UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

Commission file number:  000-50518

Franklin Bank Corp.

Registrant’s telephone number, including area code:
(713) 339-8900

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.01 Par Value,
(Title of each class)

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [  ] No [X]

     As of May 14, 2004, there were 21,225,263 shares of the registrant’s common stock, $.01 par value, outstanding.

FRANKLIN BANK CORP.
INDEX TO FORM 10-Q

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

FRANKLIN BANK CORP.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)

See notes to interim consolidated financial statements.

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FRANKLIN BANK CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)

See notes to interim consolidated financial statements.

2

FRANKLIN BANK CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)

See notes to interim consolidated financial statements.

3

FRANKLIN BANK CORP.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004
(unaudited)

1. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying Consolidated Financial Statements are unaudited and include the accounts of Franklin Bank Corp. (the “company”), a subsidiary of the company, and Franklin Bank (the “bank”) and have been prepared in accordance with accounting principles generally accepted in the United States of America. The information included in these interim financial statements reflects all adjustments that are, in the opinion of management, necessary for a fair presentation of all periods presented. Such adjustments are of a normal recurring nature unless otherwise disclosed in the Form 10-Q. Operating results for the three months ended March 31, 2004 are not necessarily indicative of the results that may be expected for the entire year or any interim period. The interim financial information should be read in conjunction with Franklin Bank Corp’s 2003 Annual Report on Form 10-K. Certain prior period amounts have been reclassified to conform to the current period presentation and had no effect on net income or stockholders’ equity.

Stock—Based Compensation

     The company measures its employee stock-based compensation using the intrinsic value based method of accounting under the provisions of AICPA Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” Accordingly, no compensation cost has been recognized for the company’s stock options. Pro-forma information regarding net income is required under SFAS No. 123, “Accounting for Stock-Based Compensation” and has been determined as if the company accounted for its employee stock-option plans under the fair value method of SFAS No. 123. The fair value of options at the date of grant was estimated using a Black-Scholes option-pricing model, which requires use of highly subjective assumptions. Also, employee stock options have characteristics that are significantly different from those of traded options, including vesting provisions and trading limitations that impact their liquidity. Because employee stock options have differing characteristics, and changes in the subjective input assumptions can materially affect the fair- value estimate, the Black-Scholes valuation model does not necessarily provide a reliable measure of the fair value of the employee stock options. The following table shows the pro forma amounts attributable to stock-based employee compensation cost for the periods presented (dollars in thousands except per share data):

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     Basic and diluted earnings per share were computed as follows (dollars in thousands, except per share data):

     Options to purchase 298,748 shares of common stock at an exercise price of $10.00 were excluded from the computation of diluted EPS for the three months ended March 31, 2003, because the options’ exercise prices were greater than the fair market value of the common stock.

3. Goodwill and Intangible Assets

     The changes in the carrying amount of goodwill for the year ended December 31, 2003 and the three months ended March 31, 2004 are as follows (in thousands):

     Intangible assets other than goodwill include core deposit premiums paid and mortgage servicing rights. The changes in other intangible assets are as follows (in thousands):

     During the first quarter of 2003 certain estimates regarding goodwill related to the acquisition of Franklin Bank were finalized and the core deposit intangible study based on the actual deposit accounts acquired was finalized. The study valued the core deposit intangible at $204,000 as compared to the estimated valuation of $1.6 million at acquisition, which was based on the asset and liability tables for the first quarter of 2002 as published by the Office of Thrift Supervision. As a result, $237,000 of amortization recorded in 2002 was reversed in 2003.

     At March 31, 2004 and December 31, 2003, the fair value of servicing rights retained from single family loan sales totaled $1.2 million and $1.1 million related to $128.9 million and $117.8 million, respectively, of principal serviced for others. The bank did not securitize any financial assets during the three months ended March 31, 2004 or the year ended December 31, 2003.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Note Regarding Forward Looking Information

     A number of the presentations and disclosures in this report, including any statements preceded by, followed by or which include the words “may,” “could,” “should,” “will,” “would,” “hope,” “might,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “assume” or similar expressions constitute forward-looking statements. These forward-looking statements, implicitly and explicitly, include information concerning possible or assumed future results of operations, trends, financial results and business plans, including those relating to:

•

earnings growth;

•

revenue growth;

•

future acquisitions;

•

origination volume in our mortgage business;

•

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.

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     Forward-looking statements involve inherent risks and uncertainties that are subject to change based on various important factors, some of which are beyond our control. We caution you that a number of important factors could cause actual results to differ materially from those contained in any forward-looking statement. Such factors include, but are not limited to:

	•		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, require 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 our subsidiaries; and

•

other economic, competitive, governmental, regulatory, and technological factors affecting our operations, pricing, products and services.

     In addition, we regularly explore opportunities for acquisitions of and hold discussions with financial institutions and related businesses, and also regularly explore opportunities for acquisitions of liabilities and assets of financial institutions and other financial services providers. We routinely analyze our lines of business and from time to time may increase, decrease or terminate one or more activities.

     If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, the forward-looking information and statements contained in this report. Therefore, we caution you not to place undue reliance on our forward-looking information and statements. The forward-looking statements are made as of the date of this report, and we do not intend, and assume no obligation, to update the forward-looking statements or to update the reasons why actual results could differ from those projected in the forward-looking statements. All forward-looking statements contained in this report are expressly qualified by these cautionary statements.

Critical Accounting Policies

     Certain of the company’s accounting policies, by their nature, involve a significant amount of subjective and complex judgment by our management. These policies relate to our allowance for credit losses, rate lock commitments and goodwill and other intangible assets. We believe that our estimates, judgments and assumptions are reasonable given the circumstances at the time of the estimate. However, actual results could differ significantly from these estimates and assumptions which could have a material impact on our

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financial condition and results of operations. These policies are described in further detail in the Company’s 2003 Annual Report of Form 10-K under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies”.

Significant Transactions

     On February 29, 2004, we acquired Lost Pines for approximately $7.0 million in cash, including $168,000 in direct acquisition costs. Lost Pines was a Texas-based bank holding company with approximately $39.9 million in assets and $36.2 million in deposits at the date of the acquisition.

     On December 30, 2003, we acquired Jacksonville for approximately $69.4 million in cash, including $1.6 million in direct acquisition costs. Jacksonville was a Texas-based savings and loan holding company with approximately $467.6 million in assets and $399.8 million in deposits at the time of the acquisition.

     In December 2003, the company sold 10,508,016 shares of common stock at an initial offering price of $14.50 per share. Underwriting discounts and other issuance costs totaling $12.1 million are included as a reduction to paid-in capital on our consolidated statement of stockholders’ equity. Of the proceeds, approximately $67.7 million was used to acquire Jacksonville, approximately $52.3 million was contributed to the capital of the bank for general corporate purposes and approximately $6.9 million was used to fund the acquisition of Lost Pines.

     On April 30, 2003, we completed our acquisition of Highland. Total consideration for Highland was $18.6 million, including $15.0 million in cash, $2.7 million in shares of our common stock, valued at $10.00 per share, and $1.0 million in direct acquisition costs. At the time of the acquisition, Highland’s total assets were approximately $83.6 million and deposits were approximately $72.9 million. The acquisition of Highland complemented our existing community banking branches and expanded our presence in our target Texas market.

Results of Operations

     The company derives a majority of its income from interest earned on its loan portfolio. Funding for these assets was sourced from the cash raised in the private stock offering completed in November 2002 and from community banking deposits, brokered deposits and borrowings from the Federal Home Loan Bank. The funds raised in the company’s initial public offering in December 2003 were utilized to acquire Jacksonville and Lost Pines and for general corporate purposes. The company’s mortgage banking activities, which generate gains on sales of single family loans and securities and loan fees, also contribute to our net income.

     Net income was $4.3 million, or $0.20 per diluted share, for the three months ended March 31, 2004, compared to $533,000, or $0.05 per share, for the three months ended March 31, 2003. The results from operations for the three months ended March 31, 2004 include activity for Lost Pines beginning March 1, 2004.

     Net interest income. Net interest income increased $11.4 million to $14.2 million for the three months ended March 31, 2004, compared to $2.8 million for the same period in 2003. The increase was due to a $1.7 billion increase in average interest-earning assets, resulting primarily from purchases and originations of single family loans and an increase in residential construction loans. Additionally, we recognized the effect of the Jacksonville acquisition for the full quarter, which added approximately $458.2 million of average interest-earning assets during the three months ended March 31, 2004. The net yield increased 57 basis points, from 1.92% for the three months ended March 31, 2003 to 2.49% for the three months ended March 31, 2004. This increase was primarily due to the acquisition of Jacksonville, which had an approximate 19 basis point positive impact on our net yield, an increase in commercial and consumer loans, and slower prepayments on our single family mortgage portfolio, resulting in a reduction in premium amortization.

     The table below illustrates the company’s average balances and related income, expense, and weighted average yields and rates for the three months ended March 31, 2004 and 2003. Balances for both periods

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     Gains on sales of single family loans increased $264,000 during the three months ended March 31, 2004 as compared to the three months ended March 31, 2003. This increase was due to an increase in mortgage banking activity. We originate loans through our retail and wholesale mortgage offices with the intention of selling the majority of loans originated, including the related servicing. At March 31, 2004, we had 44 retail and wholesale mortgage origination offices, up from 6 at March 31, 2003. During the three months ended March 31, 2004, we sold $76.7 million of single family loans, resulting in a gain of $363,000. During the three months ended March 31, 2003, we sold $6.0 million of single family loans for a gain of $99,000.

     Loan fee income increased $619,000 during the three months ended March 31, 2004, to $634,000, from $15,000 for the three months ended March 31, 2003. Of this increase, $207,000 was attributable to the Jacksonville acquisition. The remaining increase related to mortgage broker fee income earned on loans originated by us in the name of other institutions. Mortgage broker fees totaled $462,000 during the three months ended March 31, 2004, compared to $6,000 during the same period a year ago.

     Deposit fees increased $448,000 during the three months ended March 31, 2004, to $475,000, up from $27,000 during the three months ended March 31, 2003. This increase was related to service charges on checking accounts, overdraft fees and fees charged for other banking related services and was directly related to an increase in the number of checking accounts from 670 at March 31, 2003 to 16,609 at March 31, 2004. The increase in the number of checking accounts was due to the Highland acquisition on April 30, 2003, Jacksonville acquisition on December 30, 2003 and Lost Pines acquisition on March 1, 2004. Additionally, we opened a new community banking branch in the greater Austin area during March 2003.

     Gains on sales of securities were $109,000 related to the sale of $18.3 million of securities during the three months ended March 31, 2004. This compares to gains totaling $442,000 related to sales of $35.7 million of mortgage-backed securities in the corresponding prior year period. All of the securities sold during the three months ended March 31, 2004 came from the Jacksonville acquisition.

     The increase in other non-interest income totaling $493,000 includes the reversal of the credit mark on a loan acquired in the Franklin acquisition which was paid in full during the quarter ended March 31, 2004. Additionally, the acquisition of Highland added $109,000 related to ancillary income on other customer services provided and income earned on owned properties and other sources.

Non-interest expense. Non-interest expense is comprised of the following (in thousands):

     Non-interest expense increased $6.7 million during the three months ended March 31, 2004, to $8.9 million, compared to $2.2 million for the three months ended March 31, 2003. The increase in non-interest expense reflects costs incurred as our business continued to expand during the twelve month period since March 31, 2003.

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     Salaries and benefits increased $3.1 million during the three months ended March 31, 2004, to $4.4 million, from $1.3 million during the year ago period. This increase was due to the acquisitions of Jacksonville, Highland and Lost Pines, and due to hiring of employees to manage and support our growth. The number of full time equivalent employees at March 31, 2004 totaled 443, as compared to 95 at March 31, 2003.

     Occupancy expense increased $786,000 during the three months ended March 31, 2004, to $939,000, from $153,000 during the same period a year ago. The increase in occupancy expense was due to the acquisitions of Jacksonville and Highland, which added nine and one community banking branches, respectively. Additionally, we expanded our corporate office in Houston, Texas, added a community banking branch in Austin, Texas, added two residential construction lending offices in 2003, and expanded our mortgage banking business, increasing the number of retail and wholesale offices from 6 at March 31, 2003 to 44 at March 31, 2004.

     Data processing expense increased $437,000 during the three months ended March 31, 2004, to $591,000, from $154,000 during the three months ended March 31, 2003. The increase in data processing expense represents the increase in outsourced data processing services and depreciation on computer hardware and software incurred to support our expansion and growth.

     Core deposit amortization increased $343,000 during the three months ended March 31, 2004, to $116,000, compared to a credit of $227,000 during the three months ended March 31, 2003. During the three months ended March 31, 2003, the core deposit intangible study related to our acquisition of Franklin Bank was finalized. The study valued the core deposit intangible at $204,000, as compared to the estimated valuation of $1.6 million at acquisition, resulting in the reversal of $237,000 of 2002 amortization expense during the three months ended March 31, 2003. The three months ended March 31, 2004 includes amortization related to the Franklin, Highland, Jacksonville and Lost Pines acquisitions of $8,000, $21,000, $84,000 and $3,000, respectively.

     Other non-interest expense increased $1.8 million during the three months ended March 31, 2004, to $2.1 million, from $284,000 during the three months ended March 31, 2003. This increase represents costs incurred to support our growth and expansion, including higher marketing, insurance, office supplies and travel expenses, as well as increased costs related to mortgage banking activities and our acquisitions of Jacksonville and Highland.

Financial Condition

General. Total assets increased $343.2 million to $2.6 billion at March 31, 2004, from $2.3 billion at December 31, 2003. The increase in assets was primarily attributable to purchases and originations of single family loans, new residential construction loans, and the acquisition of Lost Pines, which added approximately $39.9 million in assets.

Investment Portfolio. The following table sets forth the composition and fair value of our investment portfolio as of the dates indicated (in thousands). At these dates, there were no securities held-to-maturity.

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     Our investment portfolio declined $22.1 million during the three months ended March 31, 2004, to $279.5 million, from $301.6 million at December 31, 2003. The decline in the investment portfolio was due to sales totaling $18.3 million and principal repayments. The securities sold had not yet settled with the counterparties as of March 31, 2004, and the corresponding receivable is included in other assets on the consolidated balance sheet. The Lost Pines acquisition added $10.2 million to our investment portfolio. The unrealized gain on securities available for sale increased to a gain of $905,000 at March 31, 2004, as compared to a loss of $125,000 at December 31, 2003. This improvement was due to lower market interest rates at March 31, 2004 as compared to December 31, 2003.

Loan Portfolio. The following table sets forth the composition of our loan portfolio as of the dates indicated (dollars in thousands).

     The loan portfolio increased $315.9 million, to $2.1 billion at March 31, 2004, compared to $1.8 billion at December 31, 2003. This increase was primarily in the single family and residential construction loan portfolios. Additionally, the Lost Pines acquisition added approximately $19.3 million to the loan portfolio. Single family loans held for investment increased $225.3 million to $1.6 billion at March 31, 2004, from $1.4 billion at December 31, 2003. During the three months ended March 31, 2004, purchases of single family loans totaled $366.0 million, partially offset by principal repayments of $146.2 million. Single family loans held for sale increased $26.0 million to $138.7 million at March 31, 2004, from $112.7 million at December 31, 2003. This growth came from originations in our wholesale origination offices in California and Texas and our 41 retail mortgage origination offices located in 16 states throughout the United States. Sales of single family loans totaled $76.7 million. The residential construction loan portfolio increased $49.7 million to $211.4 million at March 31, 2004, from $161.7 million at December 31, 2003 due to originations which totaled $89.0 million. Principal repayments on residential construction loans were $41.4 million during the three months ended March 31, 2004.

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Deposits. The following table sets forth the composition of our deposits as of the dates indicated (in thousands).

     Deposits increased $137.4 million during the three months ended March 31, 2004, to $1.4 billion, from $1.3 billion at December 31, 2003. This increase is due to a $54.0 million increase in community banking deposits and an $83.4 million increase in brokered and wholesale deposits. The increase in community banking deposits includes $36.2 million due to the Lost Pines acquisition. Excluding the effect of the Lost Pines acquisition, community banking deposits increased $17.8 million. We expect that brokered and wholesale deposits will remain a significant source of our deposit funding.

Borrowings. Borrowings are comprised of Federal Home Loan Bank “FHLB” advances. FHLB advances increased $199.5 million during the three months ended March 31, 2004 to $912.6 million, from $713.1 million at December 31, 2003. The increase in borrowings contributed to the funding of asset growth during the period. At March 31, 2004, FHLB advances were 39.2% of our total funding liabilities.

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Credit Quality

Non-Performing Assets

     Non-performing assets are comprised of non-performing loans and real estate owned. The table below details our non-performing assets as of the dates indicated (in thousands).

     At March 31, 2004, we had $5.6 million in non-performing assets comprised of $4.8 million in loans that were 3 payments or more delinquent in nonaccrual status, and $857,000 of real estate owned. This compares to $6.4 million in non-performing assets at December 31, 2003, comprised of $5.6 million in loans that were 90 days or more in nonaccrual status, and $873,000 of real estate owned. Beginning in 2004, we changed our methodology for determining non-accrual loans from those loan 90 days or more delinquent to 3 payments or more delinquent. Had this change been the effect as of December 31, 2003 our non-performing loans would have been $2.8 million.

     Loans are generally placed on nonaccrual status upon becoming 3 payments past due as to interest or principal. Generally, consumer loans that are not secured by real estate are placed in nonaccrual status when deemed uncollectible. Such loans are charged off when they reach 120 days past due.

     At the time a loan is placed in nonaccrual status, the accrued but uncollected interest receivable is reversed and accounted for on a cash or recovery method thereafter, until qualifying for return to accrual status. Management’s classification of a loan as nonaccrual does not necessarily indicate that the principal of the loan is uncollectible in whole or in part.

     At March 31, 2004 and December 31, 2003, we had $8.6 million and $6.2 million, respectively, in loans that were classified as potential problem loans that are not included in non-performing assets. These are loans that management believes may in the future become non-performing loans.

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Capital Resources

     Federally insured, state-chartered banks are required to maintain minimum levels of regulatory capital. These standards generally are as stringent as the comparable capital requirements imposed on national banks. The FDIC also is authorized to impose capital requirements in excess of these standards on individual banks on a case-by-case basis. For an insured institution to be considered “well capitalized,” it must maintain a minimum leverage ratio of 5% and a minimum risk-based capital ratio of 10%, of which at least 6% must be Tier 1 capital.

     The following table presents the bank’s regulatory capital and the regulatory capital requirements at March 31, 2004:

     The bank’s regulatory capital at March 31, 2004 was in excess of the “well capitalized” levels.

Liquidity

     Liquidity is the measurement of our ability to meet our cash needs. Our objective in managing our liquidity is to maintain the ability to meet loan commitments, purchase investments, meet deposit withdrawals and pay other liabilities in accordance with their terms, without an adverse impact on our current or future earnings. For the three months ended March 31, 2004 and 2003, a significant source of funding has been from our deposits, both community banking and brokered.

     Additionally, we have borrowing sources available to supplement deposits. These borrowing sources include the FHLB of Dallas and securities sold under repurchase agreements. Credit availability at the FHLB is based on our financial condition, asset size and the amount of collateral we hold at the FHLB. At March 31, 2004, our borrowings from the FHLB were $912.6 million and our additional borrowing capacity was approximately $385 million. At March 31, 2004, we had no securities sold under agreement to repurchase.

     We are a holding company without any significant assets other than our indirect equity interest in the bank. Our ability to pay dividends on our common stock or to meet our other cash obligations, including the servicing of our junior subordinated notes, is subject to the amount of liquid assets that we maintain on a separate basis from the bank and the receipt of dividends from the bank. At March 31, 2004, we had approximately $17.1 million in available cash and the bank had the ability to pay approximately $6.6 million in dividends to us without prior regulatory approval.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     Market risk is defined as the sensitivity of income, fair market values and capital to changes in interest rates, foreign currency exchange rates, commodity prices and other relevant market prices and rates. The primary market risk that we are exposed to is interest rate risk inherent in our lending, deposit taking and borrowing activities. Substantially all of our interest rate risk arises from these activities entered into for purposes other than trading.

     The principal objective of our asset/liability management is to manage the sensitivity of net income to changing interest rates. The overall interest rate risk position and strategies are reviewed by executive management and the bank’s board of directors on an ongoing basis.

Interest Rate Risk Management

     The asset/liability committee manages our interest rate risk through structuring the balance sheet to seek to maximize net interest income while maintaining an acceptable level of risk to changes in market interest rates. The achievement of this goal requires a balance between profitability, liquidity and interest rate risk.

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     One way to measure the impact that future changes in interest rates will have is through an interest rate sensitivity gap measure. The “interest rate sensitivity gap” is defined as the difference between interest-earning assets and interest-bearing liabilities maturing or re-pricing within a given time period. A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds interest rate sensitive assets. Our one year cumulative interest rate gap position at March 31, 2004 was a negative gap of $253.3 million, or 9.77%, of total assets, compared to a negative $277.7 million, or 12.3% of total assets at December 31, 2003.

     We also manage the risks associated with our single family mortgage warehouse and pipeline. Our mortgage warehouse consists of adjustable-rate loans, primarily for our portfolio and fixed-rate single family mortgage loans that are to be sold in the secondary market. Our pipeline consists of commitments to originate single family mortgage loans, both fixed and adjustable rate. The fixed rate loans in the pipeline will be sold in the secondary market. The risk associated with the pipeline is the potential for changes in interest rates on these types of loans from the time the customer locks in the rate on the loan and the time we sell the loan in the secondary market. To manage this risk, we enter into forward sales agreements to protect us from rising interest rates. On a forward sales agreement the sales price and delivery date are established at the time the agreement is entered into. As of March 31, 2004, our pipeline included $ 31.7 million of fixed rate loans with committed interest rates. We have entered into $29.1 million in forward sales agreements, based on expected close rate of 60% for these loans.

     To effectively measure and manage interest rate risk, we use simulation analysis to determine the impact on net interest income under various interest rate scenarios, balance sheet trends and strategies. Based on these simulations, we quantify interest rate risk and develop and implement strategies we consider to be appropriate. At March 31, 2004, we used a simulation model to analyze net interest income sensitivity to an immediate parallel and sustained shift in interest rates derived from the current treasury and LIBOR yield curves. For rising rate scenarios, the base market interest rate forecast was increased by 100 and 200 basis points. For the falling interest rate scenario, base market rates were only decreased 100 basis points, due to the current interest rate environment. At March 31, 2004, our net interest income exposure was within the guidelines established by our board of directors.

     The following table indicates the sensitivity of net interest income to the interest rate movements described above:

The computation of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of interest rate, asset prepayments, deposit decay and changes in re-pricing levels of deposits to general market rates, and should not be relied upon as indicative of actual results. Further, the computations do not take into account any actions that we may undertake in response to changes in interest rates.

Item 4. Controls and Procedures

     An evaluation was performed under the supervision and with the participation of the company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the company’s disclosure controls and procedures as of the end of the period covered by this report. Based on

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that evaluation, the company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that the company’s disclosure controls and procedures were effective.

     No changes were made to the company’s internal control over financial reporting during the latest fiscal quarter that materially affected, or are reasonably likely to materially affect, the company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The company and its subsidiaries are subject to various claims and legal actions that have arisen in the normal course of conducting business. Management does not expect the ultimate disposition of these matters to have a material adverse impact on the company’s financial statements.

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits and Reports on Form 8-K

  (a) Exhibits

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+ This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

  (b) Reports on Form 8-K

During the quarter ended March 31, 2004, the company filed the following reports on Form 8-K:

Current Report of Form 8-K dated January 8, 2004, which contained a press release announcing the completion of the acquisition of Jacksonville Bancorp, Inc. on December 30, 2003.

Current Report on Form 8-K dated February 18, 2004, which contained a press release announcing financial results for the quarter and full year ended December 31, 2003.

Current Report of Form 8-K dated March 2, 2004, which contained a press release announcing the completion of the acquisition of Lost Pines Bancshares, Inc. on February 29, 2004.

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Signatures

     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		Franklin Bank Corp.
		(Registrant)

Date: May 14, 2004	By:	/s/ Russell McCann
		Russell McCann
		Chief Financial Officer (Duly Authorized Officer, Principal Financial Officer and Principal Accounting Officer)

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Index to Exhibits

+ This exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

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