We put out a comment this week in The Institutional Risk Analyst about the financial problems at Franklin Bancorp (NASDAQ:FBTX), the $5 billion asset TX state chartered bank which Lewis Ranieri helped to found. Our comment follows below.
A couple of questions occurred to me after writing this comment:
1) How is it possible that Ranieri & Co, who were experienced operators of banks, did not take action to reverse the dismal performance of this institution?;
2) Why did regulators allow FBTX to continue making acquisitions given the poor performance?; and,
3), How is it possible that this bank did so poorly in the bouyant TX banking market?
The other point to make is that analysts using very well-established techniques for fundamental analysis could have easily predicted this outcome. The poor ROA/ROE, the very high LGD, and the change in the WAM vs the peer group trend, all suggest an institution under stress.
This picture just does not make sense and lends credence, in our view, to reports that there may be interal controls problems at FBTX. We’ll see.
The Sad Tale of Lewis Ranieri and Franklin Bancorp The Institutional Risk Analyst May 22, 2008
It is a matter of faith among the risk management community that Lewis Ranieri is God – or at least knows God. But at the moment Ranieri, who is best known as one of the founders of structured finance, is not having a lot of fun.
The cause of the angst is Franklin Bancorp (NASDAQ:FBTX), the $5 billion asset TX state chartered bank which Ranieri and some of his cohorts started after the successful Bank United buy and build effort. News reports suggest that a combination of internal controls problems and asset quality issues are dragging the bank down.
The stock is trading < $1 vs. $21 a year ago and appears to be headed for a delisting, thus adding yet another name to the dozens of smaller banks delisted over the past year. Let’s look at the numbers and see what Ranieri and his team should have known and when.
FBTX has this distinction of being the largest unitary bank with the name “Franklin” in its title but also the worst performance. The bank has reported below peer asset returns for the past five years, at times significantly below peer. During 2007, FBTX almost returned to peer performance based on ROA, but then fell off the edge of the proverbial table and into loss in Q4 and thereby for all of 2007.
FBTX reported 23bp of default in 2007 with a Loss Given Default of nearly 100%. In Q1 2008, FBTX reported 22bp of default for an annualized run rate of 88bp. The bank reported a WAM of 4.84 years at the end of 2007, more than a standard deviation above peer, and a very low Exposure at Default of 23.3%, as calculated by The IRA Bank Monitor. At 707 basis points, the gross loan yield of FBTX is slightly below peer.
In terms of risk profile, the Economic Capital (“EC”) model in The IRA Bank Monitor assigns a ratio of EC to Tier One Risk Based Capital of 1.2:1. At the end of 2007, we calculated a RAROC for FBTX of 12.3%, which is actually low for institutions of this size. Based upon the IRA EC model, the preponderance of risk within FBTX appears to be in the bank’s investment book.
Given the above profile, it seems clear that Ranieri and his management team at FBTX were aware of the bank’s poor financial performance going back years. It appears that in the beginning of 2006, FBTX made a deliberate decision to extend duration by increasing the WAM of the bank’s portfolio, which now is 2x the 2.35 year WAM for the peer group.
Was this change in portfolio duration by FBTX an attempt to roll the dice and save the bank by betting on the direction of Fed interest rate policy? It’s hard to say from the regulatory data. But given the years of sub-peer financial performance and especially the nose bleed LGD on the bank’s loan portfolio (98% in Q1 2008), the one thing that Ranieri cannot say is that this dismal situation is a surprise.