It's been nearly two years since my Special Situations portfolio acquired shares of Franklin Financial (UNKNOWN:FRNK.DL). The stock has performed reasonably over that period, even if the business remains mired in non-performing assets. So, I'll be selling my shares of the bank -- up 30% since I bought -- and moving them to where I see greater chance for upside.
Franklin Financial now trades around its tangible book value of $19.97. That multiple is up nicely from my original purchase at 82% of tangible book, a price that helped ensure a margin of safety.
The bank has been undertaking one of my favorite value-creating moves for a recently converted thrift. It has been buying back quite a bit of stock, plowing all free cash flow into buybacks. That move makes a lot of sense when the stock is below book value, since it results in an immediate increase in per-share book value for remaining shareholders. In fact, this is one of my markers for competent management in thrift conversion plays. But with the stock priced near tangible book, this tactic will be less successful at driving returns.
And on other fronts, I remain skeptical of this business. Non-performing assets remain elevated -- higher even than in 2009, 2010, 2011, and 2012. Years after the financial crisis, when it seems like almost every other bank is seeing declining non-performing assets, Franklin's bad assets continue to grow. So, it's great that the bank remains vastly overcapitalized, with equity at greater than 20% of assets.
Foolish bottom line
With other great investments out there -- including plenty of other banks trading below tangible book value -- I think it's time to sell Franklin Financial. My Special Situations portfolio will sell all remaining shares later this week. I'll be investing the proceeds into other great stocks. If you'd like to know what they are, follow me here and on Twitter: @TMFRoyal.