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Losing Half a Million on NetBank's Fall

The FDIC paid depositors 50% of uninsured balances.

The most interesting reader feedback from

Monday's story about the failure of NetBank Inc. (formerly a unit of



) came from Chris Coulthrust, president of Applied Cognetics in Brooklyn, N.Y.

Applied Cognetics had a million dollars in uninsured NetBank deposits. It looks like he's out about half that amount.

"I was one of NetBank's first customers back in 1998," Coulthrust says. "I moved to them after being turned away from three different banks who did not understand our business and refused to open a business account for me."

Applied Cognetics is a software developer, specializing in providing its online marketing and lead-generation platforms to Internet marketers and the consumer-finance industry. The company also provides automated underwriting engines for lenders.

Later, as his business grew, Coulthrust opened several business accounts. Only recently did Applied Cognetics keep larger uninsured balances with NetBank, so he had never considered the risk of having uninsured deposits.

"I found out about NetBank's failure last Friday when I logged into the Web site to check the status of incoming wires," Coulthrust says. After seeing the announcement of the bank failure and the transfer of accounts to ING Direct Bank (a unit of

ING Group

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), Coulthrust immediately called several customers and asked them to hold back their wires.

Depositors with uninsured balances are first in line when a failed bank's assets are liquidated. Any money they recover on their uninsured deposit is called a "dividend" by the Federal Deposit Insurance Corp. Last Friday, the FDIC immediately paid NetBank's depositors a 50% dividend on uninsured balances, anticipating the proceeds from the sale of NetBank's assets.

Now faced with losing about $500,000, Coulthrust contacted the FDIC's claims department. The agent he spoke to was sympathetic, but was unable to comment on the likelihood of any further recovery of his company's money.

Coulthrust doesn't think he has any further recourse. When he asked the FDIC claims agent if there were any bridge loans available for business depositors threatened by such large losses, the answer was no.

"A lot of that money was an operating account, so we are still sorting out things to figure out what we're going to do," he says. "Our business is sound and we will survive this because we are awesome! But it is a lot of money."

David Barr, assistant director of the FDIC's Department of Public Affairs, says the FDIC is working to sell NetBank's remaining assets. With $1.1 billion in assets remaining to be sold, he expects further dividend payments to NetBank's uninsured depositors.

Among the other feedback, a couple of readers agreed that bank ratings are important, but questioned the objectivity of our ratings, since also offers advice on stock picking. I assured them that our

Bank and Thrift Financial Strength Ratings are indeed objective, and have nothing to do with bank stocks. The ratings are based on a detailed analysis of quarterly regulatory filings.

While an individual can limit his or her risk by spreading bank deposits over several institutions, this is not a practical solution for businesses. Small businesses clearly face major risk if they do business with a troubled institution, but it would be an administrative nightmare to spread operating cash over transaction accounts at several banks.

For consumers, the FDIC has an online application called the

Electronic Deposit Insurance Estimator ,which can help you to figure out if all your deposits are insured. Even though the FDIC insurance limit on nonretirement deposits is $100,000, for example, a married couple can have a higher amount insured at the same bank if they open separate individual accounts, as well as a joint account.

Philip W. van Doorn joined Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank o f New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.