NetBank Folds on Subprime Trouble: Biggest Bank Failure Since S&L Crisis

In what regulators were quick to portray as an “isolated” incident, Alpharetta, Ga.-based thrift NetBank Inc. was closed by the OTS today. The Federal Deposit Insurance Corp. was named as the receiver for the bank’s $2.5 billion in assets.

The Net Bank failure is the largest since 1993, and is the first bank failure tied to trouble in the subprime market. The thrift had high exposure to the subprime mortgage market and could not sell its nonperforming units.

A press statement issued by the OTS noted that “NetBank sustained significant losses in 2006 primarily due to early payment defaults on loans sold, weak underwriting, poor documentation, a lack of proper controls, and failed business strategies.”

From American Banker (subscription req’d), officials were adamant in their position that the NetBank closing did not reflect a broader problem among banks:

“This is really an isolated situation,� said Kevin Petrasic, an OTS spokesman. “What was going on at this institution is not something that’s going on at any of our other institutions.�

NetBank’s problems “went beyond subprime,� Mr. Petrasic said. The thrift operated smoothly as an Internet bank, but it could not maintain its growth when expanding into a mortgage banking operation, he said. “They just did not get a handle on the loans that they were making,� he said.

The FDIC issued a press statement subsequent to the OTS noting that ING would assume the deposits of the failed online bank, and that NetBank customers would automatically become ING customers.

“When a bank fails, it touches almost every office and division in the corporation,” said FDIC Chairman Sheila C. Bair.

“As chairman, it makes me proud to see the hard work and dedication demonstrated by staff. Since we began insuring banks in 1934, not a single depositor has lost a penny of insured deposits. Customers of NetBank should have confidence and security knowing that they will have access to their insured funds in a timely and orderly manner.”

Many words come to my mind in describing the current market we’re in, but I think it’s safe to say that “confidence” and “security” are not among them.