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Franklin American Mortgage Company – from $20 million a year to $2 billion in lending in only nine years

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Financial
Banking
Not Public

Franklin American Mortgage Company

501 Corporate Center Drive – Ste. 400
Franklin, TN 37067
Phone: 615-778-1001

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Dan Crockett
President and
Chief Executive Officer

Interview conducted by:
Walter Banks
Co-Publisher

CEOCFOinterviews.com
July 2002

Bio of CEO,
Daniel G. Crockett has been President and Chief Executive officer of Franklin American Mortgage Company since he purchased the company in September 1994. Crockett was hired as the first loan officer at the company, formerly known as Merchants Home Mortgage, in 1993 and promoted to Vice President of Production before acquiring the company 15 months after being hired. He facilitated growth from a small 5 employee mortgage broker operation to a 115 employee multi-faceted mortgage banker with three branches. He created relationships with the following and expanded them to their fullest potential: Department of Housing and Urban Development; the Department of Veterans Affairs; Fannie Mae; Freddie Mac; Ginnie Mae.

Major achievements of the company under the leadership of Daniel Crockett include reversing negative financial trends and turning the company into a profitable Inc. 500 institution with increased volume of 1400% over the past five years. He originated Conventional, Jumbo, FHA, and VA residential mortgage loans and initiated establishment of a wholesale table funding division.

Before joining Franklin American Mortgage Company, Daniel Crockett resided in Tokyo, Japan teaching English conversation and studying the Japanese language and business culture, from May 1991 to July 1991. From January 1992 to December 1992, he was a financial planner with J. H. SHOEMAKER & CO., INC., and participated in their Mentor program working directly with their corporate Vice President.

Daniel Crockett’s education includes a Bachelor’s degree in of Business Administration, which he received in 1991 from LAMBUTH UNIVERSITY, Jackson, Tennessee and is a graduate of the Mortgage Banking Association School of Mortgage Banking. His achievements include being an All American in both College Football and Baseball, becoming a Licensed Real Estate Agent in 1995, completing the Series 6 and 63 Securities Exams, and registration with the SEC and NASD. Affiliations achieved from 1995 to 2002 are Mortgage Bankers Association of America, National Association of Mortgage Brokers, Tennessee Mortgage Bankers Association and Tennessee Association of Mortgage Brokers.

Company Profile:
Franklin American Mortgage Company (FAMC), a privately-held mortgage banking firm located in Franklin, Tennessee, is a full-service professional mortgage banker licensed to provide residential mortgages in more than 25 states. FAMC, which provides a host of diverse, flexible mortgage packages for customers with a variety of backgrounds and needs, is committed to helping families and individuals achieve the dream of home ownership.

An emerging leader in the mortgage industry, Franklin American Mortgage Company is fast becoming a preferred lender for consumers and mortgage professionals across the country. They have created a new Correspondent Lending division, designed to service small to mid-sized lenders across the nation. The division will harness FAMC’s growing national presence to provide high-quality services and products to these institutions and their customers. This will help smaller lenders compete with larger “mega banks” in an increasingly tight market.

FAMC offers borrowers, brokers and lenders the strength and security of a forward-thinking national mortgage company, dedicated to remaining an industry trendsetter. FAMC truly values its relationship with each customer and mortgage professional they work with, maintaining a company tradition of responsiveness and personalized service characteristic of a much smaller organization. This philosophy has enabled FAMC to become one of the fastest growing mortgage bankers in the nation.

Franklin American Mortgage Company has offices in the Tennessee cities of Franklin, Jackson and Johnson City, and in Greenville, South Carolina and Irving, Texas. The company is FHA Direct Endorsed, VA Automatic, an LAPP authority and a Fannie Mae, Freddie Mac and Ginnie Mae Approved seller/servicer.

CEOCFOinterviews: Mr. Crockett, please give us a brief history of Franklin American Mortgage.

Mr. Crockett: “We were originally incorporated in May of 1993, as a mortgage broker under the name of Merchants Home Mortgage. I began my work here in July of 1993, and was the first loan officer hired by the company, along with serving as the fourth employee of the start-up at the time.

In September of 1994, I acquired the company from the original parent. At that time, it was struggling financially and was not even a “company”. We started with five employees, grossing less than half-a-million dollars in revenue, and $20 million in total lending volume; these numbers are very small.

We began to focus on growth and I helped the company move in some directions that it had not been going in at that point. We incorporated and started a subsidiary, our wholesale lending division, under the name of Franklin American Mortgage. This name change, from Merchants Home Mortgage to Franklin American Mortgage, occurred in February of 1994, prior to my purchase of the company. I changed the name due to the tainted view of the original company within the community, allowing Franklin American Mortgage to have a new start.”

”In August of 1995, we started what today is our largest division—Wholesale Operating Division, which involves buying loans from mortgage brokers. As our clients, they deal with the public, take the application, process the file, and send it to us. We then underwrite and fund it, and from that point, it becomes our asset. This type of purchasing is how we have achieved the majority of our growth.

In August of 2001, we started our third division—Correspondent Lending Division. We buy closed loans from other mortgage bankers and banks. This is an edge for us and we look forward to it providing additional growth as we move forward, enhancing our ability to compete and diversify ourselves in the market place among the industry of mortgage banking. That concludes the story of Franklin American Mortgage from a macro standpoint.”

CEOCFOinterviews: What would you say excites you the most about Franklin American Mortgage?

Mr. Crockett: “The thing that is most exciting is to have started at $20 million a year and to have grown to $2 billion in lending in only nine years. It is more difficult to construct and build a platform from $20 million to $2 billion, than it is to go from $2 billion to 10 billion. Although we have been fortunate and have done profitable things as an organization, I think the future of our company is ahead of us.

With the addition of new leadership in our Correspondent Division on the operation side of our company and the scale we are able to achieve now that we are larger and on the radar screen, there is a lot of value that we can attack and procure in the market place. We will benefit from those opportunities by becoming even more competitive. We will add some of the value we are going to attain in the market place back to our product and price, continue to grow our market share, and enhance our bottom line with it as well. As I said before, I feel our future is still ahead of us-- there are many things yet to be done.”

CEOCFOinterviews: Looking at the success of your Wholesale Division, do you think that the Correspondent platform will do equally as well?

Mr. Crockett: “Yes, I believe that long-term the Correspondent Division will be our largest volume producing operation. They had it a bit easier, from the bottom-line standpoint; I think they will be profitable immediately. They’ve profited somewhat already, but we previously had the infrastructure in place, the capital equipment, requirements and office equipment in place.

Because we had the capacity from an operational stand-point internally to bring those people in and enhance our ability to generate revenue from a different sector, all we had to do was to create the strategy, hire the staff, and go to work. From a revenue stand-point, I don’t know whether they will achieve the numbers that our Wholesale Division will, given that the gross margin in that business is any where from 50-75% less than a gross margin on the wholesale side. It is a volume-driven business, however, I believe they will be very successful and provide a tremendous amount of growth to our bottom-line as we move forward.”

CEOCFOinterviews: What made you venture into correspondent lending, and can you explain Correspondent Lending?

Mr. Crockett: “Correspondent Lending is where we acquire a closed loan, a finished product; we make the credit decision and fund the loan ourselves, therefore assuming more risk.

On the Correspondent side, we spread the risk more because we are dealing with other banks and mortgage bankers with a minimum of a 250 thousand dollar net worth on one side, and a minimum of a million dollar net-worth if they are going to do government lending and under-write those loans themselves. We are able to spread some of the risk because the clientele there is more astute and solid financially. Therefore, they can absorb some of the losses that come from lending.”

”We purchase the finished product and acquire the asset after the majority of the work is done, and from our standpoint, the operational cost to procure that loan is much cheaper for us. On the Wholesale side, we under-write, fund, and do many things that we do not do on the Correspondent side, but then again the margins are much thinner.

We are not going out and buying loan products from the Bank of America, Wells Fargo or Chase. We are buying from the regional and small local banks, public companies, private banks, and some private mortgage bankers that are anywhere from half our size to one-twentieth of our size. A real niche occurs for us because the “big players” are not going after our clients, they want to buy loans from companies that are doing 2 and 3 billion dollars a year like us, rather than “Joe’s local bank” down the street who is doing 100 million dollars a year in lending.

Our clients get personalized service and we make them feel important valuable—they are valuable to us, as opposed to a larger competitor that does 50-75 billion dollars a year in lending—a hundred million dollar a year client for them is not important as it is for us. From a service standpoint, we can provide a lot of value to our competitors who are much larger than us.”

CEOCFOinterviews: What gives you the advantage of purchasing these loans over competitors that might have similar designs?

Mr. Crockett: “From a capacity standpoint, we push our people to perform 15-20% above average to the industry standard. We hire very good people and there is no one in the organization that has not had an incentive program or bonus plan. That provides value and will provide value to their life if they perform at these levels.

We are a young management team and very involved in technology; our systems are advanced. The first reason we are able to compete though we are not so large is because of our operating capacities and our ability to produce and perform above average on the operation side.”

”We also do not have the capital infrastructure, the overhead, and the bureaucratic levels of management that our competitors do, because we are very “hands on” in our leadership team. We do not have excess capacity in administration operations or production. Because we are efficient, pay attention to our expenses, and perform as near to 100% capacity at all times, we are able to achieve profitability levels we need to. Furthermore, we do not need to procure the most excessive gross margin in order to get there, making us even more competitive.

The third reason we can compete is our service. We provide services our competitors cannot because they are larger and have multi layers of management, and because there is not much focus from upper levels in the client base. We seek to be focused on our client base; we serve our clients—teach them to process loans, help them to understand HUD, FHA, and VA lending, along with providing them with mortgage banker service.”

CEOCFOinterviews: You then work strongly with your clients.

Mr. Crockett: “Absolutely! We work to achieve a partnership with our clients. Many people talk about that but very few people affect that.”

CEOCFOinterviews: You have many reps working out of their homes; is that a trend or is it just something you find prudent?

Mr. Crockett: “I think it is pretty basic. Wholesale and Correspondent is what we call third party lending. The sales force of third party lenders is going to be remotely located because on the wholesale side, they are covering anywhere from half of a major city the size of Chicago, to a two-and- a-half state territory.

On the correspondent side, it is more regionalized. When covering that kind of territory, you are traveling a lot. If you are near an operating center, it can be a benefit, but if not, it is inconvenient. It is not a competitive disadvantage to have them working out of their home because they are not really office people.”

CEOCFOinterviews: Do you see that as something that you will implement in your Correspondent Division?

Mr. Crockett: “That is correct. We will continue to do that on the Correspondent side, along with continuing the Regional. We may have two reps in Dallas/Fort Worth and one rep on the wholesale side that will cover Tennessee, Kentucky and North Alabama. On the Correspondent side, one rep would cover the entire southeast, because you are dealing with a smaller, condensed market place as opposed to Wholesale with numerous companies in one particular area you are covering.”

CEOCFOinterviews: In what regions do you market your business?

Mr. Crockett: “We are mainly in the southeast and southwest. Our largest presence is in the southeast, southwest and mid-west. Our market share potential, even in those areas, is ahead of us, especially in the Correspondent Division. I am also confident we will continue to become more competitive on the Wholesale side, and grow our market share in those areas.”

CEOCFOinterviews: How much market share do you have currently in those areas?

Mr. Crockett: “It is probably less that one half of 1% collectively. We might be at 3-5% in Texas for example, on the wholesale side. Collectively if you measure the capacity and productivity of those areas, and measured our volume as opposed to the potential of the territory, our share is less that one half of 1%.”

CEOCFOinterviews: Will future growth come by future penetration into your current markets or by expanding markets?

Mr. Crockett: “I think both; we are going to continue to penetrate the markets we have been in. We have been in business for nine years, and still are an immature company. Half of the sales force has been with us for less than two years. We will certainly grow through market penetration and through expanding our markets as well.”

CEOCFOinterviews: Do you see yourselves as becoming nationwide company?

Mr. Crockett: “Absolutely! That is what we are working towards. Year in and year out, we are arriving in more territories and expanding our horizons one day at a time. In a few more years, we are going to be there. It is very exiting.”

CEOCFOinterviews: Do you feel you have the cash and/or credit to go forward?

Mr. Crockett: “Yes, generally speaking we have a significant net-worth and a strong equity position in the corporation. We have little to no debt; our long-term lease obligations are limited.

We could liquidate the company tomorrow and walk away with a significant amount of money-- we are in sound shape financially. When you are a privately held company as we are, with very little debt and very little capital and infusion to start with, cash flow can always be a challenge, especially when you grow as we have. However, we have managed very well and our cash position currently is stronger than ever. I am hoping that our days of struggling with millions in cash are behind us, but if we grow another hundred percent in the next twelve months, I am sure we will have those challenges again.

This is a cash-intense business; we are a lending institution. Financially speaking, we are a very sound and profitable company. I feel very confident that we will continue to be in the near future.”

CEOCFOinterviews: In closing, what point would you like to get across to the business community?

Mr. Crockett: “I think it is very important first and foremost, to have a very defined vision. We have grown and built our executive team and established strong leadership-- a word we promote heavily. We are not big on “management” and “supervisor.” If we have employees who need to be managed and supervised, we ask that they go and find employment elsewhere. I want my people to lead and I want their people to want to be led and to perform better than average. We push our people each day to work on improving in everything they do as a person and a professional and in their spirit—that is what we promote.

Leadership is important, and it all starts with the vision from the executive. The vision all the way from dress code to what the business strategy is going to be. We are “old school” here, we wear suit and tie every day and professional dress for the ladies. We are not casual, we do not have casual days and we will not have casual days as long as I am the President of this company. I do not think it promotes a productive atmosphere, especially if you are a financial institution or a white-collar driven product company. Our clients and our customers appreciate that when they come to make the largest purchase of their life, our employees greet them in a business suit or a professional dress. It makes them feel safe, comfortable and confident in the person with whom they are working.”

”The CEO needs to have a clear vision and impart that vision—that is what is important. Along with the clear vision, hiring the right person to help you execute and implement your plan is vital. For us as senior executives at Franklin American, our purpose is to build our systems and equip our people to go out in the market place and compete and win the game in mortgage banking. It is our job to make sure they have the tools to do that.

Third, make sure you pay attention to administrative needs. Many fast-growing companies fail to spend money on non-revenue generating individuals. Whether it is quality control, accounting, or other areas, it is very important to make that sacrifice early on and invest in a good CEO or COO to make sure your business is managed appropriately from an internal operating standpoint.”

CEOCFOinterviews: What about logistics?

Mr. Crockett: “Logistics are important; if you don’t know what you are selling and what your margin needs to be on what you are selling, you obviously can’t make money. In addition, I am a Christian, and the most important thing for me is that I am a man of character and integrity. I try to be a man that is pleasing to God-- that is my number one focus. The reason that we have been successful is that we have been blessed, and we have been able to procure our blessings from the Lord onto the company and He has seen fit for us to be successful. From a practical standpoint, I have spoken of the things I think are important.”

CEOCFOinterviews: Would you invite major corporations who are building facilities to contact you?

Mr. Crockett: “Yes. Our Correspondent Lending Division helps facilitate the development of larger companies who are interested in lending, on their behalf. Usually they would go out, acquire a platform, and then bring in their own people.

Strategically, it is very important to be defined about what you are doing, we are a fairly “vanilla” company; we are a diversified institution within what we are going after. What we are after is Fannie Mae, Freddie Mac, and HUD lending, the core of what we do.

We are not trying to be all things to all people, yet we are not afraid to compete, create, and add demanded products to our menu that are competitively and consistently priced. If there were a way to recreate the mortgage banking business, someone would have done it before I did. It is important that whatever business you go into, you promote an atmosphere and attitude of competition in which you are not afraid to compete. We are not afraid of the “Chase Manhattans” of the world. We compete on one hand and on the other hand, we do business with them.”

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