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Fed Up: A Texas Bank Is Calling It Quits
By ROBIN SIDEL
Main Street Bank lends most of its money to small businesses and is earning decent profits. But the Kingwood, Texas, bank is about to get out of the banking business.
In an extreme example of the frustration felt by many bankers as regulators toughen their oversight of the nation's financial institutions, Main Street's chairman, Thomas Depping, is expected to announce Wednesday that the 27-year-old bank will surrender its banking charter and sell its four branches to a nearby bank.
<cite>Michael Stravato for The Wall Street Journal</cite>
Texas turnaround: Thomas Depping, chairman of Main Street Bank, plans to give up the bank's charter.
Mr. Depping plans to set up a new lender that will operate beyond the reach of banking regulators—and the deposit-insurance safety net.
Backed by the private investment firm of Microsoft Corp. co-founder
Paul Allen, the company won't be able to call itself a bank, but it will be able to do business the way Mr. Depping wants.
"The regulatory environment makes it very difficult to do what we do," says Mr. Depping, who last summer saw his bank hit with an enforcement order from the Federal Deposit Insurance Corp.
A spokesman for the FDIC declined to comment on Main Street, a unit of closely held MS Financial Inc. Dan Frasier, director of corporate activities for the Texas Department of Banking, confirmed that Main Street is "working on the process of moving out of the state banking system," but declined to provide details.
Bankers have long complained about their overseers, but it is rare for a bank to basically close its doors aside from an acquisition or failure. Mr.
Depping blames the move on a tightening regulatory noose.
Regulators came under fire in the financial crisis for lax oversight that allowed financial institutions to dole out too much credit to unworthy borrowers. Some bank executives now complain that federal and state agencies have swung to the other extreme, poring over minute details of virtually every loan, including those to small businesses.
"The No. 1 complaint that we hear from community bankers is that they feel that regulators have gone one step too far and are choking off lending," says Paul Merski, chief economist at the Independent Community Bankers of America, a trade group that represents small banks.
Regulators defend their efforts, saying that intensive oversight is needed to prevent banks from taking too much risk and repeating the behavior that got the industry in trouble.
Mr. Depping has been on a collision course with regulators since 2009, when FDIC examiners began questioning the bank's large concentration of small-business loans. Nearly all of Main Street's $175 million loan portfolio has gone to customers like dentists, owners of fast-food franchises and delivery-truck drivers, who use the loans to purchase equipment. The bank's average loan size is $100,000 to customers who have less than $1 million in annual revenue, Mr. Depping says.
Mr. Depping says that Main Street's focus on small-business lending has sheltered the bank from much of the devastation that has swept the industry, including 385 bank failures since the start of 2008.
Main Street had profits of $1 million in the second quarter and wrote off 1.25% of its loans as uncollectible. That is below the industry's charge-off rate of 1.82% in the FDIC's data for the first quarter, the latest available. The bank has earned nearly $11 million in the past year.
In July 2010, the FDIC slapped Main Street with a 25-page order to boost its capital, strengthen its controls and bring in a new top executive.
Regulators also said the bank was putting too many eggs in one basket.
Mr. Depping says regulators wanted the bank to shrink its small-business lending to about 25% of the total loan portfolio, down from about 90%.
Mr. Depping says he explained to regulators that Main Street has focused on small-business lending since he bought the bank in 2004 with a group of investors. He says the bank makes credit decisions based on a combination of the borrower's personal-credit and business-credit histories, among other factors.
"We felt that servicing small business is something the country needs and that we're really good at it. I thought the model was working just fine," Mr. Depping says.
Main Street also was required to increase its capital cushion and prohibited from substantially expanding its balance sheet.
FDIC officials told the bank to file financial reports that "accurately reflect the financial condition of the Bank as of the reporting date," particularly regarding the money it set aside to cover loan losses.
The FDIC also ordered Main Street to shore up its lending guidelines so that loans are "supported by current credit information and collateral documentation, including lien searches and the perfection of security interests; have a defined and stated purpose; and have a predetermined and realistic repayment source and schedule," according to the order.
Main Street bolstered its capital levels by getting smaller. It sold a business and shrank its loan portfolio, actions that boosted its Tier 1 leverage ratio—a measure of capital as a proportion of assets—to 17.3% at June 30 from 9.5% a year earlier. It also brought in a new president.
Even so, soon after last July's order, Mr. Depping began exploring a transaction that would include the unusual step of surrendering his banking charter.
Mr. Depping's new company, called Ascentium Capital, will be backed by Vulcan and a group of investors led by an investment arm of Luther King Capital Management, based in Fort Worth, Texas.
The new entity won't be regulated and won't be able to offer federal deposit insurance—but doesn't want to attract deposits, Mr. Depping says. The new firm is being capitalized with $75 million of equity and a $250 million financing facility led by
UBS. Mr. Depping says he wants to ultimately increase the loan portfolio to $500 million.
The deal also calls for Green Bank, a unit of Houston-based Green Bancorp Inc., to acquire Main Street's four branches. Ascentium will acquire $150 million of Main Street's loans, with the rest going to Green.
Mr. Depping hopes the deal will close by October after receiving regulatory approvals and completing Main Street Bank's unwinding.
"It's a lot easier to become a bank than to get rid of your bank charter," he says.
Write to Robin Sidel at
robin.sidel@wsj.com
