Franklin Bank Corp. in Houston has just completed its largest acquisition ever, and its chief executive says it is not done buying Texas banks.
Though some analysts view the $5.3 billion-asset Franklin as a potential takeover target, president and CEO Anthony Nocella insisted last week that Franklin intends to be a buyer and wants to roll up banks in the $100 million- to $300 million-asset range that may be looking for exit strategies.
In an interview after a presentation at an investor conference in San Francisco, Mr. Nocella said that small banks are being pressured by the inverted yield curve. Those with older boards and management teams "are looking for a way out," he said.
"Many of those banks don't have a true economic value going forward," he said; " … they could make more money being sold, and they are starting to figure that out."
Franklin closed its purchase of the $540 million-asset First National Bank of Bryan on May 9. The deal, Franklin's 10th since being founded in 2001, gave it six more branches; it now has 45 in 17 Texas counties.
The deal also continues to transform Franklin's mortgage-heavy balance sheet toward one that is more bank-like.
In
Aside from its Texas branches, Franklin has mortgage operations nationwide and commercial loan offices in several cities outside Texas. Mr. Nocella said he expects commercial banking to account for 80% of the company's earnings this year, up from 60% last year.
Some analysts read the changes as signs that the management team is readying Franklin for a sale. Mr. Nocella and Franklin's chairman, Lewis S. Ranieri, led Bank United Corp. in Houston until the company was bought by Washington Mutual Inc. in 2001.
Though its mortgage portfolio is not a major selling point these days, its size and branch network could be attractive to larger banking companies.
"There are just not that many properties in Texas that have that kind of branch network. Yes, they may take a little bit of a discount because it is rural, but still that's a lot of locations," Daniel Bass, a managing director at Carson Medlin Co., a Houston investment bank, said Friday. "There is definitely some value there."
In an interview Thursday, Mr. Nocella said, "From time to time a number of people have talked to us" about selling. "We're still building our franchise," he added, however.
Brian Klock, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc., said Franklin's large mortgage portfolio would depress its valuation if it were to try to sell in the current environment.
"It's a tough time for valuations of those [mortgage] banks," he said, "so that part of Franklin's business is probably not at its optimal valuation right now. It would be a tough time to try to sell the whole franchise."
Mr. Nocella said plenty of opportunity remains for Franklin to consolidate community banks in Texas.
Nine of his company's 10 purchases have been negotiated, he said, and one was done at auction. None of the larger national banks and few Texas banks are competing for the small banks outside metropolitan markets that Franklin wants, he said, and that is helping keep prices down.
But Mr. Bass said the market is changing. Smaller banks are being encouraged by investment bankers to seek competitive bids, and he said he gets at least one call a month from bankers looking to "jump-start the de novo process" in urban markets by acquiring an outlying community bank.
"There's so much competition now in those properties. When they initially started there wasn't so much, but now there are so many groups that I get calls from that want to buy a rural bank and then branch into Houston, Dallas, Austin, so it's hard to find a cheap bank in Texas," Mr. Bass said.
Mr. Klock said that, even with more potential buyers, prices for small Texas banks stay reasonable because there are so many. In the "golden triangle" between Dallas-Fort Worth, Houston, and the Austin-San Antonio area "there are still a couple hundred banks that are potential targets, that could be acquired," he said.
