NEWS RELEASE Comptroller of the Currency Administrator of National Banks NR 2002-09 FOR IMMEDIATE RELEASE February 7, 2002 Contact: Robert M. Garsson (202) 874-5770 OCC Closes NextBank and Appoints FDIC Receiver WASHINGTON -- NextBank NA, Phoenix, Arizona, was closed today by the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) was appointed receiver. The OCC acted after finding that the bank was operating in an unsafe and unsound manner and had experienced a substantial dissipation of assets and earnings through unsafe and unsound practices. The OCC also found that NextBank s unsafe and unsound practices were likely to deplete all or substantially all of the bank s capital, and that there was no reasonable prospect for the bank to become adequately capitalized without federal assistance. In addition, the OCC found that the bank would be unlikely to be able to pay its obligations or meet the demands of its depositors in the normal course of business. After being acquired by NextCard Inc. on September 16, 1999, NextBank pursued a strategy of marketing credit cards solely through the Internet. However, the OCC found that the bank s risk management policies and procedures were inadequate and the bank s assets were of lower credit quality than initially projected in the bank s business plan. The bank failed to identify the extent of its credit quality problem or to implement effective corrective measures. At the OCC's insistence, the board of directors of the bank adopted a detailed board resolution on October 26, 2000 that was designed to correct these deficiencies, but the bank was unable to implement the resolution. The bank failed to achieve profitability, and the $300 million in capital that had been provided by the bank s parent company, NextCard, Inc., was dissipated through credit losses and high operating expenses. During the bank's most recent examination, the OCC determined that the bank was classifying some delinquent accounts sold into a securitization trust as fraud losses, although the delinquencies were actually attributable to credit quality problems. These assets were being repurchased by the bank at par, a practice that constituted sale of assets with recourse. This finding, together with significant accounting adjustments and the need for additional loan loss reserves, resulted in the bank becoming significantly undercapitalized. The OCC issued a Prompt Corrective Action Directive on November 15, 2001 that required NextBank to restore Tier 1 capital to at least 12 percent of risk-weighted assets or commit to sell or liquidate the bank at no cost to the FDIC. NextCard, Inc. made efforts to find a buyer for the bank and holding company, but was unsuccessful. On January 12, 2002, NextCard notified the OCC that it was not possible to prepare and submit a Capital Restoration Plan, and said liquidation of the bank s assets would not raise enough money to retire in full the bank s existing and anticipated liabilities. In light of these findings, the OCC determined that it was necessary to close the bank and appoint the FDIC as receiver to protect the interests of the bank s insured depositors. As of December 31, 2001, NextBank had total assets of approximately $700 million and total deposits of approximately $550 million. NextBank was an Internet-only bank, and had no branch operations. The FDIC will release information about the resolution of the bank. # # # The OCC charters, regulates and examines approximately 2,200 national banks and 52 federal branches of foreign banks in the U.S., accounting for more than 54 percent of the nation s banking assets. Its mission is to ensure a safe and sound and competitive national banking system that supports the citizens, communities and economy of the United States.
Re: OCC Closes NextBank and Appoint I think it's important to note that NextBank did not own NextCard. Rather, NextCard, Inc. wholly owned NextBank, which was a small shell bank whose job was to do two things principally: 1) to sell $100,000 FDIC-insured CDs (and consumers couldn't buy anything less than $100k), and 2) to consider (grant or deny) credit card applications for NextCard, its corporate parent. This was a convoluted arrangement, with NextCard owning the credit card portfolio, while its wholly owned bank -- NextBank -- simply qualified potential applicants. NextCard also benefitted from the tremendous source of funds provided by the FDIC-insured CDs sold by NextBank. In fact, almost 30% of its overall managed receivables were funded by these Federally-insured deposits. Now that NextBank has imploded, the feds aren't too enthralled that taxpayers will pay (through the FDIC insurance) for the spending spree incurred by NextCard, Inc. as it squandered these deposits in attempting to keep its floundering credit card business going. Basically, the government said to NextCard, "Hey, you can't do business that way. You have to shut down your phony little shell of a bank called NextBank and find a real method to run your credit card business. It's not exactly on an Enron scale, but it's a mess. Here's an interesting article from Forbes regarding Providian which mentions NextCard and other subprime card issuers. You have to go through a free web registration/login in order to read Forbes online, but hey it doesn't cost anything but time, lol. Here's the link: http://www.forbes.com/forbes/2001/1210/080.html There have been quite a few postings here which have misinterpreted this event with themes like "NextCard closes!" and "Will my card still work today?" While those things may indeed come to pass, they're not likely. This situation is more about how NextCard chooses to play a financial shell game -- they can't do it with a shell bank, lol, anymore. Perhaps the likeliest scenario will be that NextCard does give up the ship by selling its credit card portfolio to another card issuer. Probably they'll do a selective sale (a la Providian) and sell only the customers who've demonstrated profitability and reliable payment histories, in which case the old NextCard, Inc. will take the others down with the ship. Doc
Re: OCC Closes NextBank and Appoint Psych-- The FDIC is only on the hook for the first $100K of deposits held by any one depositor. In the past, however, they have gone above that limit. It's not the taxpayers who are paying this-- it's the FDIC which is funded by insurance premiums paid by all banks. I doubt that $500M will break their bank and force them to hit up congress for $. -mj
Re: OCC Closes NextBank and Appoint Thanks for to clarification, PsychDoc.. Either way, I think between NextCard and Providian, the sub-prime marketing lenders have put the last nail in the sub-prime market casket. Two "sub-prime" businesses screw up badly, taking investors with them. It's too bad.... I think the sub-prime market has a valid place if carefully managed (ala Cap One) and can exist to help a lot of people who otherwise could not rebuild their credit in a timely manner.
Re: OCC Closes NextBank and Appoint I gotta say - it sucks, almost $30k at 9.9% between my s/o and myself. I'm torn between wanting to "close by consumer" before they do it ... or waiting to see who ends up with the accounts (please, please be Citi). Good luck all fellow Next-ers, mj
Re: OCC Closes NextBank and Appoint Applications turned off...but the account access still works...1/2 hour ago...
Re: OCC Closes NextBank and Appoint Debating about paying it off except $100.00??? Got bill today. Wondering about the payment??? Will it be posted in a "TIMELY FASHION" (3-5 days)???
