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Fed Up: A bank Is Calling It Quits


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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.

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Michael Stravato for The Wall Street Journal

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.

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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%.

It sounds to me like the same people who declared big banks "to big to fail" are now declaring that this bank is "too good to succeed." This bank has a solid, simple formula for succeeding in a market where it isnt supposed to, according to regulators. They say that they are doing it to protect the industry, but it really seems to me that they are doing it because they want this bank to fail like all the other ones.

Its like if you have a child who isnt very athletic trying out for a little league baseball team . Yet during tryouts you see him doing much, much better than you thought he would. So what do you do? Pull him off the team, of course, and tell him that even though he was running just fine, you dont believe that he can actually run.

This is very similar to the actions that many bureaucrats take concerning success. If you didn't succeed because of something they did, either for you or against you, then your success didn't actually happen in their fabricated reality. If that play isn't in their playbook, then it must have been voodoo magic.

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Poor, poor banks. They've got it so tough.

How would you feel if you spent 7 years building a successful bank, and then had people who couldn't even shine your shoes properly tell you that unless you accept their failed method of conducting business then they'll make sure you lose all of your customers?

You say "banks" in your post, but this is an individual who (along with his individual employees and fellow investors) is having his rights taken away.

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It sounds to me like the same people who declared big banks "to big to fail" are now declaring that this bank is "too good to succeed." This bank has a solid, simple formula for succeeding in a market where it isnt supposed to, according to regulators. They say that they are doing it to protect the industry, but it really seems to me that they are doing it because they want this bank to fail like all the other ones.

Its like if you have a child who isnt very athletic trying out for a little league baseball team . Yet during tryouts you see him doing much, much better than you thought he would. So what do you do? Pull him off the team, of course, and tell him that even though he was running just fine, you dont believe that he can actually run.

This is very similar to the actions that many bureaucrats take concerning success. If you didn't succeed because of something they did, either for you or against you, then your success didn't actually happen in their fabricated reality. If that play isn't in their playbook, then it must have been voodoo magic.

you think they are just out to get them? Why would the federal government want a bank to fail that takes deposits that are FDIC insured? they make these regulations because they don't want these banks to fail. small business loans are risky. for a bank to have 90% of it's money in there is risky. Yes it has worked for them so far, but the government puts their FDIC insurance stamp on deposits there and has a vested interest for all of us. if they guy wants to go own a business that gives out small business loans then fine, have at it.

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How would you feel if you spent 7 years building a successful bank, and then had people who couldn't even shine your shoes properly tell you that unless you accept their failed method of conducting business then they'll make sure you lose all of your customers?

You say "banks" in your post, but this is an individual who (along with his individual employees and fellow investors) is having his rights taken away.

rights taken away? he gets to run his business as he chooses away from regulators. he doesn't have the right to have FDIC insured deposits.

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rights taken away? he gets to run his business as he chooses away from regulators. he doesn't have the right to have FDIC insured deposits.

He does now, but he also has to break apart what he spent 7 years building.

He has the right to conduct business in whatever manner he wants so long as he is not fraudulent or deceitful in any way. But by taking away FDIC support, the government is sponsoring his competition, and his customers will choose another business that has the FDIC subsidy behind it.

Instead of trying to coerce this bank into a business model that will destroy it, what the FDIC should be doing is learning what this guy is doing right.

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He does now, but he also has to break apart what he spent 7 years building.

He has the right to conduct business in whatever manner he wants so long as he is not fraudulent or deceitful in any way. But by taking away FDIC support, the government is sponsoring his competition, and his customers will choose another business that has the FDIC subsidy behind it.

Instead of trying to coerce this bank into a business model that will destroy it, what the FDIC should be doing is learning what this guy is doing right.

he doesn't have the right to FDIC support. if the government is going to guarantee the deposits to his "bank" then they have the right to ensure that the bank is run according to their regulations.

they aren't coercing anyone. all banks have to play by the same rules. the government isn't out to get this guy as has been suggested.

he gets to run his business the way he wants. why should you or I be forced to insure the deposits on his bank if he wants to have an extremely high level of risk.

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How would you feel if you spent 7 years building a successful bank, and then had people who couldn't even shine your shoes properly tell you that unless you accept their failed method of conducting business then they'll make sure you lose all of your customers?

You say "banks" in your post, but this is an individual who (along with his individual employees and fellow investors) is having his rights taken away.

No.

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he doesn't have the right to FDIC support. if the government is going to guarantee the deposits to his "bank" then they have the right to ensure that the bank is run according to their regulations.

they aren't coercing anyone. all banks have to play by the same rules. the government isn't out to get this guy as has been suggested.

he gets to run his business the way he wants. why should you or I be forced to insure the deposits on his bank if he wants to have an extremely high level of risk.

The way I see it, we are being forced to support banks that are failing, while our money is not giving that same level of support to the banks that are really succeeding on their own in this market. It would seem that the FDIC is trying to get banks to fail as opposed to insuring their success. This behavior is completely backwards from what they were intended to do.

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The way I see it, we are being forced to support banks that are failing, while our money is not giving that same level of support to the banks that are really succeeding on their own in this market. It would seem that the FDIC is trying to get banks to fail as opposed to insuring their success. This behavior is completely backwards from what they were intended to do.

No they aren't trying to get banks to fail. I don't want to go down that road, but I'll ask... for what purpose?

just b/c a bank is succeeding now doesn't mean they will or their practices are correct. a lot of banks were "succeeding" until the bubble burst. 90% of their money was in small business loans. that is taking a lot of risk with money that we, you and me, have to pay back if the bank fails.

again, and this fact still remains, he does not have the right to FDIC insurance. He can run his business now the way he wants to. if he makes a ton of money, great, but if he fails it's not on our backs.

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Correct, he is now. My reference there was to the FDIC requirements that were to be placed on his bank, which was already successful.

successful at that point. a lot of banks and businesses were successful until about 2/3rds of the way through 2008.

FDIC insurance is something that we all have to pay for. If a bank that takes deposits that are FDIC insured fails, all of us are the hook for those deposits. you, me, everyone. Wouldn't you want to government to ensure that the banks are being responsible with what is essentially our money in the event of bank failure?

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