NetBank, Inc. Pursues Possible Sale of its Mortgage Servicing Platform and Assets

NetBank, Inc., a diversified financial services provider and parent company of NetBank(r) (www.netbank.com), today announced a plan to sell its mortgage servicing platform along with most of its portfolio of mortgage servicing rights. The proposed sale is part of management’s continuous, proactive capital management program. Management estimates such a sale would likely free up between $20 and $35 million in risk-based capital that the company currently has allocated to its servicing asset. Management would then have the opportunity to redeploy this capital in other business initiatives that it believes can generate higher returns or better serve shareholder interest.

“When we committed to this line of business as part of our overall income diversification strategy for the company, we set a goal of growing the servicing asset to at least the $25 billion mark,” said Douglas K. Freeman, chairman and chief executive officer. “Based on our analysis, we needed to reach this minimum level to rationalize our investment and to have the asset serve as an effective macro hedge against our mortgage production network.

“The economic and market environments have changed dramatically since we initiated our plan, and we have not been able to achieve the level of growth in the servicing asset we had anticipated,” Freeman added. “Given prevailing business conditions, we have determined the mortgage servicing business no longer represents the best use of our capital.

“Our obligation first and foremost is to create value for our shareholders,” Freeman concluded. “Although we will continue to plan for the long-term and persist in the face of short-term operational pressures when it is right to do so, we will also remain flexible and have the conviction to revise our business strategy when it clearly furthers the interest of our shareholders.”

Other details or likely results of the proposed sale include:

• The company has engaged a third-party firm to market the platform and asset to potential buyers beginning this week. Management believes a transaction would likely take at least 90 to 120 days to complete, although any deal is dependent on a number of factors including the company’s ability to receive an offer that meets management’s price expectations.

• A sale should improve the company’s earnings profile. Management could immediately redeploy available capital in additional earning asset growth at the bank. This would result in interest margin expansion and incremental income growth on a carry-forward basis. A certain level of earnings volatility would also be eliminated since quarterly servicing results can vary greatly. Any operational cost savings would generally be offset by the loss of escrow deposits related to the servicing asset. These deposits represent an interest-free source of liquidity that management would likely have to replace with interest-bearing liabilities.

• The sale would entail a significant one-time restructuring charge. However, management would seek to moderate the impact of the charge on the company’s tangible book value. The effect on tangible book value would be part of management’s criteria in approving any transaction.

• The company intends to keep a small servicing operation to service its own mortgage production before it is delivered into the capital markets. Management may also choose to retain certain portions of its current servicing portfolio for strategic purposes or to facilitate a deal.

  
  As of March 31, the company’s core servicing asset was comprised of $13.0 billion in loans. Management believes the underlying mortgage servicing platform could be scaled up to the $35.0 billion mark almost immediately using the operation’s existing facility and infrastructure.