##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 Form 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period
ended: June 30, 2007
 Or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from                    to
 Commission file number: 000-50518
 Franklin Bank Corp.
 (Exact name of Registrant as specified in its charter)
 Delaware(State or other jurisdiction of 
incorporation or organization)
    
    11-3626383(I.R.S. Employer
Identification Number)9800 Richmond Avenue, Suite 680Houston, Texas
    
    77042(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code:
 (713) 339-8900
 o þ
  Large accelerated
filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
 o þ




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##### 



FRANKLIN BANK CORP.
INDEX TO FORM 10-Q
 PagePART I
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (unaudited)
    
    
    1Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006
    
    
    1Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2007 and 2006
    
    
    2Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2006
    
    
    3Notes to Interim Consolidated Financial Statements
    
    
    4Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    6Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    15Item 4.
    
    Controls and Procedures
    
    
    16PART II
    
    OTHER INFORMATION
    
    
    17Item 1.
    
    Legal Proceedings
    
    
    17Item 1A.
    
    Risk Factors
    
    
    17Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    17Item 3.
    
    Defaults Upon Senior Securities
    
    
    17Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    17Item 5.
    
    Other Information
    
    
    18Item 6.
    
    Exhibits
    
    
    18Signatures
    
    
    19Rule 13a-14(a) Certification of the CEORule 13a-14(a) Certification of the CFOSection 1350 Certification of the CEOSection 1350 Certification of the CFO




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 FRANKLIN BANK CORP.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
 June 30,
    
    
    December 31,2007
    
    
    2006(unaudited)ASSETSCash and cash equivalents
    
    $
    189,905
    
    
    $
    86,783Trading securities
    
    
    128,543
    
    
    
    Securities held to maturity, at amortized cost
    
    
    166,580
    
    
    
    Securities available for sale, at fair value
    
    
    251,492
    
    
    
    349,952Federal Home Loan Bank stock and other investments, at cost
    
    
    86,516
    
    
    
    99,937Loans held for sale
    
    
    110,641
    
    
    
    682,205Loans held for investment (net of allowance for credit losses of $15.6 million and $11.7
million at June 30, 2007 and December 31, 2006, respectively)
    
    
    4,121,869
    
    
    
    3,993,857Goodwill
    
    
    251,588
    
    
    
    153,487Other intangible assets, net of amortization
    
    
    33,399
    
    
    
    14,548Premises and equipment, net
    
    
    37,836
    
    
    
    28,208Real estate owned
    
    
    31,199
    
    
    
    22,031Other assets
    
    
    136,197
    
    
    
    106,359TOTAL ASSETS
    
    $
    5,545,765
    
    
    $
    5,537,367LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIESDeposits
    
    $
    2,783,918
    
    
    $
    2,631,964Federal Home Loan Bank advances
    
    
    1,977,310
    
    
    
    2,309,745Convertible senior notes
    
    
    97,335
    
    
    
    Subordinated notes
    
    
    123,184
    
    
    
    108,093Other liabilities
    
    
    94,483
    
    
    
    54,839Total liabilities
    
    
    5,076,230
    
    
    
    5,104,641COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITYPreferred stock, $0.01 par value, 5,000,000 shares authorized, 3,450,000 issued and outstanding
    
    
    86,250
    
    
    
    86,250Common stock $0.01 par value, 35,000,000 shares authorized and 25,345,500 and 23,588,856
issued and outstanding at June 30, 2007 and December 31, 2006, respectively
    
    
    253
    
    
    
    236Additional paid-in capital
    
    
    305,482
    
    
    
    281,207Retained earnings
    
    
    79,066
    
    
    
    67,380Accumulated other comprehensive loss  Unrealized losses on securities
available for
sale, net
    
    
    (1,516
    )
    
    
    (2,347
    )Total stockholders equity
    
    
    469,535
    
    
    
    432,726TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    5,545,765
    
    
    $
    5,537,367
  1




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##### Table of Contents



FRANKLIN BANK CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(unaudited)
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006INTEREST INCOMECash equivalents and short-term investments
    
    $
    2,523
    
    
    $
    3,344
    
    
    $
    5,877
    
    
    $
    5,425Trading securities
    
    
    1,953
    
    
    
    
    
    
    
    4,002
    
    
    
    Mortgage-backed securities
    
    
    4,172
    
    
    
    4,246
    
    
    
    6,621
    
    
    
    7,769Loans
    
    
    72,785
    
    
    
    65,736
    
    
    
    142,919
    
    
    
    120,825Total interest income
    
    
    81,433
    
    
    
    73,326
    
    
    
    159,419
    
    
    
    134,019INTEREST EXPENSEDeposits
    
    
    27,108
    
    
    
    24,314
    
    
    
    53,890
    
    
    
    41,285Federal Home Loan Bank advances
    
    
    25,659
    
    
    
    22,483
    
    
    
    52,715
    
    
    
    41,943Convertible senior notes
    
    
    785
    
    
    
    
    
    
    
    785
    
    
    
    Subordinated notes
    
    
    2,207
    
    
    
    1,791
    
    
    
    4,209
    
    
    
    3,508Other
    
    
    3
    
    
    
    59
    
    
    
    3
    
    
    
    132Total interest expense
    
    
    55,762
    
    
    
    48,647
    
    
    
    111,602
    
    
    
    86,868Net interest income
    
    
    25,671
    
    
    
    24,679
    
    
    
    47,817
    
    
    
    47,151PROVISION FOR CREDIT LOSSES
    
    
    907
    
    
    
    428
    
    
    
    1,522
    
    
    
    757Net income after provision for credit losses
    
    
    24,764
    
    
    
    24,251
    
    
    
    46,295
    
    
    
    46,394NON-INTEREST INCOMELoan fee income
    
    
    2,546
    
    
    
    1,917
    
    
    
    4,384
    
    
    
    3,331Deposit fees
    
    
    2,377
    
    
    
    1,490
    
    
    
    4,028
    
    
    
    2,950Gain on sale
of single family loans and mortgage servicing rights  valuation,
net
    
    
    1,186
    
    
    
    1,591
    
    
    
    2,474
    
    
    
    2,919Bank owned
life insurance income
    
    
    1,035
    
    
    
    64
    
    
    
    2,123
    
    
    
    126Other
    
    
    757
    
    
    
    575
    
    
    
    1,439
    
    
    
    959Total non-interest income
    
    
    7,901
    
    
    
    5,637
    
    
    
    14,448
    
    
    
    10,285NON-INTEREST EXPENSESalaries and benefits
    
    
    9,889
    
    
    
    9,192
    
    
    
    18,678
    
    
    
    17,992Data processing
    
    
    1,969
    
    
    
    1,755
    
    
    
    3,255
    
    
    
    3,649Occupancy
    
    
    2,232
    
    
    
    1,772
    
    
    
    4,032
    
    
    
    3,612Professional fees
    
    
    1,069
    
    
    
    683
    
    
    
    1,801
    
    
    
    1,282Loan expenses, net
    
    
    382
    
    
    
    815
    
    
    
    892
    
    
    
    1,294Core deposit amortization
    
    
    643
    
    
    
    (111
    )
    
    
    964
    
    
    
    370Real estate owned
    
    
    406
    
    
    
    167
    
    
    
    927
    
    
    
    148Other
    
    
    2,948
    
    
    
    2,333
    
    
    
    5,514
    
    
    
    4,653Total non-interest expenses
    
    
    19,538
    
    
    
    16,606
    
    
    
    36,063
    
    
    
    33,000Income before taxes
    
    
    13,127
    
    
    
    13,282
    
    
    
    24,680
    
    
    
    23,679INCOME TAX EXPENSE
    
    
    4,409
    
    
    
    4,847
    
    
    
    8,145
    
    
    
    8,648NET INCOME
    
    
    8,718
    
    
    
    8,435
    
    
    
    16,535
    
    
    
    15,031Preferred dividends
    
    
    (1,617
    )
    
    
    (629
    )
    
    
    (3,234
    )
    
    
    (629
    )NET INCOME AVAILABLE TO COMMON STOCK SHAREHOLDERS
    
    $
    7,101
    
    
    $
    7,806
    
    
    $
    13,301
    
    
    $
    14,402Net income per common shareBasic
    
    $
    0.30
    
    
    $
    0.33
    
    
    $
    0.57
    
    
    $
    0.62Diluted
    
    $
    0.30
    
    
    $
    0.33
    
    
    $
    0.56
    
    
    $
    0.60Basic weighted average number of common shares outstanding
    
    
    23,523,391
    
    
    
    23,411,739
    
    
    
    23,481,320
    
    
    
    23,406,708Diluted weighted average number of common shares outstanding
    
    
    23,873,023
    
    
    
    24,009,121
    
    
    
    23,951,465
    
    
    
    23,941,129
  2




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FRANKLIN BANK CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)
 Six
Months Ended June 30,2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIESNet income
    
    $
    16,535
    
    
    $
    15,031Adjustments to reconcile net income to net cash flows provided (used) by operating activities:Provision for credit losses
    
    
    1,522
    
    
    
    757Provision
for real estate owned losses
    
    
    726
    
    
  
     12Net loss on trading securities hedging mortgage servicing rights
    
    
    925
    
    
    
    Change in fair value of mortgage servicing rights
    
    
    (2,474
    )
    
    
    Net gain on sale of mortgage-backed securities, loans, and real estate owned
    
    
    (929
    )
    
    
    (2,956
    )Depreciation and amortization
    
    
    3,156
    
    
    
    3,054Federal Home Loan Bank stock dividends
    
    
    (2,453
    )
    
    
    (2,026
    )Funding of loans held for sale
    
    
    (276,129
    )
    
    
    (422,364
    )Proceeds from sale of loans held for sale
    
    
    206,602
    
    
    
    386,010Proceeds from principal repayments of trading securities
    
    
    9,152
    
    
    
    Proceeds from principal repayments of loans held for sale
    
    
    22,990
    
    
    
    73,161Proceeds from sales of trading securities
    
    
    10,751
    
    
    
    Other changes in loans held for sale
    
    
    966
    
    
    
    1,507Stock based
compensation expense
    
    
    462
    
    
    
    457Change in interest receivable
    
    
    1,407
    
    
    
    (5,821
    )Change in other assets
    
    
    (23,423
    )
    
    
    29,415Change in other liabilities
    
    
    1,570
    
    
    
    (22,881
    )Net cash provided (used) by operating activities
    
    
    (28,644
    )
    
    
    53,356CASH FLOWS FROM INVESTING ACTIVITIESCash paid for acquisitions
    
    
    (134,179
    )
    
    
    Cash and cash equivalents acquired from Bryan
    
    
    15,165
    
    
    
    Fundings of loans held for investment
    
    
    (1,514,597
    )
    
    
    (1,910,656
    )Proceeds
from principal repayments of securities held to maturity
    
    
    1,033
    
    
    
    Proceeds from principal repayments of securities available for sale
    
    
    22,983
    
    
    
    29,153Proceeds from sale of loans held for investment
    
    
    583,016
    
    
    
    Proceeds from principal repayments of loans held for investment
    
    
    1,819,631
    
    
    
    2,064,023Proceeds
from maturities/sale of securities available for sale
    
    
    85,319
    
    
    
    710Proceeds from redemptions of Federal Home Loan Bank stock
    
    
    25,776
    
    
    
    16,495Proceeds from sale of real estate owned
    
    
    4,924
    
    
    
    2,762Purchases of Federal Home Loan Bank stock and other securities
    
    
    (8,853
    )
    
    
    (20,795
    )Purchases of mortgage servicing rights
    
    
    (3,898
    )
    
    
    Purchases of securities available for sale
    
    
    (41,031
    )
    
    
    (204,619
    )Purchases of
securities held to maturity
    
    
    (167,600
    )
    
    
    Purchases of loans held for investment
    
    
    (66,843
    )
    
    
    (689,721
    )Purchases of premises and equipment
    
    
    (1,667
    )
    
    
    (1,784
    )Net change in loans held for investment
    
    
    38,752
    
    
    
    (22,943
    )Net cash provided (used) by investing activities
    
    
    657,931
    
    
    
    (737,375
    )CASH FLOWS FROM FINANCING ACTIVITIESNet change in deposits
    
    
    (319,798
    )
    
    
    400,382Proceeds from Federal Home Loan Bank advances
    
    
    701,000
    
    
    
    1,528,000Repayment of Federal Home Loan Bank advances
    
    
    (1,040,325
    )
    
    
    (1,371,445
    )Payment on short-term borrowings
    
    
    
    
    
    
    (5,000
    )Proceeds from issuance of contingent convertible senior notes
    
    
    97,362
    
    
    
    Proceeds from issuance of subordinated debt
    
    
    15,000
    
    
    
    Proceeds from issuance of preferred stock
    
    
    
    
    
    
    86,250Proceeds from issuance of common stock
    
    
    24,759
    
    
    
    289Dividends on preferred stock
    
    
    (3,234
    )
    
    
    (629
    )Payment of preferred stock issuance costs
    
    
    
    
    
    
    (2,973
    )Payment of common stock issuance costs
    
    
    (929
    )
    
    
    (20
    )Net cash
provided (used) by financing activities
    
    
    (526,165
    )
    
    
    634,854NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    103,122
    
    
    
    (49,165
    )CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    86,783
    
    
    
    125,727CASH AND CASH EQUIVALENTS AT PERIOD END
    
    $
    189,905
    
    
    $
    76,562Supplemental disclosures of cash flow informationCash paid for interest
    
    $
    121,731
    
    
    $
    83,498Cash paid for taxes
    
    
    3,718
    
    
    
    4,646Noncash investing activitiesTransfers to loans held for investment
    
    $
    32,979
    
    
    $
    Real estate owned acquired through foreclosure
    
    
    14,663
    
    
    
    17,459Transfers to trading securities
    
    
    149,371
    
    
    
    Purchase of
securities available for sale on trade date basis
    
    
    35,542
    
    
    
    
  3




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FRANKLIN BANK CORP.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(unaudited)
 1. Summary of Significant Accounting Policies
 Basis of Presentation
  Recent accounting standards
 The Fair Value Option for Financial Assets and
Financial Liabilities.
 Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and
132(R).
 Fair Value Measurements.
 Considering the Effects of Prior Year Misstatements When Quantifying
Misstatements in Current Year Financial Statements.
 Accounting for Uncertainty in Income
Taxesan Interpretation of FASB Statement No. 109
 Accounting for Servicing of Financial Assets. Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, Accounting for Certain Investments in Debt and Equity
Securities,
 Accounting for Certain Hybrid Financial Instruments, Accounting for Derivative Instruments and Hedging Activities, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
 Accounting Changes and Error Corrections.
 StockBased Compensation
    4




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##### Table of Contents



2. Earnings per Common Share
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income available to common stock shareholdersNet income
    
    $
    8,718
    
    
    $
    8,435
    
    
    $
    16,535
    
    
    $
    15,031Preferred dividends
    
    
    (1,617
    )
    
    
    (629
    )
    
    
    (3,234
    )
    
    
    (629
    )Net income available to common stock shareholders
    
    $
    7,101
    
    
    $
    7,806
    
    
    $
    13,301
    
    
    $
    14,402SharesAverage common shares outstanding
    
    
    23,523,391
    
    
    
    23,411,739
    
    
    
    23,481,320
    
    
    
    23,406,708Potentially
dilutive common shares from options and restricted stock
    
    
    349,632
    
    
    
    597,382
    
    
    
    470,145
    
    
    
    534,421Average common shares and potentially dilutive common
shares outstanding
    
    
    23,873,023
    
    
    
    24,009,121
    
    
    
    23,951,465
    
    
    
    23,941,129Basic earnings per common share
    
    $
    0.30
    
    
    $
    0.33
    
    
    $
    0.57
    
    
    $
    0.62Diluted earnings per common share
    
    $
    0.30
    
    
    $
    0.33
    
    
    $
    0.56
    
    
    $
    0.60
  3. Acquisitions
   For
the three monthsended June 30,2007
    
    
    2006(In thousands, exceptper share amounts)Net interest
income
    
    $
    26,501
    
    
    $
    27,832Net income
available to common shareholders
    
    
    6,585
    
    
    
    8,509Earnings per
share (diluted)
    
    
    .28
    
    
    
    .35
 For
the six monthsended June 30,2007
    
    
    2006(In thousands, exceptper share amounts)Net interest
income
    
    $
    51,940
    
    
    $
    53,576Net income
available to common shareholders
    
    
    13,429
    
    
    
    15,506Earnings per
share (diluted)
    
    
    .56
    
    
    
    .65
  4.
Securities Held-to-Maturity and Securities Available-for-Sale
  June 30, 2007


    


December 31, 2006Gross
    
    Gross
    
    
    
    
    
    
    
    
    
    Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    Estimated
    
    Amortized
    
    Unrealized
    
    Unrealized
    
    EstimatedCost
    
    Gains
    
    Losses
    
    Fair Value
    
    Cost
    
    Gains
    
    Losses
    
    Fair ValueSecurities Held to
Maturity:U.S. government
agencies and
corporations
    
    $
    166,580
    
    
    $
    53
    
    
    $
    (2,900
    )
    
    $
    163,733
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Total
    
    $
    166,580
    
    
    $
    53
    
    
    $
    (2,900
    )
    
    $
    163,733
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Securities Available
For Sale:U.S. government
agencies and
corporations
    
    $
    164,850
    
    
    $
    216
    
    
    $
    (1,466
    )
    
    $
    163,600
    
    
    $
    139,453
    
    
    $
    348
    
    
    $
    (1,514
    )
    
    $
    138,287States and political
subdivisions
    
    
    4,480
    
    
    
    1
    
    
    
    (71
    )
    
    
    4,410
    
    
    
    5,025
    
    
    
    3
    
    
    
    (30
    )
    
    
    4,998Other
    
    
    84,569
    
    
    
    
    
    
    
    (1,087
    )
    
    
    83,482
    
    
    
    209,199
    
    
    
    
    
    
    
    (2,532
    )
    
    
    206,667Total
    
    $
    253,899
    
    
    $
    217
    
    
    $
    (2,624
    )
    
    $
    251,492
    
    
    $
    353,677
    
    
    $
    351
    
    
    $
    (4,076
    )
    
    $
    349,952
      5. Goodwill and Intangible Assets
  TotalBalance at January 1, 2006
    
    $
    147,742Branches (1)
    
    
    3,544Purchase price adjustment (2)
    
    
    2,201Balance at December 31, 2006
    
    
    153,487Bryan acquisition
    
    
    97,880Access Lending acquisition
    
    
    180Purchase price adjustment (2)
    
    
    41Balance at June 30, 2007
    
    $
    251,588
 
 (1)
    
    Goodwill obtained from purchase of Equity Bank branches in December 2006.(2)
    
    Purchase price adjustment based on additional information related to the valuation of certain
assets acquired and liabilities assumed.  CoreDepositIntangibleBalance at January 1, 2006
    
    $
    9,322Athens core deposit intangible adjustment
    
    
    (1,324
    )Branches core deposit intangible adjustment
    
    
    (153
    )Equity branches (1)
    
    
    460Amortization
    
    
    (1,024
    )Balance at December 31, 2006
    
    
    7,281Bryan
acquisition (1)
    
    
    11,400Amortization
    
    
    (964
    )Balance at June 30, 2007
    
    $
    17,717
 
 (1)
    
    Preliminary core deposit intangible from the Equity Bank branch purchase and the Bryan
acquisition were estimated based on deposits with similar
characteristics. Final core deposit intangible will be determined
using actual deposit data from the acquisitions.   Fair value on January 1, 2007
    
    $
    7,267Addition of mortgage servicing rights
    
    
    5,940Reductions due to loan payments
    
    
    (738
    )Changes in fair value due to:Changes in current market interest rates
    
    
    3,213Changes in assumptions
    
    
    Fair value on June 30, 2007
    
    $
    15,682
  January 1, 2006
    
    $
    4,632Addition of mortgage servicing rights
    
    
    1,535Amortization
    
    
    (391
    )June 30, 2006
    
    $
    5,776
   Weighted average age (in years)
    
    
    1.9Annual constant prepayment rate
    
    
    11.43
    %Annual discount rate
    
    
    9.14
    %Annual cost to service (per loan)
    
    $
    44.00Annual earnings on escrow
    
    
    5.44
    %
 6.
Convertible Notes
 th
  7. Preferred Stock
     8.
Common Stock
  9. Income Taxes
 Accounting for
Uncertainty in Income Taxes, an Interpretation of FASB Statement 109,
    10. Operating Segments
     Mortgage
    
    
    
    
    
    TotalBanking
    
    
    Banking
    
    
    Other
    
    
    ConsolidatedJune 30, 2007Net interest income (expense)
    
    $
    40,918
    
    
    $
    11,722
    
    
    $
    (4,823
    )
    
    $
    47,817Provision
for credit losses
    
    
    (1,694
    )
    
    
    172
    
    
    
    
    
    
    
    (1,522
    )Non-interest income
    
    
    8,347
    
    
    
    6,101
    
    
    
    
    
    
    
    14,448Non-interest expense
    
    
    (24,259
    )
    
    
    (11,324
    )
    
    
    (480
    )
    
    
    (36,063
    )Income (loss) before income taxes
    
    
    23,312
    
    
    
    6,671
    
    
    
    (5,303
    )
    
    
    24,680Income tax expense (benefit)
    
    
    (8,159
    )
    
    
    (2,335
    )
    
    
    2,349
    
    
    
    (8,145
    )Net income (loss)
    
    $
    15,153
    
    
    $
    4,336
    
    
    $
    (2,954
    )
    
    $
    16,535June 30, 2006Net interest income (expense)
    
    $
    31,553
    
    
    $
    19,238
    
    
    $
    (3,640
    )
    
    $
    47,151Provision
for credit losses
    
    
    (610
    )
    
    
    (147
    )
    
    
    
    
    
    
    (757
    )Non-interest income
    
    
    4,688
    
    
    
    5,591
    
    
    
    6
    
    
    
    10,285Non-interest expense
    
    
    (20,246
    )
    
    
    (12,339
    )
    
    
    (415
    )
    
    
    (33,000
    )Income (loss) before income taxes
    
    
    15,385
    
    
    
    12,343
    
    
    
    (4,049
    )
    
    
    23,679Income tax expense (benefit)
    
    
    (5,385
    )
    
    
    (4,320
    )
    
    
    1,057
    
    
    
    (8,648
    )Net income (loss)
    
    $
    10,000
    
    
    $
    8,023
    
    
    $
    (2,992
    )
    
    $
    15,031June 30, 2007Average loans
    
    $
    1,961,856
    
    
    $
    2,218,171
    
    
    $
    
    
    
    $
    4,180,027Average assets
    
    
    2,993,528
    
    
    
    2,228,069
    
    
    
    
    
    
    
    5,221,597Average deposits
    
    
    2,560,209
    
    
    
    12,343
    
    
    
    
    
    
    
    2,572,552June 30, 2006Average loans
    
    $
    1,287,319
    
    
    $
    2,744,527
    
    
    $
    
    
    
    $
    4,031,846Average assets
    
    
    2,115,195
    
    
    
    2,749,875
    
    
    
    
    
    
    
    4,865,070Average deposits
    
    
    2,341,500
    
    
    
    10,229
    
    
    
    
    
    
    
    2,351,729
  Mortgage
    
    
    
    
    
    TotalBanking
    
    
    Banking
    
    
    Other
    
    
    ConsolidatedJune 30, 2007Net interest income (expense)
    
    $
    22,040
    
    
    $
    6,452
    
    
    $
    (2,821
    )
    
    $
    25,671Provision
for credit losses
    
    
    (891
    )
    
    
    (16
    )
    
    
    
    
    
    
    (907
    )Non-interest income
    
    
    4,759
    
    
    
    3,142
    
    
    
    
    
    
    
    7,901Non-interest expense
    
    
    (13,355
    )
    
    
    (5,881
    )
    
    
    (302
    )
    
    
    (19,538
    )Income (loss) before income taxes
    
    
    12,553
    
    
    
    3,697
    
    
    
    (3,123
    )
    
    
    13,127Income tax expense (benefit)
    
    
    (4,394
    )
    
    
    (1,294
    )
    
    
    1,279
    
    
    
    (4,409
    )Net income (loss)
    
    $
    8,159
    
    
    $
    2,403
    
    
    $
    (1,844
    )
    
    $
    8,718June 30, 2006Net interest income (expense)
    
    $
    16,408
    
    
    $
    10,121
    
    
    $
    (1,850
    )
    
    $
    24,679Provision
for credit losses
    
    
    (309
    )
    
    
    (119
    )
    
    
    
    
    
    
    (428
    )Non-interest income
    
    
    2,344
    
    
    
    3,292
    
    
    
    1
    
    
    
    5,637Non-interest expense
    
    
    (9,742
    )
    
    
    (6,714
    )
    
    
    (150
    )
    
    
    (16,606
    )Income (loss) before income taxes
    
    
    8,701
    
    
    
    6,580
    
    
    
    (1,999
    )
    
    
    13,282Income tax expense (benefit)
    
    
    (3,045
    )
    
    
    (2,303
    )
    
    
    501
    
    
    
    (4,847
    )Net income (loss)
    
    $
    5,656
    
    
    $
    4,277
    
    
    $
    (1,498
    )
    
    $
    8,435June 30, 2007Average loans
    
    $
    2,055,666
    
    
    $
    2,112,725
    
    
    $
    
    
    
    $
    4,168,391Average assets
    
    
    3,165,680
    
    
    
    2,124,489
    
    
    
    
    
    
    
    5,290,169Average deposits
    
    
    2,632,521
    
    
    
    13,956
    
    
    
    
    
    
    
    2,646,477June 30, 2006Average loans
    
    $
    1,360,850
    
    
    $
    2,846,921
    
    
    $
    
    
    
    $
    4,207,771Average assets
    
    
    2,263,833
    
    
    
    2,852,561
    
    
    
    
    
    
    
    5,116,394Average deposits
    
    
    2,538,708
    
    
    
    12,156
    
    
    
    
    
    
    
    2,550,864
 5




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Cautionary Note Regarding Forward Looking Information
  
    
    earnings growth;
    
    revenue growth;
    
    future acquisitions;
    
    origination volume in our commercial and mortgage business;
    
    seasonality in our mortgage businesses;
    
    non-interest income levels, including fees from product sales;
    
    credit performance on loans made or acquired by us;
    
    tangible capital generation;
    
    margins on sales or securitizations of loans;
    
    cost and mix of deposits;
    
    market share;
    
    expense levels;
    
    results from new business initiatives in our community banking business; and
    
    other business operations and strategies.
 6




---



##### Table of Contents




    
    risks and uncertainties related to acquisitions and divestitures, including related
integration and restructuring activities, and changes in our mix of product offerings;
    
    prevailing economic conditions;
    
    changes in interest rates, loan demand, real estate values, and competition, which
can materially affect origination levels and gains on sale results in our mortgage
business, as well as other aspects of our financial performance;
    
    the level of defaults, losses and prepayments on loans made by us, whether held in
portfolio, sold in the whole loan secondary markets or securitized, which can materially
affect charge-off levels, credit loss reserve levels and our periodic valuation of our
retained interests from securitizations we may engage in;
    
    changes in accounting principles, policies and guidelines;
    
    adverse changes or conditions in capital or financial markets, which can adversely
affect our ability to sell or securitize loan originations on a timely basis or at
prices which are acceptable to us, as well as other aspects of our financial
performance;
    
    actions by rating agencies and the effects of these actions on our businesses,
operations and funding requirements;
    
    changes in applicable laws, rules, regulations or practices with respect to tax
and legal issues, whether of general applicability or specific to us; and
    
    other economic, competitive, governmental, regulatory, and technological factors
affecting our operations, pricing, products and services.
    Critical Accounting Policies
  7




---



##### Table of Contents



Overview
  Significant Transactions
       RESULTS OF OPERATIONS
 8




---



##### Table of Contents



Six Months Ended June 30, 2007 Compared to Six Months Ended June 30, 2006
  Net Interest income.
  Six Months Ended June 30,2007
    
    
    2006Interest
    
    
    Average
    
    
    
    
    
    
    Interest
    
    
    AverageAverage
    
    
    Income/
    
    
    Yield/
    
    
    Average
    
    
    Income/
    
    
    Yield/Balance
    
    
    Expense
    
    
    Rate
    
    
    Balance
    
    
    Expense
    
    
    Rate(Dollars in thousands)Interest- Earning AssetsShort-term interest earning assets
    
    $
    122,435
    
    
    $
    3,139
    
    
    
    5.10
    %
    
    $
    88,197
    
    
    $
    2,061
    
    
    
    4.65
    %Trading securities
    
    
    146,086
    
    
    
    4,002
    
    
    
    5.52
    
    
    
    
    
    
    
    
    
    
    
    Available for sale securities
    
    
    14,320
    
    
    
    285
    
    
    
    4.01
    
    
    
    64,535
    
    
    
    1,324
    
    
    
    4.14FHLB stock and other investments
    
    
    88,794
    
    
    
    2,453
    
    
    
    5.57
    
    
    
    87,855
    
    
    
    2,040
    
    
    
    4.68Mortgage-backed securities available
for sale
    
    
    200,502
    
    
    
    5,252
    
    
    
    5.24
    
    
    
    303,120
    
    
    
    7,769
    
    
    
    5.13Mortgage-backed securities held to
maturity
    
    
    47,118
    
    
    
    1,369
    
    
    
    5.81
    
    
    
    LoansSingle family
    
    
    2,218,171
    
    
    
    63,895
    
    
    
    5.76
    
    
    
    2,744,527
    
    
    
    72,230
    
    
    
    5.26Builder lines
    
    
    1,230,175
    
    
    
    51,526
    
    
    
    8.45
    
    
    
    796,199
    
    
    
    31,415
    
    
    
    7.96Commercial real estate
    
    
    405,966
    
    
    
    15,399
    
    
    
    7.65
    
    
    
    202,471
    
    
    
    7,369
    
    
    
    7.34Mortgage banker finance
    
    
    128,240
    
    
    
    4,774
    
    
    
    7.51
    
    
    
    156,786
    
    
    
    5,218
    
    
    
    6.71Commercial business
    
    
    49,802
    
    
    
    1,843
    
    
    
    7.46
    
    
    
    39,698
    
    
    
    1,343
    
    
    
    6.82Consumer
    
    
    147,673
    
    
    
    5,482
    
    
    
    7.49
    
    
    
    92,165
    
    
    
    3,250
    
    
    
    7.11Total loans
    
    
    4,180,027
    
    
    
    142,919
    
    
    
    6.87
    
    
    
    4,031,846
    
    
    
    120,825
    
    
    
    6.01Total interest-earning assets
    
    
    4,799,282
    
    
    
    159,419
    
    
    
    6.67
    
    
    
    4,575,553
    
    
    
    134,019
    
    
    
    5.88Non-interest-earning assets
    
    
    422,315
    
    
    
    
    
    
    
    
    
    
    
    289,517Total assets
    
    $
    5,221,597
    
    
    
    
    
    
    
    
    
    
    $
    4,865,070Interest-Bearing LiabilitiesDepositsCommunity bankingChecking accounts
    
    $
    177,661
    
    
    $
    1,677
    
    
    
    1.90
    %
    
    $
    190,134
    
    
    $
    1,476
    
    
    
    1.57
    %Money market and savings
    
    
    306,024
    
    
    
    5,072
    
    
    
    3.34
    
    
    
    243,071
    
    
    
    2,999
    
    
    
    2.49Certificates of deposit
    
    
    925,044
    
    
    
    21,377
    
    
    
    4.66
    
    
    
    736,379
    
    
    
    13,553
    
    
    
    3.71Non-interest bearing deposits
    
    
    199,664
    
    
    
    
    
    
    
    
    
    
    
    158,623Total
community banking
    
    
    1,608,393
    
    
    
    28,126
    
    
    
    3.53
    
    
    
    1,328,207
    
    
    
    18,028
    
    
    
    2.74Wholesale and money desk
    
    
    964,159
    
    
    
    25,764
    
    
    
    5.39
    
    
    
    1,023,522
    
    
    
    23,257
    
    
    
    4.58Total deposits
    
    
    2,572,552
    
    
    
    53,890
    
    
    
    4.22
    
    
    
    2,351,729
    
    
    
    41,285
    
    
    
    3.54FHLB advances
    
    
    2,007,131
    
    
    
    52,715
    
    
    
    5.22
    
    
    
    2,000,033
    
    
    
    41,943
    
    
    
    4.17Convertible senior notes
    
    
    39,850
    
    
    
    785
    
    
    
    3.94
    
    
    
    
    
    
    
    
    
    
    
    Subordinated notes
    
    
    113,515
    
    
    
    4,209
    
    
    
    7.37
    
    
    
    107,988
    
    
    
    3,508
    
    
    
    6.46Other borrowings
    
    
    177
    
    
    
    3
    
    
    
    3.90
    
    
    
    4,420
    
    
    
    132
    
    
    
    5.94
    %Total interest-bearing liabilities
    
    
    4,733,225
    
    
    
    111,602
    
    
    
    4.72
    
    
    
    4,464,170
    
    
    
    86,868
    
    
    
    3.90Non-interest-bearing liabilities and
stockholders equity
    
    
    488,372
    
    
    
    
    
    
    
    
    
    
    
    400,900Total liabilities and stockholders
equity
    
    $
    5,221,597
    
    
    
    
    
    
    
    
    
    
    $
    4,865,070Net interest income/interest rate
spread
    
    
    
    
    
    $
    47,817
    
    
    
    1.95
    %
    
    
    
    
    
    $
    47,151
    
    
    
    1.98
    %Net yield on interest-earning assets
    
    
    
    
    
    
    
    
    
    
    2.02
    %
    
    
    
    
    
    
    
    
    
    
    2.08
    %Ratio of average interest-earning
assets to average interest-bearing
liabilities
    
    
    
    
    
    
    
    
    
    
    101.40
    %
    
    
    
    
    
    
    
    
    
    
    102.50
    %
 Non-interest income.
 Six Months EndedJune 30,2007
    
    
    2006Loan fee income
    
    $
    4,384
    
    
    $
    3,331Deposit fees
    
    
    4,028
    
    
    
    2,950Gain on sale
of single family loans and mortgage servicing rights valuation, net
    
    
    2,474
    
    
    
    2,919Bank owned life insurance income
    
    
    2,123
    
    
    
    126Other
    
    
    1,439
    
    
    
    959$
    14,448
    
    
    $
    10,285
      Non-interest expense.
 Six Months EndedJune 30,2007
    
    
    2006Salaries and benefits
    
    $
    18,678
    
    
    $
    17,992Data processing
    
    
    3,255
    
    
    
    3,649Occupancy
    
    
    4,032
    
    
    
    3,612Professional fees
    
    
    1,801
    
    
    
    1,282Loan expenses, net
    
    
    892
    
    
    
    1,294Core deposit amortization
    
    
    964
    
    
    
    370Real estate owned
    
    
    927
    
    
    
    148Other
    
    
    5,514
    
    
    
    4,653$
    36,063
    
    
    $
    33,000
          Three Months Ended June 30, 2007 Compared To Three Months Ended June 30, 2006
  Net Interest income.
  Three Months Ended June 30,2007
    
    
    2006Interest
    
    
    Average
    
    
    
    
    
    
    Interest
    
    
    AverageAverage
    
    
    Income/
    
    
    Yield/
    
    
    Average
    
    
    Income/
    
    
    Yield/Balance
    
    
    Expense
    
    
    Rate
    
    
    Balance
    
    
    Expense
    
    
    Rate(Dollars in thousands)Interest- Earning AssetsShort-term interest earning assets
    
    $
    86,257
    
    
    $
    1,123
    
    
    
    5.15
    %
    
    $
    129,865
    
    
    $
    1,568
    
    
    
    4.78
    %Trading securities
    
    
    141,899
    
    
    
    1,953
    
    
    
    5.52
    
    
    
    
    
    
    
    
    
    
    
    Available for sale securities
    
    
    15,608
    
    
    
    165
    
    
    
    4.23
    
    
    
    64,333
    
    
    
    681
    
    
    
    4.25FHLB stock and other investments
    
    
    84,373
    
    
    
    1,235
    
    
    
    5.87
    
    
    
    89,412
    
    
    
    1,095
    
    
    
    4.91Mortgage-backed securities available
for sale
    
    
    213,773
    
    
    
    2,803
    
    
    
    5.25
    
    
    
    323,234
    
    
    
    4,246
    
    
    
    5.25Mortgage-backed securities held to
maturity
    
    
    93,718
    
    
    
    1,369
    
    
    
    5.84
    
    
    
    
    
    
    
    
    
    
    
    LoansSingle family
    
    
    2,112,725
    
    
    
    31,377
    
    
    
    5.94
    
    
    
    2,846,921
    
    
    
    39,112
    
    
    
    5.50Builder lines
    
    
    1,247,554
    
    
    
    26,162
    
    
    
    8.41
    
    
    
    848,467
    
    
    
    17,392
    
    
    
    8.22Commercial real estate
    
    
    438,199
    
    
    
    8,328
    
    
    
    7.62
    
    
    
    222,326
    
    
    
    4,140
    
    
    
    7.47Mortgage banker finance
    
    
    122,393
    
    
    
    2,292
    
    
    
    7.51
    
    
    
    157,570
    
    
    
    2,802
    
    
    
    7.13Commercial business
    
    
    61,372
    
    
    
    1,165
    
    
    
    7.61
    
    
    
    38,551
    
    
    
    647
    
    
    
    6.73Consumer
    
    
    186,148
    
    
    
    3,461
    
    
    
    7.46
    
    
    
    93,936
    
    
    
    1,643
    
    
    
    7.02Total loans
    
    
    4,168,391
    
    
    
    72,785
    
    
    
    7.00
    
    
    
    4,207,771
    
    
    
    65,736
    
    
    
    6.26Total interest-earning assets
    
    
    4,804,019
    
    
    
    81,433
    
    
    
    6.80
    
    
    
    4,814,615
    
    
    
    73,326
    
    
    
    6.10Non-interest-earning assets
    
    
    486,150
    
    
    
    
    
    
    
    
    
    
    
    301,779Total assets
    
    $
    5,290,169
    
    
    
    
    
    
    
    
    
    
    $
    5,116,394Interest-Bearing LiabilitiesDepositsCommunity bankingChecking accounts
    
    $
    195,706
    
    
    $
    1,004
    
    
    
    2.06
    %
    
    $
    177,943
    
    
    $
    671
    
    
    
    1.51
    %Money market and savings
    
    
    348,724
    
    
    
    2,989
    
    
    
    3.44
    
    
    
    246,696
    
    
    
    1,638
    
    
    
    2.66Certificates of deposit
    
    
    974,229
    
    
    
    11,391
    
    
    
    4.69
    
    
    
    777,599
    
    
    
    7,555
    
    
    
    3.90Non-interest bearing deposits
    
    
    251,937
    
    
    
    
    
    
    
    
    
    
    
    166,901
    
    
    
    
    
    
    
    Total community banking
    
    
    1,770,596
    
    
    
    15,384
    
    
    
    3.49
    
    
    
    1,369,139
    
    
    
    9,864
    
    
    
    2.89Wholesale and money desk
    
    
    875,881
    
    
    
    11,724
    
    
    
    5.37
    
    
    
    1,181,725
    
    
    
    14,450
    
    
    
    4.90Total deposits
    
    
    2,646,477
    
    
    
    27,108
    
    
    
    4.11
    
    
    
    2,550,864
    
    
    
    24,314
    
    
    
    3.82FHLB advances
    
    
    1,955,338
    
    
    
    25,659
    
    
    
    5.19
    
    
    
    2,028,836
    
    
    
    22,483
    
    
    
    4.38Convertible senior notes
    
    
    79,262
    
    
    
    785
    
    
    
    3.92
    
    
    
    
    
    
    
    
    
    
    
    Subordinated notes
    
    
    118,865
    
    
    
    2,207
    
    
    
    7.34
    
    
    
    108,004
    
    
    
    1,791
    
    
    
    6.56Other borrowings
    
    
    352
    
    
    
    3
    
    
    
    3.84
    
    
    
    3,846
    
    
    
    59
    
    
    
    6.56Total interest-bearing liabilities
    
    
    4,800,294
    
    
    
    55,762
    
    
    
    4.63
    
    
    
    4,691,550
    
    
    
    48,647
    
    
    
    4.13Non-interest-bearing liabilities and
stockholders equity
    
    
    489,875
    
    
    
    
    
    
    
    
    
    
    
    424,844Total liabilities and stockholders
equity
    
    $
    5,290,169
    
    
    
    
    
    
    
    
    
    
    $
    5,116,394Net interest income/interest rate
spread
    
    
    
    
    
    $
    25,671
    
    
    
    2.17
    %
    
    
    
    
    
    $
    24,679
    
    
    
    1.97
    %Net yield on interest-earning assets
    
    
    
    
    
    
    
    
    
    
    2.17
    %
    
    
    
    
    
    
    
    
    
    
    2.08
    %Ratio of average interest-earning
assets to average interest-bearing
liabilities
    
    
    
    
    
    
    
    
    
    
    100.08
    %
    
    
    
    
    
    
    
    
    
    
    102.62
    %
 Non-interest income.
 Three Months EndedJune 30,2007
    
    
    2006Loan fee income
    
    $
    2,546
    
    
    $
    1,917Deposit fees
    
    
    2,377
    
    
    
    1,490Gain on sale
of single family loans and mortgage servicing rights valuation, net
    
    
    1,186
    
    
    
    1,591Bank owned life insurance income
    
    
    1,035
    
    
    
    64Other
    
    
    757
    
    
    
    575$
    7,901
    
    
    $
    5,637
      Non-interest expense.
 Three Months EndedJune 30,2007
    
    
    2006Salaries and benefits
    
    $
    9,889
    
    
    $
    9,192Data processing
    
    
    1,969
    
    
    
    1,755Occupancy
    
    
    2,232
    
    
    
    1,772Professional fees
    
    
    1,069
    
    
    
    683Loan expenses, net
    
    
    382
    
    
    
    815Core deposit amortization
    
    
    643
    
    
    
    (111
    )Real estate owned
    
    
    406
    
    
    
    167Other
    
    
    2,948
    
    
    
    2,333$
    19,538
    
    
    $
    16,606
          9




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##### Table of Contents



Results of Segment Operations
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Banking
    
    $
    8,159
    
    
    $
    5,656
    
    
    $
    15,153
    
    
    $
    10,000Mortgage Banking
    
    
    2,403
    
    
    
    4,277
    
    
    
    4,336
    
    
    
    8,023Other
    
    
    (1,844
    )
    
    
    (1,498
    )
    
    
    (2,954
    )
    
    
    (2,992
    )Consolidated net income
    
    $
    8,718
    
    
    $
    8,435
    
    
    $
    16,535
    
    
    $
    15,031
 Banking
      Mortgage Banking
      Other
   Financial Condition
 General.
 Investment Portfolio
 10




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##### Table of Contents



Loan Portfolio.
 June 30, 2007
    
    
    December 31, 2006Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentHeld for investment:Single family mortgages
    
    $
    1,932,076
    
    
    
    46.99
    %
    
    $
    2,112,055
    
    
    
    53.11
    %Builder lines
    
    
    1,272,403
    
    
    
    30.94
    
    
    
    1,200,798
    
    
    
    30.20Mortgage banker finance
    
    
    129,182
    
    
    
    3.14
    
    
    
    150,731
    
    
    
    3.79Commercial real estate
    
    
    413,084
    
    
    
    10.05
    
    
    
    321,138
    
    
    
    8.08Commercial business
    
    
    77,566
    
    
    
    1.89
    
    
    
    39,543
    
    
    
    0.99Multi-family
    
    
    71,605
    
    
    
    1.74
    
    
    
    41,665
    
    
    
    1.05Consumer
    
    
    215,840
    
    
    
    5.25
    
    
    
    110,463
    
    
    
    2.78Sub-total
    
    
    4,111,756
    
    
    
    100.00
    %
    
    
    3,976,393
    
    
    
    100.00
    %Allowance for credit losses
    
    
    (15,640
    )
    
    
    
    
    
    
    (11,671
    )Deferred loan costs, net
    
    
    25,753
    
    
    
    
    
    
    
    29,135Total loans held for investment
    
    
    4,121,869
    
    
    
    
    
    
    
    3,993,857Held for sale:Single family mortgages
    
    
    109,928
    
    
    
    
    
    
    
    677,837Deferred loan costs, net
    
    
    713
    
    
    
    
    
    
    
    4,368Total loans held for sale
    
    
    110,641
    
    
    
    
    
    
    
    682,205Total loans
    
    $
    4,232,510
    
    
    
    
    
    
    $
    4,676,062
  11




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##### Table of Contents



Deposits.
 June 30,
    
    
    December 31,2007
    
    
    2006Non-interest bearing
    
    $
    284,558
    
    
    $
    158,522Custodial accounts
    
    
    12,856
    
    
    
    6,917Interest bearing depositsChecking accounts
    
    
    200,884
    
    
    
    147,570Money market accounts
    
    
    351,279
    
    
    
    213,255Subtotal
    
    
    552.163
    
    
    
    360,825Savings accounts
    
    
    68,012
    
    
    
    48,956Certificates of depositConsumer and commercial
    
    
    1,045,914
    
    
    
    865,494Wholesale and brokered
    
    
    820,415
    
    
    
    1,191,250Subtotal
    
    
    1,866,329
    
    
    
    2,056,744Total interest bearing deposits
    
    
    2,486,504
    
    
    
    2,466,525Total deposits
    
    $
    2,783,918
    
    
    $
    2,631,964Community
banking deposits
    
    $
    1,963,503
    
    
    $
    1,440,714Wholesale
and brokered
    
    
    820,415
    
    
    
    1,191,250Total
deposits
    
    $
    2,783,918
    
    
    $
    2,631,964
  Borrowings.
 12




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##### Table of Contents



Credit Quality
 Non-Performing Assets
 
 June 30,
    
    
    December 31,2007
    
    
    2006Non-performing loansSingle family mortgages
    
    $
    9,853
    
    
    $
    12,383Commercial
    
    
    5,116
    
    
    
    494Consumer
    
    
    1,355
    
    
    
    383Total non-performing loans
    
    
    16,324
    
    
    
    13,260Real estate ownedSingle family mortgages
    
    
    8,668
    
    
    
    3,803Commercial
    
    
    22,202
    
    
    
    17,460Total real estate owned
    
    
    30,870
    
    
    
    21,263Total non-performing assets
    
    $
    47,194
    
    
    $
    34,523
     June 30,
    
    
    December 31,2007
    
    
    2006With allowances
    
    $
    13,964
    
    
    $
    6,711Without allowances
    
    
    
    
    
    
    $
    13,964
    
    
    $
    6,711Allowance for impaired loans
    
    $
    97
    
    
    $
    400
  Six Months Ended June 31,2007
    
    2006Average balance of impaired loans
    
    $
    12,635
    
    
    $
    7,299Interest income recognized
    
    
    149
    
    
    
    19
    13




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##### Table of Contents



Allowance for Credit Losses
  For the Six Months EndedJune 30,2007
    
    
    2006Beginning balance
    
    $
    11,671
    
    
    $
    13,367Provisions for credit lossesAcquisitions
    
    
    4,613
    
    
    
    Single Family
    
    
    (205
    )
    
    
    143Commercial
    
    
    1,650
    
    
    
    605Consumer
    
    
    77
    
    
    
    9Charge- offsSingle family
    
    
    (457
    )
    
    
    (137
    )Commercial
    
    
    (1,680
    )
    
    
    (152
    )Consumer
    
    
    (70
    )
    
    
    (89
    )RecoveriesSingle Family
    
    
    
    
    
    
    1Commercial
    
    
    2
    
    
    
    27Consumer
    
    
    39
    
    
    
    19Ending balance
    
    $
    15,640
    
    
    $
    13,793Allowances for credit losses to non-performing loans
    
    
    95.82
    %
    
    
    118.43
    %Allowance for credit losses to total loans
    
    
    0.37
    
    
    
    0.32Allowance for credit losses to average loans
    
    
    0.37
    
    
    
    0.34Net charge-offs to average loans
    
    
    0.05
    
    
    
    0.01
   14




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##### Table of Contents



Capital Resources
   WellCapitalized
    
    ActualTier 1 leverage capital ratio
    
    
    5.00
    %
    
    
    7.49
    %Tier 1 risk-based capital ratio
    
    
    6.00
    %
    
    
    9.85
    %Total risk-based capital
    
    
    10.00
    %
    
    
    10.65
    %
  Liquidity
      
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
   Derivatives and Hedging Activities
  Interest Rate Risk Management
  15




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##### Table of Contents



Adjusted net
    
    Percentage changeInterest Rate Scenario
    
    Interest Income
    
    from Base(in thousands)Up 200 basis points
    
    $
    126,447
    
    
    
     7.5
    %Up 100 basis points
    
    
    122,446
    
    
    
    4.1Base
    
    
    117,617
    
    
    
    Down 100 basis points
    
    
    115,622
    
    
    
    (1.7
    )Down 200 basis points
    
    
    110,969
    
    
    
    (5.7
    )
  
 Item 4. Controls and Procedures
  16




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
   th
 
 Item 1A. Risk Factors
  Risks Related to the Convertible Notes
 The notes are effectively subordinated to any existing and future secured indebtedness and
are structurally subordinated to debt of our subsidiaries.
  We are a holding company and rely on our subsidiaries for operating funds, and our subsidiaries
have no obligation to supply us with any funds.
  We continue to have the ability to incur debt; if we incur substantial
additional debt, these higher levels of debt may affect our ability to pay principal and interest
on the notes.
  Upon conversion of the notes, holders may receive less proceeds than expected because the value of our
common stock may decline between the day that the conversion right is exercised  and the day the
value of the shares is determined.
  The right to convert the notes is conditional, which could impair the value of the notes.
  The price of our common stock, and therefore of the notes, may fluctuate significantly which may
make it difficult for holders to resell the notes or the shares of our common stock that may be
issued upon conversion of the notes when desired or at desired prices.
  
    
    actual or anticipated fluctuations in our results of operations;
 
    
    changes in expectations as to our future financial performance, including financial estimates
by securities analysts and investors, and our ability to meet expectations;
 
    
    the operating and stock performance of our competitors;
 
    
    fluctuations in market rates of interest and loan and deposit pricing in our market areas;
 
    
    deterioration in asset quality due to an economic downturn;
 
    
    legislative or regulatory changes;
 
    
    adverse developments in our loan or investment portfolios;
 
    
    unanticipated declines or slower than anticipated growth in our business or in the businesses of institutions we acquire; and
 
    
    competition and the possible dilutive effect of potential acquisitions, expansions or future capital raises.
  We may be unable to repurchase the notes as required under the indenture upon a fundamental
change or on the specified dates at the option of the holder or pay  cash upon conversion of
the notes.
  We may redeem the notes under specified circumstances, which may adversely affect the return on
the notes.
  Holders may have to pay taxes with respect to distributions on our common stock that they do not
receive.
  The adjustment to the conversion rate for notes converted in connection with certain fundamental
changes may not adequately compensate holders for the lost option time value of their notes as a
result of such fundamental change and may not be enforceable.
  Provisions of the notes could discourage an acquisition of us by a third party.
  A market may not develop for the notes.
  The notes may not be rated or may receive a lower rating than anticipated.
  Holders of notes are not entitled to any rights with respect to our common stock, but
are subject to all changes made with respect to our common stock.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
   
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
 (a)
    
    The company held its annual meeting of stockholders on May 10, 2007.
 (b)
    
    At the 2007 annual meeting, the stockholders of the company elected Lawrence Chimerine,
Ph.D., James A. Howard, C.P.A., and Anthony J. Nocella as Class I directors to serve until the 2010
annual meeting of stockholders. The terms of office of each David M. Golush, Alan E. Master,
William B. Rhodes, Lewis S. Ranieri, Robert A. Perro, and John B. Selman continued after the
meeting.
 (c)
    
    Set forth below is a description of each matter voted on at the 2007 annual meeting, the
number of votes cast for, against, or withheld and the number of abstentions and broker
non-votes as to each such matter, including a separate tabulation for each nominee for
director:
  (1)
    To elect three Class I director nominees to serve until
the 2010 annual meeting of
stockholders. Each director nominee was elected.
 Name of Nominee
    
    Total Votes For
    
    Total Votes Withheld
    
    Broker Non-VoteLawrence Chimerine, Ph.D.
    
    
    20,817,515
    
    
    
    505,671
    
    
    
    James A. Howard
    
    
    20,896,308
    
    
    
    426,878
    
    
    
    Anthony J. Nocella
    
    
    20,896,808
    
    
    
    426,378
    
    
    
    
 (2)
    To ratify the appointment of Deloitte & Touche LLP as the companys independent
auditors for the fiscal year ended December 31, 2007.
 Total Votes for
    
    Total Votes Against
    
    Total Abstentions
    
    Broker Non-Vote21,162,380
    
    
    113,582
    
    
    
    47,224
    
    
    
    
 (d)
    None
 17




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##### Table of Contents



Item 5. Other Information





Item 6. Exhibits


ExhibitNumber
    
    Description4.1
    
    First Supplemental Indenture, dated as of April 18, 2007, to the Indenture, dated
as of April 9, 2007, between the Company and The Bank of New York Trust Company, N.A.,
as trustee. (Incorporated by reference to Exhibit 4.1 to the Companys Current Report on
Form 8-K dated April 12, 2007)4.2
    
    Form of Indenture for Subordinated Debt Securities (including form of Note for
Subordinated Debt Securities). (Incorporated by reference to Exhibit 4.2 to the
Companys Registration Statement on Form S-3 (Registration No. 333- 141039) dated April
5, 2007)10.1
    
    Engagement Letter by and between
Franklin Bank Corp. and SMH Capital Inc., dated June 19, 2007.
(Incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K dated June 26, 2007)10.2
    
    Form of Stock Purchase Agreement.
(Incorporated by reference to Exhibit 10.2 to the Company's
Current Report on Form 8-K dated June 26, 2007)31.1
    
    Rule 13a-14(a) Certification of the Companys Chief Executive Officer31.2
    
    Rule 13a-14(a) Certification of the Companys Chief Financial Officer32.1+
    
    Section 1350 Certification of the Companys Chief Executive Officer32.2+
    
    Section 1350 Certification of the Companys Chief Financial Officer







18




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##### Table of Contents



Signatures
  Franklin Bank Corp.(Registrant)Date: August 8, 2007
    By:
    /s/ Russell McCannRussell McCannChief Financial Officer (Duly Authorized Officer,
Principal Financial Officer and Principal
Accounting Officer) 19




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##### Table of Contents



Index to Exhibits
 ExhibitNumber
    
    Description4.1
    
    First Supplemental Indenture, dated as of April 18, 2007, to the
Indenture, dated as of April 9, 2007, between the Company and The Bank of
New York Trust Company, N.A., as trustee. (Incorporated by reference to
Exhibit 4.1 to the Companys Current Report on Form 8-K dated April 12,
2007)4.2
    
    Form of Indenture for Subordinated Debt Securities (including form of Note
for Subordinated Debt Securities). (Incorporated by reference to Exhibit 4.2 to the
Companys Registration Statement on Form S-3 (Registration No. 333- 141039) dated
April 5, 2007)10.1
    
    Engagement Letter by and between
Franklin Bank Corp. and SMH Capital Inc., dated June 19, 2007.
(Incorporated by reference to Exhibit 10.1 to the Company's
Current Report on Form 8-K dated June 26, 2007)10.2
    
    Form of Stock Purchase Agreement.
(Incorporated by reference to Exhibit 10.2 to the Company's
Current Report on Form 8-K dated June 26, 2007)31.1
    
    Rule 13a-14(a) Certification of the Companys Chief Executive Officer31.2
    
    Rule 13a-14(a) Certification of the Companys Chief Financial Officer32.1+
    
    Section 1350 Certification of the Companys Chief Executive Officer32.2+
    
    Section 1350 Certification of the Companys Chief Financial Officer