers checks and Visa TravelMoney through our Web site. We plan to continue to pursue other marketing alliances to provide our customers an even broader array of products and services. We believe these alliances provide us with the opportunity to cross-sell our products and services to the customers of these financial service providers and to our existing customers.

        Advertising Strategies.    During 2001, we enhanced our targeted advertising approach by initiating pay-for-funded account type relationships with successful online businesses. We conducted creative direct online marketing programs to attract new customers and focused on cross-selling products to existing customers. As a result, we substantially increased our number of checking and money market customers, which traditionally retain longer-term banking relationships. In the future, we plan to continue to pursue pay-for funded account relationships and cross-sell existing customers. In addition, targeted advertising continues to be effective in bringing new customers to NetBank. In particular, we've found that advertising on financial sites or the finance areas of high-traffic sites, such as MSN Money Central, Yahoo! Finance, Bankrate.com, and Motley Fool produces excellent results. In addition, we have the ability to monitor the audience that we reach as well as the results of our on-line advertising campaign. For example, in addition to tracking on-line click-through and conversion rates, we also track the number of hits on our Web site that result from a particular advertisement and incorporate our findings into our subsequent marketing efforts.

        Public Relations.    We also derive a marketing benefit from media coverage that we generate through our public relations efforts. We believe continual press coverage increases the general public's awareness of NetBank and attracts new customers.

Competition

        We believe that the principal competitive factors in the financial services industry are market presence, customer service, convenience, product offerings, deposit and loan rates, and associated account fees. While the financial services industry is highly competitive, we believe we compete effectively with our principal competitors, which are traditional banks, Internet banks and other financial services providers. We believe our low cost structure, which allows us to offer attractive interest rates and low fees, gives us a competitive advantage over traditional banks, which must support a physical branch structure. We also believe our operating history and name recognition give us an advantage over other independent Internet banks, many of which are still in a relatively early stage of

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operation. Furthermore, we are able to offer a broader array of products and services than many non-bank financial services providers. However, many of our competitors have larger customer bases, greater name recognition and brand awareness, greater financial and other resources and longer operating histories. Additionally, new competitors and competitive factors are likely to emerge, particularly in view of the rapid development of Internet commerce.

Intellectual Property and Proprietary Rights

        We regard the form and substance of our name and other intellectual property we have developed as proprietary and attempt to protect them by relying on intellectual property laws. We own a federally registered trademark for NETBANK®. We take active measures to safeguard our name and other proprietary intellectual property. Policing unauthorized use of proprietary information is difficult, however, because of the uncertain and complicated nature of this kind of litigation. See "Legal Proceedings."

        We own the Internet domain name "netbank.com." Domain names in the United States and in foreign countries are regulated by the laws and regulations governing the Internet are continually evolving. We do actively monitor the use of potentially infringing names on the Internet and take action to protect our intellectual property rights.

Supervision and Regulation

        Savings and loan holding companies and federal savings banks are extensively regulated under both Federal and state law. The following is a brief summary of certain statutes and rules and regulations that affect or may affect NetBank, Inc. (the "Company") and NetBank (the "Bank"). This summary is qualified in its entirety by reference to the particular statute and regulatory provision referred to below and is not intended to be an exhaustive description of the statutes or regulations applicable to the business of the Company and the Bank. Supervision, regulation and examination of the Company and the Bank by the regulatory agencies are intended primarily for the protection of depositors rather than shareholders of the Company. The terms savings association, federal savings bank and thrift are used interchangeably in this section.

Savings and Loan Holding Company Regulation

        The Company is a registered holding company under both the Savings and Loan Holding Company Act (the "SLHCA") set forth in Section 10 of the Home Owners Loan Act ("HOLA") and the Financial Institutions Code of Georgia ("FICG"). The Company is regulated under such acts by the Office of Thrift Supervision (the "OTS") and by the Department of Banking and Finance (the "Georgia Department"), respectively. As a savings and loan holding company, the Company is required to file with the OTS an annual report and such additional information as the OTS may require pursuant to the SLHCA. The OTS also conducts examinations of the Company and each of its subsidiaries.

        Savings and loan holding companies and their subsidiaries are prohibited from engaging in any activity or rendering any services for or on behalf of their savings institution subsidiaries for the purpose or with the effect of evading any law or regulation applicable to the institution. This restriction is designed to prevent the use of holding company affiliates to evade requirements of the SLHCA that are designed to protect the holding company's savings institution subsidiaries. However, if the holding company owns only one insured institution (a unitary holding company) and was in existence prior to May 4, 1999, the SLHCA and the FICG impose no such restrictions on the activities of its non-bank subsidiaries, provided that the lone savings institution satisfies the qualified thrift lender test (discussed below). Moreover, a unitary holding company that satisfies these requirements is not restricted to any statutory prescribed list of permissible activities. However, the Financial Services Modernization Act of 1999 provides that, while existing unitary holding companies retain these unrestricted powers, if the

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unitary is then acquired by another party, its powers are restricted to those permitted for financial holding companies under the Act.

        The SLHCA and the FICG makes it unlawful for any savings and loan holding company, directly or indirectly, or through one or more subsidiaries or one or more transactions, to acquire control of another savings association or another savings and loan holding company without prior approval from the OTS and the Georgia Department, respectively. The acquisition of more than 25% of any class of voting stock of a savings association or holding company is deemed to be conclusive evidence of control. Savings and loan holding companies are allowed to acquire or to retain as much as 5% of the voting shares of an unaffiliated savings institution or savings and loan holding company without regulatory approval. On December 7, 2000, Congress passed the American Homeownership and Economic Opportunity Act of 2000, which permits savings and loan holding companies to acquire or to retain a 5% to 25% non-controlling interest in an unaffiliated savings institution or savings and loan holding company with prior regulatory approval.

        An acquisition by merger, consolidation or purchase of assets of such an institution or holding company or of substantially all of the assets of such an institution or holding company is also prohibited without prior OTS or Georgia Department approval. When considering an application for such an acquisition, the OTS and the Georgia Department take into consideration the financial and managerial resources and future prospects of the prospective acquiring company and the institution involved. This includes consideration of the competence, experience and integrity of the officers, directors and principal shareholders of the acquiring company and savings institution. In addition, the OTS and the Georgia Department consider the effect of the acquisition on the institution, the insurance risk to the Savings Association Insurance Fund ("SAIF") and the convenience and needs of the community to be served.

        The OTS may not approve an acquisition that would result in the formation of certain types of interstate holding company networks. The OTS is precluded from approving an acquisition that would result in the formation of a multiple holding company controlling institutions in more than one state unless the acquiring company or one of its savings institution subsidiaries is authorized to acquire control of an institution or to operate an office in the additional state pursuant to a supervisory acquisition authorized under Section 13(k) of the Federal Deposit Insurance Act or unless the statutes of the state in which the institution to be acquired is located permits such an acquisition.

Bank Regulation

        General.    The Bank is a federal savings bank organized under the laws of the United States subject to examination by the OTS. The OTS regulates all areas of the Bank's banking operations including reserves, loans, mergers, payment of dividends, interest rates, establishment of branches, and other aspects of operations. OTS regulations generally provide that federal savings banks must be examined no less frequently than every 12 months, unless the federal savings bank (i) has assets of less than $250 million; (ii) is well capitalized; (iii) was found to be well managed and its composite condition was found to be outstanding (or good, if the bank had total assets of not more than $100 million) during its last examination; (iv) is not subject to a formal enforcement proceeding or an order from the Federal Deposit Insurance Corporation ("FDIC") or another banking agency; and (v) has not undergone a change of control during the previous 12-month period. In any event, however, federal savings banks must be examined no less frequently than every 18 months. The Bank also is subject to assessments by the OTS to cover the costs of such examinations.

        The Bank is also insured and regulated by the FDIC. The major functions of the FDIC with respect to insured federal savings banks include paying depositors to the extent provided by law in the event an insured bank is closed without adequately providing for payment of the claims of depositors and preventing the continuance or development of unsound and unsafe banking practices.

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        Subsidiary institutions of a savings and loan holding company, such as the Bank, are subject to certain restrictions imposed by the Federal Reserve Act on any extension of credit to the holding company or any of its subsidiaries, on investment in the stock or other securities thereof, and on the taking of such stock or securities as collateral for loans to any borrower. In addition, a holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with any extension of credit or provision of any property or services.

        Capital Requirements.    OTS regulations require that federal savings banks maintain (i)"tangible capital" in an amount of not less than 1.5% of total assets, (ii) "core capital" in an amount not less than 4.0% of total assets, and (iii) a level of risk-based capital equal to 8% of risk-weighted assets. Under OTS regulations, the term "core capital" generally includes common stockholders' equity, noncumulative perpetual preferred stock and related surplus, and minority interests in the equity accounts of consolidated subsidiaries less unidentifiable intangible assets (other than certain amounts of supervisory goodwill) and certain investments in certain subsidiaries plus 90% of the fair market value of readily marketable purchased mortgage servicing rights ("PMSRs") and purchased credit card relationships (subject to certain conditions). "Tangible capital" generally is defined as core capital minus intangible assets and investments in certain subsidiaries, except PMSRs.

        In determining total risk-weighted assets for purposes of the risk-based requirement, (i) each off-balance sheet asset must be converted to its on-balance sheet credit equivalent amount by multiplying the face amount of each such item by a credit conversion factor ranging from 0% to 100% (depending upon the nature of the asset), (ii) the credit equivalent amount of each off-balance sheet asset and each on-balance sheet asset must be multiplied by a risk factor ranging from 0% to 200% (again depending upon the nature of the asset) and (iii) the resulting amounts are added together and constitute total risk-weighted assets. "Total capital," for purposes of the risk-based capital requirement equals the sum of core capital plus supplementary capital (which, as defined, includes the sum of, among other items, perpetual preferred stock not counted as core capital, limited life preferred stock, subordinated debt, and general loan and lease loss allowances up to 1.25% of risk-weighted assets) less certain deductions. The amount of supplementary capital that may be counted towards satisfaction of the total capital requirement may not exceed 100% of core capital, and OTS regulations require the maintenance of a minimum ratio of core capital to total risk-weighted assets of 4%.

        OTS regulations also include an interest-rate risk in the risk-based capital requirement. Under this regulation, an institution is considered to have excess interest rate-risk if, based upon a 200-basis point change in market interest rates, the market value of an institution's capital changes by more than 2%. This requirement does not have any material effect on the ability of the Bank to meet the risk-based capital requirement. The OTS also revised its risk-based capital standards to ensure that its standards provide adequately for concentration of credit risk, risk from nontraditional activities and actual performance and expected risk of loss on multi-family mortgages.

        Capital requirements higher than the generally applicable minimum requirement may be established for a particular savings association if the OTS determines that the institution's capital was or may become inadequate in view of its particular circumstances.

        Additionally, the Georgia Department requires that savings and loan holding companies, such as the Company, must maintain a 5% Tier 1 leverage ratio on a consolidated basis.

        Prompt Corrective Action.    The Federal Deposit Insurance Corporation Improvement Act of 1991 establishes a system of prompt corrective action to resolve the problems of undercapitalized financial institutions. Under this system, the federal banking regulators have established five capital categories (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) in which all institutions are placed. Federal banking regulators are required to take some mandatory supervisory actions and are authorized to take other discretionary actions, with respect to institutions in the three undercapitalized categories. The severity of the action depends upon the

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capital category in which the institution is placed. Generally, subject to a narrow exception, the banking regulator must appoint a receiver or conservator for an institution that is critically undercapitalized. The federal banking agencies have specified by regulation the relevant capital level for each category.

        An institution that is categorized as undercapitalized, significantly undercapitalized, or critically undercapitalized is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. A holding company must guarantee that a subsidiary depository institution meets its capital restoration plan, subject to certain limitations. The controlling holding company's obligation to fund a capital restoration plan is limited to the lesser of 5% of an undercapitalized subsidiary's assets or the amount required to meet regulatory capital requirements. An undercapitalized institution is also generally prohibited from increasing its average total assets, making acquisitions, establishing any branches or engaging in any new line of business, except under an accepted capital restoration plan or with regulatory approval. An institution may be downgraded to a lower capital category based on supervisory factors other than capital.

        FDIC Insurance Assessments.    The FDIC has adopted a risk-based assessment system for insured depository institutions that takes into account the risks attributable to different categories and concentrations of assets and liabilities. The system assigns an institution to one of three capital categories: (1) well capitalized; (2) adequately capitalized; and (3) undercapitalized. These three categories are substantially similar to the prompt corrective action categories described above, with the "undercapitalized" category including institutions that are undercapitalized, significantly undercapitalized, and critically undercapitalized for prompt corrective action purposes. The FDIC also assigns an institution to one of three supervisory subgroups within each capital group. The supervisory subgroup to which an institution is assigned is based on a supervisory evaluation that the institution's primary federal regulator provides to the FDIC and information that the FDIC determines to be relevant to the institution's financial condition and the risk posed to the deposit insurance funds. The FDIC then determines an institution's insurance assessment rate based on the institution's capital category and supervisory category. Under the risk-based assessment system, there are nine combinations of capital groups and supervisory subgroups to which different assessment rates are applied. Assessments range from $0.00-$0.27 per $100 of deposits, depending on the institution's capital group and supervisory subgroup.

        In addition, effective January 1, 1997, the FDIC imposed assessments to help pay off the $780 million in annual interest payments on the $8 billion Financing Corporation bonds issued in the late 1980s as part of the government rescue of the thrift industry. The assessment is calculated at a rate of 3.7 cents per $100 (the same assessment rate that is imposed on commercial banks).

        The FDIC may terminate its insurance of deposits if it finds that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order, or condition imposed by the FDIC.

        Community Reinvestment Act.    The Community Reinvestment Act requires that, in connection with examinations of financial institutions within their respective jurisdictions, the federal banking regulators shall evaluate the record of each financial institution in meeting the credit needs of its local community, including low and moderate income neighborhoods. These facts are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility. Failure to adequately meet these criteria could impose additional requirements and limitations on the Bank. The CRA requires that board of directors of financial institutions, such as the Bank, to adopt a CRA statement for each assessment area that, among other things, describes its efforts to help meet community credit needs and the specific types of credit that the institution is willing to extend. The Bank's CRA performance will be assessed pursuant to the following criteria: (1) the Bank's loan to deposit ratio, adjusted for seasonal variation and, as appropriate, other related lending activities such as loan originations for sale to the secondary markets, community development loans and qualified investments; (2) the percentage of loans and, as appropriate, other lending related activities located in the Bank's

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assessment area; (3) the Bank's record of lending to and, as appropriate, engaging in other lending related activities for borrowers of different income levels and businesses and farms of different sizes; (4) the geographic distribution of the Bank's loans; and (5) the Bank's record of taking action if warranted in response to written complaints about its performance in helping to meet credit needs in its assessment area.

        Capital Distributions.    An OTS rule requires prior notice reporting all capital distributions by savings associations that are subsidiaries of a holding company (including dividends, stock repurchases and cash-out mergers). An institution that both before and after a proposed capital distribution has net capital equal to or in excess of its capital requirements may, subject to any otherwise applicable statutory or regulatory requirements or agreements entered into with the regulators, make capital distributions in any calendar year up to (i) 100% of its net income to date during the calendar year plus the amount that would reduce by one-half its "surplus capital ratio" (i.e., the percentage by which the association's capital-to-assets ratio exceeds the ratio of its fully phased-in capital requirement to its assets) at the beginning of the calendar year or (ii) 75% of its net income over the most recent four-quarter period.

        An institution that either before or after a proposed capital distribution fails to meet its then applicable minimum capital requirement or that has been notified that it needs more than normal supervision may not make any capital distributions without the prior written approval of the OTS. In addition, the OTS may prohibit a proposed capital distribution, which would otherwise be permitted by the regulation, if the OTS determines that such distribution would constitute an unsafe or unsound practice.

        Equity Investments.    The OTS has revised its risk-based capital regulation to modify the treatment of certain equity investments and to clarify the treatment of other equity investments. Equity investments that are permissible for both savings banks and national banks will no longer be deducted from savings associations' calculations of total capital over a five-year period. Instead, permissible equity investments will be placed in the 100% risk-weight category, mirroring the capital treatment prescribed for those investments when made by national banks under the regulations of the OCC. Equity investments held by savings associations that are not permissible for national banks must still be deducted from assets and total capital.

        Qualified Thrift Lender Requirement.    A federal savings bank is deemed to be a "qualified thrift lender" ("QTL") as long as its "qualified thrift investments" equal or exceed 65% of its "portfolio assets" on a monthly average basis in nine out of every 12 months. Qualified thrift investments generally consist of (i) various housing related loans and investments (such as residential construction and mortgage loans, home improvement loans, mobile home loans, home equity loans and mortgage-backed securities), (ii) certain obligations of the FDIC and (iii) shares of stock issued by any FHLB, the FHLMC or the FNMA. In addition, the following assets may be categorized as qualified thrift investments in an amount not to exceed 20% in the aggregate of portfolio assets: (i) 50% of the dollar amount of residential mortgage loans originated and sold within 90 days of origination; (ii) investments in securities of a service corporation that derives at least 80% of its income from residential housing finance; (iii) 200% of loans and investments made to acquire, develop or construct starter homes or homes in credit needy areas (subject to certain conditions); (iv) loans for the purchase or construction of churches, schools, nursing homes and hospitals; and (v) consumer loans (in an amount up to 20% of portfolio assets). For purposes of the QTL test, the term "portfolio assets" means the savings institution's total assets minus goodwill and other intangible assets, the value of property used by the savings institution to conduct its business, and liquid assets held by the savings institution in an amount up to 20% of its total assets.

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        OTS regulations provide that any savings association that fails to meet the definition of a QTL must either convert to a national bank charter or limit its future investments and activities (including branching and payments of dividends) to those permitted for both savings associations and national banks. Further, within one year of the loss of QTL status, a holding company of a savings association that does not convert to a bank charter must register as a bank holding company and will be subject to all statutes applicable to bank holding companies. In order for the Bank to exercise the powers granted to federally chartered savings associations and for the Company to retain the power of a unitary holding company, the Bank must meet the definition of a QTL.

        Loans to One Borrower Limitations.    HOLA generally requires savings associations to comply with the loans to one borrower limitations applicable to national banks. National banks generally may make loans to a single borrower in amounts up to 15% of their unimpaired capital and surplus, plus an additional 10% of capital and surplus for loans secured by readily marketable collateral. HOLA provides exceptions under which a savings association may make loans to one borrower in excess of the generally applicable national bank limits. A savings association may make loans to one borrower in excess of such limits under one of the following circumstances: (i) for any purpose, in any amount not to exceed $500,000; or (ii) to develop domestic residential housing units, in an amount not to exceed the lesser of $30 million or 30% of the savings association's unimpaired capital and unimpaired surplus, provided other conditions are satisfied. The Federal Institutions Reform, Recovery, and Enforcement Act of 1989 provided that a savings association could make loans to one borrower to finance the sale of real property acquired in satisfaction of debts previously contracted in good faith in amounts up to 50% of the savings association's unimpaired capital and unimpaired surplus. The OTS, however, has modified this standard by limiting loans to one borrower to finance the sale of real property acquired in satisfaction of debts to 15% of unimpaired capital and surplus. That rule provides, however, that purchase money mortgages received by a savings association to finance the sale of such real property do not constitute "loans" (provided no new funds are advanced and the savings association is not placed in a more detrimental position holding the note than holding the real estate) and, therefore, are not subject to the loans to one borrower limitations.

        Commercial Real Property Loans.    HOLA limits the aggregate amount of commercial real estate loans that a federal savings association may make to an amount not in excess of 400% of the savings association's capital.

        Federal Home Loan Bank System.    The FHLB System consists of 12 regional FHLBs, each subject to supervision and regulation by the Federal Housing Finance Board (the "FHFB"). The FHLBs provide a central credit facility for member savings associations. The maximum amount that the FHLB of Atlanta will advance fluctuates from time to time in accordance with changes in policies of the FHFB and the FHLB of Atlanta, and the maximum amount generally is reduced by borrowings from any other source. The Financial Services Modernization Act has enabled the FHLB to expand the credit window for members by expanding the purposes for which FHLB's may make secured advances and the types of collateral eligible to secure these advances, as well as eliminating restrictions on advances to thrifts not meeting the QTL test.

        Federal Reserve System.    The Federal Reserve Board has adopted regulations that require savings associations to maintain non-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). Because required reserves must be maintained in the form of cash or a non-interest-bearing account at a Federal Reserve Bank, the effect of this reserve requirement is to reduce the amount of the Bank's interest-earning assets.

        Savings institutions also have the authority to borrow from the Federal Reserve "discount window." Federal Reserve Board regulations, however, require savings associations to exhaust all FHLB sources before borrowing from a Federal Reserve bank.

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        Other Regulations.    Interest and other charges collected or contracted for by the Bank are subject to various laws concerning interest rates and the Bank's loan operations are also subject to various laws applicable to credit transactions, such as:

The federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

The Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

The Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

The Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies;

The Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and

The rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.

        The deposit operations of the Bank are subject to:

The Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

The Soldiers' and Sailors Civil Relief Act of 1940, governing the repayment terms of, and property rights underlying, secured obligations of persons in military service; and

The Electronic Funds transfer Act and Regulation E issued by the Federal Reserve to implement that act, which governs automatic deposits to and withdrawals from deposit accounts and customers' rights and liabilities arising from the use of automated teller machines and other electronic banking services.

Anti-Terrorism Legislation

        In the wake of the tragic events of September 11^th, on October 26, 2001, the President signed the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001. Under the USA PATRIOT Act, financial institutions are subject to prohibitions against specified financial transactions and account relationships as well as enhanced due diligence and "know your customer" standards in their dealings with foreign financial institutions and foreign customers. For example, the enhanced due diligence policies, procedures, and controls generally require financial institutions to take reasonable steps—

to conduct enhanced scrutiny of account relationships to guard against money laundering and report any suspicious transaction;

to ascertain the identity of the nominal and beneficial owners of, and the source of funds deposited into, each account as needed to guard against money laundering and report any suspicious transactions;

to ascertain for any foreign bank, the shares of which are not publicly traded, the identity of the owners of the foreign bank, and the nature and extent of the ownership interest of each such owner; and

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to ascertain whether any foreign bank provides correspondent accounts to other foreign banks and, if so, the identity of those foreign banks and related due diligence information.

        Under the USA PATRIOT Act, financial institutions have 180 days from enactment (or until April 25, 2002) to establish anti-money laundering programs. The USA PATRIOT Act sets forth minimum standards for these programs, including:

the development of internal policies, procedures, and controls;

the designation of a compliance officer;

an ongoing employee training program; and

an independent audit function to test the programs.

        Before the 180-day grace period expires, the Secretary of the Treasury will prescribe regulations that consider the extent to which these new requirements are commensurate with the size, location, and activities of financial institutions subject to the Act.

        In addition, the USA PATRIOT Act authorizes the Secretary of the Treasury to adopt rules increasing the cooperation and information sharing between financial institutions, regulators, and law enforcement authorities regarding individuals, entities and organizations engaged in, or reasonably suspected based on credible evidence of engaging in, terrorist acts or money laundering activities. Any financial institution complying with these rules will not be deemed to have violated the privacy provisions of the Gramm-Leach-Bliley Act, as discussed above.

Effect of Governmental Monetary Polices

        The Company's earnings are affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. The Federal Reserve Bank's monetary policies have had, and are likely to continue to have, an important impact on the operating results of financial institutions through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve Board have major effects upon the levels of bank loans, investments and deposits through its open market operating in United States government securities and through its regulation of the discount rate on borrowings of member banks and the reserve requirements against member bank deposits. It is not possible to predict the nature or impact of future changes in monetary and fiscal policies.

Transactions with Affiliates Restrictions

        The Company and the Bank are subject to the provisions of Section 23A of the Federal Reserve Act. Section 23A places limits on:

The amount of loans or extensions of credit to affiliates;

The amount of investment in affiliates;

The amount of the purchase of assets from affiliates, except for real and personal property exempted by the Federal Reserve;

The amount of loans or extensions of credit to third parties collateralized by the securities or obligations of affiliates; and

The amount of any guarantee, acceptance or letter of credit issued on behalf of an affiliate.

        The aggregate of all of the above transactions is limited in amount, as to any one affiliate, to 10% of a bank's capital and surplus and, as to all affiliates combined, to 20% of a bank's capital and surplus. In addition to the limitation on the amount of these transactions, each of the above

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transactions must also meet specified collateral requirements. The Company must also comply with certain provisions designed to avoid the taking of low-quality assets.

        The Company and the Bank are also subject to the provisions of Section 23B of the Federal Reserve Act which, among other things, prohibits an institution from engaging in the above transactions with affiliates unless the transactions are on terms substantially the same, or at least as favorable to the institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.

        The Bank is also subject to restrictions on extensions of credit to its executive officers, directors, certain principal shareholders and their related interests. These extensions of credit (1) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties, and (2) must not involve more than the normal risk of repayment or present other unfavorable features.

Proposed Legislation and Regulatory Action

        New regulations and statutes are regularly proposed that contain wide-ranging proposals for altering the structures, regulations and competitive relationships of the nation's financial institutions. The Company cannot be predict whether or in what form any proposed regulation or statute will be adopted or the extent to which its business may be affected by any new regulation or statute. Legislation that would eliminate the federal savings bank charter is under discussion. If such legislation is enacted, the Bank would be required to convert its federal savings bank charter to either a national bank charter or to a state depository institution charter. Various legislative proposals also may result in the restructuring of federal regulatory oversight, including, for example, consolidation of the OTS into another agency, or creation of a new Federal banking agency to replace the various such agencies which presently exist. The Bank is unable to predict whether such legislation will be enacted or, if enacted, whether it will contain relief as to bad debt deductions previously taken.

ITEM 2. PROPERTIES

        We lease 48,960 square feet of office space for our headquarters at 11475 Great Oaks Way, Suite 100, Alpharetta, Georgia 30022. The office space is subject to a lease that expires on June 30, 2006. Market Street's corporate offices are located at 2650 McCormick Drive, Suite 200, Clearwater, Florida 33759. Market Street leases 5,631 and 27,159 square feet of office space in Clearwater under leases that expire June 30, 2002 and April 30, 2004, respectively. In addition, Market Street leases approximately 39 branch offices located in 10 states.

ITEM 3. LEGAL PROCEEDINGS

Lindhe et al.v. NetBank, Inc. and CompuBank, N.A., C.A. No. C01-0822R (Western District of Washington)

        On June 4, 2001, NetBank, Inc. (the "Company") was served with a class action complaint filed by Per Martin Lindhe and ShellyRae Norbeck in the United States District Court for the Western District of Washington. The complaint alleges violations of the federal Expedited Funds Availability Act, and state law claims of breach of contract, breach of common law duties, and conversion arising from the Company's acquisition of deposit accounts from CompuBank, N.A. A settlement is pending Court approval, and assuming such approval, the suit would represent a potential loss to or payment by the Company of approximately $200,000.

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Illinois Union Insurance Co. v. Commercial Money Center, Inc., et al., Case No. CV-01-0685-KJD-RJJ (District Court of Nevada)

        On December 3, 2001, the Company was served with a complaint filed by Illinois Union Insurance Company in the United States District Court for the District of Nevada. The complaint seeks rescission of certain insurance policies relating to leases purchased by the Company and restitution and recovery of any benefits paid to the Company. We have filed a separate action against Illinois Union and three other surety companies seeking payment under performance bonds guaranteeing payment under the leases. At this time, we are unable to express an opinion as to the likelihood of loss, or the amount or range of potential loss, with regard to this matter.

interstate NetBank v. NetBank, Inc. and NetBank, Case No. 1:01-CV-1324(JBS) (District of New Jersey)

        On June 27, 2001, the Company was served with a complaint for a declaratory judgment filed by interState NetBank in the District of New Jersey challenging the "NETBANK®" service mark. The Company answered and counterclaimed for trademark infringement on July 13, 2001. Factual discovery had been scheduled through January 31, 2002, with expert discovery to have been completed by April 30, 2002. Discovery was stayed pending a ruling on interState NetBank's November 19, 2001 motion for summary judgment, which claimed that "NETBANK" is generic for all banking services delivered over the Internet. The Company's response to the motion is due on March 29, 2002 and discovery may recommence depending on the outcome of the ruling on the motion.

        The Company intends to vigorously defend against interState NetBank's challenge of the "NETBANK®" service mark and will pursue its counterclaims for trademark infringement, cyberpiracy and unfair competition. While there is a possibility of an adverse outcome for the Company, at this stage of the matter, we cannot fairly determine the likelihood of an adverse outcome. However, in the event of an adverse outcome, it is unlikely that there would be a monetary loss aside from the loss in value of the intellectual property rights in the NETBANK® registration.

NetBank, Inc. and NetBank v. The RiverBank, Case No. 1:00-CV-2154 CC (Northern District of Georgia)

        The Company filed an infringement lawsuit against RiverBank in the United States District Court for the Northern District of Georgia on August 21, 2000. Following motion practice over jurisdiction, the case has been transferred to Minnesota.

        The Company intends to continue to pursue its infringement claims against the RiverBank. While there is a possibility of an adverse outcome for the Company, at this stage of the matter, we cannot fairly determine the likelihood of an adverse outcome. However, in the event of an adverse outcome, it is unlikely that there would be a monetary loss aside from the loss in value of the intellectual property rights in the NETBANK® registration.

        The Company has also sent numerous letters to other entities that appear to be infringing the Company's rights in the NETBANK® service mark and variations of that mark. The letters demand that the entities immediately cease and desist from any such infringing activities. If the entities refuse to cease the infringement, the Company intends to file additional lawsuits similar to those that have already been filed. If litigation becomes necessary, it is possible that the entities will respond by also seeking to cancel the NETBANK® registration. To date, however, no other entity has actually threatened or suggested such action.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        Not applicable.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

        Our common stock is quoted on the Nasdaq Stock Market under the symbol "NTBK." The following table shows, for the periods indicated, the high and low closing prices per share of our common stock as reported by the Nasdaq Stock Market.

        We have not declared or paid any cash dividends on our common stock. We have no present plan to pay dividends, but the Board of Directors may consider paying a moderate dividend in the future. In addition, the Office of Thrift Supervision regulates the amount of dividends that our subsidiary thrift can pay to us.

        On June 29, 2001, we issued 1,689,189 shares of common stock to Republic Bancorp, Inc. in a private placement to a single accredited investor pursuant to Rule 506 under the Securities Act of 1933, as amended. The shares were issued as part of the consideration for our acquisition of Market Street Mortgage Corporation and were valued at $8.88 per share, representing an aggregate value of approximately $15 million.

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

        The following selected financial data is derived from our consolidated financial statements, which are attached as Exhibit 13.1 to this report. The data should be read in conjunction with the consolidated financial statements, related notes, and other financial information included elsewhere herein.

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ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

        NetBank, Inc. is a bank holding company that wholly owns the outstanding stock of NetBank, FSB, its wholly owned subsidiary, Market Street Mortgage Corporation ("Market Street"), and NB Partners, Inc. ("NB Partners") and its wholly owned subsidiary NetBank Partners, LLP ("NetBank Partners"), (jointly, "NetBank"). NetBank, FSB is a federal savings bank, and its subsidiary, Market Street, is a mortgage company that was acquired on June 29, 2001. NB Partners and NetBank Partners are both involved in strategic partnering opportunities. As of December 31, 2001, NetBank had 245,000 accounts and $1.5 billion in deposits.

        On May 14, 1999, we effected a three-for-one split of our common stock in the form of a stock dividend paid to shareholders of record as of the close of business on April 23, 1999. All references to share and per share amounts reflect the split.

Financial Condition

        At the beginning of 2001, NetBank's stated goal was to place renewed emphasis on the profitability of operations. By the end of 2001, income before extraordinary gain had increased from a $1.1 million loss, or $(0.04) per share, in 2000 to $6.6 million or $0.22 per share income in 2001. Total assets were $2.9 billion as of December 31, 2001 as compared with $1.8 billion as of December 31, 2000. The growth in the balance sheet was fueled by internal growth of our deposit accounts as well as through two acquisitions during the year ended December 31, 2001.

        Total deposits increased 52.3% from $980.8 million as of December 31, 2000 to $1.5 billion as of December 31, 2001. Approximately $75.7 million of the $513.1 million increase in deposits resulted from our acquisition of 50,000 accounts from Compubank on March 28, 2001. The remaining portion of the increase was the result of internal growth. In addition, as part of our income diversification strategy, on June 29, 2001, we purchased Market Street, a retail mortgage lender based in Clearwater, Florida, and licensed to conduct business in 37 states. Since the acquisition, Market Street has originated approximately $1.3 billion of residential mortgages. As of December 31, 2001, $295.5 million of those mortgages were recorded as loans held for sale and a $33.6 million liability was recorded related to loans in process. Other borrowed funds increased $447.8 million, from $564.2 million at December 31, 2000 to $1.0 billion at December 31, 2001. The increase was the result of $147.0 million outstanding under Market Street's $250.0 million warehouse line with the Federal Home Loan Bank of Atlanta ("FHLB") and $810.0 million in conventional FHLB advances extended to NetBank, offset by the repayment of $509.2 million in NetBank FHLB advances.

        As Market Street primarily originates fixed first mortgages, NetBank purchased $739.4 million in adjustable first and fixed second residential mortgages, commercial mortgages, home equity lines and leases during the year ended December 31, 2001. The purchases were offset by prepayments due to increased refinancing activity in a declining rate environment, resulting in a net increase of $125.7 million in NetBank's loan portfolio to $1.5 billion at December 31, 2001. The securities portfolio increased $461.2 million from $388.9 million at December 31, 2000 to $850.1 million at December 31, 2001 as NetBank began to increase liquidity in anticipation of acquiring Resource Bancshares Mortgage Group, Inc. ("RBMG") during the first quarter of 2002. RBMG is a wholesale mortgage banking company headquartered in Columbia, South Carolina focused on the purchase, sales and servicing of residential, single-family mortgage loans through a nationwide network of independent brokers and correspondent banks. The acquisition is motivated primarily by balance sheet synergies between the two companies. NetBank will gain access to higher-yield assets and additional fee based income, while RBMG will enjoy a lower cost of funding.

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        Capital resources remained fairly constant at December 31, 2001 at $255.5 million, compared with $250.6 million at December 31, 2000. We issued 1,689,000 new shares in conjunction with the acquisition of Market Street and repurchased approximately 1,818,000 shares under a stock repurchase program begun during 2000. As of December 31, 2001, the total number of shares held in treasury was 2,737,000 at an aggregate cost of $21,509,000, or $7.86 per share.

        Average Balances, Net Interest Income and Yields Earned and Rates Paid.    The following table sets forth information regarding our average balance sheet (in 000's). Information is based on average monthly balances during the years ended December 31, 2001, 2000, and 1999.

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(1)

Based on amortized cost; changes in fair value are not considered.

(2)

No separate treatment has been made for non-accrual loans.

(3)

Net interest income divided by average interest-earning assets.

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        The following table sets forth a summary of the changes in interest income and interest expense resulting from changes in volume and rates for the years indicated (in 000's):

(1)

The changes in interest income and/or expense not due solely to rate or volume have been allocated to the volume component.

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Results of Operations

        On June 29, 2001, NetBank acquired Market Street in a transaction accounted for as a purchase. Accordingly, Market Street's results of operations are included from the date of acquisition.

Critical Accounting Policies

        NetBank's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"), which often require the judgment of management in the selection and application of certain accounting principles and methods. Management believes the quality and reasonableness of its most critical policies enable the fair presentation of its financial position and results of operations. However, investors are cautioned that the sensitivity of financial statements to these methods, assumptions and estimates could create materially different results under different conditions or using different assumptions.

        In response to the Securities and Exchange Commission's ("SEC") Release No. 33-8040, Cautionary Advice Regarding Disclosure About Critical Accounting Policies, NetBank has identified the following as the most critical accounting policies upon which its financial status depends. These critical policies were determined by considering accounting policies that involve the most complex or subjective decisions or assessments. NetBank's most critical accounting policies are those related to:

        Allowance for Loan Losses—The allowance for loan losses is maintained at a level estimated to be adequate to provide for probable losses in the loan portfolio. As the majority of NetBank's portfolio is purchased, an estimate of the loss inherent in the purchased portfolio is made and an allowance for loan losses is recorded by adjusting the premium associated with the purchased loans at the time of purchase. Management determines the adequacy of the allowance based upon reviews of individual and pools of loans, recent loss experience, current economic conditions, the risk characteristics of the various categories of loans, the seller's reserve, and other pertinent factors. Any deterioration in a loan pool occurring after the date of purchase is charged to the provision for loan loss. Loans deemed uncollectible are charged to the allowance. Provisions for loan losses, net of recoveries on loans previously charged off are added to the allowance.

        Gains on Sales of Mortgage Loans and Servicing Rights—Gains or losses resulting from loan sales are generally recognized based on the difference between the net sale proceeds and the net book value of the loans sold. Deferred fees and costs are recorded as an adjustment of the book value and are included in the gain or loss on sale when the mortgage loan is sold. Gains or losses on sales of mortgage loans are affected by the sale of, or the recording of retained mortgage servicing rights related to the specific pools of loans sold.

        Premium on Loans Purchased—Premiums on loans purchased from third parties are capitalized and amortized over the average life of the loan as an adjustment to yield. Such premiums are classified with the loan balance to which they relate for financial reporting purposes.

Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000

        General.    At the beginning of 2001, NetBank's stated goal was to place renewed emphasis on the profitability of operations. By the end of 2001, income before extraordinary gain had increased from a $1.1 million loss, or $(0.04) per share, in 2000 to $6.6 million or $0.22 per share income in 2001. The increase in overall income before extraordinary gain was driven by a company-wide focus on serving our existing customer base more efficiently, providing enhancements to products where the initial investment had already been made and cross-selling products to turn less profitable customers into more profitable ones. During the year ended December 31, 2001, we substantially reduced our marketing and infrastructure expenditures by continuing our focus on pay-for-performance type arrangements, introducing certain fees intended to encourage our existing customers to take advantage

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of less costly, on-line services and customer self-service tools on our Web site. In addition, we examined our relationship with each of our major vendors and asked those vendors to work with us to identify ways to cut costs. We also diversified and enhanced our income stream through the acquisition of Market Street. This acquisition allowed us to generate fee income related to the origination and sale of first mortgages, to reduce the risk of material write-downs of premiums related to prepayment activity during periods of declining rates, and to participate in the increased refinancing activity during a period of declining rates.

        Interest Income.    Interest income related to our loan and investment portfolio for the year ended December 31, 2001 increased $35.2 million, to $151.5 million from $116.3 million for the year ended December 31, 2000. The increase in interest income was primarily the result of a higher average balance in both the securities and the loan portfolios due to account growth during the year ended December 31, 2001 as compared with the year ended December 31, 2000, offset by lower yields on both portfolios as interest rates declined and both loans and securities repriced during the year. The average balance in the loan and securities portfolio was $1.5 billion and $581.8 million, respectively during the year ended December 31, 2001, as compared with $1.1 billion and $432.9 million during the year ended December 31, 2000. Loan yields were 7.5% for both the years ended December 31, 2001 and 2000. The yield on the investment portfolio was 6.1% for the year ended December 31, 2001 as compared with 7.1% for the year ended December 31, 2000. The mix of the loan portfolio remained relatively stable, with 36% of our loan portfolio invested in first mortgages at both December 31, 2001 and 2000.

        Interest Expense.    Interest expense for the year ended December 31, 2001 increased $22.1 million, or 28.1%, to $100.6 million from $78.6 million for the year ended December 31, 2000. The primary reason for the increase was the $513.1 million, or 52.3%, increase in our deposit portfolio and a $447.8 million, or 79.4%, increase in other borrowed funds, primarily FHLB advances and the Market Street warehouse line. This increase in volume was offset by constant decreases in interest rates throughout the year ended December 31, 2001, with the average rate paid on deposits decreasing from 6.0% for the year ended December 31, 2000 to 4.7% for the year ended December 31, 2001 and the average rate paid on other borrowed funds decreasing from 6.7% for the year ended December 31, 2000 to 5.9% for the year ended December 31, 2001.

        Net Interest Income.    Net interest income is determined by our interest rate spread, which is the difference between the yield earned on our interest-earning assets and the rates paid on our interest-bearing liabilities, and is effected by the relative amounts of interest-earning assets and interest-bearing liabilities. Net interest income was $50.9 million, or 2.4% of average interest-earning assets for the year ended December 31, 2001 compared to $37.8 million, or 2.4% of interest-earning assets for the year ended December 31, 2000. Net interest margin remained constant due to loan and securities yields decreasing due to the declining rate environment and deposits re-pricing at approximately the same rate, thereby keeping the net interest spread constant.

        Provision for Loan Losses.    In connection with the purchase of loan portfolios, we assess the inherent loss in the portfolios at the date of purchase and record the necessary allowance by adjusting the premium associated with each portfolio. We determine the adequacy of the allowance based upon reviews of individual and pools of loans, recent loss experience, current economic conditions, the risk characteristics of the various categories of loans, the seller's reserve, and other pertinent factors. Any deterioration in a loan pool occurring after the date of purchase is charged to the provision for loan loss. During the year ended December 31, 2001, we recorded $11.5 million as an addition to premiums related to allowance for loan losses for loans purchased during the year. In addition, we also recorded a provision for loan losses of $0.6 million primarily related to two portfolios of fixed second mortgages with high loan to value ratios and one pool of auto loans. This compares to a provision of $0.4 million recorded during the year ended December 31, 2000 primarily related to these same pools. We

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periodically review the performance of our loan portfolio by reviewing chargeoffs, delinquency statistics, and industry statistics on a pool-by-pool basis for our purchased portfolio and a loan-by-loan basis for our originated loans. If a decline in credit quality for a specific pool or a loan is noted, we record an additional allowance through a charge to the provision for loan losses. The allowance for loan losses is maintained at a level estimated to be adequate to provide for probable losses in the loan portfolio. We determine the adequacy of the allowance based upon reviews of individual and pools of loans, recent loss experience, current economic conditions, the risk characteristics of the various categories of loans and other pertinent factors.

        Non-interest Income.    For the year ended December 31, 2001, non-interest income increased 710.0% from $3.4 million for the year ended December 31, 2000 to $27.6 million for the year ended December 31, 2001. The increase was the result of $11.8 million in gains on sales of loans and loan servicing recorded during the year ended December 31, 2001 related to Market Street, a $3.2 million increase in gains on sales of securities, and a $9.2 million increase in fee income due to an increase in service charges resulting from the $513.1 million increase in our deposit portfolio as well as new fee initiatives introduced during the fourth quarter of 2000 and the first six months of 2001. The initiatives included introduction of new fees that encouraged our existing customers to take advantage of our on-line services such as on-line bill payment, rather than more costly, labor-intensive services such as writing checks.

        Non-interest Expense.    Non-interest expense includes all operating expenses including salaries and benefits, marketing, general and administrative expenses (excluding interest expense, provision for loan losses and income taxes). Non-interest expense increased $24.3 million, or 56.2% for the year ended December 31, 2001 as compared with the year ended December 31, 2000. Approximately 60% of this increase resulted from the recording of $14.4 million in non-interest expense related to Market Street subsequent to acquisition on June 29, 2001. The remaining $9.9 million of the increase in non-interest expense resulted from increases in salaries and benefits ($3.2 million), customer service ($5.4 million), data processing ($3.6 million), depreciation and amortization ($2.9 million), and loan servicing ($1.7 million), offset by a reduction in marketing expense ($7.2 million). Salaries and benefits increased as NetBank's employee base grew from 101 full-time equivalents at December 31, 2000 to 140 full-time equivalents at December 31, 2001—an expansion necessary to support the 51.2% increase in customer accounts from 162,000 accounts at December 31, 2000 to 245,000 accounts at December 31, 2001. Customer service expense increased due to variable customer service expenses such as call center support which increased as the number of accounts increased 51.2% during the year ended December 31, 2001. In addition, we experienced a $2.1 million increase in cash item losses as compared with the year ended December 31, 2000 due to the increased number of accounts and depositors as well as uncollectible or fraudulent deposits associated with the Compubank conversion. Data processing primarily increased due to variable charges tied to the number of deposit accounts. Depreciation and amortization increased primarily due to additional amortization expense associated with the core deposit intangible recorded as part of the acquisition of Compubank accounts during the first quarter of 2001, as well as increased amortization due to higher capitalized software balances recorded during the year ended December 31, 2001 as compared with the year ended December 31, 2000. Loan servicing increased due to the 33.9% increase in the average balance of our loan portfolio for the year ended December 31, 2001 as compared to the year ended December 31, 2000. Marketing expenses returned to a more normalized level as compared with December 31, 2000 when marketing expenditures were targeted at a higher level due to gains realized on the repurchase of our convertible subordinated notes.

Year Ended December 31, 2000 Compared to the Year Ended December 31, 1999

        General.    During the first quarter of 2000, we identified an opportunity to repurchase, at a substantial discount, some of our $115 million in convertible subordinated notes outstanding. We

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realized that the gains from this repurchase of the convertible notes would allow us to accelerate our marketing and infrastructure programs to attract a greater number of customers during this growth phase of our business model. Therefore, during the year ended December 31, 2000, we repurchased $87.7 million of our convertible subordinated notes outstanding for $62.5 million in cash and 595,000 shares of NetBank common stock and recorded an extraordinary gain on early extinguishment of debt of $9.7 million, net of tax. These gains are the primary reason for the $5.5 million increase in net income for the year ended December 31, 2000 over the year ended December 31, 1999. Because of these substantial gains, we were able to invest $13.1 million in marketing expenses to attract customers, a 77.9% increase over last year's marketing expenditures of $7.4 million. This increase in marketing expenditures allowed us to attract approximately 96,000 new accounts, which generated a $326.9 million increase in customer deposits. Due to the 145.5% increase in new accounts during December 31, 2000, we made additional investments in infrastructure and new product development to support those customers and maintain our current customer attrition rate of less than 4.0% annually. Due to the extraordinary gains realized from the repurchase of debt, management increased marketing expenditures as well as infrastructure and product development investments, the primary reason for the decrease in operating income of $4.2 million, or 136.7% over the year ended December 31, 1999.

        Interest Income.    Interest income related to our loan and investment portfolio for the year ended December 31, 2000 increased $61.5 million, to $116.3 million from $54.8 million for the year ended December 31, 1999. The increase in interest income was primarily the result of the 74.9% increase in our loan portfolio from $787.3 million at December 31, 1999 to $1.4 billion at December 31, 2000, as well as better yields on our security portfolio, offset by slightly lower loan yields due to a larger percentage of first mortgages in our loan portfolio. First mortgages typically produce comparatively lower yields than second mortgages, home equity lines, or commercial mortgages. Loan yields were 7.5% for the year ended December 31, 2000 as compared to 7.8% for the year ended December 31, 1999. The yield on the investment portfolio was 7.1% for the year ended December 31, 2000 as compared with 6.9% for the year ended December 31, 1999.

        Interest Expense.    Interest expense for the year ended December 31, 2000 increased $47.2 million, or 150.2%, to $78.6 million from $31.4 million for the year ended December 31, 1999. The primary reason for the increase was the $326.9 million, or 50.0%, increase in our deposit portfolio and a $320.2 million, or 131.2%, increase in other borrowed funds, primarily FHLB advances. The increase in interest expense was further the result of higher interest rates, with the average rate paid on deposits increasing from 5.4% for the year ended December 31, 1999 to 6.0% for the year ended December 31, 2000 and the average rate paid on other borrowed funds increasing from 6.0% for the year ended December 31, 1999 to 6.7% for the year ended December 31, 2000.

        Net Interest Income.    Net interest income is determined by our interest rate spread, which is the difference between the yield earned on our interest-earning assets and the rates paid on our interest-bearing liabilities, and is effected by the relative amounts of interest-earning assets and interest-bearing liabilities. Net interest income was $37.8 million, or 2.4% of average interest-earning assets for the year ended December 31, 2000 compared to $23.4 million, or 3.2% of interest-earning assets for the year ended December 31, 1999. The decrease in net interest income, or spread, was primarily the result of higher interest rates paid on customer deposits due to increased competition for retail deposits, as well as higher interest rates paid on other borrowed funds due to an inverted yield curve. The inverted yield curve that existed throughout most of the year ended December 31, 2000, also negatively effected the yields on investment securities and loans.

        Provision for Loan Losses.    In connection with the purchase of loan portfolios, we assess the inherent loss in the portfolios and record the necessary allowance by adjusting the premium associated with each portfolio. During the year ended December 31, 2000, we recorded $7.3 million as an addition to premiums related to allowance for loan losses for loans purchased during the year. In addition, we

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also recorded a provision for loan losses of $0.4 million primarily related to originated loans and two portfolios of fixed second mortgages with high loan to value ratios. This compares to a provision of $0.1 million recorded during the year ended December 31, 1999. The increase is primarily due to the increase in volume of our originated portfolio. We periodically review the performance of our loan portfolio by reviewing chargeoffs, delinquency statistics, and industry statistics on a pool-by-pool basis for our purchased portfolio and a loan by loan basis for our originated loans. If a decline in credit quality for a specific pool or a loan is noted, we record an additional allowance through a charge to the provision for loan losses. The allowance for loan losses is maintained at a level estimated to be adequate to provide for probable losses in the loan portfolio. We determine the adequacy of the allowance based upon reviews of individual and pools of loans, recent loss experience, current economic conditions, the risk characteristics of the various categories of loans and other pertinent factors.

        Non-interest Income.    For the year ended December 31, 2000, we recorded approximately $3.4 million in non-interest income compared to $1.7 million recorded during the year ended December 31, 1999. Gains on sales of securities, which are included in this category were $0.4 million during the year ended December 31, 2000, as compared with $0.5 million for the year ended December 31, 1999. The remaining portion of the increase was due to an increase in service charges resulting from the $326.9 million increase in our deposit portfolio as well as a new fee initiative introduced during the fourth quarter of 2000. The initiative included introduction of new fees that encouraged our existing customers to take advantage of our on-line services such as on-line bill payment, rather than more costly, labor- intensive services such as writing checks.

        Non-interest Expenses.    Non-interest expenses include all operating expenses including salaries and benefits, marketing, general and administrative expenses (excluding interest expense, provision for loan losses and income taxes). Non-interest expense increased $22.6 million, or 110.0% for the year ended December 31, 2000 as compared with the year ended December 31, 1999. This increase was primarily the result of planned increases in marketing and infrastructure as a result of the gains realized on the repurchase of our convertible subordinated notes. These increases primarily fell into three categories—marketing, which increased $5.7 million, customer services which increased $8.3 million, and data processing which increased $1.6 million. In addition, customer service was also impacted by a $1.8 million non-recurring charge during the fourth quarter of 2000 that resulted from a detailed review of all customer accounts including customer credit scoring procedures, hold policies, and overdraft policies which may be impacted by the impending economic slowdown. Consequently, we have closed certain accounts due to these tighter controls, written-off customer debit balances greater than 90 days old, and we have established what we believe is a required cash item loss reserve on our balance sheet. Customer service was also impacted by increasing incremental expenses such as postage, telephone and loan servicing fees commiserate with the 145.5% increase in new accounts. In addition, salaries and benefits increased $2.9 million as a result of additional headcount as we continued to add employees to support the rapid growth of NetBank's activities and customer base.

Interest Rate Sensitivity

        We measure interest rate sensitivity as the difference between amounts of interest-earning assets and interest-bearing liabilities that mature, reprice, or repay within a given period of time. The difference, or the interest rate sensitivity "gap," provides an indication of the extent to which an institution's interest rate spread will be affected by changes in interest rates. A gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of interest-rate sensitive liabilities, and a gap is considered negative when the amount of interest-rate sensitive liabilities exceeds the amount of interest-rate sensitive assets. In a rising interest rate environment, an institution with a positive gap would be in a better position than an institution with a negative gap to invest in higher yielding assets or have its asset yields adjusted upward. This would result in the yield on its assets

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increasing at a faster pace than the cost of its interest-bearing liabilities. During a period of falling interest rates, however, an institution with a positive gap would tend to have its assets adjusted downward at a faster rate than one with a negative gap. This would tend to reduce or restrain the growth of its net interest income.

        The following table sets forth the interest rate sensitivity of our assets and liabilities as of December 31, 2001 (in 000's):

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LENDING ACTIVITIES

        General.    Since inception, the major component of our asset gathering strategy has always been to purchase high-quality loans from other originating institutions. With the purchase of Market Street during the year ended December 31, 2001, we modified this strategy to include the origination of high-quality loans. The origination capability allows us to participate in the fee income stream related to origination and reduces the risk of material write-downs of premium related to prepayment activity during periods of declining rates. However, as Market Street primarily originates fixed first mortgages, we continue to purchase other types of loans through bulk loan purchases. Both our loan acquisition and origination strategy continue to focus on single-family residential mortgages, with some diversification during the year as we continue to slow our asset growth. During the year, $570 million, or 77.1% of our purchases were first and second residential mortgages, bringing the total percentage of our loan portfolio secured by single-family residential mortgages to 78.2% as of December 31, 2001. At December 31, 2001, 2000, and 1999, our loans receivable portfolio, including loans held for sale, totaled $1.8 billion, $1.4 billion, and $787.3 million, or 62.0%, 74.7%, and 62.6% of total assets, respectively.

        Loan Portfolio Composition.    The following table sets forth the composition of our loan portfolio by type of loan as of December 31, 2001, 2000, 1999, 1998 and 1997 (in 000's):

        Contractual Principal Repayments.    The following table sets forth certain information at December 31, 2001 regarding the dollar amount of loans maturing in our total loan portfolio, based on the contractual terms to maturity. Loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less (in 000's):

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        The following table sets forth the dollar amount of total loans, exclusive of loans held for sale, due after one year from December 31, 2001, as shown in the preceding table, which have fixed interest rates or which have floating or adjustable interest rates (in 000's):

        A savings institution generally may not make loans to one borrower and related entities in an amount which exceeds 15% of its unimpaired capital and surplus, although loans in an amount equal to an additional 10% of unimpaired capital and surplus may be made to a borrower and its related entities if the loans are fully secured by readily marketable securities. At December 31, 2001, our limit on loans to one borrower was approximately $33.7 million (15% unimpaired capital and surplus). At December 31, 2001, we had not made any loans to any one borrower, including persons or entities related to the borrower, exceeding the limitation.

        Asset Quality and Non-performing Assets.    As of December 31, 2001 and 2000, NetBank had $3,195,000 and $979,000, respectively, of impaired, non-accrual loans. The amount of impaired loans written off during the years ended December 31, 2001, 2000, and 1999 was $2,597,000, $1,839,000, and $1,790,000, respectively. NetBank had $74,000 in real estate owned resulting from loan foreclosures as of December 31, 2001. NetBank had no restructured loans as of either December 31, 2001 or 2000.

        Concentrations of Credit Risk.    At December 31, 2001, 15%, 14%, 13%, and 6% of NetBank's loans were with customers residing in California, Texas, Florida, and Georgia, respectively. At December 31, 2000, 21.5%, 10.3%, 6.3%, and 5.6% of NetBank's loans were with customers residing in California, Florida, Georgia, and New York, respectively. At December 31, 2001 and 2000, 24.7% and 44.1%, respectively, of NetBank's loans were purchased from and serviced by Countrywide Home Loans, Inc. In addition, at December 31, 2001, 14.0% of NetBank's loans were purchased from and serviced by Guaranty Bank.

        Allowance for Loan Losses.    The allowance for loan losses is maintained at a level management considers adequate to provide for probable losses in the loan portfolio. As the majority of our portfolio is purchased, we make an estimate of the loss inherent in the purchased portfolio at the date of purchase based on industry statistics and a review of the seller's reserve and record an allowance for loan losses by adjusting the premium associated with the purchased loans. We periodically review the adequacy of the allowance based upon reviews of individual loans and loan pools, recent loss experience, current economic conditions, the risk characteristics of the various pools of loans, or individual loans, industry statistics and other pertinent factors. If we note a decline in credit quality for a specific loan pool or a loan, we record an additional allowance through a charge to the provision for loan losses. Loans that we deem uncollectible are charged to the allowance. We also add provisions for loan losses, net of recoveries on loans previously charged off, to the allowance.

        Although we use the best information available to make determinations with respect to the provisions for loan losses, additional provisions for loan losses may be necessary in the future should economic or other conditions change substantially. In addition, the Office of Thrift Supervision, as an integral part of the examination process, periodically reviews our allowance for loan losses. The agency may require us to recognize additions to the allowance based on their judgments about the information available to them at the time of their examination.

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        The following table sets forth an analysis of our allowance for loan losses during the years ended December 31, 2001, 2000, 1999, 1998, and 1997 (in 000's):