What the Brief Life of CFG Community Bank Means for Banking

Capital Funding Group (CFG) had a brief taste of banking, and that was enough.

The looming challenge of Basel III prompted the health-care financing company to exit banking just four years after its purchase of the then-struggling AmericasBank in Maryland.

Capital Funding's recent decision to sell its $478 million-asset bank, which had been renamed CFG Community Bank, is emblematic of a larger trend of companies that are scaling back operations — or getting out of banking completely — in response to tighter regulation.

Diversified firms like the Baltimore-based Capital Funding "are focusing on their primary business," says David Danielson, a managing director at Ambassador Financial Group who advised the buyer in the deal. "When you get pulled into industries beyond your core that are regulated, you either better specialize in it or maybe separation is a better business decision."

For years, Capital Funding, in Baltimore, founded by Jack Dwyer in 1993, has specialized in using loans from the U.S. Department of Housing and Urban Development and the Federal Housing Administration to finance nursing homes.

Like a lot of nonbanks even today, Capital Funding found the allure of low-cost funding that banks offer hard to resist. It bought AmericasBank to draw on its deposits to fund bridge loans to assisted-living facilities and nursing homes.

The banking venture had paid off until now, executives say. Capital Funding injected more than $34 million into CFG Community Bank, which turned a profit every period since the fourth quarter of 2009, according to data from the Federal Deposit Insurance Corp. A 2011 Federal Reserve Board consent order related to the bank's corporate governance and management structure has done little to slow down the bank, which earned $17.2 million through Sept. 30.

But with Basel III's new capital requirements set to take effect next year, Capital Funding realized it would have to give up its bank, according to Chief Executive Dan Baird. The new regulation imposes strict limits on the amount of mortgage servicing rights companies can count as Tier 1 capital, he says.

"Our mortgage servicing rights are a significant portion of our capital," Baird says. "We'd otherwise be undercapitalized."

In October, Capital Funding found a buyer. MVB Financial (MBVF) in Fairmont, W.Va., agreed to pay roughly $30 million in cash and stock for CFG Community Bank, which is in Luthersville, Md. The deal is set to close in the first quarter.

Capital Funding plans to return its focus to health-care financing while maintaining a relationship with MVB, according to a press release issued by MVB in late October.

Its exit from the banking industry is an increasingly familiar story, Danielson says. Tighter regulation in the aftermath of the financial crisis has compelled many companies to simplify their operations.

Several high-profile companies have already sold their banking units while opting to stay in a different financial business. The Dodd-Frank Act prompted Shelter Insurance in Columbia, Mo., to exit banking. Life insurance company Ameritas Mutual Holding in Lincoln, Neb., announced plans sell its Virginia subsidiary, Acacia Federal Savings Bank, to Stifel Financial Corp. (SF) in St. Louis in July.

H&R Block also tried to sell its bank unit to Republic Bancorp (RBCAA) in Louisville, Ky., in July, but the deal collapsed as federal regulators reportedly challenged Republic's move to combine banking and tax businesses. And several years ago, a wave of insurance companies including MetLife, Hartford Financial and Prudential Financial sold off their banking units in the face of increased compliance pressures from Dodd-Frank and other regulation.

Danielson predicts that more companies will give up their banks "as Basel III becomes more of a reality and everyone prepares for that implementation." Most Basel III provisions are set to take effect Jan. 1.