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Regulators shut NextBank
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February 8, 2002: 1:31 p.m. ET
Unit of online credit card firm NextCard accused of 'unsound' practices.
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NEW YORK (CNN/Money) - Federal regulators have shut down NextBank, the first such Internet-only bank to be seized by the government, claiming it put its customers' money at risk with "unsound practices."
The Office of the Comptroller of the Currency (OCC) shut the Phoenix-based bank on Thursday and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver of the bank's $550 million in assets and $700 million in deposits.
"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 government said in a statement.
Beginning Monday, the FDIC will mail checks to the bank's customers in the amount of their insured deposits. Customers with more than $100,000 on deposit should contact the FDIC and speak to a claims agent. About $29.4 million of the deposits in NextBank's 2,075 accounts are uninsured, the FDIC said.
The Nasdaq Stock Exchange halted trading of shares of NextBank parent NextCard Inc. (NXCD: Research, Estimates), which closed Thursday at 14 cents a share.
San Francisco-based NextCard said it and its adviser Goldman Sachs & Co. had tried unsuccessfully since Oct. 31, 2001, to find a buyer for NextBank, which had no branches, checking accounts or savings accounts. Instead, the bank offered $100,000 certificates of deposit, which were used to support its credit card business.
NextCard, which markets credit cards on the Internet with an online approval procedure, said it planned to "reevaluate its business and operations strategies" in the wake of NextBank's failure.
NextCard bought NextBank in September 1999, the OCC said, but the bank's depositors had worse credit than estimated in the bank's business plan, and its management couldn't or wouldn't fix the problem.
In October 2000, at the OCC's direction, the bank's board of directors came up with a plan to fix its problems; but the plan was never implemented, the OCC said, and the bank eventually used up $300 million in capital given to it by NextCard.
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During the most recent OCC review of the bank's books, it found accounting irregularities, and the adjustments made after those findings left the bank undercapitalized, the OCC said.
Finally, in January, NextCard told regulators that it couldn't come up with a plan to restore capital to the bank and that the bank's assets couldn't match its deposits, which are counted as liabilities, leading to the OCC's shutdown of NextBank.
Other creditors lending to high-risk customers have suffered recently, including Providian Financial Corp. (PVN: up $0.76 to $4.22, Research, Estimates), which has also solicited outside help to solve its problems.
In January, NextCard cut about 170 jobs, or about 20 percent of its work force. 
-- from staff and wire reports
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