WASHINGTON In what is believed to be the first collapse of an Internet bank, federal regulators announced late Thursday that they had closed $700 million-asset NextBank in Phoenix.
NextBank is the fourth bank to fail in less than a month.
NextBank, and its parent company NextCard Inc., were once hailed as Internet success stories, but had fallen on tough times. Late last year, as part of an agreement with regulators, NextCard provided $300 million in capital to NextBank, funds that the Office of the Comptroller of the Currency said on Thursday had been dissipated through credit losses and high operating expenses.
NextCard executives had tried but failed to sell the company. They also had acknowledged that their business had been the victim of so much fraud that regulators finally stepped in. But the OCC said later that some of NextBanks claims of fraud were exaggerated and attributed much of the delinquencies to credit quality problems.
The OCC on Thursday said the bank had been operating in an unsafe and unsound manner and had experienced a substantial dissipation of assets and earnings through unsafe and unsound practices.
The OCC also found that NextBanks unsafe and unsound practices were likely to deplete all or substantially all of the banks capital, and that there was no reasonable prospect for the bank to become adequately capitalized without federal assistance, the agency said.
The OCC said that this finding, combined with significant accounting adjustments and the need for additional loan loss reserves, resulted in NextBank becoming significantly undercapitalized. In November, the OCC issued a prompt-corrective-action directive requiring the bank to restore its capital to 12% of risk-weighted assets or to sell or liquidate the bank. The agency said that NextCard made efforts to find a buyer but was ultimately unsuccessful.
The Federal Deposit Insurance Corp., too, said Thursday that it could not find a buyer for the banks $554 million of deposits and was still attempting to value its assets. The FDIC said that $29 million of NextBanks deposits were uninsured.
The FDIC did not provide an estimated cost of the failure to the Bank Insurance Fund.
NextBanks demise reflects some of the problems faced by Internet-only institutions with no so called brick-and mortar branches. Once seen as the future of banking, the business model has experienced increasing difficulties with the burst of the dot-com bubble. As late as Thursday morning, before the announcement of NextBanks failure, Comptroller John Hawke Jr. warned that Internet institutions face an uphill battle.
There was a time three or four years ago when Internet banking reflected all of the ebullience that we saw in the dot-com world, Mr. Hawke said during a question and answer session at a conference of banking lawyers. But for the most part, those expectations have not been borne out. There are a couple of Internet banks that are related to brokerage operations that seem to have done reasonably well. But the business plans of the pure, stand-alone Internet banks clearly did not work, even though they were able to raise a lot of capital in the early days.
NextCard representatives were not available for comment but in the past, executives had expressed frustration with the regulatory process.
When you are a small company that does not have lots and lots of capital, you fall under some increased scrutiny, John V. Hashman, NextCards chief executive officer, said in October in announcing that the company was putting itself up for sale. You end up in a situation where people want you to keep additional reserves and take more conservative accounting practices than larger companies.