The concept of bankruptcy as a surefire step toward recapitalization isn't always so surefire.
Take the case of Nexity Bank. For more than a year, Michael Gillfillan and Andrew McGhee tried to save the embattled correspondent bank in Birmingham, Ala. Gillfillan and McGhee worked with Nexity's holding company, Nexity Financial Corp., as the latter entered into bankruptcy to relieve debt.
Seeking a clean end to the mess, however, the Federal Deposit Insurance Corp. on Friday took the bank itself into receivership, and then sold it to Gillfillan and McGhee, who were backed by four private-equity firms.
On Monday, AloStar Bank of Commerce, a newly chartered Alabama bank with $150 million of capital, opened.
Friday was the busiest night the FDIC has had so far this year, with six failures. Banking lawyers said that Nexity's resolution is particularly noteworthy because it shows that the much-hyped bankruptcy route as a way to save problem banks burdened by debt does not always work.
"It is not a panacea," said Chip MacDonald, a partner at Jones Day in Atlanta.
"Sometimes these banks need cleaning up in a way that only receivership can provide."
Meanwhile, AloStar's plan to keep offering correspondent services while diversifying into nationwide commercial lending also piqued observers' interest.
Correspondent banks and bankers' banks such as the $794 million-asset Nexity assist other banks with tasks such as picking investments and splitting up participation loans. Nexity was, however, not a traditional bankers’ bank, which are typically closed off to retail deposits. Nexity offered bankers’ bank services, but also had a large deposit base on the Internet.
The failure of Nexity follows the 2009 failures of Silverton Bank, an Atlanta correspondent bank that ran afoul when as it moved away from its bankers’ bank roots, and Independent Bankers' Bank in Springfield, Ill., which was failed after significant write downs on securities.
Experts said that the bankers' bank model needs a major overhaul, but said that with so many of the lenders on the ropes, there could be a huge opportunity for AloStar. "Participation loans were a big part of correspondent banking, and I have had banks tell me 'I'll never buy another out-of-market participation loan as long as I live,' " said Walter Moeling, a partner at Bryan Cave in Atlanta. "So much of what made a correspondent bank profitable has changed, so AloStar's business model will be key."
Moeling added, "There is still a need for a lot of correspondent bank services, and many of the bankers' banks are still struggling and larger correspondents have retreated."
The necessary changes to the correspondent banking business are not lost on Gillfillan, a former Wells Fargo & Co. executive who was named AloStar's chairman and chief executive. "People are beginning to realize that loans that were used as a source of capital didn't really serve either side and proved to be very risky," Gillfillan said. "There are going to be some fundamental changes."
For instance, loans that would be used for capital building likely won't be a part of AloStar, but participation loans would be considered. In such cases, Gillfillan said AloStar would hold 50% of the loan, rather than selling the lender's interest down to zero.
Still, correspondent banking is not the only thing AloStar would offer.
Gillfillan and McGhee first set out to start a nationwide lender to small businesses with a model similar to a specialty finance company. After examining about 50 struggling banks, the partners came across Nexity and, despite its problems, believed it was a good fit for their intentions. The bank has a single office, but a robust back office to support its nationwide clients, including retail internet customers. The new bank should have loan production offices set up across the country in short order.
The men began their due diligence on Nexity in January 2010, but soon realized that the company would need to restructure its debt before a deal could happen. Nexity Financial filed for Chapter 11 bankruptcy reorganization in July in an attempt to cram down the debtholders. That process continues.
Meanwhile, Gillfillan and McGhee searched for capital. Ultimately, private-equity investors told them that they couldn't get comfortable with the portfolio outside of receivership. In November, Gillfillan said he started pursuing a new charter that would be granted specifically for the failure of Nexity. "The firms told us they liked our model tremendously and liked our management team, but were still reluctant," Gillfillan said. "We told the Nexity people it wasn't going to happen."
While failed bank deals are a competitive bid process, MacDonald said that familiarity always helps a bidder feel comfortable with the process. "It puts you in a much better position to bid," MacDonald said. "You have a superior knowledge that can really help."