Do not miss this under followed regional bank



Would you like to invest alongside with a proven management team that already has successfully sold two banks at attractive valuations? Would you like to own a promising bank that has demonstrated tremendous growth in the past few years and is poised to grow further? If these questions piqued your interest, read on.


According to the bank’s 2014 10-K filing, Franklin Financial Network(ticker symbol FSB) is a bank holding company that owns Franklin Synergy Bank located in Franklin, Tennessee. The founding team, led by Chairman and CEO Richard Herrington, found their first bank Franklin Financial Corporation (not related with this current bank) in 1988 and sold it at five times tangible book value to Fifth Third Bancorp in 2002. Then they took over a troubled Tennessee-based bank in Dec 2002, turned it around by slashing nonperforming loans to a seventh and expanded net income six times within four years, and sold this second bank at three times net tangible book value to Green Country Bancshares in May 2007. Without taking much pause, such savvy management picked the worst timing for the banking industry and started their third bank in the midst of the Great Recession. They didn’t just survive in this terrifying environment- they totally killed it. The management swiftly worked out the majority of the non-performing loans and FSB’s non-performing loans to total loans is at 0.1% at the end of 2014, a stunning figure which is about 2.5% lower than its peers. Net charge-offs even in 2009 was only at 0.26%, which is about 1% lower than its peers, and the charge-offs at the end of 2014 is around 0.


Recently, another Tennessee bank has filed for an IPO, and their filing shed some more light on Tennessee’s local banking landscape. I was able to locate most local Tennessee competitors and compare their results against Franklin Financial’s. The results are quite revealing and even further strengthened my belief that Franklin Financial has probably the best managerial talent in Tennessee. But before I talk about the comparisons, let’s answer another important question first: why Tennessee?


The state since the past few years has become very business friendly. As a result, it is benefitting from business and manufactures relocating from other places. Tennessee has been the No.1 states

for advanced industry job growth since 2013.  Fast job growth push unemployment below the national average and is around the lowest level in 15 years.  Forbes magazine ranks Tennessee’s Nashville metroplex fourth on the 2016 Best Big Cities for Jobs, only behind San Francisco, San Jose and Orlando.

branch locations

Yellow dots mark Franklin Financial’s branch locations.


Williamson County and Rutherford County, where Franklin Financial’s 11 out of 12 branches are located, have a blended median household income at $79,443 in 2014, higher than cities like San Francisco and Honolulu. Their projected population growth is at 8.4% which is on par with other high growth cities such as Houston and Dallas.  A combination of high income, robust job growth, healthy population growth makes the area very attractive to banks.

Now let’s move onto the local competitive banking landscape.

Deposit growth and branch efficiency


Deposit CAGR 2013 – 2016 Q2 Branches Total Deposit(in millions) Deposit/ Branch
First Horizon National Corp(FHN) 5.48% 152 20,630 135.7236842
Pinnacle Financial Partners(PNFN) 13.36% 44 7,293 165.75
FB Financial Corp(N/A) 8% 45 2,500 55.6
Franklin Financial(FSB) 38.83% 12 2,250 187.5

All data compiled from the listed companies’ 10-K and 10-Q reports


This table shows the publicly listed Tennessee-based banks that only conduct businesses in Tennessee. As we can see, Franklin Financial experienced a superior deposit growth compared to other banks. Although observant readers will point out that Franklin started with a much smaller base compared to its larger competitors, but what makes Franklin’s truly shine are two facts behind the already stellar numbers. First, the deposit/ branch number is highest on the list. For the same amount of deposit held, lower bank branch number means less branch costs, contributing to lower Efficiency Ratio (which we will get into in a second). Second, most of the deposit growth is from organic growth. Franklin grew its deposit base in Williamson County solely in an organic fashion and became the No.1 bank in that county in 7 years, coming on top over many other much more established national and other regional contenders. In July 2014, it acquired MidSouth Bank that exclusively operated in Rutherford County. The MidSouth Bank had $244 million deposit and 5 branches, making the deposit/branch at a much lower $50 million/branch. Franklin’s combined total deposit immediately after the MidSouth Bank acquisition stood at $992 million and after 2 years at the end of 2016 Q2 the number increased by an astounding 127%. Therefore, of the $2,250 million deposit it currently holds, $2 billion is from organic growth. The huge organic growth just shows how good Franklin’s bankers are at getting deposit against the competition. It gives me the confidence that the company is capable of acquiring banks and growing the acquired businesses if more acquisitons occur in the future.


2016 Q2 Operating metrics comparison


Net Interest Margin Efficiency Ratio Net charge offs Nonperforming asset ratio ROE ROA
First Horizon National Corp 2.92% 70.51% 0.25% 0.24% 10.00% 0.91%
Pinnacle Financial Partners 3.72% 51.90% 0.39% 0.33% 9.92% 1.33%
FB Financial Corp 4.20% 69.54% 0% 0.66% 16.00% 1.40%
FSB 3.33% 52.58% 0% 0.10% 14.48% 1.14%


All figures except FB Financial’s are from the companies respective SEC 2016 Q2 filing. FB Financial figures are adjusted based on its initial IPO filling by normalizing its tax rate.


In this table, like I mentioned before, Pinnacle and Franklin the two banks that have a much higher deposit/branch number also hold a much better Efficiency ratio. In addition, Franklin’s net charge offs and nonperforming asset ratio are the lowest among the four. ROE is the second highest right behind FB Financial. However, FB Financial’s income and ROE figures benefited greatly from its mortgage re-financing business while Franklin’s income is mostly from its lending business. If interest rate starts to rise, re-fi business will shrink while lending will become more profitable. So my forecast is that going forward in a rising interest-rate environment, Franklin will have the best ROE among the four Tennessee banks.


Lastly, let’s look at the valuation comparison. I removed FB Financial because it is not yet listed. Also, I added the median numbers for region banks in the South and banks with a similar asset size to Franklin’s. The median numbers are referenced from here. The stock prices are from Aug 26, 2016.


TTM P/E Forward P/E P/TBV
First Horizon National Corp 14.3 15.9 1.68
Pinnacle Financial Partners 20 18.6 3.15
Franklin Financial 16.3 13.2 1.89
median for southern banks 16.3 1.47
median for $1B-$5B banks 15.3 1.44


Franklin is not cheap based on average price to tangible book value but we are not paying for an average bank either. The investment is a bet on the continued healthy net income growth reflected here in a low forward P/E ratio. From 2012 to 2015, Franklin Financial’s loan quadrupled and so did its net income. Its revenue in the most recent quarter is growing at 50% year over year and net income year over year doubled. As Franklin Financial demonstrate continued fast revenue and income expansion, the market should eventually reward the bank with a premium valuation.


Future catalysts for Franklin Financial:


  1. Loan expansion. Based on management’s consistent past record, the loan volume should keep rising in the future. The company is well above the required ratio for banks to be considered well capitalized so it is allowed to leverage its balance sheet further even if it doesn’t acquire any more deposit. But I don’t believe the company will stop taking deposit in its market so the combination of deposit growth and increase in leverage will be the engine for loan volume growth.


  1. Asset mix improvement. Franklin Financial’s loans make up only about 62.4% percent of total earning assets, a figure quite low compared to average bank’s number. As lower yield assets(securities held for sale such as bonds), which generates only half of the yield as Franklin’s loans do, become a smaller part of the total portfolio, the mix will improve and net interest margin will rise.


  1. Expansion into Nashville. The company expanded into Nashville with one bank branch. It also announced acquisition of Civic Bank which consists of two branches in Nashville. I believe Franklin can repeat its previous acquisition success and take market share in Nashville.


  1. M&A. Regional banks are not as much heavily regulated as the big banks. It is almost impossible for big banks to acquire more assets due to regulatory constraint so a lot of M&A activity is happening between the smaller regional banks. Franklin’s management team sold its previous two banks valued at five times and three times tangible book value respectively. Williamson County and Rutherford County are highly desirable markets for any banks that want to grow in Tennessee and what is a better way to enter these market than buying the Franklin Financial the best franchise in these two regions? Franklin currently is in the sweet spot where it can either be an acquirer or a target. A high net tangible book value multiple is probably well deserved to buy Franklin’s well managed assets.


  1. Rise in interest rate. This is the obvious catalyst that should propel all bank stocks higher.


  1. Recovery in housing market. Franklin’s bankers are specialized in real estate lending. Residential construction loans and residential real estate loans make up about half of its loan portfolio. If the auspicious August new housing starts indicates a sustained housing market recovery by any chance, Franklin should be able to crank up even higher residential loan volumes.



Franklin Financial is managing lending risks better and growing a lot faster than the average regional banks, a sign that demonstrate management excellence. The management team already has two successes under its belt, prospered through multiple cycles, and enjoyed working together for a long history. The banking business in Tennessee should experience solid growth under the current economic expansion and job growth. Therefore, as investors of this company, we are investing in the right place at the right time with the best management who owns over 12% of the company.  This is not a typical discount to tangible book value play but I believe paying for the current premium will reap big dividend in the future.

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