NextCard, Hurt by Losses, Seeks Buyer
NextCard Inc., which mushroomed into the nation’s No. 1 Internet credit card company by offering instant online credit approvals, put itself up for sale Wednesday after federal regulators forced it to set aside huge cash reserves to cover mounting losses on loans.
*extCard said it needs at least $140 million in new capital to satisfy regulators that it can operate safely. With the company unable to raise that on its own, it said it hired Goldman Sachs & Co. to find it a “larger and better-capitalized” buyer.
The news stunned investors, who sent NextCard stock tumbling $4.48 a share, or 84%, to close at 87 cents on Nasdaq. The stock peaked at $44.25 in June 1999, the Internet boom year when a group of longtime credit card executives took the new-wave San Francisco lender public.
*extCard’s crisis raises concerns about rising defaults on consumer loans in an economy that has soured, particularly since the Sept.11 terrorist attacks. Noting that consumer debts are at record levels, Standard & Poor’s said this week that the credit card industry could see 8% of its loans go bad next year, up from a forecast of 6.9% three months ago. NextCard said it wrote off nearly 8% of its loans as losses in the third quarter.
The debacle also raises questions about the software programs that financial firms have developed to predict loan losses and, in NextCard’s case, to make 30-second decisions on the type and amount of credit to issue to customers. Critics say these programs have never been tested in a recession, when a greater number of borrowers are unable to make debt payments.
“If they were so good, how come their losses went up so much in as short a time as they have?” Wachovia Securities analyst Meredith Whitney said. NextCard appears to be in a “death spiral” and will be hard pressed to find a buyer, Whitney said.
*extCard is the second card issuer crippled by loan losses this month. Providian Financial Corp., which used its own secret software to refine lending to borrowers with poor credit histories, said Oct. 19 that it was getting out of that business.
Providian said Wednesday that it has hired two advisors, Goldman Sachs and Salomon Smith Barney Inc., to evaluate financial options for the company.
Online credit card issuers will account for about $11 billion of the $115 billion in new lending for the industry this year, Forrester Research has predicted.
In that relatively small part of the industry, NextCard has grown phenomenally. The company, which started issuing cards in 1997, boosted its total credit card lending to $2 billion by Sept. 30 from $1billion a year earlier. Taxpayer-insured deposits at its bank subsidiary also have more than doubled to $607 million.
Under pressure from the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency, which regulates national banks, NextCard increased its bad-loan reserves to $71.6 million in the third quarter from $31 million in the same period a year earlier.
It wrote off $37.1 million in loans as uncollectable, compared with $6.4 million a year ago. And it reported that its third-quarter loss swelled to $53.1 million, or $1 a share, from $20.2 million, or 38 cents, a year earlier.
Regulators have moved more aggressively lately against risky lenders as the economy weakens and delinquencies rise. Critics have said the regulators were slow in seizing Superior Bank, an Illinois thrift that specialized in loans to sub-prime borrowers. The government estimates it will cost $500 million to repay depositors in Superior, which failed in July.
*extCard said regulators insisted it no longer issues cards to borrowers with less-than-high-end credit ratings.
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Bloomberg News and Associated Press were used in compiling this report.
