The flattening yield curve has made life tougher for banks such as Bank of America (NYSE:BAC), JP Morgan Chase (NYSE:JPM), and Citigroup (NYSE:C). The gap between what banks are charged for loans and what they pay on deposits is shrinking, and so are the banks' profits. Internet banks aren't immune from the yield crunch, either; witness NetBank (NASDAQ:NTBK), which reported earnings yesterday.

In the fourth quarter, NetBank eked out a net profit of $895,000, or $0.02 per share. That did improve upon the year-ago quarter, in which the company sustained a loss of $17.7 million, or $0.38 per share.

Despite the flattening yield curve, NetBank's retail banking segment posted pre-tax profits of $10.6 million, an $8.1 million increase from the third quarter. But most of the gain came from declining marketing expenses. If the yield curve stays flat, the company said it expects its net interest margins to narrow, as well, diminishing those profits.

NetBank has experienced tremendous challenges in its fiercely competitive mortgage business. Over the past year, this division went from a positive pre-tax contribution of $21.1 million to a pre-tax loss of $17.7 million. Going forward, that loss might impair the company on a larger scale; difficulties in its mortgage business have made it harder for the company to procure capital, limiting its ability to pursue additional business. Unfortunately, NetBank's mortgage market doesn't seem to be improving.

Even as the flat yield curve compresses profits, the company acknowledges tough competition from other online banks, which offer aggressively attractive rates on deposits. To NetBank's merit, it tallied moderate increases in customers and deposits, each clocking in nearly 6% higher year over year.

My primary concern for the company is the decreasing novelty of dot-com banking. Like many customers, I use my own traditional bank's online system, which works fine. Why should I switch to NetBank?

Worse yet, NetBank's lower profits will constrain the resources it needs to diversify its business. If you want to invest in banks, consider a megabank like Bank of America or Citigroup. Unlike NetBank, they have strong websites and diverse sources of revenue.

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Fool contributor Tom Taulli does not own shares mentioned in this article.