Oct 31 new release for REFERENCE
NextCard Retains Goldman Sachs to Pursue Sale of the Company; The Company also reports Operating Results for Third Quarter 2001 and New Regulatory Limitations
NextCard Retains Goldman Sachs to Pursue Sale of the Company; The
Company also reports Operating Results for Third Quarter 2001 and New
Regulatory Limitations
SAN FRANCISCO, Oct 31, 2001 (BUSINESS WIRE) -- NextCard, Inc. announced today
that its Board of Directors has retained Goldman, Sachs & Co. to explore
opportunities for the sale of the Company to a larger, more established
financial institution with the resources necessary to support the Company's
continued growth. The Company's decision 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.
"NextCard has established a strong leadership position in the Internet channel,
which is the fastest growing channel in the credit card business," said John
Hashman, Chief Executive Officer of NextCard. "We believe we have created
tremendous value in our business model, and we should be in a better position to
unlock that value for our shareholders through a transaction with a larger
entity."
Continued Mr. Hashman: "We have a leading technology infrastructure, and have
established one of the most recognizable brands on the Internet. Further, our
direct marketing and credit underwriting expertise, along with our $2.0 billion
in loans under management, should provide great value for any company that
desires to establish its own leadership position in this growth channel."
Goldman Sachs has commenced an active marketing program for the sale of the
Company. The Company describes, below, the elements of value a potential
acquirer might attribute to the Company. However, the Company cannot give any
assurance at this time as to whether any transaction will result from this
process or as to the value or timing of any possible transaction.
Company Provides Additional Reserves and Limits Certain Operating
Activities
The Company announced that it is taking several steps to increase reserves and
limit certain lending activities of its wholly owned banking subsidiary,
NextBank, N.A. (the "Bank"). These steps are being taken as a result of
discussions with the Bank's regulators, the Office of the Comptroller of the
Currency (the "OCC") and the Federal Deposit Insurance Corporation (the "FDIC,"
collectively with the OCC, the "Regulators"), as well as in consideration of the
worsening economic situation. The Regulators are currently completing an
examination of the Bank.
The increase in the Allowance for Loan Loss amount was developed in consultation
with the Regulators to give full consideration to changes in economic conditions
and the impact those effects may have on the portfolio. The Bank has increased
the Allowance for Loan Losses by increasing its reserves to provide coverage for
12 months of projected losses, which is a more conservative approach to
reserving for losses inherent in the portfolio.
As an additional result of discussions with the Regulators, the Company has
further tightened its underwriting criteria to limit new account originations to
FICO scores above 680, suspended originations of secured credit cards, and
suspended or limited certain line management programs, re-pricing programs, and
fee-based product strategies.
The Bank also established a valuation reserve during the third quarter in the
amount of $5.6 million to recognize the estimated uncollectible portion of
accrued finance charges and fees on certain on-balance sheet loans that are more
than 30+ days delinquent. Historically, and consistent with certain industry
practice, these finance charges and fees were reversed against current revenue
upon charge-off of the related account.
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. As a result of discussions with the Regulators, the Company is
developing an account level classification system to identify each fraudulent
account in this category. 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.
In addition, the Regulators have notified the Bank that, as a result of the
change in treatment of certain losses on loans sold through the Bank's
securitization activities as fraud losses rather than credit losses, as
described above, they have determined that the Company's securitization
activities do not qualify for "low-level recourse treatment" under applicable
regulations. The impact of the Regulators' decision to disallow low-level
recourse treatment on the securitized assets was to increase the Bank's
risk-weighted assets by approximately $537.5 million, to $2.1 billion as of
September 30, 2001. The Bank is appealing this matter, which it does not believe
is supported by regulatory guidelines. The Company cannot give any assurances as
to whether this appeal will be favorably decided or the timing of any action on
the appeal.
Finally, during the third quarter of 2001 the Bank expensed $35.7 million in
certain capitalized intercompany acquisition costs previously expensed by the
Company but still capitalized on the Bank's books. This change reduced the
Bank's regulatory capital on a dollar-for-dollar basis but did not have any
effect on the Company's consolidated financial statements.
Capital Ratios and the Bank
As a result of the increase in loan loss reserves, the elimination of low-level
recourse treatment for securitized assets, the write-off of deferred acquisition
costs and the Bank's reported loss for the third quarter 2001, the Bank's total
risk-based capital ratio decreased to 5.38 percent of total risk-weighted assets
as of September 30, 2001, as compared to 17.35 percent as of June 30, 2001. The
Bank's Tier 1 risk-based capital ratio was 4.11 percent as of September 30,
2001, as compared to 15.69 percent, as of June 30, 2001, and the Bank's leverage
ratio was 10.79 percent as of September 30, 2001, as compared to 18.55 percent
as of June 30, 2001.
The Bank is now considered "significantly undercapitalized" under applicable
federal banking regulations because its risk-based capital ratio has dropped
below 6%. The Bank's Tier 1 and leverage capital ratios remain at amounts
consistent with requirements for "well capitalized" banks. As a "significantly
under-capitalized" institution, the Bank will be subject to Prompt Corrective
Action (a "PCA") under applicable federal banking law. Under PCA provisions, the
Bank must promptly submit an acceptable capital restoration plan to the OCC. In
addition, the Bank is prohibited from increasing its average asset position
above that established in the third quarter of 2001, will be prohibited from
accepting or renewing any "brokered" deposits and must limit certain payments
from the Bank to any affiliated entity. The Bank will also be subject to
heightened regulatory scrutiny and prior approval requirements. Additional
restrictions could be imposed on the Bank at the discretion of the OCC, without
prior notice.
The Bank had previously agreed with the OCC to maintain total capital of not
less than 12 percent of risk-weighted assets, a level that exceeds the
regulatory requirements for well-capitalized institutions. As of September 30,
2001, the Bank would have required approximately $140 million in additional
regulatory capital to reach the 12 percent capital level committed to the OCC.
The Company is a party to a Capital Assurance Agreement with the Bank, dated
October 26, 2000, which states that the Company will contribute additional
capital to return the Bank to a capital level equal to or exceeding "well
capitalized" status in the event the Bank falls below such level.
Third Quarter Operating Results
The Company today also announced operating results for the third quarter of
2001. Total managed revenue, which includes the impact of securitization
activities, increased to $95.7 million. Operating revenue on a managed basis
increased to $95.5 million for the quarter ended September 30, 2001, compared to
$49.3 million for the quarter ended September 30, 2000. This represents an
increase of 94 percent over the same period in 2000 and an increase of 19
percent over the previous quarter.
Total managed loans rose over 82 percent to $2.0 billion as of September 30,
2001, compared to $1.1 billion as of September 30, 2000, and rose 11 percent
over the $1.8 billion in managed loans as of June 30, 2001. Total customer
accounts increased over 100 percent to 1.2 million as of September 30, 2001,
compared to approximately 600 thousand customer accounts as of September 30,
2000, increasing 20 percent over the approximately 1.0 million customer accounts
as of June 30, 2001.
The Company's net loss for the third quarter of 2001 was $53.1 million, or $1.00
per share. This compares to a net loss per share of $0.38 in the third quarter
of 2000 and a net loss per share of $0.27 in the second quarter of 2001.
Net-interest margin for the third quarter of 2001 rose to 7.80 percent from 6.51
percent in the second quarter of 2001. The Company continues to enhance its
overall pricing strategies through its proprietary Profile Based Pricing system
and its customer management programs. The Company has seen continued
improvements in cost of funds during the third quarter of 2001 as the Company
benefited from further re-pricing of its CD portfolio and conduit borrowing
facilities. Cost of funds decreased by 80 basis points during the quarter.
Total yield on the managed loan portfolio for the third quarter of 2001 was
20.30 percent, compared to 18.89 percent in the second quarter of 2001 and 19.00
percent in the same quarter the prior year. The stronger than expected yield was
the result of the Company's pricing expertise, cardholder purchase activity, and
solid results from the sale of fee-based products.
Risk-adjusted margin on the managed loan portfolio for the third quarter of 2001
was 7.57 percent, compared to 8.34 percent in the second quarter and 9.05 in the
same quarter the previous year. The risk-adjusted margin in the third quarter
was positively impacted by the stronger than expected yield and lower cost of
funds.
Total loan charge-offs for the third quarter of 2001 were 7.89 percent.
Excluding the change in fraud classification discussed above, loan charge-offs
would have been 6.13 percent, compared to loan charge-offs of 4.92 percent for
the second quarter of 2001. The delinquency rate (30+ days) on total managed
loans increased to 5.90 percent as of September 30, 2001, compared to 5.25
percent as of June 30, 2001.
Consolidated cash and cash equivalents were $129.9 million as of September 30,
2001, compared to $198.4 million as of June 30, 2001 and $210.7 million as of
September 30, 2000. Unrestricted cash and cash equivalents at the Parent,
NextCard, Inc. were $35.7 million as of September 30, 2001.
Financial Guidance Withdrawn
Prior to the changes in its business operations announced today, the Company
believed that it was on track to achieve profitability in the fourth quarter of
2001, and recognize significant profits in 2002 and 2003. The primary impact of
these changes in business operations will be to reduce revenues beginning in the
fourth quarter, which are likely to be offset by reduced marketing and
acquisition costs and lower operating expenses, giving the Company continued
confidence in a fourth quarter break-even. However, in light of the strategic
decisions announced today, the Company believes it is appropriate to formally
withdraw guidance for the fourth quarter of 2001 as well as 2002 and 2003.
Elements of Company Value
The Company believes that it has built a business with tremendous franchise
value which could be realized most effectively as part of a larger institution
with greater financial and capital resources. While no assurance can be given
regarding a sale of the Company, nor the price of such a sale, the Company
believes that a potential acquirer may focus on some, or all, of the following
elements in valuing the Company as an acquisition target:
-- The Company's adjusted book value;
-- The after-tax value of the Company's net operating loss carry
forward;
-- The value of the Company's loan portfolio; and
-- The Company's industry-leading technology and marketing platforms.
As of September 30, 2001, the Company's equity was $118.6 million and the
Company's loan loss reserves were $71.6 million, resulting in aggregate equity
plus reserves of $190.2 million. On September 30, 2001, unamortized goodwill was
$4.3 million. Therefore the adjusted book value of the Company, derived from
subtracting unamortized goodwill from the aggregate equity and reserves, was
$185.9 million on September 30, 2001.
The estimated net operating loss carry forward of the Company for federal tax
purposes on September 30, 2001, exceeded $175.0 million. The use of net
operating losses by any potential buyer would be subject to restrictions and
limitations imposed by the U.S. Internal Revenue Code.
The Company's technology and marketing platform has enabled the Company to gain
the largest share of credit card originations in the online credit card
origination channel, according to Brittain Associates. Brittain Associates
reports that in 2001, the Company has attained a 26% share of online applicants.
This platform has also enabled the Company to offer a leading, differentiated
product to consumers. As validation of this, NextCard was named the No. 1
Internet credit card four times out of five by Gomez(TM) in the past two years.
While the Company would expect that a potential acquirer will utilize some or
all of the data described above in its valuation analysis, no assurances can be
made about the value a potential acquirer will place on these elements, nor can
the Company speculate on other elements of value, both positive and negative,
that a potential acquirer may incorporate into its analysis.
About NextCard
NextCard, Inc. (www.nextcard.com) is the leading issuer of credit cards on the
Internet. Launched in 1997, the Company was the first to offer instant online
credit card approval, a choice of customized credit card offers, and exceptional
online customer service. NextCard is one of the leading direct marketers on the
Internet, operates a network of more than 90,000 online affiliates, and has
exclusive card relationships with leading online brands, including Amazon.com
and MyPoints.com.
NextCard was named the No. 1 Internet credit card by Gomez. According to the
2001 Brittain Associates "Credit Cards on the Net" study, NextCard leads the
online credit card market with a 26 percent share. NextCard, Inc. issues credit
cards through NextBank N.A., a wholly owned subsidiary.
Statements contained herein as to the Company's expectations and goals are
forward-looking statements under the Private Securities Litigation Reform Act of
1995. Such forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
projected. Among the significant risks and uncertainties are: competitive
pressures arising from aggressive competition from other consumer lenders;
factors that affect the delinquency rate on the Company's consumer loans and the
rate at which the Company's consumer loans are charged off; the Company's
ability to grow its consumer loan portfolio; changes in the cost, availability,
or access to funding due to changes in the deposit, credit or securitization
markets.; the effects of government policy and regulation, including
restrictions and/or limitations arising from banking laws, regulations and
examination, including the current proceedings before the OCC and the related
appeal described in this press release; legal proceedings; and the ability to
attract and retain key personnel. More information on risk factors affecting the
Company is available in the Company's filings with the Securities and Exchange
Commission, including its annual report on Form 10-K, quarterly reports on Form
10-Q, and current reports on Form 8-K.
NEXTCARD, INC AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition
(in thousands) (unaudited)
Sept. 30 June 30 March 31 Dec. 31 Sept. 30
2001 2001 2001 2000 2000
-------- ------- -------- ------- --------
Assets:
Cash and cash
equivalents $121,868 $174,853 $194,547 $151,850 $192,538
Cash and cash
equivalents,
restricted 8,078 23,544 21,190 38,876 18,138
Loans held for
securitization 167,000 70,000 - - -
Credit card
loans
receivable (1) 554,193 509,525 474,971 528,110 544,171
Allowance for
loan losses (71,598) (31,074) (24,135) (25,136) (21,377)
-------- -------- -------- -------- ---------
Net loans 482,595 478,451 450,836 502,974 522,794
Interest
receivable 3,563 8,561 8,468 7,546 4,247
Equipment and
leasehold
improvements,
net 25,035 22,848 19,028 19,414 17,357
Due from
securitizations 85,469 69,835 111,437 75,857 73,516
Prepaid and
other assets 60,736 50,331 40,192 52,070 34,271
-------- -------- -------- -------- --------
Total assets $954,344 $898,423 $845,698 $848,587 $862,861
======== ======== ======== ======== ========
Liabilities and shareholders' equity:
Deposits $607,513 $494,622 $488,694 $380,248 $302,313
Accounts payable 9,028 7,792 6,497 10,558 12,010
Accrued expenses
and other
liabilities 43,032 39,099 32,519 38,040 28,194
Other borrowings 2,127 2,811 3,474 4,117 4,743
Secured borrowings 174,000 183,000 130,000 214,734 294,600
-------- -------- -------- -------- --------
Total
liabilities 835,700 727,324 661,184 647,697 641,860
-------- -------- -------- -------- --------
Common stock 53 53 53 53 53
Additional
paid-in capital 383,899 383,136 382,504 382,573 384,710
Deferred stock
compensation (1,442) (1,370) (1,688) (2,006) (6,199)
Accumulated
deficit (261,137) (207,991) (193,626) (177,001) (157,563)
Treasury Stock (2,729) (2,729) (2,729) (2,729) -
-------- -------- -------- -------- --------
Total
shareholders'
equity 118,644 171,099 184,514 200,890 221,001
-------- -------- -------- -------- --------
Total
liabilities
and
shareholders'
equity $954,344 $898,423 $845,698 $848,587 $862,861
======== ======== ======== ======== ========
$2,010,300 $1,789,409 $1,594,659 $1,312,318 $1,093,437
(1) Total Managed Loans
NEXTCARD, INC AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(in thousands) (unaudited)
Three Months Ended Nine Months Ended
----------------------------- -------------------
Sept. 30 June 30 Sept. 30 Sept. 30 Sept. 30
2001 2001 2000 2001 2000
--------- --------- --------- --------- ---------
Interest income:
Loans (2) $ 19,008 $ 14,685 $ 20,980 $ 47,304 $ 48,441
Investment
securities and
other 647 570 3,549 3,941 9,092
--------- --------- --------- --------- ---------
Total interest
income 19,655 15,255 24,529 51,245 57,533
Interest expense:
Borrowings 875 1,086 4,422 4,178 7,977
Deposits 7,488 7,011 7,512 21,707 18,075
--------- --------- --------- --------- ---------
Total interest
expense 8,363 8,097 11,934 25,885 26,052
Net interest
income 11,292 7,158 12,595 25,360 31,481
Provision for
loan losses 55,534 18,509 16,134 94,092 34,297
--------- --------- --------- --------- ---------
Net interest
income after
provision for
loan losses (44,242) (11,351) (3,539) (68,732) (2,816)
Non-interest
income (3) 34,891 36,521 23,760 108,408 44,960
Non-interest
expenses:
Salaries and
employee benefits 17,329 15,020 15,606 48,232 36,747
Marketing,
advertising
and branding 3,429 4,093 7,891 12,109 26,212
Credit card
activation and
servicing costs 9,605 8,422 5,628 26,974 14,685
Occupancy and
equipment 4,978 3,987 3,045 13,015 7,369
Professional fees 518 886 823 2,583 3,139
Amortization of
loan structuring
fee 960 653 774 2,374 1,944
Amortization of
deferred stock
compensation 604 318 1,264 1,240 3,696
Other 6,372 6,156 5,448 17,285 10,770
--------- --------- --------- --------- ---------
Total non-interest
expenses 43,795 39,535 40,479 123,812 104,562
Net loss $(53,146) $(14,365) $(20,258) $(84,136) $(62,418)
========= ========= ========= ========= =========
Basic and diluted
loss per share $ (1.00) $ (0.27) $ (0.38) $ (1.58) $ (1.19)
========= ========= ========= ========= =========
Weighted average
common shares used
in net loss per
common share
calculation 53,392 53,223 53,075 53,254 52,339
========= ========= ========= ========= =========
(2) Excludes interest income on loans which have been securtized
off-balance sheet.
(3) Includes servicing and securitization income related to the
Company's off-balance sheet securitizations.
For these securtized credit card loans, amounts that otherwise
would have been recorded as net interest income, fee income and
provision for loan losses are instead reported in non-interest
income.
NEXTCARD, INC (NXCD)
Financial & Statistical Summary
(in thousands, except per 2001 2001 2001
share and employee data) Q3 Q2 Q1
--------------------------------------
Earnings (Managed Basis)
Revenue:
Operating income:
Credit card loan
finance charges $ 60,895 $ 51,157 $ 45,853
Interchange fees 7,575 6,564 5,349
Credit card fees 25,887 20,578 16,571
Cash and investments
income 1,131 2,251 2,717
--------------------------------------
Total operating income 95,488 80,550 70,490
Securitization income 257 6,550 11,210
--------------------------------------
Total Revenue 95,745 87,100 81,700
Interest Expense 22,485 23,361 24,073
Provision for
Loan Losses 81,388 33,250 31,260
Non-Interest Expense 45,018 44,854 42,992
--------------------------------------
Net Loss $ (53,146) $ (14,365) $ (16,625)
Key Statistics - Managed
Basis:
Quarter End Loans $ 2,010,300 $ 1,789,409 $ 1,594,659
Quarter Average
Loans $ 1,884,714 $ 1,680,784 $ 1,474,501
Total Portfolio
Yield 20.30% 18.89% 18.64%
Risk-Adjusted
Margin (Loans) (4) 7.57% 8.34% 8.03%
Net Interest Margin
(Earning Assets) 7.80% 6.51% 5.94%
Total Number of
Accounts (000's) 1,200 1,016 881
Net Charge-Offs $ 37,186 (6) $ 20,665 $ 14,709
Net Charge-Off Rate 7.89% (6) 4.92% 3.99%
Delinquency Rate
(30+ Days) 5.90% 5.25% 4.75%
Key Statistics -
On Balance Sheet:
Quarter End Loans (5) $ 554,193 $ 509,525 $ 474,971
Quarter Average Loans $ 631,381 $ 512,328 $ 498,020
Equity to Earning
Assets 13.94% 21.99% 26.71%
Reserves as a Percent
of Loans 12.92% 6.10% 5.08%
Common Share Statistics:
EPS - Basic and Diluted $ (1.00) $ (0.27) $ (0.31)
Shares Outstanding
(Period End) 53,479 53,251 53,205
Weighted Average
Shares O/S 53,392 53,223 53,134
Employees (FTE) 1,045 1,030 925
(in thousands, except per 2000 2000
share and employee data) Q4 Q3
------------------------
Revenue:
Operating income:
Credit card loan
finance charges $ 39,071 $ 31,560
Interchange fees 5,190 3,973
Credit card fees 14,943 10,152
Cash and investments
income 2,817 3,624
------------------------
Total operating income 62,021 49,309
Securitization income 9,643 7,634
------------------------
Total Revenue 71,664 56,943
Interest Expense 21,497 17,503
Provision for
Loan Losses 26,687 18,516
Non-Interest Expense 42,918 41,182
------------------------
Net Loss $ (19,438) $ (20,258)
Key Statistics - Managed
Basis:
Quarter End Loans $ 1,312,318 $ 1,093,437
Quarter Average
Loans $ 1,206,397 $ 961,983
Total Portfolio Yield 19.63% 19.00%
Risk-Adjusted
Margin (Loans) (4) 9.40% 9.05%
Net Interest Margin
(Earning Assets) 5.83% 6.02%
Total Number of
Accounts (000's) 708 577
Net Charge-Offs $ 9,347 $ 6,426
Net Charge-Off Rate 3.10% 2.67%
Delinquency Rate
(30+ Days) 3.92% 3.30%
Key Statistics -
On Balance Sheet:
Quarter End Loans (5) $ 528,110 $ 544,171
Quarter Average Loans $ 643,686 $ 642,280
Equity to Earning Assets 27.95% 29.28%
Reserves as a Percent
of Loans 4.76% 3.93%
Common Share Statistics:
EPS - Basic and Diluted $ (0.37) $ (0.38)
Shares Outstanding
(Period End) 53,014 53,121
Weighted Average
Shares O/S 53,189 53,075
Employees (FTE) 820 650
(4) Risk-adjusted margin is total loan revenue less interest expense
and net charge-offs as a percentage of average managed loans.
(5) Excludes loans held for securitization.
(6) Excluding the change in fraud classification, Q3 2001 net
charge-offs would have been $29,059, and the net charge-off rate
would have been 6.13%.
CONTACT: NextCard, Inc.
Cammeron Finnegan, 415/369-5732 (Investor Contact)
investorrelations@nextcard.com
Camille Lepre, 415/369-5517 (Press Contact)
camille.lepre@nextcard.com |
