Citizens Financial Group, Inc. to Expand Mortgage Banking Business with Acquisition of Franklin American Mortgage Company – Citizens Bank

Citizens Financial Group, Inc. to Expand Mortgage Banking Business with Acquisition of Franklin American Mortgage Company – Citizens Bank

05/31/2018

Citizens Financial Group, Inc. to Expand Mortgage Banking Business with Acquisition of Franklin American Mortgage Company

Creates top-15 bank-owned mortgage servicing and origination platform*

PROVIDENCE, R.I.–(BUSINESS WIRE)–
Citizens Financial Group, Inc. (NYSE:CFG or “Citizens”) today announced
a definitive agreement to purchase the assets of Franklin American
Mortgage Company (“Franklin American Mortgage”), a Franklin,
Tennessee-based, highly regarded national mortgage servicing and
origination firm with a leading position among private, non-bank
mortgage companies. 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 addition of Franklin American Mortgage triples the size of Citizens’
off-balance sheet mortgage servicing portfolio, providing significantly
more balance sheet leverage. 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. Franklin American Mortgage has made significant
investments in platform innovation and its unique, proprietary
technology delivers a strong competitive advantage by providing an
excellent customer experience while reducing risk.

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%.”

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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, Tennessee.

“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,” said Dan Crockett, owner, President and Chief Executive
Officer of Franklin American Mortgage. “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.”

Franklin American Mortgage has approximately 900 employees and Citizens
expects to maintain a significant presence in Tennessee and Texas
associated with the expanded distribution platform of the combined
business. Dan Crockett will remain involved in the business in an
advisory role with Citizens Home Mortgage.

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.

Additional Information

A presentation providing additional information on the transaction is
available at http://investor.citizensbank.com/about-us/investor-relations/events-and-presentations/2018.aspx.

Forward-Looking Statements

This document contains forward-looking statements within the Private
Securities Litigation Reform Act of 1995. Statements regarding potential
future share repurchases and future dividends are forward-looking
statements. Also, any statement that does not describe historical or
current facts is a forward-looking statement. These statements often
include the words “believes,” “expects,” “anticipates,” “estimates,”
“intends,” “plans,” “goals,” “targets,” “initiatives,” “potentially,”
“probably,” “projects,” “outlook” or similar expressions or future
conditional verbs such as “may,” “will,” “should,” “would,” and “could.”

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Forward-looking statements are based upon the current beliefs and
expectations of management, and on information currently available to
management. Our statements speak as of the date hereof, and we do not
assume any obligation to update these statements or to update the
reasons why actual results could differ from those contained in such
statements in light of new information or future events. We caution you,
therefore, against relying on any of these forward-looking statements.
They are neither statements of historical fact nor guarantees or
assurances of future performance. While there is no assurance that any
list of risks and uncertainties or risk factors is complete, important
factors that could cause actual results to differ materially from those
in the forward-looking statements include the following, without
limitation:

  • Negative economic and political conditions that adversely affect the
    general economy, housing prices, the job market, consumer confidence
    and spending habits which may affect, among other things, the level of
    nonperforming assets, charge-offs and provision expense;
  • The rate of growth in the economy and employment levels, as well as
    general business and economic conditions, and changes in the
    competitive environment;
  • Our ability to implement our business strategy, including the cost
    savings and efficiency components, and achieve our financial
    performance goals;
  • Our ability to meet heightened supervisory requirements and
    expectations;
  • Liabilities and business restrictions resulting from litigation and
    regulatory investigations;
  • Our capital and liquidity requirements (including under regulatory
    capital standards, such as the U.S. Basel III capital rules) and our
    ability to generate capital internally or raise capital on favorable
    terms;
  • The effect of changes in interest rates on our net interest income,
    net interest margin and our mortgage originations, mortgage servicing
    rights and mortgages held for sale;
  • Changes in interest rates and market liquidity, as well as the
    magnitude of such changes, which may reduce interest margins, impact
    funding sources and affect the ability to originate and distribute
    financial products in the primary and secondary markets;
  • The effect of changes in the level of checking or savings account
    deposits on our funding costs and net interest margin;
  • Financial services reform and other current, pending or future
    legislation or regulation that could have a negative effect on our
    revenue and businesses, including the Dodd-Frank Act and other
    legislation and regulation relating to bank products and services;
  • A failure in or breach of our operational or security systems or
    infrastructure, or those of our third party vendors or other service
    providers, including as a result of cyber-attacks; and
  • Management’s ability to identify and manage these and other risks.

In addition to the above factors, we also caution that the amount and
timing of any future common stock dividends or share repurchases will
depend on our financial condition, earnings, cash needs, regulatory
constraints, capital requirements (including requirements of our
subsidiaries), and any other factors that our Board of Directors deems
relevant in making such a determination. Therefore, there can be no
assurance that we will repurchase shares or pay any dividends to holders
of our common stock, or as to the amount of any such repurchases or
dividends.

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More information about factors that could cause actual results to differ
materially from those described in the forward-looking statements can be
found under “Risk Factors” in our Annual Report on Form 10-K for the
year ended December 31, 2017.

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 broad
range of retail and commercial banking products and services to
individuals, small businesses, middle-market companies, large
corporations and institutions. Citizens helps its customers reach their
potential by listening to them and by understanding their needs in order
to offer tailored advice, ideas and solutions. In Consumer Banking,
Citizens provides an integrated experience that includes mobile and
online banking, a 24/7 customer contact center and the convenience of
approximately 3,300 ATMs and approximately 1,150 branches in 11 states
in the New England, Mid-Atlantic and Midwest regions. Consumer Banking
products and services include a full range of banking, lending, savings,
wealth management and small business offerings. In Commercial Banking,
Citizens offers corporate, institutional and not-for-profit clients a
full range of wholesale banking products and services, including lending
and deposits, capital markets, treasury services, foreign exchange and
interest rate products, and asset finance. More information is available
at www.citizensbank.com
or visit us on Twitter,
LinkedIn
or Facebook.

About Franklin American Mortgage Company

Franklin American Mortgage is a privately held mortgage banking firm
headquartered in Franklin, Tenn. and licensed to provide residential
mortgages across the nation. For nearly a quarter of a century, Franklin
American Mortgage has been an industry leader committed to helping
families and individuals achieve their dreams of homeownership. 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
.

Citizens Financial Group, Inc.
Media:
Peter Lucht,
781-655-2289
or
Investors:
Ellen A. Taylor, 203-900-6854

Source: Citizens Financial Group, Inc.

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