Texas Lender Details His Reluctant Move to Shadow Banking

Thomas Depping loves lending but had grown weary of crippling regulation.

The veteran lender found a simple solution. Depping, former chairman and chief executive of a Houston-area bank, voluntarily relinquished his charter in 2011 to form Ascentium Capital, a small-business lender that lets him keep doing what he loves without interference — and a one-size-fits-all approach — from folks in Washington.

Regulators "didn't understand our business and they didn't want to," Depping said.

"There's so much red tape and you find yourself running the bank to make regulators happy," he added. "I'm not sure it makes anything safer."

Having distance from bank regulation has been a boon to Depping and Ascentium in recent years. The company earned $14 million last year, and its total funded volume topped $1 billion in November. Originations should reach $630 million this year, representing a jaw-dropping 36% increase from 2014, and Ascentium is considering going public in the next year.

"I've been in this business a long time, and our results now are better than they've ever been," Depping said. "Our portfolio statistics are second to none."

Ascentium's success is noteworthy because it essentially relies on the same business plan as Main Street Bank, the Kingwood, Texas, bank Depping ran without incident for six years before regulators flagged its operation as being too risky.

There's nothing particularly complex about Ascentium's business model. It raises money from investors, including Luther King Management and Microsoft co-founder Paul Allen's Vulcan Capital, and lends it to a variety of small businesses around the country — funding everything from medical practices to trucking firms.

Loans average roughly $60,000, with very few exceeding $150,000, Depping said.

Ascentium packages many of its credits into securitizations. The senior classes of its 2012 and 2013 tranches are rated "AAA" by DBRS and "Aaa" by Moody's Investors Service, while the junior classes were upgraded earlier this year. Moody's has also lowered its cumulative net loss estimate for the securitizations to just 2%. A third securitization, consisting of $303 million of loans and leases, closed earlier this month.

Depping has made a career out of small-business lending. He was president of SunAmerica Financial Resources from 1991 to 1994 before founding First Sierra Financial. Depping sold First Sierra to American Express after his firm had originated more than $1 billion in small-business loans. A core group of lenders and executives have moved with Depping from stop to stop.

Main Street was a 20-year old community bank with about $36 million of assets when Depping's team bought it in 2004 and switched its focus to small-business lending. By early 2010, the bank had swelled to $442 million in assets, including a $384 million loan portfolio.

Regulators, who initially had no problems with the small-business loan concentration, eventually soured on the business model. Following a contentious examination, Main Street entered into a consent order with the Federal Deposit Insurance Corp. and the Texas Department of Banking in July 2010.

The bank was flagged for having a business model deemed "riskier than traditional banking concepts," Depping said in a press release issued soon after being hit with the regulatory order.

Main Street's performance ratios at the time indicated financial health. It was adequately capitalized, with a 9.84% equity-to-assets ratio, and ended up earning nearly $5 million in 2010. The ratio of nonperforming loans to total loans was just 0.52% around the time of the exam — significantly lower than the industry average for commercial banks.

The bank's Texas ratio — a measure of credit problems derived by dividing nonperforming assets by tangible common equity — was a scant 3.8%. Industry experts typically start to worry when a bank's Texas ratio hits 100%.

An FDIC spokesman declined to comment.

"Some people work better in a less-regulated environment," Texas Banking Commissioner Charles Cooper said. "I'm glad Mr. Depping's venture is doing well."

Regulators have long been concerned about banks that amass significant loan concentrations, said Dalvinder Singh, a professor at the University of Warwick School of Law in Coventry, England. He said that concerns arise when concentrations exceed 25% of total loans.

At Main Street, commercial loans made up 97% of total loans around the time of the exam.

"There were a number of banks with large concentrations that failed in the 1970s and 1980s," added Singh, who also serves as managing editor of the Journal of Banking Regulation. "That's when large exposure requirements were implemented."

Regulators' concern about loan concentrations heightened in the aftermath of the financial crisis, when 389 banks failed from 2009 to 2011.

"Some banks with very concentrated business models began to struggle and the regulators' view of concentration became much more negative," said Andrew Sandler, chairman and executive partner of BuckleySandler in Washington.

As regulators' concerns about concentrations mounted, they allowed their worries to overshadow meaningful analysis of each bank's financial strength, Sandler said. An overreaction "had the effect of forcing banks with difficulties to change, but it also damaged healthy banks by forcing virtually instantaneous change in successful business models," he said.

Main Street's order required it to increase its Tier 1 leverage ratio to 14% within seven months, capped annual growth at 10% and required the board to find a new chief executive.

Depping's team chose another path, buying the bank's lending platform and selling three branches, $168 million in deposits and $13 million in loans to Green Bancorp in Houston. Main Street was voluntarily shut down in November 2011.

Voluntary liquidations are rare, though Greystone Bank in Raleigh, N.C., willingly shut its doors a month after Main Street.

For Depping and his associates, their experience at First Sierra made turning Main Street into Ascentium an easy task. In less than five years, they have established a niche in the top tier of nonbank lenders.

Ascentium's appeal, Depping said, is speed and simplicity. For many loans, completing a one-page application is all that is required. Decisions come within hours with an efficiency that most bankers cannot easily match.

"We tried to do the same thing at the bank, but it was too cumbersome," Depping said. "For folks who have to go down to a bank [for a loan], it's a painful experience."

For all the trouble Main Street endured, Depping said he enjoyed his time there. "It was the tail end I wished I wouldn't have had to go through," he said.