As one subprime lender, NextCard ( NXCD), had its online banking operation shut down by regulators, another credit card issuer, Providian Financial ( PVN), saw its stock soar Friday as investors determined that the company wouldn't go out of business in the near future. NextCard's banking arm, NextBank, was shuttered Thursday night by the Office of the Comptroller of the Currency. The OCC said the firm's "unsafe and unsound" practices were likely to deplete substantially all of the bank's capital. NextCard attempted, but failed, to turn the operation around. As a result, the Federal Deposit Insurance Corp. has been appointed the receiver of the bank, which had assets of $700 million and total deposits of $550 million. Providian, meanwhile, said banking regulators approved its own capital improvement plan. And while NextCard's shares were halted at 14 cents, Providian was up 77 cents, or 22.3%, to $4.23. NextBank's closing, which doesn't entirely come as a surprise, wasn't reverberating throughout the sector, probably because Providian's announcement couldn't have come at a better time. Credit card lender Metris ( MXT) rose 7% to $14.36, auto lender AmeriCredit ( ACF) gained 8% to $21.62, and mobile home lender Conseco ( CNC) added 1% to $3.26. Credit card issuer Capital One ( COF) was up 2% to 47.10. Providian and NextCard both watched their market capitalizations evaporate last year as the subprime lending business -- the practice of lending to high- risk clients at higher interest rates -- collapsed amid a weak economy, mounting job losses and tougher regulations. Providian's stock lost 94% of its value in 2001. NextCard is down 74% just since the start of 2002, and the stock fell to 52 cents from $8 last year. As the case of NextCard illustrates, investors continue to face a potential minefield in the subprime lending sector. Even though Providian's news spurred a buying frenzy of that company's stock, some analysts aren't convinced the firms that make a living with high-risk loans are standing on solid ground.
In October, the OCC asked NextBank to exit certain businesses, boost loan-loss reserves and reclassify fraud losses as loan losses. The bank, which then became "significantly undercapitalized," put itself up for sale. But with no buyers, NextCard notified regulators that it wasn't possible to prepare and submit a capital restoration plan. The bank also said liquidating its assets wouldn't raise enough money to retire all of the existing and anticipated liabilities. "The bank failed to identify the extent of its credit quality problem or to implement effective corrective measures," the OCC said in a statement.