Citizens Financial Group, Inc. (NYSE:CFG) on Thursday announced their intention to purchase the assets of Franklin American Mortgage Company, the Franklin, Tennessee-based national mortgage servicing and origination firm, for $511 million in cash.
Franklin American Mortgage has approximately 900 employees and Citizens announced that it expects to maintain a significant presence in Tennessee and Texas associated with the expanded distribution platform of the combined business. Owner, President and Chief Executive Officer of Franklin American Mortgage Dan Crockett will remain involved in the business in an advisory role with Citizens Home Mortgage.
The Rhode Island-based Citizens will triple the size of their off-balance sheet mortgage servicing portfolio through the transaction, providing significantly more balance sheet leverage.
As of March 31, 2018, Franklin American Mortgage managed a $41.4 billion mortgage servicing portfolio and generated approximately $13.7 billion in annualized originations for the first quarter 2018, nearly 100 percent of which was conforming.*
The transaction also more than doubles Citizens’ origination platform while significantly diversifying its origination capabilities with the addition of correspondent and wholesale channels, which complement Citizens’ strong retail capabilities.
On a Combined basis, it is anticipated that upon closing Citizens will:*
- Become a top-15 bank-owned, residential mortgage servicing and origination platform.
- Gain significant scale in mortgage servicing by expanding its existing off-balance sheet portfolio from $20.2 billion to approximately $61.6 billion, with a total portfolio of approximately $78.9 billion, including Citizen’s existing on-balance sheet mortgage portfolio.
- Add approximately 200,000 servicing households, more than 600 correspondent relationships and more than 1,000 wholesale-broker relationships.
- Expand its origination presence, providing additional geographic and demographic diversity to the business mix.
- Improve the mix of conforming originations from approximately 45% to approximately 85% with approximately 70% of combined originations represented by purchase volume.
“This transaction takes our mortgage business to the next level, expanding our reach and adding immediate scale in servicing as well as innovative correspondent and wholesale solutions,” said Brad Conner, Citizens vice chairman and Head of Consumer Banking. “Franklin American Mortgage’s strong history of excellence in customer service is a great cultural fit with our organization and we are excited to welcome a new group of colleagues to Citizens.”
“We are extremely pleased with the financial and strategic opportunities the acquisition of Franklin American Mortgage creates for Citizens,” said John F. Woods, Citizens Chief Financial Officer. “This transaction fits perfectly with our objective of improving shareholder returns and delivering against our key strategic imperatives. The combined platform will provide significant additional fee income opportunities with enhanced channel diversification, as well as opportunities to realize efficiency gains. The transaction is expected to be modestly accretive to second half 2018 and approximately 3% accretive to 2020 earnings per share, with an earnback period of less than three years. Additionally, our strong capital position provides us the flexibility to support continued organic growth across our platform and attractive capital returns to shareholders, while still remaining opportunistic around compelling acquisition opportunities in the fee income space. We expect this transaction to deliver a mid-teens return on invested capital with an internal rate of return of more than 20%.”
The combined mortgage business will be led by Eric Schuppenhauer, current Citizens President of Home Mortgage. Following the completion of the transaction Scott Tansil, Chief Financial Officer and Chief Operating Officer, of Franklin American Mortgage will lead the acquired correspondent and wholesale origination businesses headquartered in Franklin.
“We view this transaction as an opportunity to add scale and capital to the outstanding platform and customer-centric culture that our employees have created,” Crockett said, . “Citizens shares our deep and enduring focus on delivering for customers, as well as our strong commitment to colleagues and communities, which Franklin American Mortgage employees have long embraced. Together, we’ll be able to increase our positive impact on customers and grow the business platforms that are a great source of pride for us.”
Under the terms of the asset purchase agreement,* Citizens’ wholly-owned subsidiary, Citizens Bank, N.A., will purchase assets with a net book value of approximately $488 million, which includes a mortgage servicing rights portfolio valued at $550 million, for $511 million in cash, or approximately 1.1 times tangible book value. The transaction is expected to improve fee income, produce attractive returns and have a crossover earnback period of less than three years. The transaction is expected to reduce the company’s Basel III common equity tier one ratio by approximately 18 basis points at the transaction close. This transaction has no impact on the execution of Citizens’ previously announced planned share repurchases under its 2017 capital plan. The company expects to achieve annual expense synergies of approximately $50 million by 2020 with total estimated after-tax integration costs of $30 to $45 million.* Return on average tangible common equity accretion is expected to be approximately 30 basis points in 2019 and approximately 45 basis points in 2020 with earnings per diluted common share accretion of approximately 2% in 2019 and approximately 3% in 2020. The transaction is expected to close in the third quarter of 2018, subject to customary closing terms and conditions and regulatory approval.
Debevoise & Plimpton, LLP is serving as legal advisor to Citizens. Morgan Stanley & Co., LLC acted as financial advisor to Franklin American Mortgage on the transaction. Baker, Donelson, Bearman, Caldwell & Berkowitz, PC acted as legal advisor to Franklin American Mortgage on the transaction.
A presentation providing additional information on the transaction is available at https://investor.citizensbank.com/aboutus/investor-relations/events-and-presentations/2018.aspx.
About Citizens Financial Group, Inc.
Citizens Financial Group, Inc. is one of the nation’s oldest and largest financial institutions, with $153.5 billion in assets as of March 31, 2018. Headquartered in Providence, Rhode Island, Citizens offers a range of retail and commercial banking products and services to individuals, small businesses, middle-market companies, large corporations and institutions.
In Consumer Banking, Citizens provides a 24/7 customer contact center and approximately 3,300 ATMs and approximately 1,150 branches in 11 states in the New England, Mid-Atlantic and Midwest regions. More information is available at www.citizensbank.com.
About Franklin American Mortgage Company
Franklin American Mortgage is a privately held mortgage banking firm headquartered in Franklin for nearly a quarter of a century. For more information about the company and its services, please go to www.franklinamerican.com. Equal Housing Lender, Company NMLS #1599.
*Annualized servicing portfolio data and origination volumes as of and for the three month period ended March 31, 2018. Combined data as of March 31, 2018. ROTCE, efficiency ratio and EPS accretion data are presented before the impact of an estimated $30-45 million in after-tax integration costs, to be incurred over approximately an 18-month timeframe and reflect Bloomberg consensus estimates for CFG as of May 25, 2018, and management estimates for Franklin American Mortgage. Earnback calculated using the crossover method. Estimated CET1 reduction impact includes estimated day-1 integration costs compared with CFG’s 2Q18 outlook of ~11.2% and reflects 100% RWA treatment for Franklin American Mortgage’s mortgage servicing rights as of April 30, 2018. Total combined mortgage servicing portfolio includes loans held on Citizen’s balance sheet. Combined origination to purchase volume mix reflects 2018 expectations. Net book value of assets to be acquired and liabilities as of April 30, 2018. Net book value of assets and liabilities as of the closing date will differ. Expect goodwill and intangibles of ~$95 million at closing. Mortgage rankings as of 4Q17, Inside Mortgage Finance Publications, Inc.