Patriot Bank can't spend its capital fast enough.
The Houston bank, which opened in March of last year with $23 million of assets, had $382 million as of last week. Now it is wooing two banks in the Dallas market, where it already has a branch, and eyeing targets in Austin and San Antonio.
"We think there is a niche in Texas as consolidation continues to occur for smaller banks to become real players," said Don Ellis, Patriot's founder, chairman, and chief executive officer.
The start-up's secret weapon is capital. It has already raised $38 million and plans to raise $30 million more next spring. Having so much capital gives Patriot two things: large loan limits and some slack from regulators.
"Our average-size relationship is about $5 million to $5.5 million," Mr. Ellis said. "That means 70% to 80% of small community banks can't compete. I can play in the backyards of Frost and Amegy."
(Frost Bank is a unit of Cullen/Frost Bankers Inc. in San Antonio. Amegy Bank of Houston is owned by Zions Bancorp. in Salt Lake City.)
Randall James, the commissioner of the Texas Department of Banking, said a large capital cushion gives a bank a margin for error.
"It provides an opportunity to the institution and to the management to have a mistake or two without completely impacting the institution's overall health," he said.
After working for eight years for BB&T Corp. in the Washington area, Mr. Ellis moved to Texas in 2002 to run Union Planters Bank's operations there. When Regions Financial Corp. acquired Union Planters Corp. in 2004, Mr. Ellis asked investment bankers for help in buying a bank. None of them took him seriously, he said, so he decided to find a bank himself.
One of his investors, Bill York, sent a mass mailing to small banks, asking if they would like to sell.
First State Bank in Honey Grove, 90 miles northeast of Dallas, responded, and the investor group spent $3 million to buy the $17 million-asset bank. The investors moved it to Houston and renamed it Patriot Bank.
After raising an initial $23 million, Patriot raised $15 million more in a second stock offering in April. A third offering scheduled for next spring is expected to generate another $30 million.
"We will soon run out of capital with our current growth curve," Mr. Ellis said. "We need more."
A Honey Grove branch remains open, and when the $14 million-asset Farmers and Merchants State Bank in nearby Ladonia went up for sale, Patriot bought it, too. The bank has not made any other acquisitions. In addition to Dallas, Houston, Honey Grove, Ladonia, it recently opened a branch in Friendswood, a town southeast of Houston. Mr. Ellis said Patriot plans to add branches in Dallas and Houston this year and next.
Raising so much capital has its downside. Patriot's 8.35% return on equity is well below the average of 14.65% for banks with $300 million to $500 million of assets, according to the Federal Deposit Insurance Corp.
But that can be explained partly by the bank's explosive growth. As of June 30, Patriot was in the top 1% in growth among banks in the $100 million-$300 million asset group, according to the FDIC.
Mr. Ellis said attributed the growth to experienced lenders who have a financial incentive to succeed.
"We did something very unusual," he said. "One reason we've grown fast and performed well is we set aside 8% of total capital and gave every person a material position with stock set aside for them. It encouraged them to do the right things and make good loans, because it's their own money."
During its first few months of operation, Patriot's average expenses topped $200,000 a month, including $155,000 of payroll costs.
The outgoing cash in the first few months "was a worrisome thought," Mr. Ellis said. "But we had so many guys that were so good that by July of last year we were already at $91 million of assets in total operation. By Dec. 31 we had $181.6 million in total assets."
Patriot broke even just five months after opening its doors, he said.
Dan Bass, the managing director of Carson Medlin Co. Investment Bankers in Houston, keeps a close eye on the 27 banks operating in Houston. He said several industry watchers have wondered if Patriot has been selective enough with its loans, but he also said that FDIC data shows Patriot's loan quality remains solid.
Mr. Ellis "sees a lot more loans than most banks, because his lenders are aggressive," Mr. Bass said. "If you are seeing all of them, then you can pick which ones you want."
According to the FDIC, Patriot's ratio of noncurrent to total loans is 0.34%; the average for banks its size is 0.54%.
To fund its loan growth, Patriot offers high-rate certificates of deposit, including a 5.5% 12-month CD for customers who open a checking account as well.
Bankrate.com shows the average 12-month CD rate in Texas is 5.01%, just above the national average of 4.9%. Patriot had $285 million of deposits on June 30, up 477% from a year earlier, according to the FDIC. Interest-bearing deposits made up about 85% of the total.
"When you are a small bank, you have to have something to get people in the door," Mr. Ellis said. "You can't expect to throw out a bunch of image advertising and expect them to come to you."
