RealTime IT News

NextCard Stock Crashes

Shares in San Francisco-based NextCard, the Internet banking and credit card company, plunged as much as 80 percent Wednesday when the company said it will be "significantly undercapitalized" after it follows recommendations from banking regulators.

NextCard also said it has retained Goldman Sachs to explore opportunities for the sale of the company.

Regulators told the company that its NextBank wholly owned subsidiary will have to categorize certain "fraud losses" as "credit losses" and would have to apply them to its loan loss reserves.

In a statement, NextCard said: "The bank has determined that, effective in the third quarter of 2001, it will classify as credit losses certain loan losses which were previously recognized as fraud losses and reflected as other expenses in the company's financial statements. The company believes that a substantial portion of these losses are related to fraudulent account origination activity specific to the Internet channel."

NextCard said its banking operation "is now considered significantly undercapitalized under applicable federal banking regulations because its risk-based capital ratio has dropped below 6 percent."

NextCard's stock at mid-morning was trading at $1.43, down $3.92. Its low for the day was $1.02 after closing yesterday at $5.35.

At the same time, NextCard reported a third-quarter net loss of $53.1 million, or $1 per share. This compares to a net loss per share of 38 cents in the third quarter of 2000.

For the six months ended June 30, net loss was $31 million.

NextCard established its banking unit with the August 1999 acquisition of Textron Financial Corp. "The formation of NextBank is a natural progression in our strategy to deliver online consumer credit, giving NextCard the ability to originate credit card accounts for our own account," NextCard's CEO said at the time.

Today NextCard said that its decision to sell the company "resulted from its belief that, given newly imposed regulatory limitations on its business operations, as well as the current market environment, it can best enhance shareholder value through a transaction with a larger and better-capitalized entity."

As a result of discussions with banking regulators, NextCard said it is "developing an account level classification system to identify each fraudulent account... until such time that this classification system is fully developed, the company will continue to classify these losses going forward as credit losses, and include them in its calculation of loan loss reserves.

NextCard withdrew all financial guidance for the fourth quarter of 2001 as well as 2002 and 2003.

NextCard, established in 1997, was the first to offer instant online credit card approval. The company operates a network of more than 90,000 online affiliates, and has exclusive card relationships with some top online brands, including Amazon.com and MyPoints.com.