* Restructuring of approximately $580 million of its Single Family Loan Portfolio will be completed by the end of the 1st Quarter 2007, resulting in improved interest margins. * Acquisition of First National Bank of Bryan (FNB) is expected to close during the 2nd quarter 2007. * Commercial loans grew 65% for the year * Community banking deposits grew more than 12% organically from December 31, 2005 HOUSTON -- Anthony J. Nocella, President and CEO of Franklin Bank Corp., the parent company of Franklin Bank, S.S.B., todaysaid, "Franklin in 2006 made substantial progress towards becoming thelargest community based commercial bank in Texas. This is a result of thecontinued growth in our commercial and community banking businesses as wellas the planned acquisition of the First National Bank of Bryan. Earningsfor the year and fourth quarter were lower than our expectations as aresult of the inverted yield curve, weakened mortgage market and ourunwillingness to compromise our credit standards by participating in thehigher risk non-traditional mortgages that were the dominant product in themarket." "This transformation should enhance Franklin's earnings and marketvaluation by providing higher, more stable returns for our stockholders asour commercial and community banking operations continue to grow despitethe continuing adverse economic conditions," he added. "Thus, lookingforward we expect our 2007 earnings to improve to record levels by thefourth quarter as a result of the expected growth of our commercial loans,the completion of the balance sheet restructuring and the acquisition ofFNB." He then pointed out that commercial loans grew 65% for the year andcommunity banking deposits grew more than 12% organically from the previousyear. "At year end, 40% of total loans were commercial and communitybanking loans, a significant increase from 30% last year." Nocella alsonoted that commercial and community banking loans are expected to exceed50% of total loans during 2007, "a goal we announced during our IPO roadshow." Franklin continues to pursue additional acquisitions inside itscommunity banking markets. Glenn Mealey, Managing Director and EVP ofMergers and Acquisitions, stated that, "We are excited about theacquisition of the First National Bank of Bryan. This helps us to movecloser to becoming the largest community bank in Texas with a focus outsidethe major metropolitan areas. As we have previously stated, we arefinancially responsible owners and we will only pursue deals that are inthe stockholders' best interest." Comparison of the years ended December 31, 2006 and 2005: * Adjusted net income for 2006 was $30.1 million or $1.26 per diluted share, with certain exclusions referenced later. (See the attached exhibit reconciling GAAP earnings to adjusted earnings.) * On a GAAP basis, Franklin had net income of $15.5 million or $.65 per diluted share compared to $26.3 million or $1.13 per diluted share, reflecting the short term impact of the restructuring * Franklin's assets increased 24% to $5.5 billion primarily as a result of the growth within the commercial loan portfolio which increased 65% to $1.8 billion. * Community banking deposits increased 15% to $1.4 billion. Comparison of the quarters ended December 31, 2006 and 2005: * Adjusted net income for the quarter ended December 31, 2006 was $7.2 million or $.30 per diluted share, with certain exclusions referenced later. * On a GAAP basis, Franklin had a net loss of $4.0 million or $.17 per diluted share compared to net income of $4.7 million or $.19 per diluted share for 2005. The loss is primarily the result of the restructuring of the single family loan portfolio. Business Highlights: * Franklin recently announced the reclassification of approximately $580 million in single family loans, or 20% of the single family loan portfolio, from Held For Investment to Held For Sale. * In addition, Franklin announced the acquisition of FNB and expects the acquisition to close during the second quarter 2007. FNB had approximately $520 million in total assets of which the majority is commercial and community banking loans. * During the quarter, Franklin announced the completion of the purchase and assumption from Equity Bank of two banking offices with approximately $42.7 million in deposits located in East Texas. Looking Forward: * Assuming the yield curve will remain relatively flat and will not worsen, Franklin expects 2007 GAAP diluted earnings per share to be $1.34 - $1.44, per diluted share, which is an increase from our previous guidance of $1.32 - $1.40. The increase includes the FNB acquisition, the restructuring effect of the sale of the $580 million of single family loans and the reduction of wholesale funding, as well as raising additional capital during the year. The guidance excludes any merger related costs associated with the FNB acquisition. Earnings For the year ended 2006, Franklin had adjusted net income of $30.1million or $1.26 per diluted share excluding reconciling items of $14.6million or $.61 per diluted share. The following is a reconciliation of Franklin's 2006 adjusted netincome and diluted earnings per share to GAAP net income and dilutedearnings per share: Items are in thousands, except for per share data Net Diluted Income EPS Adjusted 2006 net income and diluted earnings per share $30,110 $1.26 Less: (items are net of tax except for preferred stock dividends) Litigation Reserve - Taylor Brown, L.P. et al 978 0.04 Preferred Stock Dividends (2nd, 3rd & 4th Qtr.) 3,863 0.16 One-time effect of FAS 123R 162 0.01 Prior Guidance 25,107 1.05 Expected sale of single family loans 8,843 0.37 Charges for loan reserves 747 0.03 Restructuring charge 9,590 0.40 GAAP net income and diluted earnings per share available to common stockholders for 2006 $15,517 $0.65 For additional information on the reconciling items including theusefulness and purposes of adjusted net income and diluted earnings pershare refer to the exhibits and the non-GAAP disclosure section of thisannouncement. On a GAAP basis, Franklin had net income, available to commonshareholders, for the year of $15.5 million or $.65 per diluted sharecompared to $26.3 million or $1.13 per diluted share for 2005. For the quarter ended December 31, 2006, Franklin had a loss of $4.0million or $.17 per diluted share compared to net income of $5.1 million or$.21 per diluted share for the quarter ended September 30, 2006 and $4.7million or $.19 per diluted share for the quarter ended December 31, 2005.Such loss was primarily attributable to the restructuring charges discussedearlier within this release totaling $9.6 million or $.40 per dilutedshare. For the year ended December 31, 2006, net interest income increased$8.7 million to $92.7 million compared to $84.0 million at December 31,2005. The increase is primarily attributable to the increase in higheryielding commercial loans during the year reduced by the effects of theinverted yield curve. Net interest income was $23.5 million for the quarter ended December31, 2006 compared to $22.1 for the quarter ended September 30, 2006, and$21.3 million for the quarter ended December 31, 2005. The increase fromprior periods was primarily the result of the increase in higher yieldingcommercial loans reduced by the effects of the inverted yield curve. For the years ended December 31, 2006 and 2005, non-interest income was$8.7 million and $18.8 million, respectively. The decline from the prioryear is primarily a result of the $14.0 million, pre-tax, restructuringcharge recorded as gain (loss) on sale of single family loans during thefourth quarter 2006. For the quarter ended December 31, 2006, Franklin had a non-interestloss of $8.3 million, compared to non-interest income of $6.7 million forthe quarter ended September 30, 2006, and non-interest income of $4.9million for the quarter ended December 31, 2005. The loss during thecurrent quarter was primarily attributable to the restructuring charge of$14.0 million, pre-tax, or $8.8 million, net of tax. For the years ended December 31, 2006 and 2005, non-interest expensewas $67.0 million and $56.7 million, respectively. The increase from theprior year is primarily a result of the increase in salaries and benefitsfrom the expansion of our community banking and commercial lendingbusinesses, the expansion of the corporate headquarters, the full-yearimpact of the acquisitions of the First National Bank of Athens, ElginBank, and the branch purchase from Washington Mutual. The above items wereoffset by net recoveries of $380,000 or $.02 per diluted share relating tothe Taylor Brown litigation recorded within REO. Non-interest expense was $16.5 million for the quarter ended December31, 2006, compared to $17.5 million for the quarter ended September 30,2006, and $14.2 million for the quarter ended December 31, 2005. Thedecrease from the third quarter 2006 to the fourth quarter was mainlyattributable to a $978,000, net of tax, charge for the settlement of thelitigation in the third quarter. Financial Condition At December 31, 2006 Franklin's assets stood at $5.5 billion whichrepresents a 24% increase when compared to the same quarter last year and a7% increase from September 30, 2006. The increase from 2005 is primarilythe result of growth within the commercial loan portfolio. Franklin's loan portfolio totaled approximately $4.7 billion as ofDecember 31, 2006, $4.4 billion as of September 30, 2006, and $3.8 billionas of December 31, 2005. The commercial loan portfolio increased 14% to$1.8 billion at December 31, 2006 compared to $1.5 billion at September 30,2006 and increased 65% from $1.1 billion at December 31, 2005. Singlefamily loans were $2.8 billion at December 31, 2006 and September 30, 2006compared to $2.7 billion at December 31, 2005. During the fourth quarter, Franklin recorded a $580 millionreclassification of single family loans from Held For Investment to HeldFor Sale. The sale of these single family loans is expected to be completedby the end of the first quarter 2007. Franklin will initially pay-downhigher cost wholesale deposits and borrowings and then reinvest theproceeds in higher yielding commercial loans. Franklin continues to maintain solid asset quality. The allowance forloan losses declined $2.5 million to $11.7 million at December 31, 2006from $14.2 million at September 30, 2006. The reduction is primarily theresult of the fourth quarter charge-off relating to a fully-reservedmortgage banker finance loan partially offset by the previously mentionedrestructuring reserves. Franklin has filed claims with insurance and titlecompanies, as well as a lawsuit against the guarantors of the mortgagebanker finance loan. Nonperforming assets as a percentage of total assets declined to .62%or $34.5 million as of December 31, 2006 compared to .66% or $33.9 millionas of September 30, 2006 and .69% or $31.0 million at December 31, 2005.Approximately 40% of the nonperforming assets were related to the $14.2million development loan to Taylor Brown, L.P. Community banking deposits increased 15%, or 12% organically, fromDecember 31, 2005 to December 31, 2006. Community banking deposits remainedflat from September 30, 2006 to December 31, 2006 at $1.4 billion which isup from $1.3 billion at December 31, 2005. Looking Forward Franklin Bank continues to transition into a commercially-orientedcommunity bank. It plans to increase assets by 10% to $6 billion by the endof 2007 including the acquisition of FNB and the sale of the $580 millionof single family loans. The growth is expected to come from commercial andcommunity banking loans. On a pro forma basis, including the acquisition ofFNB and the sale of $580 million of single family loans, commercial andcommunity banking loans are expected to exceed 50% of total loans during2007. Franklin's goal for 2007 is to grow community banking deposits,including the deposits acquired from FNB, by 35%. The restructuring steps, which include the sale of the $580 million ofsingle family loans and the pay-down of higher costing wholesale depositsand borrowings are expected to be implemented by the end of first quarter2007. Going forward, the net interest margin is expected to improve byapproximately 15 to 20 basis points over the December 31, 2006 level of1.88%. For 2007, Franklin's net income, available to common stockholders,targets will be announced on a quarterly basis. Franklin's guidance isbased on the following assumptions: 1) merger related expenses for FNB arenot included; 2) the yield curve will remain relatively flat and will notworsen; 3) completion of the acquisition of FNB by the second quarter; and4) capital raises of $50 million in common equity and $50 million in othercapital related instruments. For 2007, the first quarter is targeted at $.25 to $.27 per dilutedshare, the second quarter at $.30 to $.32 per diluted share, the thirdquarter at $.38 to $.41 per diluted share, and the fourth quarter at $.41to $.44 per diluted share. The increase in earnings per share from thesecond quarter to the fourth quarter is the accretive effect of therestructuring, the expected growth in the commercial loan portfolio, andthe accretive effect of the FNB acquisition and its related capital raises. These estimates are based initially on an estimated 24.2 million commonshares with additional common equity being issued in the second quarter. Thetable below details Franklin's guidance for 2007 which includes the effect ofthe restructuring, the acquisition of FNB, and capital raises expected duringthe year. Previous Adjusted Guidance Guidance including the effect Range of the restructuring, the acquisitions, and capital raises Low High Low High 1st Quarter $ 0.24 $ 0.26 $ 0.25 $ 0.27 2nd Quarter $ 0.29 $ 0.31 $ 0.30 $ 0.32 3rd Quarter $ 0.38 $ 0.40 $ 0.38 $ 0.41 4th Quarter $ 0.41 $ 0.43 $ 0.41 $ 0.44 2007 Guidance $ 1.32 $ 1.40 $ 1.34 $ 1.44 In addition, Franklin will implement segment reporting for the yearended 2006 in order to clarify the financial statements. The reportablesegments are banking and mortgage. Net earnings used for segment reportingexclude the restructuring charges. The net earnings from the bankingsegment was approximately 60% for 2006 as compared to an expectation ofapproximately 69% for 2007. Corporate Overview Franklin Bank Corp., headquartered in Houston, Texas, was formed inApril 2002 and is now a $5.5 billion company. Franklin's common stockinitiated trading on the NASDAQ in December 2003 under the ticker symbolFBTX. Franklin Bank Corp.'s common stock is currently included within thefollowing indices: Russell 3000, Russell 2000, Russell Microcap, AmericanCommunity Bankers, S&P SmallCap 600 Index, S&P Composite 1500, S&P 1000,NASDAQ Bank, NASDAQ Composite, NASDAQ NNM Composite, and NASDAQ GlobalSelect Market Composite. In May 2006, Franklin raised additional capitalthrough a Preferred Stock offering that is now trading on the AMEX underthe ticker symbol FBK-P. Franklin's community banking philosophy focuses on a high growthcommercial lending approach outside the major metropolitan cities in Texas.In addition to its corporate headquarters in Houston, there are currently38 community banking offices in Texas, 8 regional commercial lendingoffices, and 37 mortgage loan production offices located throughout theUnited States. Through its subsidiary, Franklin Bank S.S.B., Franklin offers a widevariety of commercial products that allows it to serve customers incommunities, as well as on a national basis. Franklin Bank focuses onproviding high-quality personalized service through its "trusted financialadvisors" and strives to meet all of the financial needs of its customers.In addition to various deposit and loan products, Franklin Bank offersretail brokerage services. For more information, you can visit its websiteat http://www.bankfranklin.com . Franklin Bank is FDIC insured and an equalhousing lender. Use of Non-GAAP Financial Measures This announcement includes certain non-GAAP financial measures. Anexhibit to this announcement reconciles the non-GAAP financial measuresdiscussed within this announcement. Management believes that these non-GAAPfinancial measures provide useful information to investors in understandingthe underlying performance of the Company because they provide informationthat shows the financial effect of the lower of cost or market adjustmentfor the expected sale of the single family loans, the increase in reservesfor single family and commercial loans, the legal settlement related toTaylor Brown, L.P., the preferred stock dividend, and the one-time effectof the restricted stock. Franklin believes that these non-GAAP financial measures provideinformation useful to investors in understanding the underlying operationalperformance of the company, its business and performance trends andfacilitates comparisons with the performance of others in the financialservices industry. Specifically, Franklin believes the exclusion of theseitems permits evaluation and a comparison of results for on-going businessoperations, and it is on this basis that Franklin's management internallyassesses the company's performance. These items are also excluded fromFranklin's segment measures used internally to evaluate segmentperformance. Included within the exhibits to this announcement is a tablereconciling the non-GAAP financial measures discussed within thisannouncement with GAAP net income and GAAP net income per share. Thenon-GAAP financial measures are used in this announcement in addition to,and in conjunction with, results presented in accordance with GAAP. Thesenon-GAAP financial measures should not be relied upon to the exclusion ofGAAP financial measures. These non- GAAP financial measures reflect anadditional way of viewing aspects of Franklin's operations that, whenviewed with the GAAP results and the accompanying reconciliations tocorresponding GAAP financial measures, may provide a more completeunderstanding of factors affecting Franklin's business. Franklin stronglyencourages investors to review the consolidated financial statements andpublicly filed reports in their entirety and to not rely on any singlefinancial measure. Because non-GAAP financial measures are notstandardized, it may not be possible to compare the non-GAAP financialmeasures Franklin has presented in this announcement with announcements byother companies containing the same or similar non-GAAP financial measures. Forward-Looking Information This announcement includes forward-looking statements. These forward-looking statements include comments with respect to the goals, objectives,expectations, and strategies and the results of the company's operationsand business. However, by their nature, these forward-looking statementsinvolve numerous assumptions, uncertainties and opportunities, both generaland specific. The risk exists that these statements may not be fulfilled.Franklin does not undertake, and hereby disclaims, any duty to update theseforward-looking statements even though the situation and circumstances maychange in the future. Readers are cautioned not to place undue reliance onthese forward-looking statements as a number of factors could cause futurecompany results to differ materially from these statements. Forward-looking statements may be influenced in particular by factorssuch as fluctuations in interest rates and stock indices, the effects ofcompetition in the areas in which Franklin operates, and changes ineconomic, political, regulatory and technological conditions. Otherspecific risks related to Franklin include the following: potentialinability to successfully implement its growth business strategy; theintegration of businesses that may be acquired; Franklin's limitedoperating history; the potential unavailability of external financing;reliance on brokered deposits; the geographic concentration of itsbusiness, commercial real estate and consumer loan portfolios, including asignificant concentration in California; the potential unavailability ofsingle family loans for bulk purchase; the portion of the single familyloan portfolio that is less than one year old; fraud and negligence by loanapplicants and others with whom Franklin does business; credit riskassociated with smaller borrowers in its mortgage banker finance operation;the effect of changes in the extensive regulatory scheme to which thecompany is subject; the possibility that allowance for credit losses may beinsufficient to cover actual losses; interruption in or breach of theinformation systems; the potential inability to obtain the third-partyinformation services on which it relies; and environmental risks associatedwith foreclosure on real estate properties. Franklin cautions that theforegoing list is not exhaustive. Investors should carefully consider theaforementioned factors as well as other uncertainties and events. Conference Call The company will conduct a conference call to review the announcementsmade in this press release on Wednesday, January 31, 2007, at 10:00 a.m.CT. The conference call is available by telephone 1-800-231-9012.Participants calling from outside the United States may dial1-719-457-2617. The passcode "7262848" is required to access the call.Please call in 10 minutes before the call to avoid being unable to enterthe call on time. A recording of the conference call will be available after 2 p.m. CT onWednesday, January 31, 2007 through midnight on February 13, 2007. Therecorded message will be available at 1-888-203-1112. Participants callingfrom outside the United States may dial 1-719-457-0820. The passcode"7262848" is required to access the replay of the call. FRANKLIN BANK CORP. CONSOLIDATED BALANCE SHEET (In thousands) (Unaudited) December 31, September 30, December 31, 2006 2006 2005 Assets Cash and cash equivalents $86,783 $63,352 $125,727 Available for sale securities 59,232 60,503 63,779 FHLB stock and other investments 99,937 87,927 80,802 Mortgage-backed securities 290,720 302,041 137,539 Loans Single family 2,826,730 2,778,650 2,672,603 Commercial 1,750,701 1,537,167 1,061,649 Consumer 110,302 110,329 92,510 Allowance for credit losses (11,671) (14,212) (13,367) Loans, net 4,676,062 4,411,934 3,813,395 Goodwill 153,487 149,858 147,742 Other intangible assets, net 14,548 13,809 13,954 Premises and equipment, net 28,208 27,411 25,459 Real estate owned 22,031 20,259 5,856 Other assets 106,359 36,108 56,999 $5,537,367 $5,173,202 $4,471,252 Liabilities Deposits $2,631,964 $2,562,362 $2,121,508 FHLB advances 2,309,745 2,018,290 1,842,394 Other short-term borrowing --- --- 5,000 Junior subordinated notes 108,093 108,059 107,960 Other liabilities 54,839 48,521 61,559 Total liabilities 5,104,641 4,737,232 4,138,421 Stockholders' equity Preferred stock 86,250 86,250 --- Common stock 236 235 234 Paid-in capital 281,207 280,125 281,789 Retained earnings 67,380 71,392 51,863 Accumulated other comprehensive income: - Unrealized losses on securities available for sale, net (2,347) (2,032) (1,606) - Cash flow hedges, net --- --- 551 Total stockholders' equity 432,726 435,970 332,831 $5,537,367 $5,173,202 $4,471,252 FRANKLIN BANK CORP. STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited) Quarter Ended Dec. 31, Sept. 30, Dec. 31, 2006 2006 2005 Interest income Cash equivalents and short-term investments $2,432 $2,353 $2,231 Mortgage-backed securities 4,028 4,104 1,542 Loans 75,338 68,785 52,042 Total interest income 81,798 75,242 55,815 Interest expense Deposits 28,182 27,120 15,367 FHLB advances 28,057 24,120 17,549 Junior subordinated notes 2,044 1,939 1,649 Other 11 --- --- Total interest expense 58,294 53,179 34,565 Net interest income 23,504 22,063 21,250 Provision for credit losses 2,440 607 4,443 Net interest income after provision for credit losses 21,064 21,456 16,807 Non-interest income Loan fee income 1,534 1,746 1,504 Deposit fees 1,615 1,703 1,445 Gain (loss) on sale of single family loans (13,123) 1,733 1,210 Gain on sale of securities --- --- 203 Other 1,661 1,519 498 Total non-interest income (8,313) 6,701 4,860 Non-interest expense Salaries and benefits 9,092 8,036 6,644 Data processing 1,564 1,650 1,313 Occupancy 1,873 1,979 1,632 Professional fees 1,215 868 882 Loan expenses 432 591 616 Core deposit amortization 327 327 391 Real estate owned (478) 1,856 165 Other 2,444 2,235 2,594 Total non-interest expenses 16,469 17,542 14,237 Income before taxes (3,718) 10,615 7,430 Income tax expense (benefit) (1,323) 3,871 2,707 Net income $(2,395) $6,744 $4,723 Net income available to common stockholders $(4,012) $5,127 $4,723 Basic earnings per common share $(0.17) $0.22 $0.20 Diluted earnings per common share $(0.17) $0.21 $0.19 FRANKLIN BANK CORP. STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited) Year Ended December 31, 2006 2005 Interest income Cash equivalents and short-term investments $10,210 $7,697 Mortgage-backed securities 15,901 4,520 Loans 264,948 184,957 Total interest income 291,059 197,174 Interest expense Deposits 96,587 51,791 FHLB advances 94,120 56,909 Junior subordinated notes 7,491 4,441 Other 143 2 Total interest expense 198,341 113,143 Net interest income 92,718 84,031 Provision for credit losses 3,804 4,859 Net interest income after provision for credit losses 88,914 79,172 Non-interest income Loan fee income 6,611 6,920 Deposit fees 6,268 4,874 Gain (loss) on sale of single family loans (8,471) 4,214 Gain (loss) on sale of securities (2) 974 Other 4,267 1,802 Total non-interest income 8,673 18,784 Non-interest expense Salaries and benefits 35,120 28,452 Data processing 6,863 5,463 Occupancy 7,464 5,379 Professional fees 3,365 5,040 Loan expenses 2,317 2,343 Core deposit amortization 1,024 1,304 Real estate owned 1,526 269 Other 9,332 8,421 Total non-interest expenses 67,011 56,671 Income before taxes 30,576 41,285 Income tax expense 11,196 14,989 Net income $19,380 $26,296 Net income available to common stock shareholders $15,517 $26,296 Basic earnings per common share $0.66 $1.16 Diluted earnings per common share $0.65 $1.13 FRANKLIN BANK CORP. YIELD ANALYSIS (In thousands) (Unaudited) Quarter Ended December 31, 2006 Interest Average Average Income/ Yield/ Balance Expense Rate Interest-Earning Assets Short-term interest earning assets $42,446 $547 5.05% Available for sale securities 61,390 757 4.89% FHLB stock and other investments 92,003 1,128 4.86% Mortgage-backed securities 300,171 4,028 5.37% Loans Single family 2,842,111 40,316 5.67% Builder lines 1,099,510 23,513 8.48% Commercial real estate 326,142 6,261 7.62% Mortgage banker finance 137,353 2,580 7.45% Commercial business 38,161 701 7.29% Consumer 109,571 1,967 7.12% Total loans 4,552,848 75,338 6.57% Total interest-earning assets 5,048,858 81,798 6.43% Non-interest-earning assets 288,310 Total assets $5,337,168 Interest-Bearing Liabilities Deposits Community banking Checking accounts $156,715 609 1.54% Money market and savings 255,158 1,982 3.08% Certificates of deposit 834,622 9,304 4.42% Non-interest bearing deposits 151,251 --- --- Total community banking 1,397,746 11,895 3.38% Wholesale and money desk 1,195,497 16,287 5.41% Total deposits 2,593,243 28,182 4.31% FHLB advances 2,142,418 28,057 5.12% Short term borrowing 783 11 --- Junior subordinated notes 108,074 2,044 7.40% Total interest- bearing liabilities 4,844,518 58,294 4.74% Non-interest-bearing liabilities and stockholder's equity 492,650 Total liabilities and stockholder's equity $5,337,168 Net interest income/ interest rate spread $23,504 1.69% Net yield on interest- earning assets 1.88% Ratio of average interest-earning assets to average interest- bearing liabilities 104.22% FRANKLIN BANK CORP. YIELD ANALYSIS (In thousands) (Unaudited) Quarter Ended September 30, 2006 Interest Average Average Income/ Yield/ Balance Expense Rate Interest-Earning Assets Short-term interest earning assets $41,942 $537 5.01% Available for sale securities 62,963 723 4.55% FHLB stock and other investments 87,074 1,093 4.98% Mortgage-backed securities 308,839 4,104 5.32% Loans Single family 2,854,474 38,497 5.39% Builder lines 952,046 20,488 8.54% Commercial real estate 233,864 4,518 7.66% Mortgage banker finance 152,745 2,837 7.37% Commercial business 38,339 686 7.10% Consumer 94,240 1,759 7.41% Total loans 4,325,708 68,785 6.34% Total interest- earning assets 4,826,526 75,242 6.21% Non-interest-earning assets 286,624 Total assets $5,113,150 Interest-Bearing Liabilities Deposits Community banking Checking accounts $160,889 610 1.50% Money market and savings 248,356 1,855 2.96% Certificates of deposit 805,968 8,401 4.14% Non-interest bearing deposits 148,884 --- --- Total community banking 1,364,097 10,866 3.16% Wholesale and money desk 1,225,121 16,254 5.26% Total deposits 2,589,218 27,120 4.16% FHLB advances 1,940,504 24,120 4.86% Short term borrowing --- --- --- Junior subordinated notes 108,038 1,939 7.02% Total interest- bearing liabilities 4,637,760 53,179 4.52% Non-interest-bearing liabilities and stockholder's equity 475,390 Total liabilities and stockholder's equity $5,113,150 Net interest income/interest rate spread $22,063 1.69% Net yield on interest- earning assets 1.87% Ratio of average interest- earning assets to average interest-bearing liabilities 104.07% FRANKLIN BANK CORP. YIELD ANALYSIS (In thousands) (Unaudited) Quarter Ended December 31, 2005 Interest Average Average Income/ Yield/ Balance Expense Rate Interest-Earning Assets Short-term interest earning assets $68,581 $668 3.81% Available for sale securities 65,650 643 3.89% FHLB stock and other investments 88,757 920 4.11% Mortgage-backed securities 143,026 1,542 4.31% Loans Single family 2,794,074 32,854 4.70% Builder lines 644,879 11,235 6.91% Commercial real estate 179,269 3,174 7.03% Mortgage banker finance 162,687 2,551 6.22% Commercial business 42,698 626 5.81% Consumer 87,836 1,602 7.24% Total loans 3,911,443 52,042 5.30% Total interest- earning assets 4,277,457 55,815 5.20% Non-interest-earning assets 229,686 Total assets $4,507,143 Interest-Bearing Liabilities Deposits Community banking Checking accounts $173,262 601 1.38% Money market and savings 195,841 898 1.82% Certificates of deposit 552,193 4,427 3.18% Non-interest bearing deposits 137,150 --- --- Total community banking 1,058,446 5,926 2.22% Wholesale and money desk 994,613 9,441 3.77% Total deposits 2,053,059 15,367 2.97% FHLB advances 1,966,839 17,547 3.49% Short term borrowing 109 2 6.95% Junior subordinated notes 107,939 1,649 5.98% Total interest-bearing liabilities 4,127,946 34,565 3.30% Non-interest-bearing liabilities and stockholder's equity 379,197 Total liabilities and stockholder's equity $4,507,143 Net interest income/interest rate spread $21,250 1.90% Net yield on interest- earning assets 2.02% Ratio of average interest- earning assets to average interest-bearing liabilities 103.62% FRANKLIN BANK CORP. YIELD ANALYSIS (In thousands) (Unaudited) Year Ended December 31, 2006 Interest Average Average Income/ Yield/ Balance Expense Rate Interest-Earning Assets Short-term interest earning assets $65,006 $3,146 4.77% Available for sale securities 63,346 2,803 4.42% FHLB stock and other investments 88,704 4,261 4.80% Mortgage-backed securities 303,818 15,901 5.23% Loans Single family 2,796,836 151,043 5.40% Builder lines 911,932 75,415 8.27% Commercial real estate 241,556 18,148 7.51% Mortgage banker finance 150,869 10,636 7.05% Commercial business 38,968 2,730 7.01% Consumer 97,075 6,976 7.19% Total loans 4,237,236 264,948 6.25% Total interest-earning assets 4,758,110 291,059 6.12% Non-interest-earning assets 288,485 Total assets $5,046,595 Interest-Bearing Liabilities Deposits Community banking Checking accounts $174,340 2,696 1.55% Money market and savings 247,449 6,836 2.76% Certificates of deposit 778,682 31,258 4.01% Non-interest bearing deposits 154,310 --- --- Total community banking 1,354,781 40,790 3.01% Wholesale and money desk 1,117,683 55,797 4.99% Total deposits 2,472,464 96,587 3.91% FHLB advances 2,020,917 94,120 4.59% Short term borrowing 2,389 143 5.88% Junior subordinated notes 108,022 7,491 6.84% Total interest-bearing liabilities 4,603,792 198,341 4.28% Non-interest-bearing liabilities and stockholder's equity 442,803 Total liabilities and stockholder's equity $5,046,595 Net interest income/interest rate spread $92,718 1.84% Net yield on interest-earning assets 1.98% Ratio of average interest-earning assets to average interest-bearing liabilities 103.35% FRANKLIN BANK CORP. YIELD ANALYSIS (In thousands) (Unaudited) Year Ended December 31, 2005 Interest Average Average Income/ Yield/ Balance Expense Rate Interest-Earning Assets Short-term interest earning assets $86,232 $2,446 2.80% Available for sale securities 66,709 2,202 3.30% FHLB stock and other investments 83,328 3,049 3.66% Mortgage-backed securities 117,022 4,520 3.86% Loans Single family 2,758,065 125,776 4.56% Builder lines 514,418 34,455 6.70% Commercial real estate 128,568 8,684 6.75% Mortgage banker finance 148,488 8,765 5.90% Commercial business 33,192 2,012 6.06% Consumer 73,875 5,265 7.13% Total loans 3,656,606 184,957 5.06% Total interest-earning assets 4,009,897 197,174 4.92% Non-interest-earning assets 183,649 Total assets $4,193,546 Interest-Bearing Liabilities Deposits Community banking Checking accounts $126,794 1,496 1.18% Money market and savings 190,621 3,106 1.63% Certificates of deposit 457,174 12,770 2.79% Non-interest bearing deposits 114,592 --- --- Total community banking 889,181 17,372 1.95% Wholesale and money desk 1,068,696 34,419 3.22% Total deposits 1,957,877 51,791 2.64% FHLB advances 1,821,530 56,909 3.08% Short term borrowing 27 2 6.95% Junior subordinated notes 72,525 4,441 6.04% Total interest-bearing liabilities 3,851,959 113,143 2.91% Non-interest-bearing liabilities and stockholder's equity 341,587 Total liabilities and stockholder's equity $4,193,546 Net interest income/interest rate spread $84,031 2.01% Net yield on interest-earning assets 2.12% Ratio of average interest-earning assets to average interest-bearing liabilities 104.10% FRANKLIN BANK CORP. FINANCIAL HIGHLIGHTS (dollars in thousands except per share data) (Unaudited) Quarter Ended Dec. 31, Sept. 30, Dec. 31, 2006 2006 2005 Common share data Ending shares outstanding 23,588,856 23,541,080 23,375,076 Average shares outstanding - basic 23,563,133 23,476,260 23,375,076 Average shares outstanding - diluted 24,204,064 24,086,350 23,803,082 Basic earnings per share $(0.17) $0.22 $0.20 Diluted earnings per share (0.17) 0.21 0.19 Common book value (period end) $14.90 $15.07 $14.24 Common tangible book value (period end) 7.77 8.12 7.32 Average balances Assets $5,337,168 $5,113,150 $4,507,143 Interest-earning assets 5,048,858 4,826,526 4,277,457 Interest-bearing liabilities 4,844,518 4,637,760 4,127,946 Ratios ROA (0.18%) 0.52% 0.42% ROCE (2.69%) 6.19% 5.66% Net interest spread 1.69% 1.69% 1.90% Net yield on interest-earning assets 1.88% 1.87% 2.02% Efficiency Ratio 55.33% [a] 59.85% 53.45% Equity to assets (period end) 7.81% 8.43% 7.44% Equity to assets (average) 8.18% 8.45% 7.34% Capital ratios - (bank only): Leverage ratio 7.22% 7.63% 6.33% Tier 1 risk-based capital ratio 9.85% 10.92% 9.92% Total risk-based capital ratio 10.15% 11.33% 10.41% Asset quality Nonperforming Loans ("NPLs") $13,260 $14,478 $26,057 REO 21,263 19,456 4,932 Nonperforming Assets ("NPAs") $34,523 $33,934 $30,989 NPLs as % of loans 0.28% 0.33% 0.68% NPAs as % of assets 0.62% 0.66% 0.69% Allowance to period end loan balance 0.25% 0.32% 0.35% Allowance to average loan balance 0.26% 0.33% 0.34% Branch and employee data Full-time equivalent employees 627 624 710 Commercial banking offices 8 9 6 Retail mortgage offices 37 38 45 Wholesale mortgage origination offices 2 2 4 Community banking offices 39 36 36 Loan portfolio Single family Held for investment $2,144,525 $2,593,396 $2,405,580 Held for sale 682,205 185,254 267,023 Builder lines 1,196,841 1,043,571 668,753 Mortgage banker finance 150,824 136,831 173,990 Other 513,338 467,094 311,416 Allowance for credit losses (11,671) (14,212) (13,367) Loans, net $4,676,062 $4,411,934 $3,813,395 Deposits Community banking $1,440,714 $1,367,149 $1,252,915 Wholesale and money desk 1,191,250 1,195,213 868,593 Total deposits $2,631,964 $2,562,362 $2,121,508 [a] Excludes loss on restructuring FRANKLIN BANK CORP. FINANCIAL HIGHLIGHTS (dollars in thousands except per share data) (Unaudited) Year Ended December 31, 2006 2005 Common share data Ending shares outstanding 23,588,856 23,375,076 Average shares outstanding-basic 23,463,666 22,739,255 Average shares outstanding-diluted 24,046,578 23,209,893 Basic earnings per share $0.66 $1.16 Diluted earnings per share 0.65 1.13 Common book value (period end) $14.90 $14.24 Common tangible book value (period end) 7.77 7.32 Average balances Assets $5,046,595 $4,193,546 Interest-earning assets 4,758,110 4,009,897 Interest-bearing liabilities 4,603,792 3,851,959 Ratios ROA 0.38% 0.63% ROCE 5.63% 8.53% Net interest spread 1.84% 2.01% Net yield on interest-earning assets 1.98% 2.12% Efficiency Ratio 57.19% [a] 54.37% Equity to assets (period end) 7.81% 7.44% Equity to assets (average) 7.84% 7.35% Capital ratios - (bank only): Leverage ratio 7.22% 6.33% Tier 1 risk-based capital ratio 9.85% 9.92% Total risk-based capital ratio 10.15% 10.41% Asset quality Nonperforming Loans ("NPLs") $13,260 $26,057 REO 21,263 4,932 Nonperforming Assets ("NPAs") $34,523 $30,989 NPLs as % of loans 0.28% 0.68% NPAs as % of assets 0.62% 0.69% Allowance to period end loan balance 0.25% 0.35% Allowance to average loan balance 0.28% 0.37% Branch and employee data Full-time equivalent employees 627 710 Commercial banking offices 8 6 Retail mortgage offices 37 45 Wholesale mortgage origination offices 2 4 Community banking offices 39 36 Loan portfolio Single family Held for investment $2,144,525 $2,405,580 Held for sale 682,205 267,023 Builder lines 1,196,841 668,753 Mortgage banker finance 150,824 173,990 Other 513,338 311,416 Allowance for credit losses (11,671) (13,367) Loans, net $4,676,062 $3,813,395 Deposits Community banking $1,440,714 $1,252,915 Wholesale and money desk 1,191,250 868,593 Total deposits $2,631,964 $2,121,508 [a] Excludes loss on restructuring FRANKLIN BANK CORP. RECONCILIATION OF GAAP NET INCOME AND DILUTED EARNINGS PER SHARE TO ADJUSTED AMOUNTS (In thousands, except per share data) (Unaudited) Year Ended Three Months Ended Dec. 31, Dec. 31, Sept. 30, 2006 2006 2006 NET INCOME Net income as reported (GAAP) $15,517 $(4,012) $5,127 Reconciling items, net of tax, except preferred dividends: Expected sale of single family loans [a] 8,843 8,843 --- Charge for loan reserves [b] 747 747 --- Restructuring charge 9,590 9,590 --- Subtotal 25,107 5,578 5,127 Legal settlement [c] 978 --- 978 Preferred dividends [d] 3,863 1,617 1,617 Restricted stock [e] 162 --- 162 Adjusted net income $30,110 $7,195 $7,884 DILUTED EARNINGS PER SHARE Diluted earnings per share (GAAP) $0.65 $(0.17) $0.21 Reconciling items, net of tax, except preferred dividends: Expected sale of single family loans [a] 0.37 0.37 --- Charge for loan reserves [b] 0.03 0.03 --- Restructuring charge 0.40 0.40 --- Subtotal 1.05 0.23 0.21 Legal settlement [c] 0.04 --- 0.04 Preferred dividends [d] 0.16 0.07 0.07 Restricted stock [e] 0.01 --- 0.01 Adjusted diluted earnings per share $1.26 $0.30 $0.33 Descriptions of the reconciling items are as follows: [a] Lower of cost or market adjustment on the expected sale of single family loans totaling $8.8 million or $.37 per diluted share related to the $580 million reclassification of single family loans from Held For Investment to Held For Sale. [b] Charge for loan reserves of $747,000 or $.03 per diluted share recorded as part of the overall restructuring and strengthening of the balance sheet. The net charge is primarily comprised of additional reserves established for the commercial and single family held for investment loan portfolios. [c] Legal settlement of $978,000 or $.04 per diluted share, relating to the Taylor Brown REO. This litigation related to a disputed tract of land which is included in Franklin's REO. [d] Preferred Stock dividend payments of $3.9 million or $.16 per diluted share were paid during the year. This capital was raised late during the second quarter in anticipation of an acquisition. [e] One-time restricted stock expense recorded of $162,000 or $.01 per diluted share related to stock granted to retirement-age employees and directors.
