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

FORM 10-K

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. Yes o    No ý

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2): Yes ý    No 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 $13.05 of such common equity as of June 30, 2003: $624,518,164.

        Number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: 47,114,828 shares of Common Stock at March 03, 2004.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of the Registrant's Proxy Statement for the Annual Meeting of Shareholders, scheduled to be held on April 29, 2004, are incorporated by reference into Part III.

TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT

PART I

ITEM 1. BUSINESS

General

        NetBank, Inc. is a holding company that wholly owns the outstanding stock of NetBank, ("NetBank, FSB" or the "Bank"), a federal savings bank; Meritage Mortgage Corporation ("Meritage"), a wholesale non-conforming mortgage provider; MG Reinsurance Company ("MG Reinsurance"), a captive reinsurance company; NetInsurance, Inc., ("NetInsurance"), a licensed insurance agency; and NB Partners, Inc., a corporation formed to be involved in strategic partnering opportunities. NetBank, FSB also owns all of the outstanding stock of Market Street Mortgage Corporation ("Market Street"), a retail mortgage company; NetBank Payment Systems, Inc. ("NPS"), formerly Financial Technologies, Inc., a leading provider of ATM services for retail and other non-bank businesses, and Resource Bancshares Mortgage Group, Inc. ("Resource"). Resource wholly owns RBMG, Inc. ("RBMG"), a wholesale mortgage banking company, and Republic Leasing Company, Inc. ("Republic Leasing"), a commercial financing company.

        The entire consolidated company is referred to herein as "NetBank" or "the Company".

        NetBank was founded in October 1996 and completed its initial public offering of stock in July 1997. It is one of the pioneers of the Internet banking industry, and NetBank, FSB is recognized as one of the first successful internet-only banks.

        NetBank's business model has three basic strategies:

        Internet-only bank—NetBank, through its Internet banking operations, operates as an FDIC-insured, federally chartered thrift institution that currently serves more than 165,000 customers throughout the United States and in approximately 20 foreign countries. NetBank operates a totally branchless model and passes on a portion of the cost savings to its customers in the form of attractive yields on deposits. Its array of products and services are available to its customers 24 hours per day, seven days a week, and all 365 days during the year.

        Financial Intermediary—Through its mortgage banking operations, NetBank serves as an intermediary between consumers and institutional investors. NetBank obtains mortgage loans by originating loans directly with consumers or through brokers or by buying closed loans from a network of correspondent banks, thrifts and independent mortgage companies. The majority of these loans are held for sale on the Company's balance sheet prior to delivery into the secondary market. The Company thus earns a long-term yield on an asset held short-term and also earns origination and servicing revenues and gains on the sale of the mortgages or resulting mortgage-backed securities.

        Transaction Processor—NetBank, through its Resource Mortgage Solutions initiative, sells its core mortgage lending competencies on a "private label" basis to community banks, credit unions and other financial businesses that lack the technical expertise, technology or critical mass to open up their own mortgage lending operations. Late in 2003, NetBank acquired NPS, a leading provider of ATM services for retail and non-bank businesses. NPS operates 5,300 ATM machines across the country and ranks fifth among third-party, off- premises ATM providers in the United States.

Segmented Income Statements

        NetBank's principal activities include retail banking and mortgage lending. The retail banking segment primarily consists of offering consumer banking products such as checking, money market, and certificates of deposit; the origination of auto loans through a network of auto dealers; and the purchase of mortgage loans for investment primarily through its subsidiaries including RBMG and Market Street. The mortgage banking segment either originates mortgage loans or acquires mortgage loans from correspondents and/or brokers and packages pools of such loans either inclusive of or exclusive of servicing rights for sale into the secondary market. The tables set forth in Note 18 to the

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consolidated financial statements included in this report present a summary of the revenues and expenses for each of the Company's business segments for each of the years ended December 31, 2003, 2002, and 2001, respectively. The following represents the percentage and amount of total Company revenues contributed by the various operating segments for the years ended December 31, 2003, 2002, and 2001:

        Substantially all of the Company's revenues are derived from customers located in the United States of America.

Retail Banking Segment

        Consumer adoption of online banking has risen dramatically over the past several years. According to a study by the Pew Internet & American Life Project released in December 2003, online banking represented the fastest growing Internet activity since 2000. The institution reported that 34 million Americans were conducting their banking online, representing a growth rate of 179% over the past three years. According to the same study, these individuals tend to have higher household incomes and education levels in comparison to those of the average consumer. College graduates and young adults also emerged as the most ardent adopters of online banking. With this generation of consumers, the Internet is expected to surpass the branch as the primary delivery channel for financial services.

        The commercialization of the Internet in the 1990's quickened the proliferation of online banking. Consumers no longer had to use proprietary software applications to conduct transactions because financial institutions were able to leverage the Internet as a more efficient means of communication. Through a direct Web interface, banks could give their customers the ability to conduct real-time transactions and to access their account information 24 hours a day, seven days a week.

        From an industry-wide perspective, online banking has faced two main obstacles in reaching mass consumer adoption—1) security concerns; and 2) reluctance on the part of consumers to change behavior or learn new ways of conducting their transactions.

        Security concerns have been allayed largely by the passage of time. Consumers have become more comfortable with conducting a wide array of financial transactions online, such as making retail purchases, booking travel arrangements and purchasing stock. The financial industry and bank regulators have worked to set standards on security technology and protocols on how information can be exchanged both internally and externally. Institutions, including NetBank, have also made an effort to educate consumers on the relative safety of electronic transactions in comparison to paper-based transactions. By automating the fulfillment of transactions, online banking arguably provides greater security and privacy by eliminating the middleman and reducing the number of individuals who have access to a consumer's sensitive financial information. In addition, banking laws and regulations afford online consumers the same protections as offline consumers.

        Large traditional banks, such as Bank of America, JP Morgan Chase, Citibank and Wells Fargo, have helped to fuel online banking adoption by deploying and actively promoting online banking solutions for their own customers. Although these institutions may have introduced the service at first to remain competitive in the marketplace, they have begun to market it aggressively due to its inherent cost and customer-retention benefits. According to a well-publicized, independent research study by

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Booz Allen & Hamilton in 2000, a branch transaction typically costs an institution more than $1.00 when overhead and salary expenses are included. In comparison, an Internet-based transaction typically costs an institution one cent. Bank of America, Wells Fargo and others routinely report their online customers have higher account balances and lower attrition rates on average than their offline customers have, which is a trend consistent with NetBank's own customer base.

Market Position

        NetBank, FSB is the country's largest branchless bank. Customers conduct their business through automated or remote means using the Internet, telephone, postal service and/or proprietary and third-party ATM networks. NetBank's low-cost business model and focus on select service delivery channels give it certain advantages over traditional branch-based institutions. The bank's value proposition is built on the premise that it will share its operational cost savings with the customer by paying more competitive deposit rates and creating a more seamless, technically robust customer experience.

        NetBank caters to well-defined, niche market segments. Management understands that the bank's value proposition does not appeal to everyone. The bank competes by serving consumers who feel underserved or exploited by traditional branch banks. NetBank's average customer is a time-starved, emerging affluent professional who prefers the convenience, control and value of banking online. Basic demographics of the typical customer today include:

43 years of age
Married
Homeowner
Two-household income
College-educated
Urban dweller

        Traditional banks have posed a greater challenge to NetBank in recent years as they have spent more energy on developing and promoting their own online banking programs. Critics of NetBank's branchless model suggest most consumers will gravitate toward an institution that offers both an online and physical presence—frequently referred to in the media as a "click-and-mortar" strategy.

        These critics may be underestimating the long-term power of NetBank's value proposition. Current NetBank customers understand there are implied costs to doing business with a "click-and-mortar" bank. For consumers who rarely use a branch, they are subsidizing the branch network for others when they do business with a "click-and-mortar" institution. To rationalize their cost structure, these institutions must pay lower deposit rates and require their customers to maintain higher minimum deposits to avoid fees. As part of its ongoing marketing and public relations effort, NetBank makes an effort to educate consumers of these implied costs.

        NetBank believes that "click-and-mortar" consumers are likely to migrate to a branchless provider as they become more comfortable with online banking in general and more aware of the value that a branchless provider offers. Younger, more technology-advanced consumers are likely to be even more receptive to this proposition. It may motivate these consumers to choose a branchless provider from the start of their financial lives and bypass the branch system altogether.

Products & Services

        NetBank's goal is to be a trusted, comprehensive financial services partner to its customers. The bank maintains a full line of financial products and services, from deposit accounts and loans to investment and insurance services. Today, through its automated and remote delivery channels, the bank provides a product and service offering that compares favorably in scope to the offering of a traditional branch bank.

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        FDIC-insured products include:

Individual and small business checking accounts
Individual and small business money market accounts
Individual and small business certificates of deposit

        Additional products include:

IRAs
Mortgages
Home equity loans and lines of credit
Auto loans
Boat and recreational vehicle loans
Credit cards
Overdraft protection
Brokerage
Financial planning
Insurance
Small business payroll services
Small business equipment leasing
Foreign currency exchange

        Ancillary services include:

Online bill payment and presentment
Online check imaging
Online statements
Online account funding
ATM cards
ATM deposit-gathering
VISA® Check Card
Wireless account access
Account aggregation
Consumer credit report monitoring

        Many of the offerings listed above are provided by the bank on a solitary basis. For non-core services, the bank partners with specialty providers to make them available to its customers. For example, the bank relies on CheckFree Corporation for online bill payment and presentment; Teknowledge Corporation for account aggregation; and Experian for consumer credit report monitoring.

        These partnerships allow the bank to extend its product and service offerings without the assumption of significant expense and operational risk, which might put its underlying value proposition at jeopardy. The partnerships also provide the bank with additional revenue opportunities. To mitigate some of the inherent reputation risk, NetBank maintains service level agreements and monitors the solvency of its partners on a periodic basis as part of its vendor management process.

Marketing Efforts

        NetBank continues to attract the majority of its new, first-time customers through direct marketing and public relations efforts. During 2003, the Bank spent $4.5 million on marketing programs. These programs helped to drive 114,612 applications through its automated online application process, representing a very efficient cost per application of $39.18. The bank ended 2003 with 165,762 customers and $2.5 billion in deposits, representing a year-over-year increase of 13,202 and $0.5 billion, respectively.

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        Through detailed financial analysis and ongoing customer satisfaction surveys, NetBank has made strides in segmenting its customer base. This research has given the bank a clearer understanding of the profitability of its customer relationships. The Bank has used findings to tighten its pricing strategy and improve the effectiveness of marketing campaigns. For example, new account bonuses are paid only when certain conditions and requirements that tie back to customer profitability are met. The more stringent criteria ensure the bank is providing incentives only to the most desirable customers whose transaction behavior is likely to be compatible with the bank's value proposition. The bank also leverages this research to design custom marketing campaigns that target and resonate more deeply with specific segments.

        A short-term tradeoff to the segmentation process has been more regulated customer growth on a net basis. The Bank has put more emphasis on quality over quantity in attracting and retaining customer relationships. Although some growth may have been sacrificed, transactional account balances increased by 55% in 2003 on a year-over-year basis and its new customer acquisition cost decreased by 6.35%. These statistics point to increased marketing efficiency.

        From a tactical standpoint, the Bank's marketing efforts are concentrated primarily on online advertising. The Bank advertises on top Web sites devoted to financial activity or other topics specifically relevant to the bank's desired market segments. Campaigns normally include banner ads or sponsorship of a special section on the site.

        The Bank monitors the performance of each campaign and quickly adjusts or pulls promotions as the results warrant. This type of disciplined campaign measurement has helped the Bank to succeed with online marketing while other businesses have failed or been dissatisfied with their results. However, an increase in the number of institutions advertising online has begun to pose new challenges. This increased competition makes it more difficult for the Bank to negotiate pricing discounts and to stand out to the consumer in an already crowded marketplace.

        As an alternative to direct online advertising, the Bank maintains a number of affinity marketing partnerships. These alliances with other businesses or associations are typically structured as pay-for-performance. The Bank is required to pay only for new customer relationships that it receives through the program—unlike a traditional fee-based advertising buy that provides no performance guarantees. The attraction for the bank's affinity partner is twofold. The partner gets a value-added service to offer its customers as well as a new revenue source.

        The Bank purposely chooses partners that serve consumers with similar demographics to the bank's existing customers. The partner usually promotes the Bank's products and services on its own Web site and through printed marketing collateral, such as statement stuffers and customer newsletters. The Bank's current affinity marketing partners include Delta Airlines, Intercontinental Hotels, United Airlines and others.

        Several other marketing opportunities exist for the Bank going forward. The Bank intends to ramp up its cross-selling activity through NetBank, Inc. affiliated businesses, such as Market Street Mortgage Corporation; Meritage Mortgage Corporation; NetInsurance, Inc.; RBMG, Inc.; and Republic Leasing. The Bank's services will be packaged with synergistic products—such as mortgages, auto loans or insurance policies—and sold through an affiliate during the loan origination process. The Bank may also pursue offline marketing campaigns on a limited basis to target small business consumers, college students or other select segments.

Security & Technology

        The Bank relies on state-of-the art technology and prevailing industry standards to ensure a safe, secure business environment. Data is encrypted and exchanged only over secure connections. The Bank's operating system does not connect directly to the Internet. It is isolated and protected by "firewalls" that comply with National Computer Security Association standards.

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        The Bank uses a hybrid approach in acquiring technology to run its operation. Although it may develop proprietary applications for certain services, the Bank typically partners with specialty technology providers and works to customize the partner's existing solution to meet the Bank's need. This outsourced approach is less capital intensive and allows the Bank to take advantage of the partner's larger infrastructure and operating scale. In addition, the Bank is able to switch to another provider in the future if a competing, more compelling technology emerges.

        The Bank's top technology partners include, but are not limited to: BISYS; Corillian; CheckFree; FiServ, Inc.; and NCR. The Bank mitigates its exposure to security risks by continually testing its systems. These tests include annual disaster recovery exercises by the Bank and its key vendors. Additionally, the Bank maintains service level agreements with its partners and monitors their solvency on a periodic basis.

Lending & Investment Activity

        The Bank's primary investment strategy for its deposits is to fund the origination of assets that can be sold into the capital markets. The Bank lends money on an intra-company basis to its lending units, which include Dealer Financial Services (DFS), Market Street Mortgage, RBMG, Republic Leasing Company and potentially others in the future. These units originate auto loans and conforming mortgages. Their production is typically sold into forward commitments within the secondary market. The Bank's auto lending unit, DFS, began operation in April 2003. The majority of DFS's 2004 production will be retained and held for investment. Once an appropriate percentage of auto loans have been retained, approximately 15% of total interest earning assets, DFS will begin selling excess production into the secondary markets.

        NetBank believes this investment strategy has numerous advantages. It reduces The Bank's credit and interest rate risks. Because loans are typically sold into the capital markets within 30 to 90 days, the Bank's exposure is limited to this period. Once the loans are sold, the Bank's principal investment is put back to work in new originations.

        The Bank also maintains a loan and investment portfolio separate from the funding lines for its lending operations. This portfolio serves several purposes.

        The Bank chooses to retain loans made to its core customers. By retaining the loans or servicing rights, the Bank can continue to own the relationship and ensure a more consistent, higher-quality customer experience. If the Bank sold the asset to another provider, then it could not guarantee consistent service or prevent the other provider from cross-selling the customer its own products and services.

        The Bank is better able to justify its cost structure on a stand-alone basis by building and maintaining a sizeable amount of varied earning assets. The other assets that the Bank chooses to invest in typically produce higher yields than the intra-company funding lines. With adequate leverage over its expenses, the Bank is able to deliver on its value proposition of returning the cost-savings of its branchless delivery system to customers in the form of higher deposit rates, more reasonable fees and enhanced technology.

        The investment and loan portfolio is an outlet for excess liquidity that the Bank cannot actively deploy through its lending operations. The Bank's deposits are likely to grow more quickly over time than the lending operations' need for additional funding. Plus, consumer demand affects production within these businesses. In a rising interest rate environment, these operations tend to experience lower production levels and therefore have reduced funding needs. During these times, the Bank must shift liquidity into other investments to offset the corresponding drop in earnings from these businesses.

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Mortgage Banking Segment

        NetBank originates and purchases principally agency-eligible mortgage loans through its subsidiaries Market Street and RBMG. Agency-eligible mortgage loans are loans that meet the size, documentation, borrower and credit standards to qualify to be pooled into mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae. The Company also originates non-conforming mortgages primarily through its subsidiary Meritage Mortgage. These loans are sold to private whole loan investors and private-label mortgage conduits.

        After the sale or securitization of primarily agency-eligible mortgage loan production, NetBank, in some cases, continues to service mortgages on behalf of the permanent investor. Servicing activities include collecting and remitting mortgage loan payments, accounting for principal and interest, holding escrow funds for payment of mortgage-related expenses such as taxes and insurance, making inspections of the mortgaged premises as required, making advances to cover delinquent payments, supervising foreclosures and property dispositions in the event of unremedied default, and generally administering agency-eligible mortgage loans.

        NetBank also sells its entire range of mortgage competencies on a private-label basis to financial institutions that lack the knowledge or infrastructure to originate mortgages themselves. NetBank has branded this product offering as "Resource Mortgage Solutions" (RMS). Beginning early in 2002, RMS partnered with the Independent Community Bankers of America (ICBA) to offer mortgage services to its 5,000 community bank members. Through December 31, 2003, RMS had contracts in place to offer services to 501 of ICBA's members. RMS originations were $719 million and $223 million for the respective years ended December 31, 2003 and 2002.

Mortgage Loan Production Channels

        Correspondent Production.    NetBank, through RBMG, acquires recently originated mortgages from a nationwide network of correspondent lenders. Correspondents are primarily mortgage lenders, mortgage brokers, savings and loan associations and small commercial banks. At December 31, 2003, the Company had approximately 785 correspondents originating mortgage loans in 48 states and the District of Columbia. Agency-eligible residential loan production for RBMG by correspondents is widely dispersed, with the top 20 correspondents supplying the Company with 33% of its dollar volume of correspondent loans.

        During 2003, RBMG emphasized correspondent loan production. By emphasizing correspondent lending, RBMG can match its costs more directly with the volume of agency-eligible loans purchased, so that a substantial portion of RBMG's cost is variable rather than fixed. By emphasizing the correspondent origination approach, RBMG has greater flexibility to adjust to varying market conditions. As conditions change, RBMG can expand into new geographic markets without incurring significant additional costs by utilizing existing and new correspondents that operate in each new market. The use of correspondents also enables RBMG to exit markets easily if circumstances dictate. Correspondent loan production enables NetBank to optimize available volumes and margins in lower rate environments, such as existed in 2003 and 2002, without incurring significant fixed expenses.

        RBMG attracts and maintains relationships with correspondents by offering a variety of services that provide incentives for the correspondents to sell agency-eligible mortgage loans to RBMG. RBMG's strategy with respect to its correspondents is to provide a high level of service rather than the lowest price. Services provided include timely underwriting and approval or rejection of a loan, timely purchase of loans, seminars on how to process and prepare a loan application and updates on current underwriting practices. In addition, RBMG provides correspondents with a variety of products and delivery capabilities and multiple means of funding loans. eRBMG, RBMG's business-to-business Internet offering, makes it easier for correspondents to interact with the Company by automating the flow of information between the correspondent and RBMG. eRBMG allows correspondent lenders to upload/key files, register and lock a loan, submit a loan to Fannie Mae Desktop Underwriting, print out

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a fax cover with a bar code to be faxed and routed electronically, submit an electronic file to one of RBMG's regional operating centers for validation and request closing funds on-line. As the mortgage lending market increases in sophistication and loan-price differentials narrow among mortgage bankers, RBMG believes that the level of service and commitment it provides to its correspondents will be paramount to its success.

        Management believes that through correspondent lending it can manage risks and maintain good quality control. Correspondents have to meet established standards to be approved by the Veteran's Administration (VA), the U. S. Department of Housing and Urban Development (HUD) or private mortgage insurance companies. A correspondent qualifies to participate in RBMG's correspondent program only after a thorough review of its reputation and mortgage lending expertise, including a review of references and financial statements and a personal visit by one or more representatives of RBMG. After a correspondent qualifies for RBMG's program, RBMG closely monitors the correspondent's performance in terms of delinquency ratios, document exceptions and other pertinent data. Furthermore, all mortgage loans purchased by RBMG through correspondents are subject to various aspects of RBMG's underwriting criteria, and correspondents are required to repurchase loans or otherwise indemnify RBMG for its losses in the event of fraud or misrepresentation in the origination process and for certain other reasons, including noncompliance with underwriting standards.

        All loan applications are subject to RBMG's underwriting criteria and the guidelines set forth by the Federal Housing Authority (FHA), the VA, Ginnie Mae, Fannie Mae, Freddie Mac or private investors, as applicable. RBMG or the correspondent, in the case of a correspondent with delegated underwriting authority, verifies, as appropriate for the loan type, each applicant's income and bank deposits, as well as the accuracy of the other information submitted by the applicant, and obtains and reviews a credit report from a credit reporting agency, a preliminary title report and a real estate appraisal. Generally, delegated underwriting authority is granted by RBMG to its larger correspondents that meet certain financial strength, delinquency ratio, underwriting and quality control standards.

        With respect to FHA and VA loans, HUD and the VA, respectively, have established approval guidelines for the underwriting of loans to be covered by FHA insurance or a VA guaranty. The Company is approved by both HUD and the VA to underwrite FHA and VA loans submitted by specified correspondents and wholesale brokers. The Company purchases FHA and VA loans only from those correspondents who are approved to underwrite FHA and VA loans and from those correspondents for whom the Company has been approved to underwrite FHA and VA loans.

        RBMG has implemented a quality control program to monitor compliance with the its established lending and servicing policies and procedures, as well as with applicable laws and regulatory guidelines. RBMG believes that the implementation and enforcement of its comprehensive underwriting criteria and its quality control program are significant elements in the Company's efforts to purchase high-quality mortgage loans and servicing rights. RBMG's quality control department examines loans in order to evaluate the loan purchasing function for compliance with underwriting criteria. The quality control department also reviews loan applications for compliance with federal and state lending standards, which may involve re-verifying employment and bank information and obtaining separate credit reports and property appraisals.

        Wholesale Production.    The wholesale division of RBMG receives loan applications through brokers, underwrites the loans, funds the loans at closing and prepares all closing documentation. Typically, mortgage brokers are responsible for taking applications and accumulating the information precedent to RBMG's processing of the loans. All loan applications processed by the wholesale division are subject to underwriting and quality control comparable to the standards used in RBMG's correspondent lending program.

        RBMG processes wholesale loans through regional operations centers. At December 31, 2003, RBMG had five regional operations centers serving approximately 7,000 brokers. These offices are

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located in San Jose, California; Boston, Massachusetts; Minneapolis, Minnesota; St. Louis, Missouri; and Jacksonville, Florida. Although maintaining regional operations centers involves the incurrence of fixed expenses associated with maintaining those offices, wholesale operations also generally provide for higher profit margins than correspondent loan production. Additionally, each regional operations center can serve a relatively sizable geographic area by establishing relationships with large numbers of independent mortgage loan brokers who bear much of the cost of identifying and interacting directly with loan applicants. RBMG also offers the use of eRBMG to its brokers. eRBMG has the same features and benefits for brokers as enumerated above for the correspondent lending program.

        Retail Production.    NetBank offers mortgage products directly to consumers through 41 retail branches located in 12 states. Market Street maintains relationships directly with realtors and builders to focus on purchase mortgage transactions (as opposed to refinance) business. NetBank also offers construction-to-perm loans enabling consumers to finance the construction and permanent financing of their new home in one seamless transaction. Although costs to produce through its retail channel are more expensive than correspondent and broker channels, the retail channel offers higher margins than those channels. Likewise, the retail channel offers a direct relationship with the customer, which allows for more potential cross-selling of other products and services to the customer. Market Street's production is less impacted by cyclical trends that affect the volumes and margins in the correspondent and wholesale channels because a larger portion of Market Street's volume comes from home purchase transactions.

        In its retail offices, Market Street's representatives take mortgage applications, process and underwrite the loans, and fund the approved loans. At its home office in Clearwater, Florida, Market Street performs quality control tests, secondary marketing and loan shipping.

        RMS Production.    NetBank also sells its entire range of mortgage banking competencies on a private label basis to financial institutions that lack the knowledge and infrastructure to originate mortgages themselves. NetBank has branded this product offering as "Resource Mortgage Solutions" (RMS). RMS processes loans originated on behalf of these other financial institutions through its wholesale processing center in Jacksonville, Florida. Depending on the level of service provided to the business partner, the margins on RMS production can range from those found in the retail channel to those found in the correspondent and wholesale channels. Beginning early in 2002, RMS partnered with the Independent Community Bankers of America (ICBA) to offer mortgage services to its 5,000 community bank members. As of December 31, 2003, RMS had contracts in place to offer services to 501 of ICBA's members. During 2003, RMS originated $719 million of mortgage loans, representing a $496 million increase from 2002.

        Non-conforming Production.    Through Meritage Mortgage Corporation, the Company originates mortgages that will not qualify for agency-eligible mortgage-backed securities due to loan size, the extent of loan documentation, or borrower credit. Meritage originates non-conforming mortgages through a nationwide network of brokers. Meritage underwrites and processes loans at two regional processing centers located in Portland, Oregon and Jacksonville, Florida. All non-conforming loans are sold in the secondary market for cash, and Meritage retains no recourse risk beyond normal seller representations and warranties.

        Non-conforming mortgages are more expensive to process than agency-eligible loans. However, the margin on sale makes these products generally the Company's highest profit mortgage offering. Likewise, the majority of the loans funded through Meritage's non-conforming channel are home purchase mortgage loans as opposed to refinance transactions. Accordingly, Meritage's production volumes tend to be less cyclical than the volumes in NetBank's correspondent and wholesale channels.

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        The following summarizes NetBank's production volumes by channel:

        NetBank purchases and originates a variety of mortgage loan products that are designed, in conjunction with the requirements of prospective purchasers of such loans, to respond to consumer needs and competitive factors. In addition to 15-year and 30-year conventional mortgage loans and 15-year and 30-year FHA loans and VA loans, NetBank purchases and originates products designed to provide lower interest rates to borrowers or lower principal and interest payments by borrowers, including balloon mortgage loans that have relatively short terms (e.g., five or seven years) and longer amortization schedules (e.g., 25 or 30 years) and adjustable rate mortgage loans. The Company also purchases and originates mortgage loans featuring a variety of combinations of interest rates and discount points so that borrowers may elect to pay higher points at closing and less interest over the life of the loan, or pay a higher interest rate and reduce or eliminate points payable at closing. The portion of total loans held for sale at any time that consists of a particular product type depends upon the interest rate environment at the time such loans are originated.

        The following is a summary of NetBank's loan production for 2003 and 2002 by major product type.

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        The following table shows the geographic distribution of NetBank's residential production volume for the top ten states for the year ended December 31, 2003:

Sale of Residential Loans

        NetBank customarily sells fixed rate agency-eligible mortgage loans that it originates or purchases, retaining the mortgage servicing rights, which may be sold separately or retained by NetBank. Under ongoing programs established with Fannie Mae and Freddie Mac, NetBank aggregates its conforming conventional loans into pools that are assigned to Fannie Mae or Freddie Mac in exchange for mortgage-backed securities. NetBank's FHA mortgage loans and VA mortgage loans are generally pooled and sold in the form of Ginnie Mae mortgage-backed securities. NetBank pays certain fees to Freddie Mac, Fannie Mae or Ginnie Mae, as applicable, in connection with these programs. NetBank then sells Freddie Mac, Fannie Mae and Ginnie Mae securities to securities dealers. Substantially all of the Company's agency-eligible mortgage loans qualify under the various Fannie Mae, Freddie Mac and Ginnie Mae program guidelines, which include specific property and credit standards, including a loan size limit. Depending on market conditions for conforming loans and the related servicing rights, NetBank from time to time will sell a portion of its conventional loan production in whole loan sales to other conventional loan seller/servicers to optimize its overall execution into the secondary markets. Depending on its appetite for earning assets, NetBank, FSB retains certain adjustable rate and jumbo mortgages for long-term investment. During 2003, NetBank retained for portfolio mortgages with principal balances aggregating $1.2 billion.

        Non-conforming residential mortgage loans are sold to private investors through whole loan sales for cash, retaining no residual interests.

        In the case of conventional loans, subject to the obligations of any primary mortgage insurer, NetBank is generally at risk for any mortgage loan default until the loan is sold (typically less than 45 days). Once NetBank sells the loan, the risk of loss from mortgage loan default and foreclosure generally passes to the purchaser or insurer of the loan. In the case of FHA and VA loans, NetBank has, from the time such a loan is originated or purchased until the first borrower payment is due, a minimum of 31 days to request insurance or a guarantee certificate. Once the insurance or the guarantee certificate is issued, NetBank has no risk of default, except with respect to certain losses related to foreclosures of FHA mortgage loans and losses that exceed the VA's guarantee limitations. In connection with NetBank's loan exchanges and sales, NetBank makes representations and warranties

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customary in the industry relating to, among other things, compliance with laws, regulations and program standards and as to accuracy of information. NetBank may become liable for certain damages or may be required to repurchase such loans and bear any potential related loss on the disposition of those loans. Typically, with respect to loans that NetBank repurchases, NetBank corrects the flaws that had resulted in the repurchase, and the loans are resold in the market or are repurchased by the original correspondent pursuant to the prior agreement.

        NetBank uses hedging techniques to reduce its exposure to interest rate risk in connection with loans not yet sold or securitized. NetBank projects the portion of the pipeline loans that it anticipates will close. NetBank assesses the interest-rate risk associated with the commitments that it has extended to originate or purchase loans and evaluates the interest-rate risk of these commitments based upon a number of factors, including the remaining term of the commitment, the interest rate at which the commitment was provided, current interest rates and interest-rate volatility. NetBank constantly monitors these factors and adjusts its hedging instruments when appropriate throughout each business day. NetBank's hedging strategy currently consists of utilizing a combination of mandatory forward sales commitments on mortgage-backed securities and mortgage loans and options on mortgage-backed securities.

        The sale of mortgage loans may generate a gain or loss to NetBank. Gains or losses result primarily from two factors. First, NetBank may originate or purchase a loan at a price (i.e., interest rate and discount) that may be higher or lower than NetBank would receive if it immediately sold the loan in the secondary market. These pricing differences occur principally as a result of competitive pricing conditions in the primary loan origination market. Second, gains or losses upon the sale of loans may result from changes in interest rates, which cause changes in the market value of the loans, or commitments to originate or purchase loans, from the time the price commitment is given to the customer until the time that the loan is sold by NetBank to the investor. To reduce the effect of interest-rate changes on the gain or loss on loan sales, NetBank generally commits to sell all of its agency-eligible warehouse loans and a portion of its pipeline loans to investors for delivery at a future time for a stated price.

        In connection with its agency-eligible loan sale program, which involves the sale of mortgage loans and mortgage-backed securities on a forward or other deferred delivery and payment basis, NetBank has credit risk exposure to the extent purchasers are unable to meet the terms of their forward purchase contracts. As is customary in the mortgage industry, none of the forward payment obligations of any of the Company's counterparties is secured or subject to margin requirements; however, NetBank attempts to limit its credit exposure on forward sales arrangements by entering into forward sales contracts solely with institutions that NetBank believes are sound credit risks, and by limiting exposure to any single counterparty by selling to a number of investors. For example, it is NetBank's current policy that not more than the lesser of (i) $500 million or (ii) 30% of the total forward purchase contracts outstanding at any time be with any single counterparty. All counterparties are obligated to settle such sales in accordance with the terms of the related forward sale agreement.

Mortgage Servicing

        NetBank services primarily agency-eligible loans that were securitized and sold as described above. While it services loans, NetBank earns servicing revenue (usually stated as a percent of the outstanding principal balance). NetBank earns late charges assessed to borrowers on payments not paid when contractually due. NetBank also receives a float benefit from escrow accounts for taxes and insurance and for collections of principal and interest that have not yet been passed on to the investor.

        As a servicer of mortgage loans underlying mortgage-backed securities, NetBank is obligated to make timely payments of principal and interest to security holders, whether or not such payments have been made by mortgagors on the underlying mortgage loans. Similarly, in the event of foreclosure,

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NetBank is responsible for covering with its own funds principal and foreclosure costs to the extent not covered by FHA insurance or a VA guarantee.

        The following table shows the delinquency percentages (excluding bankruptcies and foreclosures) of NetBank's residential mortgage servicing rights portfolio (excluding loans serviced under subservicing agreements) at December 31, 2003.

        At December 31, 2003, NetBank's total owned mortgage servicing rights portfolio had an underlying unpaid principal balance of $12.5 billion. The portfolio had a weighted average note rate of 6.09%. The following table provides year of origination information regarding NetBank's agency-eligible mortgage servicing rights available for sale portfolio at December 31, 2003:

        The following table sets forth NetBank's agency-eligible mortgage servicing rights available for sale portfolio by loan type at December 31, 2003:

        Because servicing rights are held as a longer-term investment, they are subject to interest rate (prepayment) risk. During periods of declining interest rates, prepayments of mortgage loans increase

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as homeowners seek to refinance at lower rates, resulting in a decrease in the value of NetBank's available for sale servicing rights portfolio. Mortgage loans with higher interest rates are more likely to result in prepayments. The following table sets forth certain information regarding the aggregate unpaid principal balance of mortgage loans underlying NetBank's portfolio of available for sale mortgage servicing rights. The table includes both fixed and adjustable rate loans at December 31, 2003:

        The following table sets forth the geographic distribution of the aggregate unpaid principal balance of mortgage loans underlying NetBank's portfolio of available for sale mortgage servicing rights at December 31, 2003: