No Regrets

No Regrets

A few years ago, we commented on the case of a Texas banker who had finally had his fill of regulators beating him down for the act of engaging in a legitimate and profitable line of business (small business lending) and who turned in his charter and became the love that dares not speak its name (but we will): “A nonbank.”

Not surprisingly, the nonbank is doing just fine, thanks for asking (paid subscription required).

Such cases have been rare up to this point.
Such cases have been rare up to this point.

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.

This from a bank whose business model was labeled by the FDIC as riskier than traditional banking, so risky that the regulator hit the bank with an enforcement order. Yet, here is the successor, making money hand over fist in an economy that is hardly pre-crash robust.

As experts in the linked article note, “concentration” causes regulators’ heartburn. That’s because many of the community banks that failed in the last downturn had concentrated on commercial real estate lending, especially acquisition and development lending. When the economy hit the skids and real estate values plummeted, many of them bit the dust. Nevertheless, single-minded discouragement of asset concentration fails to account for the fact that some management teams not only can “concentrate” on a line of business and manage their risks appropriately, but their laser-like focus and degree of sophistication on a specific area could very well mean that an attempt to “diversify” into other areas might increase, not decrease the risk.

We wondered whether the “take-this-charter-and-shove-it” approach might gain a little traction. It does not appear to have done so. Still, there’s at least one Texas banker, and a group of savvy investors, who are pleased as punch to be free from second-guessing by folks whose business acumen wouldn’t power a cockroach on a popsicle stick one revolution around the inside of a tomato can.

Texas Banking Commissioner Chuck Cooper put it nicely.

“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.”

So are we.

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