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Bear of the Day: Franklin Financial Network (FSB)

David Borun

Last week brought the news that Fed Chairman Jay Powell was inclined to lower interest rates to address global growth issues going forward and stocks broadly rallied, shaking off the previous week’s malaise. Long term rates stayed at 20-month lows as well, with the yield on the benchmark 10-year treasury note just barely above 2% and the rate on 30-year mortgages dipping below 4% again, which should give a shot in the arm to the housing industry.

There’s one notable sector that doesn’t benefit from low rates however and that’s banking – especially smaller regional outfits which are more dependent on traditional deposit and lending activity than their larger counterparts who have many other lines of business.

As rates fall, the spreads between borrowing and lending rates contract, hurting profits at small banks.

Franklin Financial Network (FSB), headquartered in Franklin Tennessee, is a holding company for Franklin Synergy Bank and operates primarily in that local market.

FSB shares were hurt recently by an earnings miss and the surprise resignation of Chairman, President and CEO Richard Herrington as well as his son, the company’s COO Kevin Herrington.

On Friday, a day when the Dow Jones Industrial average ended up 1% to finish the best week of the year with a gain of over 250 points, Franklin Financial Network shed $0.09/share.

The bank declined to provide any details about the Herringtons’ departures other than to say that they would stay on board as employees while the company executes a search to fill their former positions. The responsibilities of Chairman, President, CEO and COO will all be filled by existing employees (and one board member) on an interim basis.

Unexpected executive departures not due to health or other personal reasons are generally viewed as a negative indicator for a company’s future prospects. (Who jumps ship when they’re in line for increased compensation from expected successes?) The resignation of the two officials who have the best view of the financial position of a lending institution as a big red flag.

FSB shares now trade more than 37% lower than all-time highs reached in 2017 - a period during which the S&P 500 has gained almost 20%.

Since that Q1 earnings miss and the unexpected departures, estimates for the next two quarters, full- year 2019 and full-year 202 have all come down. The reductions haven’t been huge, but it’s another red-flag in a lending company with a stock market and economy that are both expanding.

Franklin Financial Network simply isn’t a good investment for the average portfolio. In the financial sector, investors would be better off looking at financial firms that get a significant portion of revenues from trading and/or brokerage activity like LPL Financial (LPLA) or Stifel Financial Corporation (SF), which both enjoy a Zacks Rank #1 (Strong Buy).

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