Franklin Financial's Restructuring Work Pays Off With A Good Buyout Offer

In doing some prep work ahead of earnings, I’d flagged Franklin Financial Network (FSB) as a name to cover given what I thought would be an increasing likelihood of a buyout as management cleaned up and repositioned the balance sheet. Turns out that was the right assumption, as Franklin Financial announced in conjunction with fourth quarter earnings that it had accepted a buyout offer from FB Financial (FBK), a fellow Tennessee-based bank company.

I think Franklin Financial shareholders are getting a pretty good deal here. Even though FB Financial shares have sold off a bit, the approximately $38/share effective deal price as of this writing is about 1.4x tangible book value – a small premium to the highest ROTCE Franklin has posted in recent years and a hefty premium to the current financial performance. For those investors who don’t want to sell out, FB Financial isn’t a bad bank, though I don’t see the shares trading at a significant discount today unless management can really work some synergy magic with Franklin.

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Franklin Financial's Restructuring Work Pays Off With A Good Buyout Offer

Fulton Financial Still Floundering

It looks like the struggle for Fulton Financial (FULT) shares to find some traction is going to go on a little longer. Investors were already a little impatient with the slow progress in resolving the BSA/AML consent orders that have prevented the bank from consolidating its charters and participating in M&A, but now they also have to digest a sizable fraud-related loss and ongoing sluggishness in core lending growth.

Although the potential for better long-term results is certainly here, the shares have already been reflecting that potential for some time, and I believe the lack of execution on that potential goes a long way toward explaining why the shares have not only lagged regional bank ETFs, but peers (in terms of asset size) like Western Alliance (WAL), Chemical Financial (CHFC), Old National (ONB), United Bancshares (UBOH), and UMB (UMBF) on a year-to-date, one-year, and two-year basis.

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Fulton Financial Still Floundering

Franklin Financial Wedged Between A Good Market And Challenged Funding

For Tennessee’s Franklin Financial (FSB), it is the best of times and the worst of times. Credit quality is excellent, and Nashville remains an exceptionally attractive market for loan growth. On the flip side, deposit costs are rising quickly, and Franklin Financial has a relatively poor mix of core deposits, making M&A seemingly all but obligatory if management really wants to maximize the potential of this upswing.

Valuation is an interesting discussion. Franklin Financial looks priced for low double-digit returns, which is good but not exceptional among small banks, and the company’s recent struggles to grow have certainly weighed on sentiment. Patient investors could do well with this name over time, but I think it could frustrate less patient investors who want more quarter-to-quarter action in their holdings.

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Franklin Financial Wedged Between A Good Market And Challenged Funding