Franklin Bank in Southfield, Mich., plans to sell off the business that pushed it into the red in the second quarter-office and medical equipment leasing.
The $500 million-asset bank declared a $632,000 loss for the quarter and added $2.7 million to its loan- and lease-loss reserves.
Franklin's board has voted to sell the $110 million lease portfolio as soon as possible.
Losses in the portfolio "have been unacceptably high in recent years," said Reed P. Dunn, Franklin's president and chief executive officer. "As in any other industry, if a product line becomes unprofitable, it's generally discontinued."
Franklin entered the leasing business in 1993. This year the bank called off a deal to sell $42 million of its lease portfolio to Icon Funding Corp. of Harrison, N.Y.
Mr. Dunn would not say why that deal fell through.
Michael M. Moran, a bank analyst with Roney Capital Markets, Detroit, said Franklin should sell the lease portfolio quickly. He said the bank does not have the expertise to manage the leases effectively.
"It was not one of their better decisions to get into this business in the first place," he said. "We would like to see them simply exit and rededicate their resources elsewhere."
The leasing debacle is not Franklin's first setback this year. Franklin said in January that it had been the victim of a check kiting scheme that cost it $2.8 million.
When the bank restated its 1997 earnings to reflect that loss, earnings dropped from $3.9 million, or $1.12 per share, to $2 million, or 59 cents per share.
In light of the latest announcement, patience among investors "has run pretty thin," Mr. Moran said.
From late Friday, when Franklin released its earnings, its stock had dropped 18% by midday Wednesday, to $13.25. Franklin's stock reached its 52-week high of $18.25 on February 26.
Mr. Moran said he expects Franklin's stock to trade in the $13 to $14 range until earnings improve. If Franklin cannot recover quickly and boost its share price, the bank may be forced to sell, Mr. Moran said.
Its branch network in southeast Michigan, which specializes in serving small and midsize businesses, would be an attractive addition for a larger local player, Mr. Moran said, adding that the bank could fetch as much as $20 per share.
A sale could present some delicate problems among the bank's staff and customers. Franklin is well known in its market for humorous radio ads that poke fun at megamergers, such as Banc One's deal with First Chicago NBD Corp. In one a ad, a military general complains that Franklin's marketplace was being "attacked" by larger banks headquartered outside of Michigan.
"Franklin's ad campaign presents some difficult emotional issues," Mr. Moran said.
