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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:

        To help NetBank manage risk related to prepayments of its servicing portfolio, the Company has purchased interest-rate floor contracts, which provide an interest rate differential on a fixed portion of the portfolio in the event interest rates fall below a certain level, interest rate swap transactions, and forward purchase contracts on FNMA mortgage backed securities (FNMA TBA). For a more detailed discussion of derivative instruments purchased by the Company to hedge interest rate risk on its servicing portfolio see Note 22 of NetBank's consolidated financial statements, found within this report.

        In those cases where the Company sells the servicing rights on a flow basis or in bulk sales, NetBank may temporarily subservice the loans until the servicing files are transferred to the acquiror of the servicing rights. Likewise, NetBank subservices loans on behalf of other third parties pursuant to subservicing agreements. Those agreements provide for compensation to NetBank usually on a monthly

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per loan basis. At December 31, 2003, NetBank was subservicing 9,285 loans under such subservicing arrangements with an aggregate unpaid principal balance of $1.1 billion.

Procedures for Determining the Adequacy of the Allowance for Credit Losses

        The Company reviews large, heterogeneous loans for collectibility on a loan level basis. During 2003, the Company reviewed its portfolio of commercial real estate loans in this fashion. Specifically, the Company reviews collateral appraisals, current rent rolls, cash projections and financial statements for each property. Guarantor financial statements are reviewed where appropriate. The Company then classifies each loan as "Pass," "Special Mention," "Substandard," "Doubtful" or "Loss", as appropriate, and applies percentages or ranges of allowances to each classification.

        The Company considers each of its portfolios of 1^st mortgages, 2^nd mortgages, HELOCs, consumer loans, and auto loans as being respective portfolios of homogeneous assets. The Company evaluates the adequacy of its allowance for each of these portfolios based on the risk characteristics of each portfolio taken as a whole. Additionally, the Company reviews the delinquency status of each of the loans within the portfolio and classifies it as "Pass," "Special Mention," "Substandard," "Doubtful" or "Loss" based on delinquency status. Allowance percentages are applied to each risk category. The Company provides allowances of 15%, 50% and 100% for loans classified "Substandard," "Doubtful" and "Loss", respectively. For "Pass" and "Special Mention" credits, the Company reviews loss estimates made by rating agencies for securitizations of loans of similar type and determines a range of life of loan losses for each group of loans. The Company selects its point estimate in that range based upon the seasoning of the groups of loans in its portfolio including the age of the respective portfolios, incidence of default, and loss severity to date. The Company is maintaining a data base of vintage loss history on loans in its portfolio that it originated. When the Company's vintage analysis has adequate statistical data on the loss behaviors of loans that it produced and retained, it will supplement the data used from rating agencies with its own experience and use the combined data to estimate expected losses.

        For lease receivables, the Company uses its historic "vintage analysis" to estimate probable losses for leases originated by its subsidiary, Republic Leasing. In the past, the Company acquired certain leases from an outside third party that were guaranteed by three sureties. The Company is currently in litigation with the sureties on those leases. See Note 19 to the consolidated financial statements contained within this report for information related to the allowance for losses on those leases.

Competition

Retail Banking

        Banking has become an increasingly commoditized business. Most consumers perceive no difference between the offerings of large national or regional banks. Credit unions, community banks and Internet banks, such as NetBank, are arguably the only institutions that have had success in distinguishing their offerings.

        NetBank completed market research in 2003 that showed more than 40% of consumers were less than satisfied by their current banking relationship. Approximately 25% of survey respondents said that they were with their current financial services provider simply because of inertia. When asked what would motivate them to consider moving to another provider, approximately 38% of all respondents cited better deposit rates as a potential factor while another 25% said convenience. (Respondents were allowed to choose up to three factors.)

        NetBank has chosen to position itself in the marketplace as a niche provider. Its value proposition is catered to time-starved, technology-oriented individuals who prefer the convenience and control of conducting financial transactions through remote channels instead of a traditional branch bank. NetBank offers a product line comparable in scope to traditional banks, but it uses the significant

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operational cost savings of its branchless business model to provide customers with more competitive deposit rates, 24/7 customer support and free online services, which traditional banks may charge for.

        A major challenge to NetBank's success has been increased competition from traditional banks that now offer an online banking service. The combination of a branch and online presence has broad appeal. Many consumers believe that access to a branch network may prove more convenient for ATM withdrawals or problem resolution. To convert these consumers, NetBank must persuade them that the convenience and overall value of its offering outweighs those benefits.

Mortgage Banking

        The mortgage banking industry is highly competitive. The Company competes with financial institutions, mainly mortgage banking companies, commercial banks and savings and loan associations and, to a lesser extent, credit unions and insurance companies. The Company competes principally by purchasing or originating a variety of mortgage loans, emphasizing the quality of its service and pricing the loans at competitive rates. Many of the Company's competitors may have greater financial resources, better operating efficiencies and longer operating histories than the Company. Many of the nation's largest mortgage banking companies and commercial banks have a significant number of branch offices in areas in which the Company's correspondents and wholesale regional operations centers operate. Increased competition for mortgage loans from larger lenders may result in a decrease in the volume of loans purchased or originated by the Company, thereby likely reducing the Company's revenues. At the same time, Fannie Mae and Freddie Mac are developing technologies and business practices that could reduce their reliance on large mortgage banking companies for loan production and enable them to access directly smaller producers for volume. Due to the current highly competitive market-pricing environment, the Company may be unable to achieve its planned level of originations or consummate acquisitions of servicing rights at a satisfactory cost. The Company does not have a significant market share of mortgage banking activities in the areas in which it conducts operations.

        Due to the foregoing considerations, there can be no assurance that the Company will be able to continue to compete successfully in the markets it serves. Inability to compete successfully would have a material adverse effect on the results of operations and financial condition of the Company.

Intellectual Property and Proprietary Rights

        NetBank regards the form and substance of its name and other intellectual property that it has developed as proprietary, and NetBank attempts to protect them by getting the courts to enforce intellectual property laws. NetBank owns a federally registered trademark for NetBank. NetBank takes active measures to safeguard its 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.

        NetBank owns the Internet domain name "netbank.com." as well as other domain names related to the businesses the Company operates. Domain names in the United States and in foreign countries are regulated, but the laws and regulations governing the Internet are continually evolving. NetBank actively monitors the use of potentially infringing names on the Internet and takes action to protect its intellectual property rights.

Supervision and Regulation

        Savings and loan holding companies and federal savings banks are extensively regulated under federal law, as are operating subsidiaries of federal savings banks. In addition, state-licensed mortgage lenders are heavily regulated under federal and state law. The following is a brief summary of certain statutes and rules and regulations that affect or may affect the Company and its major subsidiaries with regard to Savings and Loan Holding Company Regulation, Bank Regulation and Mortgage Banking

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Regulation. 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 businesses of the Company and its subsidiaries. Supervision, regulation and examination of the Company and its subsidiaries by the regulatory agencies are intended primarily for the protection of depositors and borrowers 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 Georgia 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 annual safety and soundness and information technology examinations of the Company.

        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 unitary is then acquired by another party, its powers are restricted to those permitted for financial holding companies under the Act. The Company is currently a unitary holding company that satisfies these requirements.

        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

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insurance risk to the Savings Association Insurance Fund ("SAIF"), the convenience and needs of the community to be served and any possible anti-competitive effect.

        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.

        In connection with the March 31, 2002 acquisition of Resource by the Company, the regional director of the OTS and the Company entered into a side letter agreement providing that the Company, on a consolidated basis, maintain minimum capital held against forward sold conforming mortgages to be the greater of 5% or $50,000 and in no event allow the total capital to total assets to fall below 8%. Additionally, NetBank, FSB is required to maintain 6% core capital and 12% total risk-based capital ratios. Due to a number of factors, NetBank, FSB did not meet the 12% total risk-based capital level. The Company has notified the OTS of this deficiency, and management does not expect any adverse action by the OTS as a result of its non-compliance. Reference is made to note 21 in the notes to financial statements found in Part II. Item 8. of this report for additional details regarding NetBank's capital.

        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.

Bank Regulation

        General.    The Bank is a federal savings bank organized under the laws of the United States. The Bank and its operating subsidiaries are subject to annual examination by the OTS for safety and soundness, for compliance with consumer protection laws and regulations and for information technology. 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 and their operating subsidiaries must be examined no less frequently than every 12 months, with certain exceptions. In any event, however, federal savings banks must be examined no less frequently than every 18 months. The Bank 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.

        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. See the section below entitled "Transactions with Affiliates Restriction" below for greater detail.

        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,

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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 component 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.

        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 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

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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 $0.0 to $0.27 cents 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 adjusted quarterly and is set at 1.54 cents per $100 of deposits (the same assessment rate that is imposed on commercial banks) for the first quarter of 2004.

        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 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. Additionally, the terms of any CRA-related agreements must be publicly disclosed.

        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

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statutory or regulatory requirements or agreements entered into with the regulators, without an application to the OTS make capital distributions in any calendar year up to 100% of its net income to date during the calendar year to date plus the retained net income for the two preceding calendar years.

        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 Office of the Comptroller of the Currency. 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.

        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

23

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.

        Privacy.    Financial institutions are required to disclose their policies for collecting and protecting confidential information. Customers generally may prevent financial institutions from sharing nonpublic personal financial information with nonaffiliated third parties except under narrow circumstances, such as the processing of transactions requested by the consumer or when the financial institution is jointly sponsoring a product or service with a nonaffiliated third party. Additionally, financial institutions generally may not disclose consumer account numbers to any nonaffiliated third party for use in telemarketing, direct mail marketing or other marketing to consumers.

        Consumer Credit Reporting.    On December 4, 2003, the President signed the Fair and Accurate Credit Transactions Act (the FAIR Act), amending the federal Fair Credit Reporting Act (the FCRA). Most of the amendments to the FCRA (the FCRA Amendments) will become effective in late 2004, depending on implementing regulations to be issued by the Federal Trade Commission and the federal bank regulatory agencies.

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        The FCRA Amendments include, among other things:

new requirements for financial institutions to develop policies and procedures to identify potential identity theft and, upon the request of a consumer, place a fraud alert in the consumer's credit file stating that the consumer may be the victim of identity theft or other fraud;

new consumer notice requirements for lenders that use consumer report information in connection with risk-based credit pricing programs;

for entities that furnish information to consumer reporting agencies, new requirements to implement procedures and policies regarding the accuracy and integrity of the furnished information and regarding the correction of previously furnished information that is later determined to be inaccurate; and

a new requirement for mortgage lenders to disclose credit scores to consumers.

        The FCRA Amendments also will prohibit a business that receives consumer information from an affiliate from using that information for marketing purposes unless the consumer is first provided a notice and an opportunity to direct the business not to use the information for such marketing purposes (the "opt-out"), subject to certain exceptions. While the FCRA Amendments will limit NetBank's ability to share information with its affiliates for marketing purposes, the actual impact of these limitations will depend on the extent to which our customers elect to prohibit the use of their personal information for marketing purposes. We have no basis at this time to predict the volume of consumer "opt-outs."

        Prior to the effective date of the FCRA Amendments, NetBank and its subsidiaries will implement policies and procedures to comply with the new rules.

        Anti-Money Laundering and Anti-Terrorism Legislation.    The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001, signed by the President on October 26, 2001, imposed new requirements and limitations on specified financial transactions and account relationships, intended to guard against money laundering and terrorism. Most of these requirements and limitations took effect in 2002. Additional "know your customer" rules became effective in June 2003, requiring NetBank's banking, mortgage banking, and insurance subsidiaries to establish a customer identification program under Section 326 of the USA PATRIOT Act. NetBank and these subsidiaries implemented procedures and policies to comply with those rules prior to the effective date of each of the rules.

        The Bank Secrecy Act, designed to fight drug trafficking, money laundering, and other federal crimes requires financial institutions to keep extensive records, file currency transaction reports if transactions involve more than $10,000 in currency unless otherwise exempt, and to report suspicious activity, creating a "paper trail" to track certain financial transactions.

        Executive Order 13224 was signed by the President on September 23, 2001, blocking property and prohibiting transactions with persons who commit, threaten to commit, or support terrorism. All U.S. persons are prohibited from making or receiving any contribution of funds, goods, or services to or for the benefit of a blocked person.

        In addition, The Office of Foreign Assets Control (OFAC) dictates how financial institutions should block or otherwise freeze and report transactions involving target countries or nationals subject to economic sanctions or persons associated with international narcotics trafficking or terrorism.

        Flood Disaster Protection Act prohibits a lender from making, renewing, or extending loans secured by property or inventory located in a FEMA designated special flood hazard area unless the loan is covered its entire term by flood insurance.

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        Consumer Protection Laws and Regulations.    Interest and other charges collected or contracted for by the Bank and its operating subsidiaries are subject to various laws concerning interest rates and disclosures. In addition, their loan operations are also subject to various laws applicable to credit transactions, such as:

        The federal Truth-In-Lending Act and Regulation Z, requiring disclosure of the costs of credit, providing for the right to rescind certain transactions, and error resolution procedures for open-end transactions. Regulation Z also implements HOEPA requiring expanded disclosures and prohibiting certain practices with regard to high cost home loans to consumer borrowers;

        The Home Mortgage Disclosure Act and Regulation C, requiring financial institutions and other mortgage lenders to collect and report certain data in connection with home purchase and home improvement loans, including refinancings. This information can be used by the public and public officials to help determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves, assist in the distribution of public sector investments, and assist in identifying possible discriminatory lending patterns and enforcing anti-discrimation statutes;

        The Equal Credit Opportunity Act and Regulation B, promoting the availability of credit to all credit worthy applicants and prohibiting discrimination against a borrower or potential borrowers on the basis of race, color, religion, national origin, sex, marital status, age, the receipt of public assistance income, or the exercise of a consumer protection right.

        The Fair Housing Act prohibiting discrimination in the sale or rental of housing, including financing and advertising, on the basis of race, color, religion, sex, handicap or familial status.

        The Real Estate Settlement Procedures Act and HUD's Regulation X, which requires the disclosure of certain basic information to mortgagors concerning settlement costs and prohibits the charging of unearned fees and certain "kickbacks" or other fees for referrals in connection with a residential mortgage settlement service.

        The Soldiers' and Sailors Civil Relief Act of 1940, recently revised by the Servicemembers Civil Relief Act governing the repayment terms of, and property rights underlying, secured obligations while persons are in active military service.

        The Fair Credit Reporting Act, governing consumer reports by consumer reporting agencies; the reporting of information to consumer reporting agencies; making prescreened offers of credit; the sharing of consumer report information among affiliated and unaffiliated third parties, and requirements for users of consumer report information.

        The Fair Debt Collection Practices Act, governing the manner in which consumer debts may be collected and prohibiting certain practices considered abusive; and

        As applicable, the rules and regulations of the various state and federal supervisory and enforcement agencies charged with the responsibility of implementing and enforcing compliance for such laws.

        The deposit operations of the Bank are subject to:

        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.

        Truth In Savings Act and Regulation DD, requires that depository institutions to provide certain account related advertising and account opening disclosures to consumers so that they can meaningfully compare products among depository institutions. Subsequent disclosures must also be provided prior to changing terms or prior to the maturity of certain time accounts.

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        Interest on Deposits—Regulation Q prohibits paying interest on demand deposits such as checking accounts, or other deposits having a maturity of seven days or less.

        Expedited Funds Availability Act and Regulation CC requires depository institutions to make deposited funds available within certain timeframe, provide disclosures of their funds availability policies, and post notices at ATMs and other places where consumer deposits are taken.

Mortgage Banking Regulation

        The mortgage banking operations of the Company are subject to extensive regulation by federal and, in the case of Meritage Mortgage, state governmental authorities. The Company's mortgage operations are also subject to various laws, including those discussed above under "Consumer Protection Regulation," and judicial and administrative decisions that, among other things, regulate credit-granting activities, require disclosures to customers, govern secured transactions and establish collection, repossession and claims handling procedures and other trade practices. The Company's mortgage operations are also subject to the rules and regulations of the FHA, Freddie Mac, Fannie Mae, Ginnie Mae, HUD, the VA and, in the case of Meritage Mortgage, state regulatory authorities with respect to originating, processing, underwriting, selling, securitizing and servicing mortgage loans.

        In addition, there are other federal and state statutes and regulations, as well as judicial decisions, affecting such activities. Those rules and regulations, among other things, impose licensing obligations on the Company, establish eligibility criteria for mortgage loans, prohibit discrimination and establish underwriting guidelines that include provisions for inspections and appraisals, require credit reports on prospective borrowers and fix maximum loan amounts, and with respect to VA loans, fix maximum interest rates. Moreover, lenders such as the Company are required to submit annually to the FHA, Freddie Mac, Fannie Mae, Ginnie Mae and the VA audited financial statements, and each regulatory entity has its own financial requirements. The Company's mortgage operations also are subject to examination by the FHA, Freddie Mac, Fannie Mae, Ginnie Mae and the VA at all times to assure compliance with applicable regulations, policies and procedures. Many of the aforementioned requirements are designed to protect the interests of consumers, while others protect the owners or insurers of mortgage loans. Failure to comply with these requirements can lead to loss of approved status, termination of servicing contracts without compensation to the servicer, demands for indemnification or loan repurchases, class-action lawsuits and administrative enforcement actions. Such regulatory requirements are subject to change from time to time and may in the future become more restrictive, thereby making compliance more difficult or expensive or otherwise restricting the ability of the Company to conduct its business as such business is now conducted.

        There are various state and local laws and regulations affecting the Company's mortgage operations. The Company's mortgage businesses are in possession of licenses in all states in which they do business if such licenses are required and the requirement for such license is not preempted by federal law. Some of the Company's mortgage loans also may be subject to state usury statutes.

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. Likewise, the monetary policies of the Federal Reserve can dramatically impact the level of overall mortgage

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industry volumes and the volumes of mortgages produced and servicing prepayments experienced by the Company's mortgage banking operations. It is not possible to predict the nature or impact of future changes in monetary and fiscal policies.

Transactions with Affiliates Restrictions

        The Bank and its subsidiaries 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.

        For purposes of Section 23A, an "affiliate" generally includes a bank's parent and all other affiliates, except subsidiaries of the bank. The aggregate of all of the above transactions is limited in amount, as to any one affiliate, to 10% of a savings 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 transactions must also meet specified collateral requirements. The Bank and its subsidiaries must also comply with certain provisions designed to avoid the taking of low-quality assets from affiliates.

        The Bank and its subsidiaries are also subject to the provisions of Section 23B of the Federal Reserve Act which, among other things, prohibits an institution from engaging in certain transactions with affiliates, including the above types, 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. Generally, 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 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 from time to time. 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 in recent years would have resulted 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 Company 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. In addition, certain recent and proposed state and local legislation and regulations designed to protect consumers from predatory lending practices of unscrupulous lenders has had and

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may continue to have the unintended consequence of imposing unrealistic barriers on legitimate lenders' ability to make mortgage loans and of restricting a consumer's access to mortgage credit.

Seasonality

        The residential mortgage banking industry is generally subject to seasonal trends. These trends reflect the general pattern of resale of homes, which typically peaks during the spring and summer seasons and declines to lower levels from mid-November through January. Refinancings tend to be less seasonal and more closely related to changes in interest rates.

Risks Relating to NetBank's Business

Changes in Economic Conditions

        NetBank's business is subject to various business risks, including competition from other mortgage banking companies and other financial institutions. Economic conditions affect the consumer's decision to buy or sell residences as well as the number of residential mortgage loan delinquencies and foreclosures, the value of collateral supporting loan portfolios, administrative costs in evaluating and processing mortgage loan applications, and the cost and availability of funds that mortgage banking companies rely upon to make or purchase loans. Changes in the level of consumer confidence, tax laws, real estate values, prevailing interest rates and investment returns expected by the financial community could make mortgage loans of the types originated or purchased by the Company less attractive to borrowers or investors. Competition also may be affected by fluctuations in interest rates and general and local economic conditions.

        The Company continues to face the same challenges as other companies within the mortgage banking industry and, therefore, is not immune to significant volume declines precipitated by changes in interest rates or other factors beyond its control.

Interest Rate Risks

        NetBank's loans held for sale are generally funded by short-term borrowings and deposits. The Company's net warehouse interest income is the difference between the interest income it earns on loans held for sale (generally based on long-term interest rates) and the interest it pays on its borrowings (generally based on short-term interest rates). The factors that can affect this spread include interest rates charged by lenders and the relationship between long-term and short-term interest rates. This spread could decrease from its current level. A decrease in the spread would have a negative effect on the Company's net interest income.

        Certain states require that interest be paid to mortgagors on escrow funds deposited by them to cover mortgage-related payments such as property taxes and insurance premiums. Federal legislation has in the past been introduced that would, if enacted, revise current escrow regulations and establish a uniform interest payment requirement in all states. If such federal legislation were enacted or if additional states enact legislation relating to payment of, or increases in the rate of interest on escrow balances, or if such legislation were retroactively applied to loans in the Company's servicing portfolio, the Company's earnings would be adversely affected.

Litigation in Mortgage Banking Industry

        In recent years, the mortgage banking industry has been subject to class action lawsuits that allege violations of federal and state laws and regulations, including the propriety of collecting and paying various fees and charges and the calculation of escrow amounts. Class action lawsuits have been commenced against various mortgage banking companies, including the Company, alleging, inter alia, that the payment of certain fees to mortgage brokers violates the anti-kickback provisions of RESPA.

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Recent interpretations by HUD together with several subsequent appellate court decisions have indicated that class actions regarding a lender's compensation to brokers are inappropriate for resolution of the issue. So far, all of the cases have been resolved favorably for the mortgage banking industry, but if any of these cases are resolved against the lenders, it may cause an industry-wide change in the way independent mortgage brokers are compensated. Such a change could have a material adverse effect on the Company and the entire mortgage lending industry. The Company's broker compensation and table-funded correspondent purchase programs permit such payments. Although the Company believes these programs comply with all applicable laws and are consistent with long-standing industry practice and regulatory interpretations, in the future new regulatory interpretations or judicial decisions may require the Company to change its broker compensation and table-funded correspondent purchase practices. Class action lawsuits may continue to be filed in the future against the mortgage banking industry generally.

Delinquency and Default

        The Company's profitability may be negatively impacted by economic downturns because, during such periods, the frequency of loan defaults tends to increase, thereby increasing defaults and loan losses on loans held in portfolio for long-term investment and increasing the cost to service the loans in the Company's servicing portfolio. Also, the Company is generally at risk for delinquency or default of newly originated or purchased loans. In the case of conventional loans, the Company is generally at risk for any mortgage loan default from origination or purchase by the Company, as the case may be, until the loan is sold (typically less than 45 days). Once the Company sells the loan, the risk of loss from mortgage loan default and foreclosure generally passes to the purchaser or insurer of the loan. The Company has from the time an FHA or VA mortgage loan is originated or purchased until the first payment is due, a minimum of 31 days, to request insurance or a guarantee certificate from the FHA and the VA, respectively. Once the insurance or the guarantee certificate is issued, the Company has no risk of default or foreclosure except with respect to certain losses related to foreclosures of FHA mortgage loans and losses that exceed the VA's guarantee limitation.

        Moreover, under certain types of servicing contracts, particularly contracts to service loans that have been pooled or securitized, the servicer must advance all or part of the scheduled payments to the owner of the loan, even when loan payments are delinquent. Also, to protect their liens on mortgaged properties, owners of mortgage loans usually require the servicer to advance mortgage and hazard insurance and tax payments on schedule even if sufficient escrow funds are unavailable.

        Prior to the liquidation of a loan, the servicer must absorb the cost of funds advanced during the time the advance is outstanding. Further, the servicer must bear the increased costs of attempting to collect on delinquent and defaulted mortgage loans. The servicer generally is reimbursed for such advances ultimately by the mortgage loan owner or from liquidation proceeds. In addition, if a default is not cured, the mortgage loan will be extinguished as a result of foreclosure proceedings, and any servicing income will cease. As a consequence, the Company will forego servicing income from the time such loan becomes delinquent until it is foreclosed upon or is brought current. The Company maintains a reserve for possible losses at a level considered adequate to provide for known and inherent risks related to foreclosure and disposition losses. The Company's evaluation of an adequate level of foreclosure reserves considers past loss experience, industry loss experience, geographic and product concentrations, delinquency trends, economic conditions and other relevant factors. The Company uses currently available information to make such evaluation; therefore, future adjustments to the foreclosure reserve will be required as conditions and assumptions are revised in response to changes in trends and the other factors and assumptions relevant to the Company's evaluation.

        With respect to VA loans, the VA guarantees the initial losses on a loan. The guaranteed amount generally ranges from 20% to 35% of the original principal balance. Before each foreclosure sale, the VA determines whether to bid to purchase the foreclosed loan by comparing the estimated net sale

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proceeds to the outstanding principal balance and the servicer's accumulated reimbursable costs and fees. If this amount is a loss and exceeds the guaranteed amount, the VA typically issues a no-bid and pays the servicer the guaranteed amount. Whenever a no-bid is issued, the servicer absorbs the loss, if any, in excess of the sum of the guaranteed principal and amounts recovered at the foreclosure sale. The Company's historical delinquency and foreclosure rate experience on VA loans has generally been consistent with that of the industry.

        In the case of loans insured by the FHA, the Company will not be reimbursed for certain amounts if foreclosure becomes necessary. Such amounts include interest on the mortgage loan for the first two months subsequent to the loan becoming delinquent and a portion of the costs of foreclosure (generally the unreimbursed amount of such costs is limited to one-third of such costs).

Changes in the Market for Mortgage Loans and Mortgage Servicing Rights

Volume of Mortgage Loans Produced

        During periods of declining interest rates, the Company typically experiences an increase in loan originations because of increased home purchases and, particularly, increased refinancing activity. Increases in interest rates typically adversely affect refinancing activity, which has an adverse effect on the Company's origination revenues. For the year ended December 31, 2003, 48% of the Company's mortgage loan production was attributable to refinances, compared to 54% during 2002.

Sales of Mortgage Loans

        Gains or losses on sales of mortgage loans may result from changes in interest rates from the time the interest rate on a customer's mortgage loan application is established to the time the Company sells the loan. At any given time, the Company has committed to sell substantially all of its agency-eligible mortgage loans that are closed and a percentage of the agency-eligible mortgage loans that are not yet closed but for which the interest rate has been established ("pipeline loans"). To manage the interest rate risk of the Company's pipeline loans, the Company continuously projects the percentage of the pipeline loans it expects to close and, on the basis of such projections, enters into forward sales commitments to sell such loans. To reduce the effect of such interest rate changes, the Company employs a variety of techniques, currently consisting of a combination of mandatory forward sales commitments for mortgage-backed securities and put and call option contracts on U.S. Treasuries.

        If interest rates make an unanticipated change, the actual percentage of pipeline loans that close may differ from the projected percentage. A sudden increase in interest rates can cause a higher percentage of pipeline loans to close than projected. To the degree that this may not have been anticipated, the Company may not have made forward sales commitments to sell these additional loans and consequently may incur significant losses upon their sale at current market prices, adversely affecting results of operations. Likewise, if a lower percentage of pipeline loans closes than was projected, due to a sudden decrease in interest rates or otherwise, the Company may have committed to sell more loans than actually close and as a result may incur significant losses in fulfilling these commitments, adversely affecting results of operations. This risk is greater during times of volatility of interest rates.

Value of Mortgage Servicing Rights

        The value of the Company's servicing portfolio may be adversely affected if mortgage interest rates decline and loan prepayments increase. In periods of declining interest rates, the economic advantages to borrowers of refinancing their mortgage loans become greater. Increases in the rate of mortgage loan prepayments reduce the period during which the Company receives servicing income from such loans. The Company capitalizes the cost of the acquisition of servicing rights from third parties and capitalizes a value for the servicing rights on loans that it originates. The value of servicing rights is

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based upon the net present value of estimated future cash flows. If the rate of prepayment of the related loans exceeds the rate assumed by the Company, due to a significant reduction in interest rates or otherwise, the value of the Company's servicing portfolio will decrease and accelerated amortization of servicing rights or recognition of an impairment provision may become necessary, thereby decreasing earnings. The Company attempts to mitigate these risks with respect to the value of its servicing rights by maintaining a portfolio of interest rate option and other derivative contracts whose value tends to increase in periods of declining interest rates, thus mitigating the decline in value typical during the same period with respect to servicing rights. However, there can be no assurance that the Company's efforts to mitigate these risks will prevent value loss or impairment provisions.

Sales of Mortgage Servicing Rights

        The prices obtained by the Company upon the sale of its mortgage servicing rights depend upon a number of factors, including the general supply of and demand for mortgage servicing rights, as well as prepayment and delinquency rates on the portfolio of mortgage servicing rights being sold. Interest rate changes can affect the ability to sell, or the profitability of a sale of, mortgage servicing rights. Purchasers of mortgage servicing rights analyze a variety of factors, including prepayment sensitivity of loans underlying servicing rights, to determine the purchase price they are willing to pay. Thus, in periods of declining interest rates, sales of mortgage servicing rights related to higher interest rate loans may be less profitable than sales of mortgage servicing rights related to lower interest rate loans because it is possible that the loans bearing higher interest rates will be refinanced. Because these factors are largely beyond the control of the Company, there can be no assurance that the current level of profitability from the sale of mortgage servicing rights will be maintained.

Liabilities Under Representations and Warranties

        In the ordinary course of business, the Company makes representations and warranties to the purchasers and insurers of its mortgage loans and the purchasers of mortgage servicing rights regarding compliance with laws, regulations and program standards and as to accuracy of information. Under certain circumstances, the Company may become liable for certain damages or may be required to repurchase a loan if there has been a breach of representations or warranties. The Company generally receives similar representations and warranties from the correspondents from whom it purchases loans. However, in the event of breaches of such representations and warranties, the Company is subject to the risk that a correspondent may not have the financial capacity to repurchase loans when called upon to do so by the Company or otherwise may not respond to demands made by the Company. The Company estimates its liability with respect to such representations and warranties based upon a vintage analysis of repurchases of loans by vintage year of production. Since the Company no longer services the vast majority of loans and servicing sold in prior years, the Company is unable to calculate the amount of loans still outstanding for which such representations and warranties relate. For example, increases or decreases in prepayments of loans and servicing previously sold can have a favorable or unfavorable impact on the amount of representation and warranty claims ultimately asserted. Therefore, there is no assurance that future claims for representations and warranties will be similar to the Company's experience as depicted in its vintage analysis.

Environmental Matters

        In the course of its business, through the foreclosure process, the Company has acquired, and may acquire in the future, properties securing loans that are in default. Although the Company lends to owners of residential properties, there is a risk that the Company could be required to investigate and clean up hazardous or toxic substances or chemical releases at such properties after its acquisition and might be held liable to a governmental entity or to third parties for property damage, personal injury and investigation or cleanup costs incurred by such parties in connection with the contamination.

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        To date, the Company has not been required to perform any investigation or cleanup activities of any material nature, nor has the Company been subject to any environmental claims. No assurance can be given, however, that this will remain the case in the future.

Changes in the Demand for Mortgage Loans and Leases

        The Company's operating results can fluctuate substantially from period to period as a result of a number of factors, including the volume of loan and lease production, the level of interest rates, the level of amortization of mortgage servicing rights required by prepayment rates and the performance of the Company's servicing portfolio hedges, which currently consists primarily of interest rate option contracts for ten year Constant Maturity Treasury floors, Constant Maturity Swap floors and forward purchase contracts on Fannie Mae mortgage backed securities. In particular, the Company's results are strongly influenced by the level of loan and lease production, which is influenced by the interest rate environment, other economic factors, and the competitive environment. Accordingly, it is likely that its operating results will fluctuate substantially from period to period.

Prepayment Risks

        Amounts capitalized as mortgage servicing rights are amortized over the period of, and in proportion to, estimated future net servicing income. The Company assesses its capitalized mortgage servicing rights for impairment (on a stratified basis) based on the estimated market values of those rights. Impairments are recognized as a valuation allowance for each impaired stratum. Market value is estimated by an internal valuation which is substantiated for reasonableness by reference to a third-party analysis. Both analyses value such rights in consideration of current forward committed delivery prices, prevailing interest, prepayment and default rates, mortgage to treasury spreads and other relevant factors as appropriate or allocable to each valuation stratum.

Dependence Upon Independent Mortgage Brokers and Mortgage Bankers

        The Company depends largely upon independent mortgage bankers, including smaller mortgage companies and commercial banks, and, to a lesser extent, upon independent mortgage brokers, for its originations and purchases of mortgage loans. Substantially all of the independent mortgage brokers and mortgage bankers with whom the Company does business deal with multiple loan originators for each prospective borrower. Wholesale lenders, such as two of the three major mortgage subsidiaries of the Company, compete for business based upon pricing, service, loan fees and costs and other factors. The Company's competitors also seek to establish relationships with the same independent mortgage bankers and mortgage brokers with whom the Company seeks to do business, none of whom is obligated by contract or otherwise to continue to do business with the Company. Future operating and financial results of the Company will be susceptible to fluctuations in the volume and cost of its broker and mortgage banker-sourced loans resulting from, among other things, competition from other purchasers of such loans.

Possible Changes in Accounting Estimates

        In preparing the Company's financial statements, management is required to make estimates based on available information that can affect the reported amounts of assets, liabilities and disclosures as of the balance sheet date and revenues and expenses for the related periods. Such estimates relate principally to the Company's allowance for foreclosure losses and repurchased loans, its reserve for representation and warranty claims for previous sales of loans and mortgage servicing rights, and its allowances for loan and lease losses. Additionally, estimates concerning the fair values of mortgage loans held for sale, servicing rights, servicing hedges and the Company's other hedging instruments are all relevant to ensuring that mortgage loans are carried at the lower of cost or market, and that potential impairments of servicing rights are recognized as and if required. Because of the inherent

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uncertainties associated with any estimation process and due to possible future changes in market and economic conditions that will affect fair values, it is possible that actual future results in realization of the underlying assets and liabilities could differ significantly from the amounts reflected as of the balance sheet date. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies."

Federal Programs: Availability of Active Secondary Market

        The Company's ability to generate revenue through sales of mortgage-backed securities is largely dependent upon the continuation of programs administered by Fannie Mae, Freddie Mac and Ginnie Mae, which facilitate the issuance of such securities, as well as the Company's continued eligibility to participate in such programs. Although the Company is not aware of any proposed discontinuation of, or significant reduction in, the operation of such programs, any such changes could have a material adverse effect on the Company's operations. The Company anticipates that it will continue to remain eligible to participate in such programs, but any significant impairment of such eligibility would materially adversely affect its operations. In addition, the mortgage loan products eligible for such programs may be changed from time to time by the sponsor. The profitability of specific types of mortgage loan products may vary depending on a number of factors, including the administrative costs to the Company of originating or purchasing such types of mortgage loans.

Employees

        At December 31, 2003, NetBank had 2,307 regular employees, substantially all of whom were full-time employees, and 100 contract employees. None of NetBank's employees are represented by a union. NetBank considers its relations with employees to be good.

Available Information

        The Company's Internet address is www.netbank.com. The Company makes its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports available free of charge through its Web site as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission.

ITEM 2.    Description of Property

        The Bank leases 48,916 square feet of office space at 11475 Great Oaks Way, Suite 100, Alpharetta, Georgia 30022. This property houses the retail bank operations and serves as the corporate headquarters. It is subject to a lease that expires on June 30, 2006. RBMG leases 131,181 square feet of office space at 9710 Two Notch Road, Columbia, South Carolina 29223. This property houses the correspondent and wholesale mortgage operations. This lease expires on September 30, 2009. Meritage leases a property located at 6000 S.W. Meadows Road, Suite 500, Lake Oswego, Oregon 97035, which houses the majority of its nonconforming mortgage operations. This property is 44,900 square feet under a lease that expires September 30, 2006. Market Street leases a property located at 2650 McCormick Drive, Clearwater, Florida 33759, and is the headquarters of the retail mortgage operations. This property is 36,853 square feet and the lease expires on April 30, 2009.

ITEM 3.    Legal Proceedings

        Illinois Union Insurance Co. v. Commercial Money Center, Inc., et al., Case No. CV-01-0685-KJD-RJJ (District Court of Nevada) and related cases now pending in In re Commercial Money Center, Inc. Equipment Lease Litigation in the United States District Court for the Northern District of Ohio, Eastern Division, MDL Case No. 1:02-CV-16000, the pending bankruptcy proceedings of Commercial Money Center, Inc. and In re Commercial Money Center, Inc., Debtor (Kipperman v. NetBank, FSB), Bankruptcy No. 02-09721; In the United States Bankruptcy Court for the Southern District of California.

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        As reported in previous filings, NetBank, FSB, filed a complaint in January 2002 against Commercial Money Center, Inc. ("CMC"), the originator, seller, and subservicer of equipment leases purchased by NetBank, FSB, and Illinois Union Insurance Company ("Illinois Union"), Safeco Insurance Company of America ("Safeco"), and Royal Indemnity Company ("Royal," with Illinois Union, Safeco and Royal, collectively, referred to as the "Sureties"), the insurance companies that issued surety bonds and insurance policies guaranteeing payment of the income stream from the leases and that also served as master servicers of the leases. The NetBank, FSB action alleges several claims, including claims for breach of contract, fraud, and bad faith, and seeks, among other things, payment under and enforcement of surety bonds and insurance policies issued by the insurance and surety companies. The Judicial Panel on Multi-District Litigation has consolidated the actions involving NetBank, FSB with more than 35 other cases pending around the country involving other banks and financial institutions that were seeking to enforce surety bonds and insurance policies relating to leases sold by CMC. All pre-trial activity is currently being held in the United States District Court for the Northern District of Ohio (the "MDL Court").

        As reported in previous filings, NetBank, FSB has joined with the other claimants in a motion for judgment on the pleadings, which motion is currently pending before the MDL Court. Meanwhile, discovery is proceeding in the action and fact discovery is scheduled to close on May 3, 2003. Amendments to the pleadings are due on April 2, 2003. The Company plans to amend and supplement its complaint to include additional claims against the Sureties based on discovery adduced and events that have occurred to date. The Company believes that based on the overall facts and circumstances, the defenses asserted by the Sureties will fail and that NetBank, FSB will ultimately prevail on its claims.

        Also, as reported in previous filings, on May 30, 2002, CMC filed for bankruptcy protection. The bankruptcy proceeding is not a part of the consolidation of cases in Ohio. On June 11, 2003, the California Bankruptcy Court approved an amended settlement agreement (the "Amended NetBank Agreement") among NetBank, FSB, Lakeland Bank and the Trustee. The Amended NetBank Agreement resolves all claims of the Trustee with respect to the lease payments that were guaranteed by surety bonds and insurance policies issued by Safeco and Illinois Union, as well as all claims related to the surety bonds and insurance policies. In addition to approving the Amended NetBank Agreement, the California Bankruptcy Court approved a settlement agreement between the Trustee and Royal (the "Amended Royal Agreement'). Under the Amended Royal Agreement, Royal has agreed, among other things, to fund litigation by the Trustee against NetBank, FSB to avoid its interests in the leases that were guaranteed by surety bonds issued by Royal, as well as NetBank, FSB's interests in the surety bonds themselves. On September 4, 2003, the Trustee filed a Complaint against NetBank, FSB as contemplated by the Amended Royal Agreement., seeking to avoid NetBank, FSB's interest in the leases and surety bonds relating to the Royal guaranteed lease pools. NetBank intends to file a motion for summary judgment against the Trustee no later than April 30, 2004.

        NetBank, FSB intends to vigorously pursue its claims against all the Sureties, including claims for any loss associated with the claims brought by the Trustee against NetBank, FSB. 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.

Clayton v. Commercial Money Center, Inc., Case No. BC 253169 (CA Sup, Ct., Los Angeles County)

        On June 27, 2001, several lessees of equipment leased from CMC filed suit in Los Angeles Superior Court against CMC and several John Doe defendants alleging that the leases violated California usury laws, the California Financial Code, and the California Unfair Business Practices Act. The plaintiffs are seeking to rescind or reform their obligations under the leases and are seeking to recover statutory damages and attorney's fees. The plaintiffs amended their complaint to name NetBank, FSB, several other investor banks, and several surety companies as co-defendants in the

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action. After CMC filed for bankruptcy, the action was removed to the bankruptcy court in the Central District of California, but the plaintiffs subsequently agreed to withdraw their claims against CMC and were successful in their motion to remand the case back to state court. NetBank, FSB, has joined with certain other defendants in demurrers and motions to strike the complaint, which are pending with the Superior Court. NetBank intends to vigorously defend the case and to pursue recovery against Safeco Insurance Company, Royal Indemnity Company, and Illinois Union Insurance Company for any damages and costs incurred in this case. 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. 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. On September 22, 2002, the District Court ruled that "NETBANK" is generic but did not cancel the Company's existing service mark registration. The Company filed a motion for reconsideration of the District Court's decision, which was denied by order of the court filed on June 23, 2003. The Court has now set a preliminary discovery schedule. The Company intends to vigorously defend against interState NetBank's challenge of the "NETBANK®" service mark and will continue to pursue its counterclaims for trademark infringement and unfair competition in the case. In addition, the Company may appeal the District Court's decision that "NETBANK" is generic. While there is a possibility of a final adverse outcome for the Company on one or more of its claims, at this stage of the matter, we cannot fairly determine the likelihood of a final, adverse outcome. However, in the event of a final, 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.

ITEM 4.    Submission of Matters to a Vote of Security Holders

        None

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PART II.

ITEM 5.    Market for Registrant's Common Equity and Related Shareholder Matters

        NetBank's 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 NetBank's common stock as reported by the Nasdaq Stock Market.

        The Company's Board of Directors declared a cash dividend of $.02 per share of common stock to shareholders of record on February 15, 2004. The dividend will be paid on March 15, 2004. The Company had approximately 420 registered shareholders of record as of February 15, 2004. Funds for the dividend will come from sources other than earnings of the Bank. Under current OTS regulations, generally, the Bank may pay dividends and make other capital distributions to the Company after giving notice to the OTS.

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ITEM 6. Selected Financial Data

        NetBank declared dividends of $0.08 per common share during the year ended December 31, 2003, and has declared a dividend of $0.02 per common share to shareholders of record on February 15, 2004. The increase in provision expense during 2002 is principally a result of the non-performing leases in the Company's CMC lease portfolio. See Part I. Item 3. Legal Proceeding and note 19 in the consolidated financial statements found in Part II. Item 8. of this report for additional details. Reference is made to Part II. Item 7. for additional details regarding the impact on the figures presented in the above table regarding the December 1, 2003 acquisition of NetBank Payment Systems, Inc., the March 31, 2002 acquisition of Resource Bancshares Mortgage Group, Inc. and the June 29, 2001 acquisition of Market Street Mortgage Corporation.

        On December 1, 2003, the Company issued 77,674 shares of common stock to the shareholders of NetBank Payment Systems, Inc. in a private placement pursuant to Rule 504 under the Securities Act of 1933, as amended. The shares were issued as part of the consideration for NetBank Payment Systems, Inc. and had an aggregate value of $1.0 million.

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ITEM 7: Management's Discussion and Analysis of Financial Condition and Results of Operations

        The following discussion may include forward-looking statements. Forward-looking statements regarding the intent, belief or current expectations of NetBank, Inc. or its officers and directors can be identified by the use of forward-looking terms such as "may," "will," "should," "believe," "expect," "anticipate," "estimate," "continue," or other comparable terminology. Various internal and external factors could cause the Company's actual results to differ materially from those anticipated by the forward-looking statements. These factors include, but are in no way limited to, 1) the evolving nature of the market for Internet banking and financial services generally; 2) the public's perception of the Internet as a secure, reliable channel for transactions; 3) the success of new products and lines of business considered critical to the Company's long-term strategy, such as small business banking and transaction processing services; 4) potential difficulties in integrating the Company's operations across its multiple lines of business; 5) the cyclical nature of the mortgage banking industry generally; 6) a possible decline in asset quality; 7) the possible adverse effects of unexpected changes in the interest rate environment; 8) adverse legal rulings, particularly in the company's litigation over leases originated by the Commercial Money Center, Inc.; and/or 9) increased competition and regulatory changes. Item 1 of this 10-K filing, which has been submitted to the Securities Exchange Commission, includes additional information on these risks and others that have the potential to impact the Company in a material way. All forward-looking statements in this report are based on information available at the time of filing. The Company has no obligation to update any forward-looking statement included herein.

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., 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 equipment financing company.

        NetBank, Inc. acquired NPS on December 1, 2003, Resource on March 31, 2002, and Market Street on June 29, 2001. Accordingly, the financial impact of these acquisitions are included from their respective dates of acquisition. The entire consolidated company is referred to herein as "NetBank" or "the Company".

        All dollar figures are presented in thousands (000s) except per share data unless otherwise noted.

        Executive Summary.    Due to historically low interest rates during the majority of 2003, mortgage loan production was a record breaking $3.8 trillion industry-wide. The refinance boom during 2003 also generated record high margins as mortgage loan pipelines remained at near capacity industry-wide. NetBank's management capitalized on these favorable market conditions, allowing the Company to post record levels in all of the following categories: net income of $50,514, or $1.04 per share compared to a 2002 loss of $15,857 or ($0.36) per share; mortgage loan production of $18.9 billion, a $7.2 billion increase; mortgage loan sales of $17.1 billion, a $5.9 billion increase; and deposits of $2.5 billion, a 24% increase over 2002. The Company retained $1.4 billion of internally originated loans and leases during 2003. This retention replaced the runoff of previously purchased pools of loans that prepaid at record levels during late 2002 and early 2003. Additionally, the Company repositioned a portion of its balance sheet as it prepaid $364 million of higher cost fixed rate Federal Home Loan Bank of Atlanta

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("FHLB") advances at a cost of $16,193, and sold $318 million of investment securities available for sale at a gain of $11,394. This strategy will more effectively balance the Company's interest rate sensitivity and improve the net interest margin in future periods.

        Management also took advantage of the favorable market conditions to push forward with its long-term strategy of balancing NetBank's operations to provide one-third of its total income from each of its major operating segments: retail banking, mortgage banking or financial intermediary, and transaction processing. During 2003 the Company reinvested some of its earnings by forming three new operating units, Dealer Financial Services ("DFS"), Small Business Banking and NetInsurance. DFS originated $99 million of auto loans in its first seven months of operations. Small Business Banking generated over $27 million of deposits and added 1,084 customers in its first year of operations, and NetInsurance had approximately 477 policies in force as of December 31, 2003.

        To compare 2003 results to 2002 results, one should note that NetBank purchased NPS on December 1, 2003 and Resource on March 31, 2002, and their respective results of operations are therefore only included since the dates of acquisition. Additionally, NetBank incurred approximately $38 million, pre-tax, in charges related to integrating Resource's operations, $10 million of acquisition and severance costs and $20 million of additional provision expense specifically for the CMC lease portfolio during 2002.

Financial Condition

        General.    NetBank's assets totaled $4.7 billion at December 31, 2003, an increase of $1.2 billion or 34% from December 31, 2002. This large increase is primarily due to four factors. First, the held-for-investment ("HFI") portfolio increased $865 million primarily due to the Company's selective retention of $1.2 billion in mortgage and home equity loans originated through its mortgage subsidiaries, $99 million of auto loans originated through its indirect auto lending unit and $147 million of small business equipment leases originated through its leasing subsidiary. The $1.4 billion of loan retentions was offset in part by amortization and prepayments of $566 million. Second, NetBank's portfolio of loans held for sale ("HFS") increased $419 million. This increase was primarily due to record mortgage production of $18.9 billion outpacing the velocity of sales into the secondary market. The Company expects the overall level of the HFS portfolio to decline as sales begin to outpace production during the first half of 2004. Third, NetBank, FSB executed a $90 million commitment of fixed-rate debt to lock in the net interest spread on certain loan purchases, which is recorded as a receivable and as an unsettled trade. NetBank did not have any unsettled debt commitments at the end of 2002.    Finally, NetBank's portfolio of mortgage servicing rights ("MSRs") increased $77 million. The $77 million increase in the value of the Company's MSRs was primarily due to the $5.6 billion or 80% increase in the principal balance of mortgage loans underlying the MSRs. Throughout 2003 the Company retained the majority of its originated MSRs and expects to continue this strategy for the foreseeable future.

        The increases mentioned above were offset in part by declines in investment securities available for sale, cash and cash equivalents and due from servicers and investors of $200 million, $78 million and $37 million, respectively. The investment securities available for sale portfolio declined $200 million as the Company chose to sell certain investment securities and use some of the proceeds to pay off certain fixed-rate term advances from the FHLB. This strategy will more effectively balance the Company's interest rate sensitivity and improve the net interest margin in future periods. Cash and cash equivalents declined by $78 million primarily due to the Company more effectively using its cash to support the increase in mortgage loan production. Due from servicers and investors declined by $37 million as a result of the Company's replacement of externally serviced loans with internally originated and serviced loans. By internally servicing its portfolio of loans and leases, NetBank will accelerate its cash receipts by eliminating the delay in collection of principal and interest payments from third-party servicers and allow the Company to expand its cross-selling efforts.

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        Investment Securities.    During 2003, the Company sold certain investment securities at gains of $12,188. NetBank used some of the proceeds to pay off certain fixed-rate term FHLB advances. NetBank may continue to selectively sell investment securities in order to use the proceeds to better position its net interest margin for the benefit of future periods. Additionally, the Company recorded impairment charges of $794 on two variable rate, long-term corporate bonds. The bonds had traded under book value for an extended period of time due to widening credit spreads. Both bonds carry a Standard & Poor's "A-rating".

        The following tables set forth certain information relating to the Company's available for sale securities:

        Reference is made to note 4 in the consolidated financials statements found in Part II. Item 8. of this report regarding additional details about the maturity, weighted average interest rate and amortized cost and fair values of the Company's investment securities available for sale portfolio.

        Loan and Lease Receivables.    For the year ended December 31, 2003, the HFI portfolio increased $865 million to $1.8 billion, a 97% increase. As discussed previously, the Company achieved this growth by selectively retaining $1.2 billion in mortgage and home equity loans originated through its mortgage subsidiaries, $99 million of auto loans originated through its indirect auto lending unit and $147 million of small business equipment leases originated through Republic leasing. The retention of these internally originated assets was offset in part by $566 million of amortization and prepayments. NetBank is actively replacing its purchased loan and lease receivables portfolio with internally originated loans and leases so it can capitalize on cross-selling opportunities, internally service the

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assets and more effectively control its credit and interest rate risk. Third-party purchased loans represent only 21% of the HFI portfolio. As a result of the strategic retention of internally originated mortgage loans, the Company has increased its percentage of residential mortgage loans to total loans and leases to 73% as of December 31, 2003, compared to 58% as of December 31, 2002. NetBank intends to continue retaining its originated auto loans until the percentage of auto and other consumer loans to total interest-earning assets reaches approximately 15%. At that time, the Company will begin selling any excess originations into the secondary markets.

        The following is a summary of NetBank's loan and lease receivables as of December 31:

        The following is a summary of the composition of allowance for credit losses for the years ended December 31:

        The Company reclassified its portfolio of commercial mortgage loans as held for sale during 2002. The increase in the allowance for credit losses from 2001 to 2002 and its retention at a similar level for 2003 is principally a result of non-performing leases in the Company's CMC lease portfolio. See Part I. Item 3. Legal Proceeding and notes 5 and 6 in the consolidated financials statements found in Part II. Item 8. of this report for additional details regarding the Company's loan and lease receivables and the associated allowance for credit losses.

        Asset Quality and Non-performing Assets.    The Company periodically reviews the performance of its loan and lease receivables portfolio by reviewing charge-offs, delinquency statistics, and various other industry statistics. Large non-homogeneous credits are reviewed on a loan-by-loan or lease-by-lease basis, whereas relatively small credits with similar risk characteristic are reviewed on a pool-by-pool basis. If a decline in credit quality for a specific pool or individual loan or lease is noted, the Company

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records additional allowance through a charge to the provision for credit losses. The allowance for credit losses is maintained at a level estimated to be adequate to provide for probable losses in the loan and lease receivables portfolio. The Company determines the adequacy of the allowance based upon reviews of individual loans and leases, recent loss experience, current economic conditions, the risk characteristics of the various categories of loans and leases and other pertinent factors. NetBank's non-performing assets as a percentage of gross unpaid principal balance (UPB) improved from 9.3% at December 31, 2002, to 4.6% at December 31, 2003, as the level of non-performing assets held constant relative to an increase of $865 million or 97% in gross UPB. This same measurement excluding the CMC lease portfolio reflects a drop from 0.4% to 0.2%. Reference is made to Part I. Item 3. Legal Proceedings for details regarding the CMC litigation. As gross UPB continues to increase from the retention of high-quality loans, the Company expects these ratios may continue to improve.

        The following tables detail NetBank's held-for-investment loan and lease portfolio, the associated allowance for credit losses and non-performing assets: