UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

Commission file number:  000-50518

Franklin Bank Corp.

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

     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 [X] No [  ]

     As of May 9, 2005, there were 22,727,698 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
(unaudited)

See notes to interim consolidated financial statements.

1

FRANKLIN BANK CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

See notes to interim consolidated financial statements.

2

FRANKLIN BANK CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

See notes to interim consolidated financial statements.

3

FRANKLIN BANK CORP.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(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, S.S.B (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, 2005 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 2004 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.

Recent accounting standards

     In March 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations. Interpretation No. 47 clarifies that conditional asset retirement obligation, as used in FASB Statement No. 143, Accounting for Asset Retirement Obligations, is considered unconditional when the timing and/or settlement of a legal obligation is conditional on a future event, even when it may or may not be under the control of the entity. If an entity has sufficient information to reasonably estimate the fair value of an asset retirement obligation, it must recognize a liability at the time the liability is incurred. If sufficient information is not available at the time the liability is incurred, a liability must be recognized at that time that sufficient information becomes available. The uncertainty about the timing and (or) method of settlement should be factored into the measurement of the liability when sufficient information exists. Interpretation 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. Interpretation No. 47 is effective for fiscal years ending after December 15, 2005 and is not expected to have a material impact on the company’s financial condition, results of operations or cash flows.

     In December 2004, the FASB issued Statement No. 123 (revised 2004), Share-Based Payment. This Statement is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees. Under the provisions of this Statement, a company is required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. The cost will be recognized over the period during which an employee is required to provide service in exchange for the award. The grant-date fair value of employee share options will be estimated using option-pricing models adjusted for the unique characteristics of those instruments. If an equity award is modified after the grant date, incremental compensation cost will be recognized in an amount equal to the excess of the fair value of the modified award over the fair value of the original award immediately before the modification. Excess tax benefits, as defined by the Statement, will be recognized as an addition to paid-in capital. This statement applies to all awards granted after the required effective date and to awards modified, repurchased, or cancelled after that date and to the unvested portion of previously granted awards that remain outstanding at the date of adoption. Upon adoption of this Statement, the company plans to use the modified prospective method of transition. Under this method, the company will record compensation expense for the unvested portion of awards granted prior to the initial adoption of this Statement and for any award issued, modified or settled after the effective date of this Statement. On April 14, 2005, the Securities and Exchange Commission delayed the effective date from the first interim or annual reporting period that begins after June 15, 2005 to the first annual reporting period that begins after June 15, 2005.

     In December 2003, the Accounting Standards Executive Committee of the AICPA issued Statement of Position No. 03-3 (“SOP 03-3”), Accounting for Certain Loans or Debt Securities Acquired in a Transfer. SOP 03-3 addresses the accounting for differences between the contractual cash flows and the cash flows expected to be collected from purchased loans or debt securities if those differences are attributable, in part, to credit quality. SOP 03-3 requires purchased loans and debt securities to be recorded initially at fair value based on the present value of the cash flows expected to be collected with no carryover of any valuation allowance previously recognized by the seller. Interest income should be recognized based on the effective yield from the cash flows expected to be collected. To the extent that the purchased loans experience subsequent deterioration in credit quality, a valuation allowance would be established for any additional cash flows that are not expected to be received. However, if more cash flows subsequently are expected to be received than originally estimated, the effective yield would be adjusted on a prospective basis. SOP 03-3 will be effective for loans and debt securities acquired after December 31, 2004. The company does not expect the requirements of SOP 03-3 to have a material impact on its financial condition, results of operations or cash flows.

     In March 2004, the Emerging Issues Task Force reached a consensus on Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. This Issue provides guidance for determining when an investment is other-than-temporarily impaired. This Issue specifically addresses whether an investor has the ability and intent to hold an investment until recovery. In addition, Issue 03-1 contains disclosure requirements that provide useful information about impairments that have not been recognized as other-than-temporary for investments within the scope of this Issue. On September 30, 2004, the FASB deferred the effective date of this Issue’s guidance on how to evaluate and recognize an impairment loss that is other-than-temporary. This Issue’s guidance is pending the issuance of a final FASB Staff Position (“FSP”) relating to the draft FSP EITF Issue 03-1-a, Implementation Guidance for the Application of Paragraph 16 of EITF have No. 03-1. “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” This deferral did not change the disclosure guidance which remains effective for fiscal years ending after December 15, 2003.

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(“APB 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 Statement of Financial Accounting Standard No. 123 (“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 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):

4

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

3. Goodwill and Intangible Assets

     The changes in the carrying amount of goodwill for the year ended December 31, 2004 and the three months ended March 31, 2005 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):

     At March 31, 2005 and December 31, 2004, the fair value of servicing rights retained from single family loan sales totaled $2.9 million and $2.2 million related to $178.3 million and $168.3 million, respectively, of principal serviced for others. The bank did not securitize any financial assets during the three months ended March 31, 2005 or the year ended December 31, 2004.

4. Junior Subordinated Notes

     At March 31, 2005, the company had two issues of junior subordinated notes outstanding as follows (in thousands):

     In February 2005, the company formed Franklin Capital Trust II (the “Trust II”), a wholly owned subsidiary. The Trust II issued $20 million of variable rate trust preferred securities and invested the proceeds in variable rate junior subordinated notes issued by the company. This issuance was part of a $60 million commitment from Cohen Bros. & Company to allow us to issue trust preferred securities until September 2005, under an agreed upon spread to 3 months LIBOR of 1.90%. The company guarantees that payments will be made to the holders of the trust preferred securities, if the Trust II has the funds available for payment. The rate on the these junior subordinated notes resets quarterly, at a base rate of 3-month LIBOR plus 1.90%. The first call date for these junior subordinated notes is March 15, 2010 and they mature in March 2035. At March 31, 2005, the interest rate was 4.91% and the company’s investment in the Trust II was $619,000. The company also entered into an interest rate swap agreement in order to reduce the impact of interest rate changes on future income. The notional amount of the swap is $20 million and has been designated as a cash flow hedge to effectively convert the new junior subordinated notes to a fixed rate basis. The agreement involves the receipt of floating rate amounts in exchange for fixed interest rate payments at an interest rate of 4.29% over the life of the agreement without an exchange of the underlying principal amounts. See “Footnote 9. Junior Subordinated Notes” under “Item 8. Financial Statements and Supplementary Data” in the Company’s 2004 Annual Report on Form 10-K for a discussion of Franklin Bank Capital Trust I.

5. Contingencies

     On May 9, 2005 a jury verdict was returned against Franklin Bank in a case pending against the bank, one of its officers and a bankrupt homebuilder in the 250^th District Court of Travis County, Texas that arises out of the bank’s loan to the homebuilder for the construction of a residence, for the plaintiffs, and which involves allegations of common law and statutory fraud and negligent misrepresentation. While judgment has not yet been entered in the case, the bank’s share of the amount of any final judgment is not expected to have a material adverse effect on the financial position or results of operation of the Company. The Company is considering all available legal options with respect to this matter.

5

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;

•

seasonality in our mortgage and commercial 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

     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 gain 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 accounting, 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. Discussions regarding potential acquisitions may be commenced at any time, may proceed rapidly and agreements may be concluded and announced at any time. Any potential acquisition, and any combination of potential acquisitions, may be material in size relative to our existing assets and operations. 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 existing at the time such estimates, judgments and assumptions are made. However, actual results could differ significantly from these estimates and assumptions, which could have a material impact on our

7

financial condition and results of operations. These policies are described in further detail in the Company’s 2004 Annual Report of Form 10-K under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies”.

Overview

     Franklin Bank Corp. is a Texas-based savings and loan holding company that offers mortgage banking, commercial banking and community banking products and services through its subsidiary, Franklin Bank, S.S.B. As of March 31, 2005, in addition to our corporate office in Houston, Texas, where we provide many of our banking services, we had 22 community banking offices in Texas, five regional construction lending offices in Florida, Arizona, Pennsylvania, Michigan and Texas, 50 retail mortgage offices in 20 states throughout the United States, and regional wholesale origination offices in California and Tennessee.

     The company derives a majority of its income from interest earned on its loan portfolio. 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. Funding for our asset growth comes primarily from community banking deposits, brokered deposits and borrowings from the Federal Home Loan Bank.

Significant Transactions

     On January 27, 2005, the company announced that it had signed a definitive agreement to acquire Elgin Bank of Texas, or Elgin. Elgin operates three community banking offices in our central Texas market. This transaction is expected to close at the end of the second quarter or beginning of the third quarter of 2005, subject to regulatory approvals and other conditions set forth in the merger agreement.

     On May 9, 2005, we acquired The First National Bank of Athens, or Athens. Athens operated four community banking offices in our east Texas market and had approximately $208.7 million in assets and $184.7 million in deposits at the time of acquisition.

     On December 4, 2004, we acquired Cedar Creek Bancshares, Inc., or Cedar Creek, for approximately $11.3 million in cash, $12.3 million in Franklin common stock and $297,000 in direct acquisition costs. Cedar Creek operated five community banking offices in our east Texas market and had approximately $107.3 million in assets and $96.7 million in deposited at the time of the acquisition.

     On February 29, 2004, we acquired Lost Pines for approximately $7.2 million in cash, including $308,000 in direct acquisition costs. Lost Pines was a Texas-based bank holding company with approximately $40.2 million in assets and $36.3 million in deposits at the date of the acquisition.

     On December 30, 2003, we acquired Jacksonville for approximately $68.6 million in cash, including $1.7 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 $18.8 million, including $15.0 million in cash, $2.7 million in shares of our common stock, valued at $10.00 per share, and $1.1 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 central Texas market.

Results of Operations – Three months Ended March 31, 2005 compared to three months Ended March 31, 2004.

     Net income was $6.9 million, or $0.31 per diluted share, for the three months ended March 31, 2005, compared to $4.3 million, or $0.20 per diluted share, for the three months ended March 31, 2004. The results of 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 $6.4 million to $20.6 million for the three months ended March 31, 2005, compared to $14.2 million for the three months ended March 31, 2004. This increase was due to a $1.3 billion increase in average interest-earning assets, resulting primarily from purchases of single family loans and an increase in residential construction and mortgage-banker finance loans. Since March 31, 2004, we have purchased approximately $2.0 billion of single family loans and opened two regional commercial lending offices, bringing our total commercial lending offices to six at March 31, 2005. Through our commercial lending offices we originated $1.6 billion in loans during the twelve month period ending March 31, 2005. The net yield decreased 18 basis points to 2.31% for the three months ended March 31, 2005, compared to 2.49% for the same period a year ago. This decline is primarily due to a decrease in the net spread on newly acquired single family mortgage loans as well as a reduction in the spread on our mortgage warehouse from a higher increase in short-term rates as compared to longer-term rates.

     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, 2005 and 2004. Balances for both periods

8

9

     Loan fee income increased $1.1 million during the three months ended March 31, 2005, to $1.7 million, from $634,000 during the three months ended March 31, 2004. This increase relates to mortgage broker fee income earned on loans originated by us in the name of other institutions. Mortgage broker fees totaled $1.5 million during the three months ended March 31, 2005, compared to $462,000 during the same period a year ago.

     Deposit fees increased $451,000 during the three months ended March 31, 2005, to $926,000, from $475,000 during the three months ended March 31, 2004. This increase relates to overdraft fees, service charges on checking accounts, and fees charged for other banking related services and is directly related to an increase in our customer base. The number of transaction accounts rose from 19,093 at March 31, 2004 to 24,656 at March 31, 2005. This growth came from our acquisition of Cedar Creek on December 4, 2004 and successful marketing efforts, including competitive pricing, newspaper advertising and direct mail. Additionally, we opened two new community banking offices in central Texas during 2004.

     Gains on sales of single family loans increased $264,000 during the three months ended March 31, 2005 as compared to the three months ended March 31, 2004 due to an increase in mortgage banking activity. During the three months ended March 31, 2005, we sold $151.9 million of single family loans, resulting in a gain of $627,000, compared to sales of $76.7 million for a gain of $ 363,000 during the three months ended March 31, 2004.

     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. We did not sell any securities during the three months ended March 31, 2005. All of the securities sold during the three months ended March 31, 2004 came from the Jacksonville acquisition.

     Other non-interest income decreased $213,000 during the three months ended March 31, 2005, to $281,000, compared to $494,000 during the three months ended March 31, 2004. This decline is due to the reversal of a credit mark on a loan acquired in the Franklin acquisition which was paid in full during the three months ended March 31, 2004.

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

     Non-interest expense increased $4.0 million during the three months ended March 31, 2005, to $12.9 million, compared to $8.9 million for the three months ended March 31, 2004. The increase in non-interest expense is due to the overall growth of the company, including the acquisitions of Lost Pines and Cedar Creek.

10

     Salaries and benefits increased $2.3 million during the three months ended March 31, 2005, to $6.7 million, compared to $4.4 million during the three months ended March 31, 2004. The number of full time equivalent employees at March 31, 2005 totaled 576, compared to 443 at March 31, 2004. The increase in headcount includes 50 from the Cedar Creek acquisition, 31 from our mortgage banking business, 13 from growth in our community banking business, including two new offices opened during 2004, and 10 from growth in our commercial banking business.

     Data processing expense increased $559,000 during the three months ended March 31, 2005, to $1.2 million, from $591,000 during the three months ended March 31, 2004. Higher data processing costs represent the increase in outsourced data processing services and depreciation on computer hardware and software to support our expansion and growth and due to the conversion of Jacksonville to our systems at the end of March 2004 and Lost Pines to our systems during the third quarter of 2004.

     Occupancy expense increased $146,000 during the three months ended March 31, 2005, to $1.1 million, from $939,000 during the three months ended March 31, 2004. This increase is due to the acquisitions of Lost Pines on February 29, 2004 and Cedar Creek on December 4, 2004, which added two and five community banking offices, respectively. Additionally, we opened two new community banking offices in central Texas during 2004 and expanded our mortgage banking business, increasing the number of retail and wholesale mortgage origination offices from 44 at March 31, 2004 to 53 at March 31, 2005.

     Professional fees increased $471,000 during the three months ended March 31, 2005, to $1.2 million, from $763,000 during the three months ended March 31, 2004. Legal fees increased due to a lawsuit relating to construction lending activities that occurred prior to our acquisition of Franklin and due to the general overall growth of the company. Audit fees increased during the three months ended March 31, 2005 as compared to the three months ended March 31, 2004, due to increased fees relating to compliance with the Sarbanes-Oxley act of 2002. Professional fees related to loan purchase and origination activities increased due to an increase in mortgage banking activity during the current period as compared to the prior year period.

     Loan expenses increased $267,000 during the three months ended March 31, 2005, to $$662,000, from $395,000 during the three months ended March 31, 2004. This increase is due to an increase in mortgage banking activity from originations, purchases and sales of single family loans during the current period as compared to the prior year period.

     Core deposit amortization increased $114,000 during the three months ended March 31, 2005, to $230,000, compared to $116,000 during the three months ended March 31, 2004. This increase relates to amortization of the core deposit intangible for the Lost Pines and Cedar Creek acquisitions. The Cedar Creek core deposit intangible was estimated at $2.2 million, and is subject to adjustment as certain valuation information becomes available.

     Other non-interest expense increased $147,000 during the three months ended March 31, 2005. This increase includes higher marketing, employee travel, postage and courier expenses, as well as increased costs related to our acquisition of Cedar Creek.

Financial Condition

General. Total assets increased $413.0 million to $3.9 billion at March 31, 2005, from $3.5 billion at December 31, 2004. The increase in assets was primarily attributable to purchases of single family loans, new residential construction loans and growth in the mortgage-banker finance portfolio.

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.

11

     Our investment portfolio declined $16.2 million during the three months ended March 31, 2005, to $241.2 million, from $257.4 million at December 31, 2004. The decline in the investment portfolio was due to maturities totaling $12.7 million and principal repayments of $7.5 million. There were no purchases or sales of securities during the three months ended March 31, 2005.

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

     The loan portfolio, excluding the allowance for credit losses, premiums and deferred fees and costs, increased $443.1 million, to $3.4 billion at March 31, 2005, compared to $3.0 billion at December 31, 2004. This increase was primarily in the single family held for investment, residential construction and mortgage banker finance portfolios. Single family loans held for investment increased $388.8 million, to $2.5 billion at March 31, 2005, from $2.1 billion at December 31, 2004. During the three months ended March 31, 2005, purchases of single family loans held for investment totaled $499.4 million and principal repayments were $166.0 million. Single family loans held for sale decreased $29.9 million, to $168.8 million at March 31, 2005, from $198.7 million at December 31, 2004. Sales of single family loans held for sale totaled $151.9 million and originations were $177.1 million during the three months ended March 31, 2005. Additionally, $55.9 million of portfolio quality single family loans were transferred from the held for sale portfolio to the single family held for investment portfolio. During low refinance periods, originations of single family mortgages tend to be higher during the summer months when more people are relocating. The residential construction loan portfolio increased $89.2 million, to $425.5 million at March 31, 2005, from $336.3 million at December 31, 2004. Fundings of residential construction loans totaled $222.0 million and principal repayments were $146.8 million during the three months ended March 31, 2005. The mortgage banker finance portfolio increased $10.1 million, to $148.2 million at March 31, 2005, from $138.1 million at December 31, 2004.

12

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

     Deposits increased $295.4 million during the three months ended March 31, 2005, to $1.8 billion, from $1.5 billion at December 31, 2004. This increase is due to an increase in brokered and wholesale deposits. We expect that brokered and wholesale deposits will remain a significant source of our deposit funding. Because these deposits generally have rates set at the then current market rates they tend to be a more expensive source of funding than community banking deposits.

Borrowings. Borrowings are comprised of Federal Home Loan Bank “FHLB” advances. FHLB advances increased $88.5 million during the three months ended March 31, 2005. The increase in borrowings contributed to the funding of asset growth during the period. At March 31, 2005, FHLB advances were 48.7% of our total funding liabilities.

Junior subordinated notes. Junior subordinated notes increased $20.6 million during the three months ended March 31, 2005, to $40.9 million, from $20.3 million at December 31, 2004. During the three months ended March 31, 2005 the company formed Franklin Capital Trust II, which issued $20 million of variable rate trust preferred securities and invested the proceeds in variable rate junior subordinated notes issued by the company. The rate on the new junior subordinated notes resets quarterly at a base rate of 3-month LIBOR plus 1.90%. At March 31, 2005 the rate on the new junior subordinated notes was 4.91%. Of the $20 million raised from the issuance of the junior subordinated notes, $18 million was contributed as capital to the bank.

13

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, 2005, we had $9.2 million in non-performing assets comprised of $4.5 million in loans that were four payments or more delinquent in nonaccrual status, and $4.7 million of real estate owned. This compares to $8.3 million in non-performing assets at December 31, 2004, comprised of $4.9 million in loans that were four payments or more delinquent in nonaccrual status, and $3.4 million of real estate owned. Additionally, at March 31, 2005, the company had $5.0 million of loans that were four payments or more delinquent and still accruing interest, which are comprised of single family loans serviced by others and are under an agreement whereby we receive scheduled payments until foreclosure.

      Non-performing assets increased $904,000 during the three months ended March 31, 2005, to $9.2 million, from $8.3 million at December 31, 2004. This increase is primarily due to a $1.3 million increase in commercial real estate owned, including a residential construction loan acquired in the Jacksonville acquisition and a lot loan acquired in the Franklin acquisition.

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

     At the time a loan is placed on 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, 2005 and December 31, 2004, we had $9.1 million and $9.0 million, respectively, in loans that were viewed by management 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.

14

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, 2005.

     The bank’s regulatory capital at March 31, 2005 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, 2005 and 2004, a significant source of funding has been from our deposits, both community banking and brokered. We also issued $20 million in junior subordinated notes during the three months ended March 31, 2005. See “Note 4. Junior Subordinated Notes” in “Item 1. Financial Statements — Notes to Interim Consolidated Financial Statements.”

     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, 2005, our borrowings from the FHLB were $1.7 billion and our additional borrowing capacity was approximately $165 million. At March 31, 2005, we had no securities sold under agreements 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, 2005, we had approximately $8.7 million in available cash and the bank had the ability to pay approximately $38.2 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 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.

16

     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, 2005, was a negative gap of $419.3 million, or 10.8%, of total assets, compared to a negative $523.8 million, or 15.1% of total assets at December 31, 2004. See “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our 2004 Annual Report on Form 10-K for further information.

     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, 2005, our pipeline included $84.2 million of loans with committed interest rates of which $38.2 million were fixed rate loans. We have entered into $72.0 million in forward sales agreements, of which $15.4 million are allocated to the loans in our pipeline with committed interest rates based on expected close rate of 66.0% 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, 2005, 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.

     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 defined in Rules 13a - 15(e) and 15d - 15(e) under the Exchange Act) as of the end of the period covered by this report. Based on

17

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 (as defined in Rule 13a - 15(f) and 15d - 15(f) under the Exchange Act) 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.

(“See Note 5 Contingencies.”)

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     (a) The information required by this item was previously reported on the Company's Form 8-K dated March 4, 2005 and has been omitted as permitted by this item.

     (b) Not applicable.

     (c) Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

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

None.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

18

+ 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.

19

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 10, 2005	By:	/s/ Russell McCann
		Russell McCann
		Chief Financial Officer (Duly Authorized Officer, Principal Financial Officer and Principal Accounting Officer)

20

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.

21