Don’t be fooled by Main Street Bank’s conventional name.
The Kingwood, Tex., bank has nearly quadrupled its assets in the last two and a half years not by targeting local customers, but by financing equipment leases to health clubs, medical clinics, restaurants, and other small businesses across the country.
A traditional but sleepy community bank until late 2004, Main Street now has $120 million of assets, and equipment leasing accounts for roughly 90% of its business. It originates $10 million of leases a month, and with another round of capital-raising nearly completed, it expects this year’s originations to increase 60% to 70% over last year.
Perhaps more significantly, Main Street is making money again. It earned $274,000 in the first quarter, its first profitable one since it changed its strategy, and at a time when other banks are struggling to maintain their net interest margins, Main Street has reported increased margins in each of the last two years.
Many banks originate leases to diversify their portfolios and income streams, but Main Street, a subsidiary of MS Financial Inc., is believed to be the only community bank specializing in the niche.
The 23-year-old bank was recapitalized with $21 million in November 2004. At that time asset growth had been flat for years, and many of its loans were of such poor quality that they later had to be charged off.
The roughly 200 investors included Tom Depping, who founded First Sierra Financial Inc., a Houston leasing company, in 1994, sold it to American Express Co. in 2001, and is now Main Street’s chairman and chief executive officer.
In an interview last week, Mr. Depping said he and other investors, many of them former colleagues at First Sierra, had wanted to get back in the leasing business but preferred to do so from a banking platform, where funding is more consistent. First Sierra typically borrowed from banks to fund its leasing operations, and the rates it charged and paid were constantly in flux, he said.
The group’s return to the leasing business is “working extremely well,” Mr. Depping said. “We’ve paired it with a Texas bank whose branches generate low-rate deposits for us.”
By Dec. 31, Main Street’s deposits had nearly tripled from two years earlier, and brokered deposits accounted for the bulk of that growth. It had $33 million of brokered deposits at Dec. 31, versus zero just two years earlier.
Still, its cost of funds at Dec. 31 was 2.95%, only slightly higher than the industry average. Last year its net interest margin was 5.84%, versus the 4.28% average for banks with $100 million to $300 million of assets, according to Federal Deposit Insurance Corp. data.
And Main Street has not abandoned the community bank model. In the two-year period that ended Dec. 31, it added roughly $16 million of core deposits, according to FDIC figures, mainly by advertising aggressively in Kingwood, an affluent Houston suburb. In the two years before that, under a different management team, core deposits increased by less than $4 million.
In fact, the current management team has been so pleased with deposit growth that Mr. Depping said the bank, which has three branches, is considering adding more and perhaps even acquiring a small bank in the future.
Main Street has received commitments for another $10 million of capital, and Mr. Depping said it would use the funds to continue doing what it has been doing — for now. He acknowledged that annual loan growth of 60% to 70% is not sustainable, and that within a few years would like that figure to be a more manageable 20% to 30%.
The management team is a mix of experienced leasing executives and traditional bankers, like J.M. “Mike” Hofmann, the bank’s president, who has 38 years of banking experience and worked with Mr. Depping at First Sierra.
“It’s a really nice business model,” Mr. Hofmann said. “We have two kinds of people in the bank: traditional bankers and people who are experts in leasing. So we cross both industries.”
The leases cover 100% of the value of the equipment, meaning by the end of the lease, the payments have covered the entire cost of the equipment. The lessee then usually purchases the equipment for $1, and the bank does not end up with property on its balance sheet.
Main Street lends on equipment such as treadmills, telephone systems, panel trucks, and global positioning systems. Its customers include Arby’s, Sonic, KFC, and Dairy Queen franchisees.
Main Street does not keep all the leases it makes in its portfolio, though. It typically sells about 20% of what it originates to other financial institutions, which are attracted to the high margin. The bank still services those leases in its operations center, and it makes some traditional loans.
Geri Forehand, the director of strategic services for Brintech Inc., a community bank consulting unit of the $5.9 billion-asset United Community Bank of Blairsville, Ga., said that even though the higher margin makes leasing very attractive, the specialized skill set needed keeps a lot of banks out of the business.
“There is a good deal of interest in leasing, because of demand by the lessee, and the financial structure is attractive, because of the margins you can create through leasing,” he said. “It’s a very attractive opportunity in light of the yield curve, but the expertise needed is quite substantial.”
