Alabama's first online-only bank, Nexity Financial Corp., is facing deep financial troubles, and filed for Chapter 11 bankruptcy protection last Thursday. The Birmingham-based bank faced waves of bad loans. At the end of last year, 22 percent of its loans were not being paid as agreed. According to the Federal Deposit Insurance Corporation, the average bad loan rate in Alabama for commercial banks is 5.4 percent.

Birmingham Chapter 11 bankruptcy attorneys noted that the filing included a pre-packaged plan, meaning repayment terms have already been agreed to by a number of creditors. Nexity is hoping for a final court hearing on the plan next month.

The company says that customers should notice no...

difference in operations. Depositors are protected by FDIC insurance.

One observer is sceptical of the plan. Tony Plath, a banking professor at the University of North Carolina Charlotte, has said that the bankruptcy of a holding company of an operating bank is a strange concept. He feels regulators will not be impressed by a weak bank operating under orders to improve its capital, and using some of that capital to pay investors.

Plath said, "I'm not buying it. You can't bail out your investors when the bank itself is at risk. The regulators will be all over this."

When Nexity opened in 1999, it seemed like a sure success. The bank saved on expenses by foregoing branch offices. Problems arrived in 2008. Nexity had partnered on home construction loans with small banks throughout the country. When the housing market went bad, construction companies failed to make payments.

  • Source: Birmingham News "Nexity files for bankruptcy; State's first Internet-only bank" July 23, 2010