Deposit Guaranty Builds on the Ruins of Texas Banks

Deposit Guaranty Bank didn’t exist 15 months ago. Now it has $600 million in assets and is a privately owned financial institution built mostly from the ruins of failed banks.

Deposit Guaranty is the sole holding of TexOp Bancshares Inc., which still has a fund of $30 million it may use to buy additional banks--enough capital to become a $1.5-billion-asset bank without additional financing.

Given the troubles of the Texas financial community, with banks and thrifts failing almost weekly--some resulting in multimillion-dollar federal bailouts--Deposit Guaranty is swimming against the tide.

Survival Plan

But Chairman Ron Steinhart and President Terry Kelley figure they have a sound plan to stay afloat.

“The mission is to build a profitable, healthy Texas banking organization and to take advantage of the problems, which are opportunities for somebody,” Kelley said.

“There was some management in place in various banks that had no capital, and some capital was available if you could find management.

“We felt like it was a rare opportunity if we could provide the capital and the management at a time when things were as they were.”

Timing was also important, he said, because he and Steinhart believed the state was returning to economic health.

“Five years ago we’d never have tried it,” Steinhart said, “and I don’t think three years from now we’d try it because the opportunity would have passed.”

Looking at Larger Banks

While the building blocks so far have generally been small, often one-branch institutions, Deposit Guaranty executives still toy with the idea of going after some large Texas banks that remain on the block.

Steinhart, a veteran of buying and selling Texas banks, admits to continuing interest in Texas American Bancshares Inc., one of the largest remaining problem banks.

Since it was formed Feb. 8, 1988, Deposit Guaranty has purchased 13 banks, 11 of them in federally assisted transactions that leave it with what Kelley calls “sterilized assets.”

The money came from a pool of private capital raised by Goldman, Sachs & Co.--$8.8 million to buy the first bank and then $62 million more to finance other purchases.

In its first 11 months of operation, Deposit Guaranty earned $1.27 million for its investors, the largest of which is the Harvard University endowment, with Goldman Sachs and brothers Robert and Richard Strauss as other principals, plus Steinhart and Kelley.

Deposit Guaranty has the advantage of obtaining its banks without the encumbrances of past problems and the burdens of Texas’ old banking laws, which until last year virtually blocked statewide banking.

High Costs

As a result of the old laws, many banks, even those owned by the same holding company, were operated separately within each county, leading to high management and real estate costs.

“We can look at what’s the most efficient way to operate a bank today and not be encumbered by an existing organization that may be operated in a more traditional basis, which may not be cost-effective and efficient in the future,” Steinhart said.

But more important is that all 11 of the failed banks have been purchased in closed bank transactions, meaning Deposit Guaranty is left with few of the obligations of the former bank. Even when Deposit Guaranty acquires troubled assets, it is protected from losses by federal regulators.

“We’re buying essentially with problems fully reserved, so that the large proportion of our people can direct their energies to building a bank and building a customer base,” Steinhart said.

Steinhart and Kelley see a highly competitive future in Texas banking, as problems are solved and the new owners--many of which are aggressive, out-of-state banks--turn their attention to the market.

“Initially they’re sorting out the good loans, the bad loans; who are the key people to keep and who are the key people to get rid of, those kind of things,” Kelley said. “One of these days that’ll all be history, and they’ll be focused on the market.”