As some companies clamor to get into banking, one group has decided to make a quiet exit.
ADB Bank, a $48 million-asset industrial loan company in Cedar City, Utah, last week invited its depositors to collect their money. The Leavitt Group, a premium finance company and the parent of ADB Bank, determined that it was time to shutter the five-year-old institution because new investors had no interest in running a bank holding company.
Leavitt's move contrasts sharply with some specialty finance companies' attempts to get into banking for the steady, inexpensive funding base that deposits provide. The uncertain regulatory environment appears to be clouding that picture for some firms.
"There is so much interest in getting into banking, but the impediments are shrinking the share of credit available through banks," said George Sutton, a partner with Jones Waldo and a former Utah Commissioner of Financial Institutions. "It ought to be the opposite of that."
Dane Leavitt, chairman of The Leavitt Group, said deposit-based funding has benefited the company. But now, his company is ready to ramp up its business, and the need for fresh capital outweighed the advantages of an inexpensive funding base.
The Leavitt Group is an organization of affiliated insurance agencies that also provides premium finance, meaning it lends to individuals and businesses to pay for insurance premiums.
"Simply put, for the foreseeable future, owning a bank prevents more opportunities than it provides, and so we are making this change," Leavitt said in a press release.
Still, shuttering ADB wasn't an easy decision, Leavitt said in an interview.
"It was not something we were hungry to do, but it was a necessity for our business," he said.
Leavitt is not closing ADB because of poor performance. In fact, the bank was profitable for the first six months of this year and for 2009.
As of June 30, ADB was exceedingly well capitalized and its noncurrent loans made up a mere 0.68% of total loans.
So, why not sell the bank rather than liquidate it? Some specialty finance firms have been trying to gain access to banks for years; for example, Mercantile Capital Corp. in Altamonte Springs, Fla., a financier specializing in making Small Business Administration-backed loans, sought a way into banking for most of 2008 and 2009. In August it found its entrance — agreeing to be purchased by a bank.
Yet while banking attorneys said ABD theoretically could have been sold, that would have been difficult to pull off.
"There is still a lot of interest. That has not gone away, but you can't get a change of control," Sutton said. "We told them they could try to find a buyer, but that it would be a lot quicker just to close it."
Sutton said heightened regulatory scrutiny makes it difficult to close any type of bank deal these days but that it is especially tough to negotiate deals with ILCs.
The Dodd-Frank Act places a three-year moratorium on all new ILCs and requires a study on their ownership by commercial companies.
That study is due to Congress within 18 months.
Such uncertainty surrounding ILCs would have made selling a complex proposition, said Terry Keating, a managing director at Amherst Partners, a Chicago investment banking firm.
"For specialty finance companies, owning a bank will always be tough," Keating said. "But right now, the fear of the unknown is great. If you know what to expect, you can plan your business around it."
Meanwhile, Leavitt said the company has struck a deal with a bank to fund its business going forward.
"Our cost of funds go up, but we are grateful for the banking relationship," Leavitt said.
Leavitt's success in garnering funding for its operations can be viewed as a sign of improving market conditions, Keating said.
"It has gotten a bit easier over the last few months," he said. "The receptivity to lend money has gotten markedly better. Bankers want to lend money."
