UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2003

Commission File No. 0-22361

NETBANK, INC.
(Exact name of registrant as specified in its charter)

Georgia		58-2224352
(State of incorporation)		(I.R.S. Employer Identification Number)

11475 Great Oaks Way Suite 100 Alpharetta, Georgia		30022
(Address of principal executive offices)		(Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 the past 90 days. YES ý NO o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2): YES ý NO o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Class		Shares Outstanding At October 30, 2003
Common Stock, par value $.01		47,835,590

NETBANK, INC.
TABLE OF CONTENTS

Part I. Financial Information

Item I. Financial Statements

Consolidated balance sheets as of September 30, 2003 and December 31, 2002	3

Consolidated statements of operations for the three and nine months ended September 30, 2003 and 2002	4

Consolidated statements of shareholders’ equity for the three and nine months ended September 30, 2003 and 2002	5

Consolidated statements of cash flows for the nine months ended September 30, 2003 and 2002	7

Notes to consolidated financial statements	8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3. Quantitative and Qualitative Disclosures about Market Risk	36

Item 4. Controls and Procedures	37

Part II. OTHER INFORMATION

Item 1. Legal Proceedings	38

Item 2. Changes in Securities and Use of Proceeds	40

Item 3. Defaults Upon Senior Securities	40

Item 4. Submission of Matters to a Vote of Security Holders	40

Item 5. Other Information	40

Item 6. Exhibits and Reports on Form 8-K	40

Signature Page	40

Part I. Item 1. Financial Statements

NetBank, Inc.
Consolidated Balance Sheets
(unaudited and in 000’s except share amounts)

	September 30, 2003			December 31, 2002
Assets
Cash and cash equivalents:
Cash and due from banks	$	24,895		$	34,687
Federal funds sold	18,941			76,878
Total cash and cash equivalents	43,836			111,565
Investment securities available for sale-at fair value (amortized costs of $312,988 and $636,991, respectively)	320,908			654,719
Stock of Federal Home Loan Bank of Atlanta - at cost	68,060			36,600
Loans held for sale	2,632,631			1,514,625
Loans and leases receivable - net of allowance for credit losses of $42,671 and $42,576, respectively	1,630,271			892,093
Mortgage servicing rights – net	140,905			88,502
Accrued interest receivable	17,341			12,839
Furniture, equipment and capitalized software – net	51,986			46,610
Goodwill and other intangibles – net	45,283			41,696
Due from servicers and investors	42,101			70,526
Other assets	67,282			57,777
Total assets	$	5,060,604		$	3,527,552

Liabilities and shareholders’ equity
Liabilities:
Deposits	$	2,524,385		$	2,044,922
Other borrowed funds	1,896,065			882,488
Convertible subordinated debt	—			26,126
Trust preferred securities	8,764			4,382
Accrued interest payable	9,908			13,266
Loans in process	50,209			45,734
Accounts payable and accrued liabilities	144,470			109,044
Total liabilities	4,633,801			3,125,962

Commitments and contingencies	—			—

Shareholders’ equity:
Preferred stock, no par (10,000,000 shares authorized; none outstanding)	—			—
Common stock, $.01 par (100,000,000 shares authorized, 52,830,921 and 52,674,751 shares issued, respectively)	528			527
Additional paid-in capital	432,105			426,485
Retained earnings (deficit)	35,048			(2,568		)
Accumulated other comprehensive income, net of taxes of $2,977 and $6,702, respectively	4,943			11,026
Treasury stock, at cost (5,064,267 and 4,024,193 shares, respectively)	(45,821		)	(33,880		)
Total shareholders’ equity	426,803			401,590
Total liabilities and shareholders’ equity	$	5,060,604		$	3,527,552

See notes to consolidated financial statements.

NetBank, Inc.
Consolidated Statements of Operations
(unaudited and in 000’s except per share amounts)

	Three months ended September 30,						Nine months ended September 30, 2003
	2003			2002			2003			2002

Interest income:
Loans and leases	$	55,159		$	39,666		$	138,323		$	94,608
Investment securities	3,702			7,822			15,662			24,255
Short-term investments	58			479			277			2,121
Total interest income	58,919			47,967			154,262			120,984

Interest expense:
Deposits	12,293			13,909			37,273			41,692
Other borrowed funds	9,666			11,244			27,818			38,323
Total interest expense	21,959			25,153			65,091			80,015
Net interest income	36,960			22,814			89,171			40,969
Provision for credit losses	2,537			(95		)	4,299			26,432
Net interest income after provision for credit losses	34,423			22,909			84,872			14,537

Non-interest income:
Service charges and fees	12,017			10,601			35,795			26,559
Gains on sales of mortgage loans and mortgage servicing rights	75,914			38,972			184,461			74,149
Net gain on sales of investment securities	—			7,638			11,394			5,781
Other income	8,717			7,622			14,696			8,621
Total non-interest income	96,648			64,833			246,346			115,110

Non-interest expense:
Salaries and benefits	37,067			28,024			98,952			61,707
Customer service	2,684			3,447			8,282			10,220
Loan servicing	550			1,155			1,711			5,312
Marketing	1,988			1,454			6,319			4,739
Data processing	3,638			3,453			11,659			9,264
Depreciation and amortization	4,063			3,769			11,254			11,985
Impairment and amortization of mortgage servicing rights	31,195			10,828			58,530			18,332
Office expenses	2,169			2,4000			7,534			6,076
Occupancy	5,578			4,929			14,131			11,777
Travel and entertainment	1,184			872			3,129			2,042
Professional fees	5,517			2,935			12,119			6,431
Other expenses	6,329			3,327			17,132			6,862
Prepayment penalties on the early extinguishment of debt	4,316			7,451			16,267			9,944
Acquisition and severance	—			—			—			10,085
Total non-interest expense	106,278			74,044			267,019			174,776
Income (loss) before income taxes	24,793			13,698			64,199			(45,129		)
Income tax (expense) benefit	(9,204		)	(5,181		)	(23,695		)	16,721
Net income (loss)	$	15,589		$	8,517		$	40,504		$	(28,408	)

Net income (loss) per common and potential common shares outstanding:
Basic	$	0.33		$	0.17		$	0.84		$	(0.66	)
Diluted	$	0.32		$	0.17		$	0.83		$	(0.66	)

Weighted average common and potential common shares outstanding:
Basic	47,829			49,778			48,039			42,830
Diluted	48,590			50,141			48,661			42,830

Dividends declared on common stock per share	$	0.02		$	—		$	0.06		$	—

See notes to consolidated financial statements.

NetBank, Inc.
Consolidated Statements of Shareholders’ Equity
(unaudited and in 000’s)

	Common shares		Common stock		Additional paid-in capital			Retained (deficit) earnings			Accumulated other comprehensive income				Treasury stock			Total
Balance - December 31, 2002	52,675		$	527	$	426,485		$	(2,568	)	$	11,026			$	(33,880	)	$	401,590
Comprehensive income:
Net income for the three months ended March 31, 2003	—		—		—			10,702			—				—			10,702
Unrealized loss on securities, net of taxes	—		—		—			—			(2,167			)	—			(2,167		)
Comprehensive income																		8,535
Dividends declared on common stock	—		—		—			(973		)	—				—			(973		)
Purchase of shares of common stock for treasury, net of reissuances	—		—		(3		)	—			—				(7,499		)	(7,502		)
Issuances of common stock	68		—		4,575			—			—				—			4,575
Balance - March 31, 2003	52,743		$	527	$	431,057		$	7,161		$	8,859			$	(41,379	)	$	406,225
Comprehensive income:
Net income for the three months ended June 30, 2003	—		—		—			14,213			—				—			14,213
Unrealized gain on securities, net of taxes	—		—		—			—			2,749							2,749
Comprehensive income																		16,962
Dividends declared on common stock	—		—		—			(964		)	—				—			(964		)
Purchase of shares of common stock for treasury, net of reissuances	—		—		(16		)	—			—				(2,228		)	(2,244		)
Issuances of common stock	19		1		348			—			—				—			349
Balance - June 30, 2003	52,762		$	528	$	431,389		$	20,410		$		11,608		$	(43,607	)	$	420,328
Comprehensive income:
Net income for the three months ended September 30, 2003	—		—		—			15,589			—				—			15,589
Unrealized loss on securities, net of taxes	—		—		—			—			(6,665			)	—			(6,665		)
Comprehensive income																		8,924
Dividends declared on common stock	—		—		—			(951		)	—				—			(951		)
Purchase of shares of common stock for treasury, net of reissuances	—		—		54			—			—				(2,214		)	(2,160		)
Issuances of common stock	69		—		662			—			—				—			662
Balance - September 30, 2003	52,831	*	$	528	$	432,105		$	35,048		$		4,943		$	(45,821	)	$	426,803

* Note that the Company held 5,064 shares in treasury as of 9/30/2003.

See notes to consolidated financial statements.

NetBank, Inc.
Consolidated Statements of Shareholders’ Equity
(unaudited and in 000’s)

	Common shares		Common stock		Additional paid-in capital		Retained earnings (deficit)			Accumulated other comprehensive (loss) income			Treasury stock			Total
Balance - December 31, 2001	31,751		$	318	$	267,004	$	13,289		$	(3,648	)	$	(21,509	)	$	255,454
Comprehensive loss:
Net loss for the three months ended March 31, 2002	—		—		—		(5,638		)	—			—			(5,638		)
Unrealized loss on securities, net of taxes	—		—		—		—			(23		)	—			(23		)
Comprehensive loss																(5,661		)
Reissuance of shares of common stock held in treasury	—		—		—		—			—			42			42
Issuance of stock in conjunction with the acquisition of Resource Bancshares Mortgage Group, Inc.	19,717		197		155,365		—			—			—			155,562
Issuances of common stock	—		—		3		—			—			—			3
Balance - March 31, 2002	51,468		$	515	$	422,372	$	7,651		$	(3,671	)	$	(21,467	)	$	405,400
Comprehensive loss:
Net loss for the three months ended June 30, 2002	—		—		—		(31,287		)	—			—			(31,287		)
Unrealized gain on securities, net of taxes	—		—		—		—			7,214			—			7,214
Comprehensive loss																(24,073		)
Reissuance of shares of common stock held in treasury	—		—		—		—			—			225			225
Issuances of common stock	1,012		10		3,325		—			—			—			3,335
Balance - June 30, 2002	52,480		$	525	$	425,697	$	(23,636	)	$	3,543		$	(21,242	)	$	384,887
Comprehensive income:
Net income for the three months ended September 30, 2002							8,517									8,517
Unrealized gain on securities, net of taxes										4,701						4,701
Comprehensive income																13,218
Purchase of common stock held in treasury, net of reissuances					7								(2,429		)	(2,422		)
Issuances of common stock	191		15		742											757
Balance - September 30, 2002	52,671	*	$	540	$	426,446	$	(15,119	)	$	8,244		$	(23,671	)	$	396,440

* Note that the Company held 2,935 shares in treasury as of 9/30/2002.

See notes to consolidated financial statements.

NetBank, Inc.
Consolidated Statements of Cash Flows
(unaudited and in 000’s)

	Nine months ended September 30,
	2003			2002
Operating activities:
Net income (loss)	$	40,504		$	(28,408	)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation and amortization	11,254			11,985
Amortization of premiums (discounts) on investment securities, loan and lease receivables, and debt	8,185			29,298
Gain on sales of fixed assets	—			(2,814		)
Origination of loans held for sale	(14,615,168		)	(7,024,767		)
Proceeds from sales of loans held for sale	13,676,118			7,024,412
Net gain on sales of mortgage loans and servicing rights	(184,461		)	(74,149		)
Capitalization of mortgage servicing rights	(169,787		)	(84,683		)
Proceeds from sales of mortgage servicing rights	58,436			138,853
Impairment and amortization of mortgage servicing rights	58,530			18,332
Provision for credit losses	4,299			26,432
Changes in assets and liabilities which provide (use) cash:
Increase in accrued interest receivable	(4,502		)	(1,726		)
Decrease in other assets, due from servicers, and intangibles	15,333			36,741
Decrease in accrued interest payable	(3,358		)	(1,929		)
Increase in loans in process	4,475			33,292
Increase in accounts payable and accrued liabilities	35,426			15,704
Net cash (used in) provided by operating activities	(1,064,716		)	116,573

Investing activities:
Purchases of available for sale securities	(50,508		)	(1,758,746		)
Principal repayments on available for sale investment securities	66,096			211,333
Sales and maturities of available for sale investment securities	318,304			1,741,670
Gain on sale of investment securities	(11,394		)	(5,781		)
(Purchase) sale of Federal Home Loan Bank Stock	(31,460		)	22,234
Origination and purchases of loans and leases	(1,128,005		)	(304,769		)
Principal repayments on loans and leases	388,496			696,752
Purchases of furniture, fixtures, and equipment	(16,630		)	(5,803		)
Net cash acquired in business combination	—			29,762
Net cash (used in) provided by investing activities	(465,101		)	626,652

Financing activities:
Increase in money market and checking accounts	576,871			435,756
(Decrease) increase in certificates of deposits	(97,408		)	129,798
Proceeds from other borrowed funds	9,865,117			5,805,577
Repayments of other borrowed funds	(8,851,540		)	(6,880,454		)
Net proceeds from issuance of trust preferred securities	4,382			—
Repayment of convertible subordinated debt	(26,126		)	—
Issuances of common stock	5,586			4,095
Net (purchase) issuance of treasury stock	(11,906		)	(2,155		)
Dividend payments on common stock	(2,888		)	—
Net cash provided by (used in) financing activities	1,462,088			(507,383		)
Net (decrease) increase in cash and cash equivalents	(67,729		)	235,842
Cash and cash equivalents:
Cash, beginning of period	111,565			22,347
Cash, end of period	$	43,836		$	258,189

Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	68,449		$	80,673
Cash paid during the period for income taxes	$	12,463		$	1,034

Non-cash investing and financing activities:
Fair value of assets acquired	$	—		$	1,075,492
Liabilities assumed	—			(919,930		)
Stock issued in transaction	—			(155,562		)
Cash paid for business	$	—		$	—

See notes to consolidated financial statements.

NETBANK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2003
(unaudited)

1. ORGANIZATION AND BASIS OF PRESENTATION

NetBank, Inc. is a savings and loan holding company that wholly owns the outstanding stock of NetBank®, (“NetBank, FSB”), 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, 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 small ticket commercial financing company.

NetBank, Inc. acquired Resource on March 31, 2002, and subsequently reorganized the holding company structure as described above based on operational, licensing and funding needs. NetBank, Inc. acquired Market Street on June 29, 2001 and subsequently donated Market Street to NetBank, FSB. Accordingly, the financial impact of Resource and Market Street are included from the dates of acquisition. The entire consolidated company is referred to herein as “NetBank” or “the Company”.

In the opinion of management, the unaudited consolidated financial statements included herein reflect all adjustments, consisting only of normal recurring accruals, which are necessary for the fair presentation of the financial condition and results of operations for the interim periods presented. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to applicable rules and regulations of the Securities and Exchange Commission (“SEC”). The financial statements included herein should be read in conjunction with the financial statements and notes thereto, included in NetBank’s Form 10-K filed with the SEC for the year ended December 31, 2002. The results of operations for the interim periods reported herein are not necessarily indicative of results to be expected for the full year. Certain 2002 amounts have been reclassified for comparability with 2003 amounts.

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

2. ACQUISITIONS

On March 31, 2002, NetBank consummated its acquisition of Resource pursuant to an Agreement and Plan of Merger dated November 18, 2001. In the merger, NetBank issued 1.1382 shares of NetBank common stock in exchange for each outstanding share of Resource common stock, equivalent to 19.7 million shares of common stock plus cash in lieu of fractional shares. The transaction was accounted for as a purchase and a total of $20.6 million of goodwill was recorded.

On June 29, 2001, NetBank, Inc. acquired all of the outstanding stock of Market Street pursuant to an agreement dated April 15, 2001, and amended as of June 29, 2001, among NetBank, Net Interim, Inc., Republic Bank, Republic Bancorp, Inc. and certain shareholders of Market Street. The consideration paid consisted of 1.7 million shares of NetBank common stock valued at $8.96 per share and cash of $6.1 million. The acquisition was accounted for as a purchase, and approximately $20.1 million in goodwill, including transaction costs, was recorded.

Pro-forma unaudited financial information assuming Resource was included in the results of operations for the nine months ended September 30, 2002 follows:

Net interest income	$	54,073
Net loss	$	(29,176	)
Basic loss per share	$	(0.60	)
Diluted loss per share and potential common equivalent share outstanding	$	(0.60	)

On October 6, 2003, NetBank announced it had reached a definitive agreement to acquire Financial Technologies, Inc. (“FTI”). FTI is a privately held leading provider of ATM services for retail and other non-bank businesses. The transaction is expected to close within the fourth quarter of 2003 and be immediately accretive to earnings. Reference is made to the current report on Form 8-K NetBank filed on October 6, 2003, for additional details regarding FTI and the purchase price.

3. ACCOUNTING POLICIES

Reference is made to the accounting policies of NetBank described in the notes to consolidated financial statements contained in NetBank’s Form 10-K for the year ended December 31, 2002. The Company has followed those policies in preparing this report.

Significant Estimates. The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Such estimates relate to the Company’s allowance for credit losses, the fair values of mortgage loans held for sale, lease receivables, servicing rights, servicing hedges and the Company’s other hedging instruments. Because of the inherent 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 and realization of the underlying assets and liabilities could differ significantly from the amounts reflected as of the balance sheet date.

Stock Options. The Company accounts for stock options issued under the recognition and measurement principles of Accounting Principles Board 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock option-based employee compensation cost is reflected in the results of operations, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the pro forma effects on the results of operations and earnings per share if the Company had applied the fair value recognition provisions of FASB Statement 123, Accounting for Stock-Based Compensation, to stock option-based employee compensation.

	Three months ended September 30,						Nine months ended September 30,
	2003			2002			2003			2002
Net income (loss), as reported	$	15,589		$	8,517		$	40,504		$	(28,408	)
Deduct:

Total stock option-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	(663		)	(690		)	(1,684		)	(1,607		)
Pro forma net income (loss)	$	14,926		$	7,827		$	38,820		$	(30,015	)

Earnings (loss) per share:
Basic – as reported	$	0.33		$	0.17		$	0.84		$	(0.66	)
Basic – pro forma	$	0.31		$	0.16		$	0.81		$	(0.70	)

Diluted – as reported	$	0.32		$	0.17		$	0.83		$	(0.66	)
Diluted – pro forma	$	0.31		$	0.16		$	0.80		$	(0.70	)

In addition, for the three months ended September 30, 2003, and nine months ended through September 30, 2003, compensation expense of $31 and $83, respectively, related to restricted stock awards was recognized and included in net income as reported.

New Accounting Pronouncements. In November 2002, the FASB issued Interpretation No. 45 (“FIN 45”), “Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”, to clarify accounting and disclosure requirements relating to a guarantor’s issuance of certain types of guarantees. FIN 45 requires entities to disclose additional information about certain guarantees, or groups of similar guarantees, even if the likelihood of the guarantor’s having to make any payments under the guarantee is remote. The disclosure provisions are effective for financial statements for fiscal years ended after December 15, 2002. For certain guarantees, the interpretation also requires that guarantors recognize a liability equal to the fair value of the guarantee upon its issuance. This initial recognition and measurement provision is to be applied only on a prospective basis to guarantees issued or modified after December 31, 2002. For the nine months ended September 30, 2003, NetBank recorded an additional charge of $15,947 associated with the establishment of reserves for potential future losses based on current loan sales in accordance with this new interpretation.

In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation (“Interpretation”) No. 46, “Consolidation of Variable Interest Entities.” Interpretation No. 46 is applied immediately to variable interest entities (“VIEs”) created after January 31, 2003, and with respect to variable interests held before February 1, 2003, Interpretation No. 46 will apply beginning with interim and annual periods ending on or after December 15, 2003. Interpretation No. 46 addresses consolidation by business enterprises of VIEs which have one or both of the following characteristics: (1) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated support from other parties, which is provided through other interests that will absorb some or all of the expected losses of the entity; or (2) the equity investors lack one or more of the following essential characteristics of a controlling financial interest: (a) the direct or indirect ability to make decisions about the entities’ activities through voting rights or similar rights; or (b) the obligation to absorb the expected losses of the entity if they occur, which makes it possible for the entity to finance its activities; or (c) the right to receive the expected residual returns of

the entity if they occur, which is the compensation for the risk of absorbing the expected losses. The adoption of this interpretation is not expected to have a significant impact on the financial condition or results of operations of the Company.

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. This statement established standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. NetBank’s accounting policies were already in compliance with FASB statement No. 150 at the time of its issuance.

4. LOAN AND LEASE RECEIVABLES

Prior to its acquisition of Resource, NetBank’s primary loan investment strategy was to purchase pools of loans from other financial institutions. Generally the selling institutions retained the servicing for such loan purchases. However, since its acquisitions of Market Street and Resource, NetBank has discontinued purchasing pools of loans from other financial institutions and selectively retains a portion of its originated loans for investment purposes. Additionally, NetBank retains primarily all of the small ticket equipment leases it originates. At September 30, 2003 and December 31, 2002 the Company had net unamortized premiums and deferred cost on its loans and leases of $29,324 and $23,547, respectively. As of September 30, 2003, NetBank had commitments to fund mortgage loans of $1.4 billion, unused home equity lines of credit of $73,704 and commercial financing commitments of $1,063.

The following is a summary of NetBank’s loan and lease portfolio:

	September 30, 2003					December 31, 2002
	Amount			%		Amount			%
Residential mortgages	$	1,246,694		74.5	%	$	545,120		58.3	%
Leases	329,975			19.7	%	305,276			32.7	%
Home equity lines	51,070			3.1	%	82,051			8.8	%
Consumer	2,489			0.1	%	2,025			0.2	%
Construction	—			0.0	%	188			0.0	%
Auto	42,714			2.6	%	9			0.0	%
Total	1,672,942			100.0	%	934,669			100.0	%
Less allowance for credit losses	(42,671		)			(42,576		)
Total	$	1,630,271				$	892,093

5. ALLOWANCE FOR CREDIT LOSSES

The following is a summary of the allowance for credit losses:

	Three months ended September 30,						Nine months ended September 30,
	2003			2002			2003			2002
Beginning balance	$	41,855		$	53,471		$	42,576		$	22,865
Allowance recorded on purchased loan pools	—			—			—			7,257
Provision for credit losses	2,537			(95		)	4,299			26,432
Allowance acquired in connection with acquisition of Resource	—			—			—			1,828
Allowance transferred to held for sale	—			—			—			(3,270		)
Charge-offs:
Residential mortgages	(817		)	(5,563		)	(1,241		)	(5,929		)
Leases	(1,372		)	(625		)	(4,127		)	(1,993		)
Home equity lines	(56		)	(63		)	(489		)	(304		)
Consumer	(27		)	—			(45		)	(196		)
Auto	—			—			—			(10		)
Recoveries:
Residential mortgages	19			4			121			65
Leases	440			492			1,427			785
Home equity lines	89			72			147			138
Consumer	3			—			3			25
Auto	—			—			—			—
Total charge-offs, net	(1,721		)	(5,683		)	(4,204		)	(7,418		)
Ending balance at 09/30/2003	$	42,671		$	47,693		$	42,671		$	47,693

Allowance for credit losses as a percentage of average loans and leases	3.1		%	3.9		%	3.8		%	3.4		%

NetBank considers a loan or lease to be impaired when it is probable that it will be unable to collect all amounts due according to the original terms of the loan or lease agreement. NetBank measures impairment of a loan or lease on a loan-by-loan or lease-by-lease basis. Amounts of impaired loans that are not probable of collection are charged-off immediately. As of September 30, 2003, and December 31, 2002, NetBank had $84,188 and $87,025, respectively, of non-performing loans and leases in its held for investment portfolio. The CMC lease portfolio, which is the subject of litigation as described in Part II. Item I. Legal Proceedings included within this report, represented $80,465 and $83,769 of NetBank’s non-performing assets as of September 30, 2003, and December 31, 2002, respectively. NetBank had $2,885 and $3,485 of real estate owned resulting from foreclosures at September 30, 2003 and December 31, 2002, respectively. NetBank had $7,262 and $4,988 of loans that were restructured as of September 30, 2003, and December 31, 2002, respectively. NetBank’s other real estate owned consists almost entirely of residential properties as a result of foreclosures.

6. FAIR VALUE AND IMPAIRMENT OF MORTGAGE SERVICING RIGHTS

For purposes of evaluating its mortgage servicing rights portfolio for impairment, the Company disaggregates its servicing portfolio into two primary segments: available for sale and held for sale.

The segment of the portfolio designated as available for sale is composed of servicing rights that were purchased in bulk transactions or that were retained out of production pursuant to individual portfolio retention decisions. As of September 30, 2003, the Company is retaining the majority of its mortgage servicing rights. The available for sale portfolio is disaggregated for purposes of measuring potential impairments according to defined risk tranches. The Company has defined its risk tranches based upon interest rate band and product type. With respect to each such risk tranche, the fair value thereof, which is based upon an internal analysis that considers current market conditions, prevailing interest rates, prepayment speeds, default rates and other relevant factors, is compared to amortized carrying values of the mortgage servicing rights for purposes of measuring potential impairment. The Company uses Constant Maturity Swap rate (CMS) floors, Constant Maturity Treasury rate (CMT) floors and corridors, interest rate swap contracts, interest rate swaptions and interest rate caps to protect itself against interest rate and prepayment risk on its available for sale portfolio.

The segment of the portfolio designated as held for sale is composed of recently produced mortgage servicing rights that are scheduled for sale and have been allocated to specific forward servicing sales contracts. The held for sale portfolio is disaggregated for purposes of measuring possible impairments according to the specific forward sales contracts to which allocated, which the Company has determined to be the appropriate approach to disaggregation by predominant risk characteristic for this portfolio. For each such risk tranche, the fair value is based upon the allocated forward committed delivery price, which is compared to amortized carrying value for purposes of measuring potential impairment.

As of September 30, 2003, the following amounts related to NetBank’s mortgage servicing rights portfolio:

	Available for sale			Held for Sale
UPB	$	10,990,711		$	281,946
Carrying value	$	137,285		$	3,620
Carrying value / UPB	1.25		%	1.28		%
Weighted average note rate	6.14		%	5.52		%
Weighted average service fee	0.34		%	0.32		%
Net basis as multiple	3.67			3.97

The following table summarizes changes in the impairment reserve for NetBank’s available for sale mortgage servicing rights:

Balance as of January 1, 2003	$	14,429
Impairment expense	38,434
Balance as of September 30, 2003	$	52,863

7. DEPOSITS

The following table sets forth the dollar amount of deposits and weighted average interest rates in the various types of deposit programs offered by the Company:

	As of September 30, 2003						As of December 31, 2002
	Amount		Percentage		Current weighted average interest rate		Amount		Percentage		Current weighted average interest rate
Non-interest bearing checking accounts	$	304,486	12.1	%	N/A		$	227,490	11.1	%	N/A
Interest bearing:
Checking accounts	204,247		8.1	%	1.5	%	163,938		8.0	%	1.6	%
Money market	1,271,439		50.3	%	2.0	%	811,873		39.7	%	2.3	%
Certificate of deposit under $100,000	631,467		25.0	%	3.0	%	720,399		35.2	%	3.4	%
Certificate of deposit over $100,000	112,746		4.5	%	3.0	%	121,222		6.0	%	3.4	%
Total deposits	$	2,524,385	100.0	%			$	2,044,922	100.0	%

Accrued interest as of September 30, 2003, related to checking, money market and certificates of deposit accounts was $91, $829 and $5,943, respectively. Accrued interest as of December 31, 2002, related to checking, money market, and certificates of deposit accounts was $71, $512 and $9,318, respectively. At September 30, 2003, and December 31, 2002, $639 and $641 of overdrawn deposits were classified as loans, respectively.

8. BORROWINGS

A summary of borrowings and available borrowings, grouped by year of maturity, as of September 30, 2003 follows:

Type of Borrowing	Year of maturity	Range of stated interest rates September 30, 2003		Principal amount outstanding September 30, 2003
$ 100 million warehouse line of credit	2003	1.13	%*	$	—
$ 250 million master repurchase facility	2003	2.36	%*	242,838
$ 625 million FHLB warehouse line	2003	DRC + 0.50	%*	254,500
$ 200 million master repurchase facility	2003	2.37	%	129,629
FHLB advances	2003	2.83%, DRC	*	875,300
FHLB advances	2004	4.45	%	50,000
FHLB advances	2005	5.63% - 7.41	%	126,000
FHLB advances	2006	5.63	%	20,000
FHLB advances	2009	4.64	%	25,000
NBI Trust I preferred securities	2032	LIBOR + 3.35	%	4,382
NBI Trust II preferred securities	2033	LIBOR + 3.25	%	4,382
$ 175 million master repurchase facility	N/A	1.52	%*	172,798
	Total Debt			$	1,904,829

* Indicates a variable rate.

Most of the Federal Home Loan Bank (“FHLB”) advances are fixed rate. Four advances, however, totaling $115,000 may be converted at the FHLB’s option to adjustable rate based on the three month floating LIBOR. The FHLB warehouse line is a $625,000 adjustable line of credit with a floating rate based on the daily rate credit (“DRC”) plus 50 basis points used to fund mortgages originated by Market Street and RBMG. All of the FHLB advances and the FHLB warehouse line are secured by investment securities or mortgage loans. At September 30, 2003, NetBank had pledged $290,441 of investment securities to the FHLB as collateral for various FHLB advances.

Convertible Subordinated Notes (“Notes”) were originally issued for $115,000, in a public offering during the year ended December 31, 1999. The Notes were scheduled to mature on June 1, 2004, and carried an interest rate of 4.75% payable semi annually on June 1 and December 1 of each year beginning December 1, 2000. Holders of the Notes could have converted any Notes or portions of the Notes into shares of NetBank’s common stock at a conversion price of $35.67 per share, subject to adjustment. This is equivalent to 28.0348 shares of common stock per one thousand dollars of principal amount of the Notes. In July 2003, all the subordinated notes were called at par, and the remaining unamortized discount of $145 was written off.

During 2002, NetBank issued $4,382 of trust preferred securities in a private pooled transaction through a newly formed trust, NBI Trust I. The securities carry a variable rate and were initially priced at LIBOR plus 3.35% with a cap of 12.5% through January 2008. Interest payments and the resetting of the rate both occur on a quarterly basis. The securities are scheduled to mature in December 2032 and cannot be redeemed by NBI Trust I for a minimum of five years. During 2003, NetBank issued an additional $4,382 of trusted preferred securities in a private pooled transaction through a newly formed trust, NBI Trust II, under similar terms as the NBI Trust I securities.

Most of the revolving lines of credit, warehouse lines of credit (other than the FHLB warehouse line), the master repurchase facilities and commercial paper conduit facility are secured by mortgage loans and are subject to restrictive covenants. The covenants include certain minimum net worth requirements, minimum tangible net worth requirements, certain minimum financial ratios, maintenance of servicer eligibility for various government agencies, a minimum balance in the mortgage servicing rights portfolio and certain minimum liquidity requirements, which are all defined in the terms of the related debt agreements. In addition, the covenants restrict the types of business activities in which the Company may engage. NetBank was in compliance with all debt covenants in place as of September 30, 2003. Although management anticipates complying with all current debt covenants, there can be no assurance that NetBank or its individual subsidiaries will be able to comply with all debt covenants in the future. Failure to comply could result in the loss of the related financing. Short-term debt outstanding to third parties reached the highest level for the quarter on September 12, 2003 with a daily short-term balance of $2,126 million.

9. NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE

Basic and diluted net income (loss) per common and potential common share has been calculated based on the weighted average number of shares outstanding. The following schedule reconciles the numerator and denominator of the basic and diluted net income (loss) per common and potential common share for the three and nine months ended September 30, 2003, and for the three months ended September 30, 2002. For the nine months ended September 30, 2002, there is no difference in basic and diluted shares as the effect of options outstanding to purchase common shares would be anti-dilutive to the net loss for that period. The effect of the recently retired convertible debt securities has not been included in any of the periods presented because the assumed conversion of such securities was anti-dilutive.

	Net Income (Numerator)			Shares (Denominator)	Per Share Amount
Nine months ended September 30, 2003
Basic EPS	$	40,504		48,039	$	0.84

Effect of dilutive securities - option to purchase common shares	—			622	(0.01		)
Diluted EPS	$	40,504		48,661	$	0.83

Three months ended September 30, 2003
Basic EPS	$	15,589		47,829	$	0.33

Effect of dilutive securities - option to purchase common shares	—			761	(0.01		)
Diluted EPS	$	15,589		48,590	$	0.32

Nine months ended September 30, 2002
Basic EPS	$	(28,408	)	42,830	$	0.66	)
Effective of dilutive securities – option to purchase common shares	—			—	—
Diluted EPS	$	(28,408	)	42,830	$	(0.66	)

Three months ended September 30, 2002
Basic EPS	$	8,517		49,778	$	0.17

Effect of dilutive securities - option to purchase common shares	—			363	—
Diluted EPS	$	8,517		50,141	$	0.17

10. BUSINESS SEGMENTS

NetBank’s principal activities include retail banking and mortgage banking. The retail banking segment primarily consists of offering consumer banking products such as checking, money market, and certificates of deposit. The retail bank primarily invests the funds generated through its consumer bank products in mortgage loans, investment securities and originated small business financing loans and leases. The mortgage banking segment originates mortgage loans directly with borrowers and purchases mortgage loans from correspondents and/or brokers. The mortgage banking segment packages or pools such loans either inclusive or exclusive of servicing rights for sale into the secondary market. Additionally, the Company has various strategic initiatives including small business banking, personal financial planning, dealer financial services and NetInsurance. These initiatives as well as the revenues and expenses of the parent company are currently reported in the Other segment.

The accompanying segment data includes the results of Resource commencing March 31, 2002, reflecting the date of acquisition. The 2002 tables include the effects of certain transactions related to the acquisition of Resource, including restructuring the investment portfolio in anticipation of the Resource transaction and certain compensation charges related to changes in management as a result of the transaction. The reader is

directed to the management discussion and analysis and results of operations included within this report for additional detail regarding comparability of period results.

The financial information for each business segment reflects specific identifiable transactions or allocated transactions based on an internal allocation method. The measurement of the performance of the business segments is based on the management structure of NetBank and is not necessarily comparable with similar information from any other financial institution. The information presented is also not necessarily indicative of the segment’s operations if they were independent entities.

	For the three months ended September 30, 2003
	Retail Banking			Mortgage Banking			Other			Eliminations			Consolidated
Interest income	$	22,111		$	36,402		$	372		$	34		$	58,919
Intersegment interest income	13,287			53			82			(13,422		)	—
Total interest income	35,398			36,455			454			(13,388		)	58,919
Interest expense	19,256			2,420			283			—			21,959
Intersegment interest expense	(35		)	13,049			408			(13,422		)	—
Total interest expense	19,221			15,469			691			(13,422		)	21,959
Net interest income	16,177			20,986			(237		)	34			36,960
Provision for credit losses	2,542			(5		)	—			—			2,537
Non-interest income	2,762			96,020			248			(2,382		)	96,648
Non-interest expense	18,947			84,345			3,074			(88		)	106,278
Pre-tax income (loss)	$	(2,550	)	$	32,666		$	(3,063	)	$	(2,260	)	$	24,793

Total assets	$	4,471,108		$	2,926,477		$	619,217		$	(2,956,198	)	$	5,060,604

	For the three months ended September 30, 2002
	Retail Banking			Mortgage Banking		Other			Eliminations			Consolidated
Interest income	$	27,384		$	20,364	$	219		$	—		$	47,967
Intersegment interest income	5,380			—		317			(5,697		)	—
Total interest income	32,764			20,364		536			(5,697		)	47,967
Interest expense	23,075			1,714		364			—			25,153
Intersegment interest expense	—			5,380		317			(5,697		)	—
Total interest expense	23,075			7,094		681			(5,697		)	25,153
Net interest income	9,689			13,270		(145		)	—			22,814
Provision for credit losses	(95		)	—		—			—			(95		)
Non-interest income	15,604			46,957		3,167			(895		)	64,833
Non-interest expense	22,529			49,875		2,225			(585		)	74,044
Pre-tax income (loss)	$	2,859		$	10,352	$	797		$	(310	)	$	13,698

Total assets	$	3,159,399		$	1,347,013	$	570,392		$	(1,598,485	)	$	3,478,319

	For the nine months ended September 30, 2003
	Retail Banking			Mortgage Banking		Other			Eliminations			Consolidated
Interest income	$	61,070		$	92,729	$	404		$	59		$	154,262
Intersegment interest income	33,110			135		948			(34,193		)	—
Total interest income	94,180			92,864		1,352			(34,134		)	154,262
Interest expense	57,807			6,110		1,174			—			65,091
Intersegment interest expense	845			32,330		1,018			(34,193		)	—
Total interest expense	58,652			38,440		2,192			(34,193		)	65,091
Net interest income	35,528			54,424		(840		)	59			89,171
Provision for credit losses	4,263			36		—			—			4,299
Non-interest income	20,274			230,485		181			(4,594		)	246,346
Non-interest expense	60,825			199,702		6,662			(170		)	267,019
Pre-tax income (loss)	$	(9,286	)	$	85,171	$	(7,321	)	$	(4,365	)	$	64,199

Total assets	$	4,471,108		$	2,926,477	$	619,217		$	(2,956,198	)	$	5,060,604

	For the nine months ended September 30, 2002
	Retail Banking			Mortgage Banking		Other			Eliminations			Consolidated
Interest income	$	76,990		$	43,750	$	244		$	—		$	120,984
Intersegment interest income	10,557			—		1,624			(12,181		)	—
Total interest income	87,547			43,750		1,868			(12,181		)	120,984
Interest expense	70,130			8,691		1,194			—			80,015
Intersegment interest expense	411			10,557		1,213			(12,181		)	—
Total interest expense	70,541			19,248		2,407			(12,181		)	80,015
Net interest income	17,006			24,502		(539		)	—			40,969
Provision for credit losses	26,432			—		—			—			26,432
Non-interest income	19,241			93,425		3,775			(1,331		)	115,110
Non-interest expense	63,316			98,377		14,104			(1,021		)	174,776
Pre-tax income (loss)	$	(53,501	)	$	19,550	$	(10,868	)	$	(310	)	$	(45,129	)

Total assets	$	3,159,399		$	1,347,013	$	570,392		$	(1,598,485	)	$	3,478,319

11. LOSS CONTINGENCY

NetBank, FSB is involved in litigation with three insurance companies who are sureties on some of NetBank, FSB’s commercial lease portfolios. NetBank, FSB has filed a claim for all principal and interest payments that are currently past due. The unpaid principal balance totals $80,465. In accordance with the Office of Thrift Supervision requirements, the Company maintains an allowance for losses against this portfolio of $21,230. The entire portfolio has been placed on non-accrual status pending the outcome of the litigation. The Company did not accrue and did not receive approximately $1.2 million and $4.1 million of interest for the three and nine months ended September 30, 2003, respectively. Approximately $1.4 million and $5.1 million of was not accrued or received during the three and nine months ended September 30, 2002, respectively. Additionally, NetBank incurred $198 and $670 of legal expenses related to this litigation for the three and nine months ended September 30, 2003. In the normal course of business NetBank is party to various legal proceedings. As of September 30, 2003, NetBank does not consider any of these proceedings to be material to its financial position

or results of operations, other than the litigation involving the CMC lease portfolio. Reference is made to Part II. Item I. Legal proceeding included within this report for additional information.

12. GUARANTEES

The Company has issued mortgage-backed securities under various programs sponsored by Ginnie Mae, Freddie Mac and Fannie Mae. In connection with servicing mortgage-backed securities guaranteed by Ginnie Mae, Freddie Mac or Fannie Mae, the Company advances certain principal and interest payments to security holders prior to their collection from specific mortgagors. Additionally, the Company must remit certain payments of property taxes and insurance premiums in advance of collecting them from specific mortgagors and make certain payments of attorney’s fees and other costs related to loans in foreclosure. These amounts are included in servicing advances under the caption due from servicers and investors in the accompanying consolidated balance sheets. Likewise, during the month that a mortgagor pays off his/her mortgage, the Company must accept an interest payment from the borrower that is pro-rated to the date of payoff and pass through a full month’s interest to the security holder. The Company includes its projection of the cost of such advances, lost interest on mortgages that prepay, and the expense of unreimbursed attorney and other costs associated with foreclosure in its valuation of the servicing assets.

In the ordinary course of business, the Company is exposed to liability under representations and warranties made to purchasers and insurers of mortgage loans and the purchasers of servicing rights. Under certain circumstances, the Company may be required to repurchase mortgage loans or indemnify the purchasers of loans or servicing rights for losses if there has been a breach of representations or warranties. At September 30, 2003 and December 31, 2002, NetBank had $35,850 and $11,893 of reserves which represent the estimated fair value of its guarantees under these contracts. For the nine months ended September 30, 2003, NetBank repurchased $32,135 of loans, which is less than two tenths of one percent of production for the same period.

In certain sales of whole loans and sales of servicing, the Company is contractually obligated to refund to the purchaser, certain premiums paid to the Company on the sale of loans or servicing rights if the mortgagor prepays the mortgage during a specified period of time (generally up to 120 days after sale). The Company had reserves for its estimated obligation of $3,475 and $1,475 as of September 30, 2003, and December 31, 2002, respectively.

Since NetBank is not the primary servicer for many of the loans or loans underlying the mortgage servicing rights it sells, it has no knowledge as to the current status of previously sold loans and mortgage servicing rights. Accordingly, NetBank is unable to determine its exposure, if any, under its representations and warranties. The maximum exposure under NetBank’s representations and warranties would be the outstanding principal balance and any premium paid of all loans or mortgage servicing rights ever sold by the Company less any loans sold servicing released or any loans underlying mortgage servicing rights that have already prepaid or defaulted without a breach of representations and warranties.

Part I. Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

Some of the statements in this report are forward-looking statements. Forward-looking statements include statements regarding the intent, belief or current expectations of NetBank or its officers and directors and can be identified by the use of forward-looking terms such as “may,” “will,” “should,” “believe,” “expect,” “anticipate,” “estimate,” “continue,” or comparable terminology. The Company’s actual results could differ materially from those anticipated from the forward-looking statements, depending on various important factors. These factors include a possible decline in asset quality; potential difficulties in integrating the Company’s operations across its multiple lines of business; the cyclical nature of the mortgage banking industry generally; the evolving nature of the market for internet banking and financial services generally; the possible adverse effects of unexpected changes in the interest rate environment; increasing competition and regulatory changes; and/or adverse legal rulings, particularly in the company’s litigation over leases originated by the Commercial Money Center, Inc. The Company’s 2002 Form 10-K filed with the Securities and Exchange Commission,

contains additional details on these and other risks that are material to operations. All forward-looking statements in this report are based on information available as of the date this report was filed with the SEC. The Company does not undertake to update any forward-looking statements that may be made.

General

NetBank, Inc. acquired Resource on March 31, 2002, and subsequently reorganized the holding company structure as described above based on operational, licensing and funding needs. Accordingly, the financial impact of Resource is included from the date 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.

Financial Condition

General. During the nine months ended September 30, 2003, the Company’s assets increased $1.5 billion or 43%. This increase was primarily due to increases of $1.1 billion, $738 million and $52 million in loans held for sale, loan and lease receivables and mortgage servicing rights, respectively. These large increases were offset in part by reductions of $334 million, $68 million and $28 million in investment securities available for sale, cash and cash equivalents and due from servicers and investors, respectively. The increase in mortgages held for sale was primarily due to the velocity of sales into the secondary markets or retention by the retail bank segment lagging production by $1.3 billion. The increase in loan and lease receivables was due to the retention of $1.0 billion of mortgage loans produced by the mortgage banking segment, partially offset by amortization, prepayments and sales of $285 million. The $52 million increase in the value of the Company’s mortgage servicing rights was primarily due to the $4.3 billion or 62% increase in the principal balance of mortgage loans underlying the mortgage servicing rights portfolio. Throughout 2003 the Company retained the majority of its originated mortgage servicing rights and expects to continue this strategy for the foreseeable future. The investment securities available for sale portfolio declined $334 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 Federal Home Loan Bank (“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 $68 million primarily due to the Company more effectively using its cash to support the increase in mortgage loan production. This increase was partially offset by a decline of $28 million in due from servicers and investors related to the Company replacing 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 and allow the Company to expand its cross-selling efforts.

Average balances. The following table contains average balances for the periods indicated. Reference is made to the rate volume variance tables contained in the results of operations section for additional detail of the Company’s average interest-earning assets and interest-bearing liabilities.

	For the three months ended September 30,				For the nine months ended September 30,
	2003		2002		2003		2002
Assets
Interest-earning	$	4,233,349	$	3,225,115	$	3,725,797	$	3,069,156
Noninterest-earning	326,806		559,813		482,246		513,771
Total	$	4,560,155	$	3,784,928	$	4,208,043	$	3,582,927

Liabilities and shareholders’ equity
Interest-bearing	$	3,668,570	$	3,004,842	$	3,398,684	$	2,878,452
Noninterest-bearing	468,019		384,942		395,622		332,397
Total liabilities	4,136,589		3,389,784		3,794,306		3,210,849
Shareholders’ equity	423,566		395,144		413,737		372,078
Total liabilities and shareholders’ equity	$	4,560,155	$	3,784,928	$	4,208,043	$	3,582,927

Investment Securities. During the nine months ended September 30, 2003, the Company sold certain investment securities at gains of $12,188. NetBank used 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 at September 30, 2003, and December 31, 2002:

As of September 30, 2003	Amortized cost		Unrealized gains		Unrealized losses		Estimated fair value
Mortgage pool securities	$	43,462	$	1,201	$	12	$	44,651
Collateralized mortgage obligations	1,537		125		—		1,662
U.S. government agencies	255,523		6,231		—		261,754
Corporate bonds	8,900		141		14		9,027
Habitat bonds and other	3,566		248		—		3,814
Total	$	312,988	$	7,946	$	26	$	320,908

As of December 31, 2002	Amortized cost		Unrealized gains		Unrealized losses		Estimated fair value
Mortgage pool securities	$	121,868	$	3,222	$	—	$	125,090
Collateralized mortgage obligations	8,774		159		9		8,924
U.S. government agencies	493,159		15,079		—		508,238
Corporate bonds	9,679		—		971		8,708
Habitat bonds and other	3,511		248		—		3,759
Total	$	636,991	$	18,708	$	980	$	654,719

Loan and Lease Receivables. 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 assets and more effectively control its credit and interest rate risk. The Company’s loan and lease receivables grew by $738 million for the nine months ended September 30, 2003, as the Company selectively retained $1.0 billion of ARM, second and jumbo mortgage loans to replace the runoff or sale of previously purchased loan and lease pools. The Company expects to continue retaining the majority of the ARM, second and jumbo mortgage loans originated by the mortgage banking segment. 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 75% as of September 30, 2003, compared to 58% as of December 31, 2002.

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 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 5.0% at September 30, 2003, as the level of non-performing assets held constant relative to an increase of $742 million or 80% in gross UPB. This same measurement excluding the CMC lease portfolio reflects a drop from 0.4% to 0.2%. As gross UPB continues to increase from the retention of residential mortgage 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:

	September 30, 2003
	Gross UPB		Allocated allowance		(1) Non- performing		Allowance / NPA		NPA / Gross UPB
Residential mortgages	$	1,246,694	$	9,779	$	2,126	460.0	%	0.2	%
Leases	249,510		10,057		1,218		825.7	%	0.5	%
Home equity lines	51,070		880		379		232.2	%	0.7	%
Consumer	2,489		266		—		n/a		0.0	%
Construction	—		—		—		n/a		n/a
Auto	42,714		459		—		n/a		0.0	%
Loan and lease receivables	1,592,477		21,441		3,723		575.9	%	0.2	%
CMC leases (2)	80,465		21,230		80,465		26.4	%	100.0	%
Total loan and lease receivables	$	1,672,942	$	42,671	$	84,188	50.7	%	5.0	%

	December 31, 2002
	Gross UPB		Allocated allowance		(1) Non- performing		Allowance / NPA		NPA / Gross UPB
Residential mortgages	$	545,120	$	10,464	$	1,851	565.3	%	0.3	%
Leases	221,507		9,009		1,405		641.2	%	0.6	%
Home equity lines	82,051		1,659		—		n/a		0.0	%
Consumer	2,025		216		—		n/a		0.0	%
Construction	188		—		—		n/a		n/a
Auto	9		—		—		n/a		0.0	%
Loan and lease receivables	850,900		21,348		3,256		655.7	%	0.4	%
CMC leases (2)	83,769		21,228		83,769		25.3	%	100.0	%
Loan and lease receivables	$	934,669	$	42,576	$	87,025	48.9	%	9.3	%

(1) Non-performing assets (“NPA”) include all loans and leases that are 90 days or more delinquent or on non-accrual status. The tables above do not include $24,212 and $30,443 of non-performing loans classified as held for sale as of September 30, 2003, and December 31, 2002, respectively. Since loans classified as held for sale are carried at the lower of cost or market, the estimated losses that may occur have already been recorded in both the balance sheet and statement of operations.

(2) The reader is directed to Part II. Item 1. Legal Proceedings contained within this report for additional detail regarding the CMC lease portfolio and the associated litigation.

Mortgage Servicing Rights. The value of NetBank’s mortgage servicing rights (“MSRs”) increased $52,403 or 59% during the nine months ended September 30, 2003. The $52,403 increase in value was primarily driven by the $4.3 billion or 62% increase in the portfolio of mortgage loans underlying its MSRs during the period. Beginning in late 2002, NetBank adopted a strategy of retaining primarily all of its originated conventional MSRs in order to achieve the necessary critical mass the servicing division requires to eventually become operationally profitable. NetBank will continue to retain the majority of its originated MSRs for the foreseeable future. In addition to scheduled amortization and valuation impairments due to accelerated prepayments, the value of the MSRs portfolio was negatively impacted by $9.7 million due to implementation of a more robust, dynamic prepayment assumption methodology and recognition of a higher cost to service certain loan products in the company’s portfolio.

Liabilities. Total liabilities for the nine months ended September 30, 2003, increased $1.5 billion. This increase was due primarily to increases of $0.5 billion in deposits and $1.0 billion in other borrowed funds. The increase in deposits is the result of adding 12,907 new customers, which is part of NetBank’s overall strategy of increasing its transactional deposit base. The increase in other borrowed funds was necessary to support the $1.1 billion increase in loans held for sale and $0.7 billion increase in loan and lease receivables. In April 2003, the Company completed its second trust preferred securities offering which also increased total liabilities by $4,382. Additionally, accounts payable and accrued liabilities increased by $35,426 primarily due to the increase in current tax liabilities associated with significant higher earnings year over year. These increases were offset in part by a $26,126 decline in convertible subordinated debt, which was retired in July 2003.

Deposits. As of September 30, 2003, deposits represented 57% of total interest-bearing liabilities (including deposits, other borrowed funds, convertible subordinated notes and trust preferred securities) outstanding. FHLB advances, warehouse lines of credit and repurchase agreements represented approximately 42%, and trust preferred securities represented less than 1%. During the nine months ended September 30, 2003, NetBank was able to increase its deposits and lower its cost of funds by replacing $97,408 of higher cost certificates of deposits with $76,996 of non-interest bearing transactional accounts and $499,875 of money market and interest-bearing checking accounts. Deposits as a percentage of total interest-bearing liabilities fell from 69% to 57% during the nine months ended September 30, 2003. NetBank would expect this trend to reverse as the level of other borrowed funds, which primarily supports loans held for sale, should decline in

proportion to expected declines in mortgage loan production. The expected decline in mortgage loan production is based on the October 22, 2003, Mortgage Bankers Association forecast of residential mortgage loan originations. NetBank will continue to emphasize transactional accounts as its primary long-term funding source. Reference is made to the detailed deposit information contained within note 7 of the notes to consolidated financial statements for additional details.

Shareholders’ Equity. Total shareholders’ equity increased $25,213 for the nine months ended September 30, 2003. The increase is primarily due to a $37,616 increase in retained earnings resulting from $40,504 of net income, offset in part by the payment of dividends of $2,888. Additional paid-in capital increased by $5,620 primarily related to the tax benefit of non-qualified option exercises. Accumulated other comprehensive income (OCI) decreased $6,083 related to the change in fair value of available for sale investment securities and the realization of $12,188 in gains due to the sale of certain investment securities offset in part by $794 of realized impairment on certain securities. Treasury stock increased $11,941 due to the repurchase of 1,201,200 shares of common stock at a weighted average cost of $11.12 per share offset in part by the reissuance of 116,126 shares under the employee stock purchase plan, for the exercise of employee stock options and the reissuance of 45,000 shares of restricted stock. NetBank will continue to repurchase shares periodically in the public market or through private transactions.

Results of Operations – Three months ended September 30, 2003, compared to the three months ended September 30, 2002

General. Net income for the three months ended September 30, 2003, was $15,589 or $0.32 per share, compared to net income of $8,517 or $0.17 per share, for the same period in 2002. The $7,072 or 83% increase in net income was primarily driven by the continued strong performance of the mortgage banking segment. NetBank had record mortgage production of $5.7 billion and record sales of $4.9 billion for the three months ended September 30, 2003, compared to production of $3.6 billion and sales of $3.4 billion for the same period of 2002.

Interest Income. NetBank’s interest income for the three months ended September 30, 2003, was $58,919 compared to $47,967 for the same period in 2002. As detailed in the following rate volume variance table, NetBank lowered the average balance of its short-term investments and investment securities available for sale by $395,972 and increased the average balance of its loans held for sale by $1.2 billion and loan and lease receivables by $154,305. This repositioning has allowed the Company to earn long-term yields on a greater percentage of its interest-earning assets while effectively holding short-term held for sale assets. During the current quarter NetBank retained $543,466 of internally originated mortgage loans and approximately $42 million of internally originated auto loans. As the Company continues to selectively retain internally originated loans, the average balance of loan and lease receivables will increase as a percentage of total interest-earning assets. The expected increase in loan and lease receivables as a percentage of total interest-earning assets will be compounded by the expected decline in the average balance of loans held for sale. This decline is based on the October 22, 2003, Mortgage Bankers Association’s forecast of residential mortgage originations being 53% lower in 2004 than in 2003. As discussed in note 11 of the consolidated financial statements included within this report, the Company has not accrued and has not received approximately $1.2 million of interest related to the CMC lease portfolio during the three months ended September 30, 2003. See Part II. Item 1. Legal Proceedings within this report for a more in depth discussion of the CMC lease portfolio and associated litigation.

Interest Expense. Total interest expense for the three months ended September 30, 2003, was $21,959 compared to $25,153 for the same period of 2002. The $3,194 decline is primarily due to the 96 basis-point reduction in the average cost of funds, offset in part by the impact of an increase of $663,728 in the average balance of interest-bearing liabilities. For the three months ended September 30, 2003, there was $12,293 of interest expense on deposits (including checking, money market and certificates of deposits) as compared to $13,909 for the three months ended September 30, 2002. The $1,616 net decrease in interest expense on deposits was the result of a 63 basis-point decline in the average rate paid on deposits resulting in a positive $1,870 rate variance,

partially offset by a negative volume variance of $254 due to increased average interest-bearing deposit balances of $233,792. For the three months ended September 30, 2003, interest expense on other borrowed funds (including short-term debt, FHLB advances, trust preferred and convertible subordinated debt) was $9,666 compared to $11,244 for the same period of 2002. The $1,578 decline in interest expense related to other borrowed funds is the result of a 159 basis-point decline in the average cost of funds, partially offset by an increase of $429,936 in the average outstanding balance. The 159 basis-point reduction in the average cost of other borrowed funds is primarily due to fixed-rate term FHLB advances being prepaid and replaced with variable rate advances. NetBank reduced its overall cost of funds during the period by reallocating its sources of funds to rely more heavily on deposits with an average cost of 229 basis points as opposed to other borrowed funds with an average cost of 255 basis points.

Net Interest Income. Net interest income is determined by interest rate spread, which is the difference between the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities, and the relative amounts of interest-earning assets and interest-bearing liabilities. Net interest income was $36,960, or 3.49% of average interest-earning assets for the three months ended September 30, 2003, compared to $22,814, or 2.83% of average interest-earning assets for the three months ended September 30, 2002.

The following table details the relative interest rates and average balances of NetBank’s interest-earning assets and interest-bearing liabilities for the three months ended September 30, 2003, and 2002:

Average Balance				Average Yield / Rate					Interest							Variance attributable to
2003		2002		2003		2002			2003		2002		Variance			Rate			Volume (3)
								Interest-earning assets:
$	25,251	$	73,026	0.92	%	2.62	%	Short-term investments	$	58	$	479	$	(421	)	$	(311	)	$	(110	)
394,350		742,547		3.76	%	4.21	%	Investment securities (1)	3,702		7,822		(4,120		)	(851		)	(3,269		)
2,449,955		1,200,054		6.08	%	7.13	%	Loans held for sale (2)	37,235		21,394		15,841			(3,155		)	18,996
1,363,793		1,209,488		5.26	%	6.04	%	Loans and leases receivable (2)	17,924		18,272		(348		)	(2,376		)	2,028
4,233,349		3,225,115		5.57	%	5.95	%	Total interest-earning assets	58,919		47,967		10,952			(6,693		)	17,645

								Interest-bearing liabilities:
191,016		147,282		1.50	%	1.64	%	Checking accounts	715		603		112			(52		)	164
1,213,121		678,766		1.98	%	2.67	%	Money market	6,018		4,536		1,482			(1,169		)	2,651
747,359		1,091,656		2.98	%	3.21	%	Certificates of deposit	5,560		8,770		(3,210		)	(649		)	(2,561		)
1,114,973		403,300		1.78	%	2.47	%	Short-term debt	4,969		2,494		2,475			(697		)	3,172
391,233		656,522		4.51	%	5.13	%	FHLB advances	4,414		8,422		(4,008		)	(1,015		)	(2,993		)
8,764		—		5.61	%	0.00	%	Trust Preferred	123		—		123			—			123
2,104		27,316		30.42	%	4.80	%	Convertible subordinate debt	160		328		(168		)	1,749			(1,917		)
3,668,570		3,004,842		2.39	%	3.35	%	Total interest-bearing liabilities	21,959		25,153		(3,194		)	(1,833		)	(1,361		)

—		—		3.18	%	2.60	%	Net interest margin	36,960		22,814		14,146			(4,860		)	19,006
564,779		220,273		0.31	%	0.23	%	Interest free sources	—		—		—			—			—
$	4,233,349	$	3,225,115	3.49	%	2.83	%	Net interest income to interest-earning assets	$	36,960	$	22,814	$	14,146		$	(4,860	)	$	19,006

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

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

(3) Variances attributable to the rate and volume mix are included in the volume variances

Provision for Credit Losses. The provision for credit losses was $2,537 for the three months ended September 30, 2003, compared to $(95) for the same period of 2002. During the three months ended September 30, 2003, NetBank began retaining its originated auto loans and recorded 110 basis points or $459 of provision expense. The remaining $2,078 of provision expense is related to the retention of $544 million of mortgage and $36 million of originated leases. The $95 recapture of provision expense during the 2002 period was the result of the loan and lease receivables portfolio declining by $174,664 due to high prepayments and sales of certain

loans as the Company was beginning to reposition the portfolio after its acquisition of Resource in March 2002. Reference is made to the asset quality and non-performing assets section in the financial condition section contained within this report for additional detail concerning the determination of provision expense related to maintaining the proper level of allowance for credit losses.

Non-interest Income. Non-interest income increased $31,815 to $96,648 for the three months ended September 30, 2003, compared to $64,833 for the same period of 2002. Gain on sales of mortgage loans and mortgage servicing rights accounted for $36,942 of the period-over-period increase, which was primarily due to the $1.5 billion increase in sales of mortgage loans period over period. This increase was partially offset by a decline of $7,638 in gains on sales of investment securities as the Company sold certain investment securities for gains of $7,638 in the corresponding period of 2002. For the three months ended September 30, 2003, other income increased $1,095 compared to the same period of 2002. Other income for the three months ended September 30, 2003, consisted of $5,181 of gains associated with fair value adjustments for assets accounted for under SFAS No. 133, $323 of revenues from MG Reinsurance, $478 of revenues from Republic Leasing and $2,735 of ancillary fees and income.

Non-interest Expense. Non-interest expense includes all operating expenses such as salaries and benefits, marketing and general and administrative expenses. Non-interest expense increased by $32,234 to $106,278 for the three months ended September 30, 2003, from $74,044 for the three months ended September 30, 2002. The largest part of the increase was impairment and amortization of mortgage servicing rights, which totaled $31,195, an increase of $20,367 period over period. This large increase was primarily due to near record high actual prepayment speeds and the implementation of a more dynamic prepayment assumption methodology, which accounted for $9.7 million of the increase. Additionally, salaries and benefits increased $9,043 for the three months ended September 30, 2003, compared to the same period of 2002. This increase is primarily related to the $2.0 billion increase in mortgage loan production during the current period. Slightly offsetting these increases, NetBank incurred $4,316 of prepayment fees on the early extinguishments of certain fixed-rate FHLB advances, a reduction of $3,135 compared to $7,451 in the same period of 2002. Additionally, customer service and loan servicing expenses declined by $763 and $605, respectively, due to increased efficiency and a reduction of loans being serviced by third parties. As the bank continues to replace third party serviced loans with internally originated loans, loan servicing expenses should continue to decline.

Retail Bank Operations

The table below provides an overview of the results of operations for the retail bank segment:

	RETAIL BANK OPERATIONS Three months ended September 30,
	2003			2002			Change
Net interest income	$	16,177		$	9,689		$	6,488
Provision for credit losses	(2,542		)	95			(2,637		)
Net interest income after provision for credit losses	13,635			9,784			3,851
Gain on sale of loans	30			3,701			(3,671		)
Service charges and fees	2,732			4,265			(1,533		)
Total revenues	16,397			17,750			(1,353		)
Total non-interest expenses	14,631			15,078			(447		)
Pre-tax income before net (loss) gain on securities and prepaid debt	1,766			2,672			(906		)
Net (loss) gain on securities and prepaid debt	(4,316		)	187			(4,503		)
Pre-tax (loss) income	$	(2,550	)	$	2,859		$	(5,409	)

Earning assets	$	4,189,997		$	2,821,486		$	1,368,511

Net interest income to earning assets	1.54		%	1.37		%	0.17		%
Net interest income after provision to earning assets	1.30		%	1.39		%	(0.09		)%
Service charges and fees to earning assets	0.26		%	0.60		%	(0.34		)%
Expenses to earning assets	1.40		%	2.14		%	(0.74		)%

The retail bank segment lost $2,550 for the three months ended September 30, 2003, compared to income of $2,859 for the three months ended September 30, 2002. As illustrated in the table above, the retail bank segment would have been profitable had it not incurred $4,316 of prepayment fees for the early extinguishments of certain fixed-rate FHLB advances during the current period. For the three months ended September 30, 2003, compared to the same period of 2002, the retail bank was able to lower its non-interest expenses while supporting a $1.4 billion increase in interest-earning assets. The cost savings were achieved through strict cost controls, effective outsourcing and consolidation of redundant functions as a result of the acquisition of Resource in 2002. The retail bank will continue to selectively retain loans originated by the mortgage banking segment as it strives to increase its interest-earning assets and improve its net interest income. This expected increase may be offset in part by a decline in the warehouse line of credit the retail bank extends to the mortgage banking segment, as the level of loans held for sale in the mortgage banking segment is expected to decrease in proportion to any declines in production over future periods. Additionally, the retail bank will retain the majority of the auto loans originated through the Company’s new indirect auto lending unit, Dealer Financial Services, which totaled approximately $42 million for the three months ended September 30, 2003.

Mortgage Banking

The following table highlights the mortgage banking segment production and sales activities:

	Mortgage banking segment Three months ended September 30,
	2003			2002			Change
Mortgage loan production:
Retail	$	874,406		$	628,669		$	245,737
Correspondent	2,678,439			1,686,094			992,345
Wholesale/broker	1,298,672			810,528			488,144
RMS	240,973			67,184			173,789
Total agency-eligible	5,092,490			3,192,475			1,900,015
Nonconforming	589,033			433,559			155,474
Total	$	5,681,523		$	3,626,034		$	2,055,489

Mortgage loan sales:
Conforming or agency-eligible sales	$	5,131,811		$	2,964,043		$	2,167,768
Non-conforming sales	332,697			476,554			(143,857		)
Mortgage banking sales	5,464,508			3,440,597			2,023,911
Sold to retail bank	(543,466		)	(12,115		)	(531,351		)
Sales to third parties	$	4,921,042		$	3,428,482		$	1,492,560

Production revenues	$	117,011		$	60,227		$	56,784
Production expenses	84,345			49,875			34,470
Pre-tax margin	$	32,666		$	10,352		$	22,314

Production revenues in bps to sales	214			175			39
Production expenses in bps to production	148			138			10
Net production margin in bps	66			37			29

Note: Production revenues in bps to sales is based on mortgage banking sales, which includes intersegment sales to the retail bank segment.

For the three months ended September 30, 2003, the mortgage banking segment posted a record pre-tax margin of $32,666 compared to $10,352 for the same period of 2002. The increase in pre-tax margin for the three months ended September 30, 2003, compared with the same period of 2002 relates primarily to record mortgage loan production of $5.7 billion and record sales of $5.5 billion compared to production of $3.6 billion and sales of $3.4 billion for the 2002 period. The mortgage banking segment achieved record production and sales in both the conforming and non-conforming channels during the 2003 period. Additionally, during the three months ended September 30, 2003, pricing pressures eased as industry pipelines neared full capacity resulting in a 39 bps increase in production revenues. Production expenses decreased by 10 basis points period over period. The decline in expenses was partially offset by increased impairment and amortization charges of $20.4 million. Net of this increase, production expenses would have declined by 25 basis points due to the mortgage banking segment leveraging its fixed costs against higher production levels.

Other Segment

For the three months ended September 30, 2003, the other segment recorded a pre-tax loss of $3,063 compared to pre-tax income of $797 for the same period of 2002. The loss includes NetBank’s strategic initiatives and holding company expenses, including Dealer Financial Services, NetInsurance, NetBank, Inc., Resource Bancshares Mortgage Group, Inc. and NetBank Partners. The 2002 pre-tax income of $797 includes a one-time gain of $2.8 million on the sale of Resource’s former headquarters.

Results of Operations – Nine months ended September 30, 2003, compared to the nine months ended September 30, 2002

General. Net income for the nine months ended September 30, 2003, was a record $40,504 or $0.83 per share, compared to a net loss of $28,408 or $0.66 per share for the same period of 2002. The 2002 loss included $10.1 million, pre-tax, of acquisition and severance charges and $59.9 million pre-tax, of charges associated with the integration and repositioning of the Company’s balance sheet as NetBank implemented its financial intermediary strategy following its acquisition of Resource in March 2002. Additionally, the prior period net loss only includes the operating results of Resource for the six months ended September 30, 2002, since its acquisition was not completed until March 31, 2002. The record net income for the nine months ended September 30, 2003, was primarily driven by the strong performance of the mortgage banking segment as it capitalized on record production of $15.6 billion and record sales to third parties of $13.3 billion compared to $7.0 billion of production and $6.9 billion of sales for the same period in 2002. The low interest rate environment and the addition of Resource’s mortgage banking operations fueled the increase in production and sales.

Interest Income. NetBank’s interest income for the nine months ended September 30, 2003, was $154,262 compared to $120,984 for the same period in 2002. Interest income for the 2002 period was negatively impacted by approximately $12,500 related to impairment of premiums on purchased loan pools that had experienced accelerated prepayments in early 2002. As detailed in the following rate volume variance table, NetBank lowered the average balance of its short-term investments by $94,332, investment securities available for sale by $238,086 and loan and lease receivables by $247,468. These declines were offset by a $1.2 billion increase in the average balance of loans held for sale. This repositioning allowed the Company to earn higher long-term yields on a greater percentage of its interest-earning assets while effectively holding short-term held for sale assets. Utilization of this strategy limited NetBank’s decline in average yield, adjusted for the 2002 impairment, to 28 basis points compared to a 116 basis-point decline in the average cost of funds. As discussed in note 11 of the consolidated financial statements included within this report, the Company has not accrued and has not received approximately $4.1 million of interest related to the CMC lease portfolio for the nine months ended September 30, 2003. See Part II. Item 1. Legal Proceedings within this report for a more in depth discussion of the CMC lease portfolio and associated litigation.

Interest Expense. Total interest expense for the nine months ended September 30, 2003, was $65,091 compared to $80,015 for the same period of 2002. The $14,924 decline is primarily due to the 116 basis-point reduction in the average cost of funds, offset in part by the impact of an increase of $520,232 in the average balance of interest-bearing liabilities. For the nine months ended September 30, 2003, there was $37,273 of interest expense on deposits (including checking, money market and certificates of deposits) compared to $41,692 for the nine months ended September 30, 2002. The $4,419 net decrease in interest expense on deposits was the result of a 89 basis-point decline in the average rate paid on deposits resulting in a positive $19,381 rate variance, partially offset by a negative volume variance of $14,962 due to an increase in average deposit balances of $431,666. For the nine months ended September 30, 2003, interest expense on other borrowed funds (including short-term debt, FHLB advances, trust preferred and convertible subordinated debt) was $27,818 compared to $38,323 for the same period of 2002. The net $10,505 decline in interest expense related to other borrowed funds is the result of a 148 basis-point decline in the average cost of funds, partially offset by a negative volume variance of $5,329 due to the $88,566 increase in the average outstanding balance. NetBank reduced its overall cost of funds during the period by reallocating its sources of funds to rely more heavily on

deposits with an average cost of 228 basis points as opposed to other borrowed funds with an average cost of 305 basis points.

Net Interest Income. Net interest income is determined by interest rate spread, which is the difference between the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities, and the relative amounts of interest-earning assets and interest-bearing liabilities. Net interest income was $89,171, or 3.19% of average interest-earning assets for the nine months ended September 30, 2003, compared to $40,969, or 1.78% of average interest-earning assets for the nine months ended September 30, 2002.

The following table details the relative interest rates and average balances of NetBank’s interest-earning assets and interest-bearing liabilities for the nine months ended September 30, 2003, and 2002:

Average Balance				Average Yield / Rate					Interest									Variance attributable to
2003		2002		2003		2002			2003		2002			Variance				Rate				Volume (3)
								Interest-earning assets:
$	32,627	$	126,959	1.13	%	2.23	%	Short-term investments	$	277	$		2,121	$		(1,844	)	$		(1,854	)	$		10
534,644		772,730		3.91	%	4.19	%	Investment securities (1)	15,662		24,255			(8,593			)	(2,877			)	(5,716			)
2,022,616		786,089		6.26	%	7.45	%	Loans held for sale (2)	95,020		43,913			51,107				(12,415			)	63,522
1,135,910		1,383,378		5.08	%	4.89	%	Loans and leases receivable (2)	43,303		50,695			(7,392			)	3,630				(11,022			)
3,725,797		3,069,156		5.52	%	5.26	%	Total interest-earning assets	154,262		120,984			33,278				(13,516			)	46,794

								Interest-bearing liabilities:
180,969		141,495		1.53	%	1.65	%	Checking accounts	2,076		1,753			323				(231			)	554
1,065,963		622,281		2.11	%	2.73	%	Money market	16,903		12,754			4,149				(5,132			)	9,281
936,350		987,840		2.61	%	3.67	%	Certificates of deposit	18,294		27,185			(8,891			)	(14,018			)	5,127
682,166		438,714		1.95	%	3.07	%	Short-term debt	9,988		10,112			(124			)	(6,557			)	6,433
507,050		660,806		4.40	%	5.50	%	FHLB advances	16,725		27,234			(10,509			)	(9,666			)	(843			)
7,157		—		5.07	%	0.00	%	Trust Preferred	272		—			272				—				272
19,029		27,316		5.84	%	4.77	%	Convertible subordinate debt	833		977			(144			)	389				(533			)
3,398,684		2,878,452		2.55	%	3.71	%	Total interest-bearing liabilities	65,091		80,015			(14,924			)	(35,215			)	20,291

—		—		2.97	%	1.55	%	Net interest margin	89,171		40,969			48,202				21,699				26,503
327,111		190,704		0.22	%	0.23	%	Interest free sources	—		—			—				—				—
$	3,725,797	$	3,069,156	3.19	%	1.78	%	Net interest income to interest-earning assets	$	89,171	$	40,969		$	48,202			$	21,699			$	26,503

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

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

(3) Variances attributable to the rate and volume mix are included in the volume variances

Provision for Credit Losses. The provision for credit losses was $4,299 for the nine months ended September 30, 2003, compared to $26,432 for the same period of 2002. The 2002 figure contained $20.1 million of provision specifically for the CMC lease portfolio. See Part II. Item 1. Legal Proceedings within this report for a more in depth discussion of the CMC lease portfolio and associated litigation. Reference is made to the asset quality and non-performing assets subsection in the Financial Condition section contained within this report for additional detail related to the determination of provision expense for maintaining the proper level of allowance for credit losses.

Non-interest Income. Non-interest income increased $131,236 to $246,346 for the nine months ended September 30, 2003, compared to $115,110 for the nine months ended September 30, 2002. Of this increase, gain on sales of mortgage loans and mortgage servicing rights accounted for $110,312. This large increase was primarily attributable to the strong performance in the mortgage banking segment and Resource’s mortgage subsidiaries not being included in the first three months of 2002. The mortgage subsidiaries’ improved results were attributable to a lower interest rate environment resulting in higher production and more favorable pricing conditions. Service charges and fees increased by $9,236 to $35,795 for the nine months ended September 30,

2003, from $26,559 in the same period of 2002. $7,826 of the increase is attributable to the addition of Resource’s mortgage servicing operation. The Company recorded $12,188 of gains on investment securities as certain investment securities were sold during the nine months ended September 30, 2003, compared to $5,781 during the same period in 2002. Current period gains of $12,188 were offset in part by impairment charges of $794 on two variable, 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. Other income was $14,696 for the nine months ended September 30, 2003, compared to $8,621 for the comparable 2002 period. Other income consisted of $7,077 of gains associated with fair value adjustments for assets accounted for under SFAS No 133, $1,504 of revenues from MG Reinsurance, $1,462 of revenues from Republic Leasing and $4,653 of ancillary fees and income.

Non-interest Expense. Non-interest expense includes all operating expenses such as salaries and benefits, marketing and general and administrative expenses. Non-interest expense increased by $92,243 to $267,019 for the nine months ended September 30, 2003, from $174,776 for the nine months ended September 30, 2002. The $267,019 of non-interest expense for the nine months ended September 30, 2003, includes $43,984 of non-interest expense associated with operations acquired as part of the Resource acquisition, which were not included in the comparable period of 2002. The $174,776 of non-interest expense for the period ended September 30, 2002, included $10,085 of acquisition and severance costs. Additionally, during the nine months ended September 30, 2003, the Company incurred $16,267 of prepayment fees on the early extinguishments of certain fixed-rate FHLB advances, compared to $9,944 of prepayment fees during the nine months ended September 30, 2002. Excluding the items listed above, non-interest expense increased $52,021 for the nine months ended September 30, 2003, compared to the same period of 2002. The majority of the increase is due to the $30,786 increase in impairment and amortization of mortgage servicing rights and the $17,566 increase in salaries and wages. The high level of refinance activity during the first nine months of 2003, associated with the low interest rate environment, drove the increase in amortization and impairment of mortgage servicing rights. The increase in salaries and wages was primarily driven by the $4.9 billion, on a comparable basis, increase in production during the nine months ended September 30, 2003, compared to the same period of 2002. These increases were partially offset by declines in loan servicing expenses of $3,601, which should continue to decline as NetBank replaces externally serviced loans with internally originated and serviced loans; and depreciation and amortization of $2,137, which contained a one-time charge of $2,469 for the write down of a core deposit intangible in 2002.

Retail Bank Operations

The table below provides an overview of the results of operations for the retail bank segment:

	RETAIL BANK OPERATIONS Nine months ended September 30,
	2003			2002			Change
Net interest income	$	35,528		$	17,006		$	18,522
Provision for credit losses	(4,263		)	(26,431		)	22,168
Net interest income after provision for credit losses	31,265			(9,425		)	40,690
Gain on sale of loans	26			2,236			(2,210		)
Service charges and fees	8,854			11,223			(2,369		)
Total revenues	40,145			4,034			36,111
Total non-interest expenses	44,558			53,372			(8,814		)
Pre-tax income (loss) before net gain (loss) on securities and prepaid debt	(4,413		)	(49,338		)	44,925
Net gain (loss) on securities and prepaid debt	(4,873		)	(4,163		)	(710		)
Pre-tax gain (loss)	$	(9,286	)	$	(53,501	)	$	44,215

Earning assets	$	3,738,264		$	2,580,570		$	1,157,694

Net interest income to earning assets	1.27		%	0.88		%	0.39		%
Net interest income after provision to earning assets	1.12		%	(0.49		)%	1.61		%
Service charges and fees to earning assets	0.32		%	0.58		%	(0.26		)%
Expenses to earning assets	1.59		%	2.76		%	(1.17		)%

Net interest income increased $18,522 for the nine months ended September 30, 2003, to $35,528, compared to $17,006 for the nine months ended September 30, 2002. Net interest income for the 2002 period was negatively impacted by approximately $12,500 related to the impairment of premiums on purchased loan pools that had experienced accelerated prepayments in early 2002. Net interest income for the 2003 period is lower than would be expected due to the retail bank lending a large portion of its funds at warehouse rates to the mortgage banking operations to support its record production levels. As the retail bank reallocates its portfolio to include more long-term investments, primarily single-family first mortgage loans, as opposed to providing relatively lower rate short-term warehouse lines of credit, its interest income should significantly improve. The 2002 provision for credit losses included $20,100 of provision specifically for the CMC lease portfolio. See Part II. Item 1. Legal Proceedings within this report for a more in depth discussion of the CMC lease portfolio and associated litigation. While non-interest expenses declined $8,814 period over period, the 2002 period included approximately $7,494 of charges associated with the integration of Resource’s leasing operations and the repositioning of the segment to align with the Company’s financial intermediary strategy. The 2003 period includes $1,760 of expenses associated with the leasing operations, which would not have been included in the 2002 period. Adjusted for these two items, non-interest expenses declined by $3,080 period over period. This decline is primarily due to a decrease of $4,186 in external loan servicing fees and a decline of $1,535 in customer service expenses. These declines were offset in part by increases of $1,101 in salaries and benefits and $1,185 in data processing.

Mortgage Banking

The following table highlights the mortgage banking segment production and sales activities:

	Mortgage banking segment Nine months ended September 30,
	2003			2002			Change
Mortgage loan production:
Retail	$	2,484,502		$	1,636,097		$	848,405
Correspondent	7,074,378			2,978,448			4,095,930
Wholesale/broker	3,926,407			1,398,825			2,527,582
RMS	599,915			103,402			496,513
Total agency-eligible	14,085,202			6,116,772			7,968,430
Nonconforming	1,555,274			908,113			647,161
Total	$	15,640,476		$	7,024,885		$	8,615,591

Mortgage loan sales:
Conforming or agency-eligible sales	$	13,039,254		$	5,976,100		$	7,063,154
Non-conforming sales	1,320,210			973,465			346,745
Mortgage banking sales	14,359,464			6,949,565			7,409,899
Sold to retail bank	(1,023,180		)	(12,115		)	(1,011,065		)
Sales to third parties	$	13,336,284		$	6,937,450		$	6,398,834

Production revenues	$	284,873		$	117,927		$	166,946
Production expenses	199,702			98,377			101,325
Pre-tax margin	$	85,171		$	19,550		$	65,621

Production revenues in bps to sales	198			170			28
Production expenses in bps to production	128			140			(12		)
Net production margin in bps	70			30			40

For the nine months ended September 30, 2003, the mortgage banking segment had a record pre-tax margin of $85,171, compared to $19,550 for the nine months ended September 30, 2002. The $65,621 increase is driven primarily by increases of $8.6 billion in production and $6.4 billion in sales and the addition of Resource’s mortgage operations on March 31, 2002, which would only be included in six of the nine months during the 2002 period. Additionally, as industry pipelines approached capacity during the 2003 period, pricing pressures eased resulting in a 28 basis-point increase in production revenues.

Other Segment

For the nine months ended September 30, 2003, the other segment recorded a pre-tax loss of $7,321 compared to a pre-tax loss of $10,868 for the same period of 2002. The loss includes NetBank’s strategic initiatives and holding company expenses, including Dealer Financial Services, NetInsurance, NetBank, Inc., Resource Bancshares Mortgage Group, Inc. and NetBank Partners. The 2002 loss included charges associated with the acquisition of Resource on March 31, 2002.

Critical Accounting Policies

As indicated in NetBank’s Annual Report on Form 10-K for the year ended December 31, 2002, NetBank has identified its policies for the valuation of its mortgage servicing rights and the maintenance of its allowance for credit losses and repurchase reserves as being its most critical accounting policies. These policies require management to make judgments, estimates and assumptions concerning future events, which materially underpin the current period accounting for these items. Given the effect such judgments, estimates and assumptions can have on NetBank’s balance sheet and statement of operations these policies are regularly reviewed by management, the Company’s audit committee and the Company’s independent auditor. Management believes that given current information, its judgments, estimates and assumptions used in these policies are appropriate. For further information regarding NetBank’s critical accounting policies, refer to its Annual Report on Form 10-K for the year ended December 31, 2002.

Liquidity and Capital Resources

Liquidity. NetBank’s liquidity, represented by cash and cash equivalents, is a product of its operating, investing, and financing activities. NetBank’s primary sources of funds are deposits, borrowings, prepayments and maturities of outstanding loans, sales of loans, sales or maturities of investment securities and other short-term investments, and funds provided from operations. While scheduled loan payments and maturing investment securities and short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. NetBank can use cash generated through the retail deposit market, its traditional funding source, to offset the cash utilized in investing activities. NetBank’s available for sale securities and short-term interest-earning assets can also be used to provide liquidity for lending and other operational requirements. For the nine months ended September 30, 2003, NetBank had negative cash flow of $67,729 compared to positive cash flow of $235,842 for the same period of 2002. The net cash out flow primarily related to the $1.1 billion increase in loans held for sale and $0.7 billion increase in loan and lease receivables. The increase in loans held for sale was primarily due to the $15.6 billion record level of production in the mortgage banking segment outpacing the $13.3 billion record level of sales into the secondary markets. The Company expects this situation to reverse once the velocity of loan sales exceeds that of production. Cash flows for the nine months ended September 30, 2002, were unusually high related to the accumulation of cash in anticipation of settling Resource’s pre-existing lines of credit after its acquisition. As an additional source of funds, NetBank had available under existing lines of credit agreements $0.6 billion at September 30, 2003, (see Note 8 of the consolidated financial statements included as part of this report for additional details of the available lines of credit). As of September 30, 2003, NetBank had commitments to fund mortgage loans of $1.4 billion, unused home equity lines of credit of $73,704 and commercial financing commitments of $1,063.

The Company uses deposits as its principal source of funds. For the nine months ended September 30, 2003, deposits increased by $479,463 to $2.5 billion from $2.0 billion as of December 31, 2002. NetBank’s deposit products include checking, money market accounts and certificates of deposit accounts. Deposit account terms vary, with the principal differences being the minimum balance required, the time periods the funds must remain on deposit and the interest rate. NetBank is competitive in the types of accounts, services and ranges of interest rates offered on deposit products. Although market demand generally dictates which deposit maturities and rates will be accepted by the public, NetBank intends to continue to promote checking, money market and certificates of deposit to the extent possible consistent with asset and liability management goals. Additionally, NetBank increased its other borrowed funds, which include FHLB advances, repurchase agreements and warehouse lines of credit, by $1.0 billion during the nine months ended September 30, 2003. This increase was primarily to support the $1.1 billion increase in loans held for sale as a result of record mortgage loan production. The Company also raised approximately $4,382 as a result of its second trust preferred securities offering completed in April 2003.

Capital Resources. NetBank and NetBank, FSB are subject to various regulatory capital requirements administered by the federal banking agencies. Failure of either company to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on NetBank’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, NetBank, FSB must meet specific capital guidelines that involve quantitative measures of NetBank, FSB’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. NetBank, FSB’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. In addition, under regulatory guidelines, NetBank, FSB may not pay a dividend to NetBank, Inc. if doing so would cause NetBank, FSB to be less than adequately capitalized, as defined below. During the quarter ended September 30, 2003, NetBank’s Board of Directors declared a dividend in the amount of $.02 per share to shareholders of record on November 15, 2003. The dividend will be paid on December 15, 2003. During the nine months ended September 30, 2003, NetBank repurchased 1,201,200 shares at a weighted average cost of $11.12, and management had authorization to repurchase up to an additional 1,464,700 shares of its common stock through open market or private transactions.

Quantitative measures established by regulation to ensure capital adequacy require NetBank, FSB to maintain minimum amounts and ratios as set forth in the following table. NetBank, FSB’s regulatory agency, the Office of Thrift Supervision (“OTS”), requires NetBank, FSB to maintain minimum ratios of tangible capital to tangible assets of 1.5%, core capital to tangible assets of 4.0% and total capital to risk-weighted assets of 8.0%. Additionally, NetBank, Inc., since its acquisition of Resource on March 31, 2002, has a side letter agreement with the OTS, which requires NetBank, Inc. to maintain a minimum 10% total capital to total assets and NetBank, FSB to maintain 6% core capital and 12% total risk-based capital ratios. The 10% total capital minimum was amended during the three months ended September 30, 2003, to allow the 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%. As of September 30, 2003, NetBank, FSB was categorized as Well Capitalized as indicated in the following table; however, primarily due to the $1.1 billion increase in loans held for sale, NetBank, FSB failed to meet the 12% total risk-based capital requirement. The Company has notified the OTS of this deficiency and intends to cure it as soon as possible. The following table presents information related to NetBank, FSB along with capital requirements mandated by the OTS:

	Actual				For capital adequacy purposes				To be categorized as Well Capitalized under prompt corrective action plan
	Amount		Ratio		Amount		Ratio		Amount		Ratio
September 30, 2003
Total capital (to risk-weighted assets)	$	319,530	10.01	%	$	255,371	8.00	%	$	319,209	10.00	%
Core capital (to adjusted total assets)	$	276,009	6.11	%	$	180,621	4.00	%	$	225,867	5.00	%
Tangible capital (to adjusted total assets)	$	276,009	6.11	%	$	67,760	1.50	%	N/A		N/A
Tier I capital (to risk-weighted assets)	$	276,009	8.65	%	N/A		N/A		$	191,451	6.00	%
December 31, 2002
Total capital (to risk-weighted assets)	$	270,732	15.42	%	$	140,447	8.00	%	$	175,572	10.00	%
Core capital (to adjusted total assets)	$	240,725	7.47	%	$	129,104	4.00	%	$	161,128	5.00	%
Tangible capital (to adjusted total assets)	$	240,725	7.47	%	$	48,338	1.50	%	N/A		N/A
Tier I capital (to risk-weighted assets)	$	240,725	13.71	%	N/A		N/A		$	105,350	6.00	%

In addition, Market Street, RBMG, Republic and Meritage are required to maintain minimum amounts of net worth to maintain their approved status with certain government agencies, investors and lenders. Failure to meet these requirements could have a material impact on the consolidated results of NetBank. Other than the side letter deficiency as described previously, at September 30, 2003, all of the capital requirements placed upon NetBank and its subsidiaries were met, and there have been no subsequent events that would lead management to believe that continued compliance would not be met in the future.

Part I. Item 3: Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Sensitivity. The Company measures interest rate sensitivity as the difference between amounts of interest–earning assets and interest–bearing liabilities that mature, reprice, or repay within a given period of time. The difference, or the interest rate sensitivity “gap,” provides an indication of the extent to which an institution’s interest rate spread will be affected by changes in interest rates. A gap is considered positive when the amount of interest-rate sensitive assets exceeds the amount of interest-rate sensitive liabilities and is considered negative when the amount of interest-rate sensitive liabilities exceeds the amount of interest-rate sensitive assets. In a rising rate environment, an institution with a positive gap would see an increase in net interest income, where an institution with a negative gap would see a decrease. During a period of falling interest rates the reverse is true. The following table sets forth the interest rate sensitivity of the Company’s assets and liabilities as of September 30, 2003:

	Less than Three Months			Over three months through one year			Over one year through five years			Over five years and insensitive			Total
	Term to Repricing, Repayment or Maturity

Interest-Earning Assets:
Cash and cash equivalents	$	24,895		$	—		$	—		$	—		$	24,895
Federal funds sold	18,941			—			—			—			18,941
Investment securities	5,803			11,444			18,445			285,216			320,908
Stock of Federal Home Loan Bank of Atlanta	68,060			—			—			—			68,060
Loans held for sale	2,632,631			—			—			—			2,632,631
Loan and lease receivables	245,129			349,669			975,772			59,701			1,630,271
Total interest-earning assets	2,995,459			361,113			994,217			344,917			4,695,706
Non interest-earning assets	—			—			—			364,898			364,898
Total assets	$	2,995,459		$	361,113		$	994,217		$	709,815		$	5,060,604

Interest-Bearing Liabilities:
Interest-bearing deposits	$	137,151		$	1,091,090		$	809,612		$	182,046		$	2,219,899
Trust preferred securities	8,764			—			—			—			8,764
Other borrowed funds	1,765,065			—			131,000			—			1,896,065
Total interest-bearing liabilities	1,910,980			1,091,090			940,612			182,046			4,124,728
Interest-free deposits	—			—			—			304,486			304,486
Other interest-free liabilities and equity	—			—			—			631,390			631,390
Total liabilities and equity	$	1,910,980		$	1,091,090		$	940,612		$	1,117,922		$	5,060,604

Net interest rate sensitivity gap	$	1,084,479		$	(729,977	)	$	53,605		$	162,871		$	570,978
Cumulative gap	$	1,084,479		$	354,502		$	408,107		$	570,978		N/A
Net interest rate sensitivity gap as a percent of interest-earning assets	36.20		%	(202.15		)%	5.39		%	47.22		%	12.16		%
Cumulative gap as a percent of cumulative interest-earning assets	36.20		%	10.56		%	9.38		%	12.16		%	N/A

As the table above displays, over the next 12 months $354,502 more interest-earning assets than interest-bearing liabilities are projected to reprice at least once, indicating an asset sensitive position. Gap analysis, however, is only one tool that management uses to measure rate sensitivity. The interest rate sensitive position displayed above is somewhat exaggerated by the current high level of loans held for sale. The Company would

expect this position to moderate over the next few quarters as sales of loans held for sale begin to outpace production resulting in a lower balance of interest rate sensitive assets.

Market Risk. NetBank’s principal businesses are retail banking and the origination and purchase of mortgage loans. These businesses are funded by customer deposits and, to the extent necessary, other borrowed funds. Consequently, a significant portion of NetBank’s assets and liabilities are monetary in nature and fluctuations in interest rates will affect NetBank’s future net interest income and cash flows. This interest rate risk is NetBank’s primary market risk exposure. For the nine months ended September 30, 2003, the only derivative financial instruments that NetBank entered into were associated with hedging activities related to the portfolio of mortgage loans held for sale, the pipeline of mortgage loans for which the interest rate has been locked, the owned mortgage servicing rights portfolio and the mortgage servicing rights which NetBank intends to retain associated with the pipeline of mortgage loans for which the interest rate has already been locked. NetBank has no market risk-sensitive instruments held for trading purposes. NetBank’s exposure to market risk is reviewed on a regular basis by NetBank’s management.

NetBank, FSB, like other banks, measures interest rate risk based on Net Portfolio Value (“NPV”) analysis. NPV equals the present value of expected net cash flows from existing assets minus the present value of expected net cash flows from existing liabilities. A NPV ratio is determined by dividing NPV by the present value of assets. The following table sets forth the estimated percentage change in NetBank, FSB’s NPV ratios as of September 30, 2003, and December 31, 2002, assuming rate shocks of +300 to -100 basis points:

Limits and current NPV ratios for NetBank, FSB

Rate shock (in basis points)	As of 9/30/2003		As of 12/31/2002		Minimum as of 9/30/2003
+300	6.59	%	9.60	%	4.00	%
+200	7.06	%	9.74	%	6.00	%
+100	7.55	%	9.81	%	6.00	%
Flat	7.80	%	9.31	%	6.00	%
–100	8.23	%	9.47	%	6.00	%

Computation of prospective effects of hypothetical rate changes is based on many assumptions, including relative levels of market interest rates, loan prepayments and deposit decay. They should not be relied upon as indicative of actual results. Further, the computations do not contemplate certain actions management could undertake in response to changes in interest rates.

Part I. Item 4: Controls and Procedures

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Executive, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to the Exchange Act Rule 13a-15. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Executive concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) that is required to be in the Company’s periodic filings with the Securities and Exchange Commission. There have been no significant changes in the Company’s internal controls or, to the Company’s knowledge, in other factors that could significantly affect those internal controls subsequent to the date the Company carried out its evaluation, and there have been no corrective actions with respect to significant deficiencies and material weaknesses.

Part II. Item 1: 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

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. The consolidation will result in all pre-trial activity 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. The Company believes that based on the overall facts and circumstances, the defenses asserted by the Sureties will fail as a matter of law 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 in the United States Bankruptcy Court for the Southern District of Florida. The Florida Bankruptcy Court ordered that all collections by the servicers and sub-servicers under the leases be paid in escrow to the bankruptcy trustee pending final resolution of rights to those collections. On September 18, 2002, that bankruptcy proceeding was transferred to the United States Bankruptcy Court for the Southern District of California and is not part of the consolidation of cases in Ohio. On February 5, 2003, NetBank and the bankruptcy trustee (the “Trustee”) entered into a proposed settlement agreement, subject to Bankruptcy Court approval, that would have settled and resolved all of the CMC bankruptcy estate’s claims against NetBank, FSB. On February 19, 2003, the Trustee in the bankruptcy action filed a motion with the Bankruptcy Court requesting approval of the settlement agreement. However, the Trustee subsequently entered into a competing agreement with Royal.

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. The Amended NetBank Agreement did not settle the Trustee’s alleged claims relating to the lease payments that were guaranteed with surety bonds issued by Royal or its claim related to those specific bonds. These claims are based on the Trustee’s assertion that NetBank, FSB’s interests in the leases were not properly perfected and that Royal could avoid those interests, as well as NetBank, FSB’s interests in the related surety bonds, under the Bankruptcy Code. NetBank, FSB disputes these claims, but contends that, in any event, it was the responsibility of CMC, as well as the Sureties to make sure that NetBank, FSB’s interests were properly perfected.

The Company believes that the approval of the Amended NetBank Agreement enhances its position in the separate proceeding now before the MDL Court since the agreement resolves any conflicts previously presented by the Trustee’s assertion of claims relating to the Safeco and Illinois Union leases and surety bonds. NetBank, FSB intends to seek recovery against the Sureties for the amounts paid pursuant to the bankruptcy settlement.

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, FSB has tendered the Complaint to Royal with a demand for indemnification pursuant to the Sales and Servicing Agreement under which Royal acted as servicer for the leases. NetBank, FSB intends to vigorously defend these claims and to pursue recovery from Royal for all damages suffered and costs incurred as a result of Royal’s financing of these claims.

In addition, NetBank, FSB intends to vigorously pursue its claims against the insurance companies, including any potential losses associated with the claims brought by the Trustee against NetBank, FSB, and has sought leave to supplement its complaint against Royal Indemnity Company to add claims relating to Royal’s attempt to undermine NetBank, FSB’s interests in the leases and surety bonds, including claims for breach of contract, breach of fiduciary duty, and tortious interference with contract. 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 action. After CMC filed for bankruptcy, the action was removed to the bankruptcy court in the Central District of California, but the plaintiffs have subsequently agreed to withdraw their claims against CMC and were successful in their motion to remand the case back to state court. NetBank, FSB 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.

Part II. Item 2: Changes in Securities and Use of Proceeds

None

Part II. Item 3: Defaults Upon Senior Securities

None

Part II. Item 4: Submission of Matters to a Vote of Security Holders

None

Part II. Item 5: Other Information

None

Part II. Item 6: Exhibits and Reports on Form 8-K

(a) Exhibits

31.1 Chief Executive Officer’s certification under Section 302 of the Sarbanes-Oxley Act

31.2 Chief Financial Executive’s certification under Section 302 of the Sarbanes-Oxley Act

32 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b) Reports on Form 8-K

i. NetBank filed a Current Report on Form 8-K on July 30, 2003, furnishing information to be provided by management to various interested parties.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	NETBANK, INC.

	By:	/s/ Steven F. Herbert
		Steven F. Herbert

Dated: November 12, 2003		Chief Financial Executive and Chief Accounting Officer