Franklin Bank Corp. in Houston is counting on its latest deal to accelerate its transition from a wholesale thrift to a more traditional community bank.
The $5.2 billion-asset Franklin announced Monday that it is buying the $517 million-asset First National Bank of Bryan for $134 million in cash. First National would be the seventh — and largest — Texas community bank bought by Franklin since it went public three years ago.
“It’s the biggest acquisition to date, and I would characterize it as the best,” Tony Nocella, Franklin’s president and chief executive, said in an interview Monday.
First National has seven offices and the No. 2 deposit share in Brazos County, 22%.
Like most other banks Franklin has targeted for acquisition, First National is primarily a commercial and consumer bank — only about 23% of its loan portfolio is in one-to-four-family homes, according to Federal Deposit Insurance Corp. data.
Barry McCarver, an analyst at Stephens Inc. in Little Rock, said that Franklin “is really more of a wholesale mortgage thrift that’s slowly molding itself into more of a community bank.”
Mr. Nocella said a key component of that strategy is to target banks in suburban or rural communities, where competition from large banks is less fierce and the cost of funding is lower. First National’s headquarters is located roughly 100 miles outside Houston.
Last year Brazos County had a population of roughly 156,000, according to the Census Bureau.
Mr. Nocella said 57 banks or branches have opened in the Houston area alone this year. If Franklin had focused on the big cities, “we would be competing at the margins, while most of the population is moving out to the outlying suburbs.”
As of Sept. 30 one-to-four-family loans made up 64% of Franklin’s loan portfolio, compared with 85% two years earlier, according to FIDC data. Its commercial loan portfolio grew 65% over the past year, to $1.5 billion as of Sept. 30, according to its third-quarter earnings report.
Mr. McCarver said there is an added benefit to buying banks in less urban markets. “If you look at the prices they’ve paid, … [it is] generally well below the kind of Texas average. So there’s definitely some value there.”
Franklin would pay 2.7 times tangible book value for First National, or 19.6 times its 12-month trailing earnings. Similar-size banks in Texas are fetching 3.5 times their tangible book value, or 27 times their 12-month trailing earnings, Mr. McCarver said.
According to FDIC data, First National’s earnings for the first nine months of this year grew 25% from a year earlier, to $5.6 million. Its return on assets for the first three quarters was 1.52%, and its return on equity was 15.91%.
Franklin’s earnings for the first nine months of this year rose less than 1% from a year earlier, to $21.8 million, according to its third-quarter report.
The deal is expected to close in the second quarter.
By late Monday, Franklin’s stock had risen 1.6%, to $19.91 a share, on news of the deal. First National is privately held.
