Internet only outfit NextBank has been closed down by the US Office of the Comptroller of the Currency and placed into receivership with the Federal Deposit Insurance Corporation.
The OCC says it acted after finding that the bank was operating in an "unsafe and unsound" manner and had experienced a substantial dissipation of assets and earnings.
After being acquired by NextCard in 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 projected. The $300 million in capital that had been provided by the bank’s parent company, NextCard, was dissipated through credit losses and high operating expenses. NextCard, which recently laid off 170 staff, appointed Goldman Sachs in October to find a buyer for the bank and holding company.
During the bank’s most recent examination, the OCC determined that the bank was classifying some delinquent accounts sold into a securitisation 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 undercapitalised, says the OCC.
NextCard has issued a statement saying it is re-examining its business and operations strategies.