NetBank Closed by Federal Regulators

Pioneering Internet bank NetBank has been shut down by the Treasury Department’s Office of Thrift Supervision and its assets placed into liquidation by the Federal Deposit Insurance Corporation.

The Alpharetta, Ga.-based online bank was formally placed under FDIC liquidation on Friday. ING Bank said on Friday that it was assuming $1.4 billion of NetBank’s deposits and 104,000 of its customers. EverBank Inc. also acquired $700 million of NetBank’s mortgage assets. NetBank’s savings-and-loan subsidiary had $2.5 billion in assets and $2.3 billion in total deposits as of June 30, according to the FDIC.

NetBank was a pioneer of online banking when it opened its virtual doors in 1996. The company was a hit with consumers who wanted to convert to digital banking. By 2005, the bank had $4.8 billion in assets and counted as many as 286,000 customers. But competition for online services from larger brick-and-mortar banks like Bank of America and Wachovia eroded NetBank’s position and the company started losing customers last year.

The bank had been granting mortgage loans since its inception, and over the past two years had offered many subprime consumers loans that were standard practice at the time. A big part of the shutdown was due to its exposure in the subprime segment. In its statement, the OTS said that NetBank “suffered significant losses in 2006 … due to early payment defaults on loans sold, weak underwriting, poor documentation, a lack of proper controls and failed business strategies.”

The NetBank shutdown represents the largest regulatory closing of a bank since the savings and loan scandals of the 1990s.