Franklin Bank Corp. 2006 Annual Report

Franklin Bank Corp. 2006 Annual Report “Without continued growth and progress such words as improvement, achievement, and success have no meaning.” — Benjamin Franklin Corporate Overview Franklin Bank Corp. (Franklin or company) is a $5.5 billion bank holding company headquartered in Houston, Texas. The company’s community banking mission focuses on serving customers in communities outside the major metropolitan cities in Texas. The company conducts business through 38 community banking offices in Texas, seven regional commercial lending offices and 38 mortgage loan production offices across the United States. Franklin offers a variety of loan and deposit products and provides high-quality personalized service through its “trusted financial advisors.” Franklin’s common stock has been traded on the NASDAQ under the symbol FBTX since December 2003. Franklin is currently included within the following indices: Russell 3000, Russell 2000, Russell Microcap, American Community Bankers, S&P SmallCap 600 Index, S&P Composite, and NASDAQ Global Select Market Composite. In May 2006, Franklin raised additional capital through a preferred stock offering that is now trading on the AMEX under the ticker symbol FBK-P. Our Core Values: • We exist to serve our customers and employees with respect and fairness, and in all things, we will be ethical, forthright and honest. • We will foster innovation and open communication, and we will recognize each individual’s contribution. • We will proactively help others to succeed. These are the core values that guide the actions of all Franklin employees and why we are known throughout the communities we serve for providing excellent customer service. Our Mission: Our mission is to grow The Franklin Family of Community Banks, which is supported by lending production that leverages our motivated professional managers. We expect our bankers to deliver high-quality customer service in our community and commercial lending markets. This mission statement accurately explains why our organization exists and what we hope to achieve in the future. It effectively resonates with people working within Franklin. It expresses our purpose in a way that inspires commitment and innovation, as we work together to cultivate an outstanding reputation and lasting legacy. Financial Highlights Creating a franchise that cannot be duplicated Dollars are in thousands except for share data At Year End 2006 2005 $ 4,471,252 $ 3,813,395 $ 2,121,508 $ 332,831 2004 $ 3,479,734 $ 3,017,502 $ 1,502,398 $ 280,709 2003 $ 2,251,300 $ 1,813,116 $ 1,259,843 $ 245,438 $ $ $ $ 2002 365,681 307,160 182,334 97,407 Total Assets ............................. $ 5,537,367 Loans, Net ............................... $ 4,676,062 Deposits ................................... $ 2,631,964 Stockholders’ Equity ................ $ 432,726 Per Common Share Net Income — Diluted ............ $ Book Value at Year End ........... $ .65 14.90 $ $ 1.13 14.24 $ $ 1.07 12.82 $ $ 0.29 11.56 $ $ (0.24) 9.41 For the Year Net Income Available to Common Stockholders ............. $ Net Interest Income ................. $ Non-Interest Expense .............. $ Employees ................................ Community Banking Offices .... 15,517 92,718 67,011 627 38 $ $ $ 26,296 84,031 56,671 710 35 $ $ $ 23,149 65,742 40,655 548 23 $ $ $ 3,198 19,435 18,227 399 14 $ $ $ (726) 2,893 4,203 74 2 Common Shares Outstanding .. 23,588,856 23,375,076 21,895,785 21,225,263 10,353,320 Net Interest Income $100,000 $6,000,000 Total Assets $3,000,000 Deposits $80,000 $4,000,000 $2,000,000 $60,000 $40,000 $2,000,000 $1,000,000 $20,000 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006 2002 2003 2004 2005 2006 Letter to Stockholders Dear Fellow Stockholders: 2006 was a very important year for Franklin. We made significant progress to becoming the largest commercial bank based in the communities we serve. At the end of the year, we announced the agreement to acquire the First National Bank of Bryan (FNB). FNB is the oldest bank in Texas, the second largest bank in the Bryan/College Station market and has had a 10-year record of strong growth and excellent credit performance. Its deposit and loan production teams are recognized as industry leaders, and we look forward to having FNB join the Franklin family and being able to offer its clients the broader Franklin Bank product line. The transition to a commercially-oriented community bank was also assisted by the sale of approximately 20 percent of our single-family loan portfolio in January 2007. This allows Franklin to initially pay-down higher cost wholesale deposits and borrowings and then reinvest the proceeds in higher yielding commercial loans. This adjustment is significant to Franklin’s earnings power and its valuation in the marketplace and should provide higher, more stable returns for our stockholders going forward. With this shift of loans, we will reach a goal set during our IPO of having 50 percent of our loans in commercial and community banking loans by the end of 2007. Franklin’s commercial loans grew 65 percent for the year from the previous year. At year end, 40 percent of total loans were commercial and community banking loans, a significant increase from 30 percent last year. Franklin’s community banking deposits grew more than 12 percent organically from prior year. Franklin’s goal for 2007 is to reach approximately $2 billion in community banking deposits that will include deposits obtained through the acquisition of FNB. Lewis S. Raneri Chairman Anthony J. Nocella President and Chief Executive Officer Letter to Stockholders (continued) For 2006, our net interest income increased 10 percent to $93 million. A large component of this increase was from our commercial loan portfolio, which grew to a record $1.8 billion by the end of the year. In order to attract new customers and originate community banking loans, market managers were added to our team in several geographic markets. These senior-level bankers have extensive lending experience in the markets they serve. In celebration of our preferred stock offering in May 2006, we had the privilege of ringing the opening bell for the American Stock Exchange on August 9th. We raised $86.3 million of capital in anticipation of growth within our commercial and community banking operations. The preferred stock trades under the symbol FBK-P. Additionally, we made presentations to investors and participated in several investor conferences. All of these events have increased understanding of our mission and our story which, in turn, has resulted in greater trading volumes, liquidity and exposure in the marketplace. We anticipate 2007 will be a year of record earnings for Franklin. The remixing of the balance sheet toward commercial and community banking lending will transform our image into a community based commercial bank. In addition, this will allow for improved valuation and more stable earnings for our stockholders. Since the founding of Franklin, our core values have emphasized the importance of providing high-quality customer service and introducing new products to satisfy our customersʼ needs. With our strong foundation in place, we shall continue pursuing additional acquisitions in target markets while expanding our commercial and community lending businesses. On behalf of The Franklin Family of Community Banks, we proudly state our commitment to work for the benefit of our stockholders, our communities and our employees. Sincerely, Lewis S. Ranieri Chairman Anthony J. Nocella President and Chief Executive Officer “2006 was a very important year for Franklin. We made significant progress to becoming the largest commercial bank based in the communities we serve.” — Anthony J. Nocella Corporate Directory Franklin Bank Corp. Lewis S. Ranieri Chairman Anthony J. Nocella President and Chief Executive Officer Lawrence Chimerine, Ph. D. David M. Golush James A. Howard Alan E. Master Robert A. Perro William B. Rhodes John B. Selman Board of Directors, Franklin Bank S.S.B. Left to Right, Back Row: William B. Rhodes Russell M. Workman - President Commercial Lending - Community Bank Alan E. Master David M. Golush Lawrence Chimerine, Ph. D. Robert A. Perro John B. Selman Front Row: James A. Howard Anthony J. Nocella - Chairman and Chief Executive Officer Lewis S. Ranieri Andy Black (not pictured) - President and Chief Operating Officer Corporate Directory Executive Management, Franklin Bank S.S.B. Left to Right, Back Row: Andy Black - President and Chief Operating Officer Russell M. Workman - President Commercial Lending - Community Bank Glenn Mealey - Executive Vice President and Managing Director - Administration Max Epperson - Executive Vice President and Chief Credit Officer Daniel E. Cooper - Executive Vice President and Managing Director - Mortgage Banking Front Row: Jan Scofield-Robbins - Executive Vice President and Chief Information Officer Anthony J. Nocella - Chairman and Chief Executive Officer Russell McCann - Executive Vice President and Chief Financial Officer Michael Davitt (not pictured) - Executive Vice President and Managing Director - Commercial Lending David Jones (not pictured) - Executive Vice President and General Counsel Advisory Directors R. Harry Akin Barry Autry Ray Beall Lee Bush Michael Cox David Holdredge Don Kinney Edwin O. Lundgren, Jr. Norman Mason Grover Shade W.F. McCasland Dr. Joe Ed Smith Neal Spelce Bill W. Taylor Charles A. Betts Dr. Douglas Curran Tina G. Ehrlich Robert A. Gould Donald H. Willis Charles Broadway Robert F. Brown Dr. Carl F. Herring Business Operations Community Banking The Franklin Family of Community Banks employs competitive pricing policies, aggressive advertising and personalized customer service to attract and retain deposits as well as to provide superior service in our markets. Our 38 community banking offices offer a wide variety of business and consumer banking products, including commercial and consumer checking accounts, money market accounts, individual retirement accounts, certificates of deposit, auto loans, home improvement and home equity loans, business loans and commercial real estate loans. We further empower our community banking office presidents with local decision-making authority, operational flexibility and the ability to offer focused products and services to their markets. In addition to offering a wide array of products and services, the Franklin Family of Community Banks specializes in providing personalized service with extensive ties to the communities where our bankers live and work. Our banking officers are the backbone of our growth and marketing efforts, acting as relationship managers and “trusted financial advisors” in every community we serve. Through the use of “Score Cards,” our bankers evaluate their performance and are motivated to better serve our customers by raising awareness of all of our products from checking accounts to loans to investment products and services. Andy Black, President and Chief Operating Officer, has lived in Austin for the last 33 years and has worked in the financial industry since 1983. During his tenure with two large financial institutions, he oversaw operations in Central and West Texas. When he joined Franklin, he emphasized the benefits of and need for relationships with customers, saying: “Our goal at Franklin Bank is to listen and understand our customers’ financial needs and do our best to satisfy those needs. Like our customers, we expect the highest quality and accept nothing less.” “An investment in knowledge always pays the best interest.” — Benjamin Franklin Our Commitment: Now and in the future, the Franklin Family of Community Banks remains committed to the communities in which they are located by providing the products customers need and the personalized services they deserve. Clay Thompson, Market President for the Tyler and Jacksonville Franklin Bank markets stated, “Our goal as a bank and in my market is to be the bank of choice. You first start with good people, then add in good products and finally, focus on taking care of the customer, one customer at a time. In Tyler and Jacksonville, we are building relationships by understanding and listening to Business Operations Community Banking (continued) the needs and challenges of our customers. As a community bank surrounded by competition, we have to have a sense of urgency to differentiate ourselves. We do that with outstanding people, an array of products for individuals and businesses and an inner drive to help our customers succeed in their financial decision making by listening first, and then offering solutions tailored to their specific needs.” Franklin Bank business customer Rick Carns, owner of Petty’s Irrigation and Landscape Company in Tyler, attests to our personalized service commitment. “Clay took the time to listen to my needs and understand my business model when many bankers would not,” Carns explained. “Through those conversations, I now have the partnership with Franklin Bank and the banking products necessary to manage a successful irrigation and landscaping business for many years to come. I appreciate the excellent job Franklin Bank is doing for Petty’s. Clay and his team work hard to help us grow our business.” The Franklin Family of Community Banks feels a real sense of responsibility to our communities that goes beyond the workplace. Clay Thompson (left) with Rick Carns, Owner of Petty’s Irrigation and Landscape. Russell Workman, President Commercial Lending - Community Bank, noted that “our officers and employees are actively involved as volunteers, board members and financial supporters of their local school districts, chambers of commerce, service clubs and civic and charitable organizations.” The Franklin Family of Community Banks remains committed to the continued development of the communities in which they are located by providing the products customers need and the personalized services they deserve. Business Operations Commercial Lending The commercial lending business has become one of our primary business drivers. Franklin currently offers business banking, builder finance and commercial real estate lending. One such organization is the East Texas Medical Center Regional Healthcare System (ETMC), which provides health care to residents of East Texas through its network of 14 hospitals. ETMC Chief Financial Officer Byron Hale stated, “When we needed financing for construction of our new medical office buildings on our Athens, Texas, campus, we found Franklin Bank not only ready and willing, but also fast, flexible and fair.” Business Banking We provide our business customers with products that are tailored to their needs, including online banking, cash management and custody services. We believe in offering our business customers superior personalized services from experienced local bankers in order to build relationships that benefit not only Franklin and the customer but also the community. Senior Vice President Kelley Lee manages the business banking product line. “As a native East Texan,” Lee said, “I am particularly proud of the relationship our bank has with many local organizations.” Builder Finance During the year, we opened three new regional commercial offices. As of December 31, 2006, we had seven regional offices serving established builders throughout the United States. Our regional offices are identified as Northeast, Mid-Atlantic, Southeast, Southwest, Rocky Mountain, West and Midwest. The majority of our customers have banked with our loan officers for many years. Feedback from our customers reflects the solid success record of our builder finance bankers. Susan Conrad, Senior Vice President of the Southwest regional office, located in Scottsdale, Arizona, has served her market for more than 15 years. “We are committed to building relationships with our clients,” Conrad said. “We listen, and we learn about our customer’s business so that we can tailor the best financial solution for our client.” East Texas Medical Center Athens Business Operations “Keep thy Shop, and thy Shop will keep thee.” — Benjamin Franklin Builder Finance (continued) One of the region’s long-time customers is John Suriano, Chief Financial Officer of Communities Southwest in Phoenix, Arizona. “Over 10 years ago, when I began to work with loan officers from Franklin Bank, they took the time to understand our company and our unique structure,” Suriano said. “Understanding our needs, they have worked with us to structure loans that make good business sense for both our companies, not some off-the-shelf structure like other banks proposed. Their commitment to the project and us continues after the initial loan closing through the twists and turns a business like ours can experience as we begin taking projects to market. The ability to be flexible and work with us is critical, but it’s the people that keep us at Franklin Bank.” Maureen Koerner, Senior Vice President and Director of the Southwest Region, added, “We currently have a $100 million line of credit which is syndicated out to five other banks for Trend Homes.” Maureen has worked with Reed Porter, President and CEO of Trend Homes for over 10 years. Trend Homes is a local, family-owned home builder, selling 800 to 1,200 plus homes per year in the Phoenix metro area. Along with the credit line Franklin provides all cash management services to Trend Homes. Porter stated, “We have worked with Maureen for almost 10 years. She has been instrumental in providing us with the service and financial products that have enabled us to grow.” He continued, “Franklin Bank has been able and willing to adapt their programs to our constantly changing needs as we have grown from year to year.” Business Operations Michael Davitt, Executive Vice President and Managing Director – Commercial Lending, foresees continued commercial loan growth in certain markets across the United States. Texas continues to be one of those markets. “We expect our growth in the commercial loan portfolio to come from the addition of new officers and the new customers they bring, while maintaining sound credit quality standards.” our acquisition program. Mike Davitt and his team at Franklin Bank are seasoned lending professionals capable of creating and delivering complex financing structures tailored to suit our specific needs as real estate owners and developers.” Mortgage Lending During 2006, Franklin Bank restructured its single family loan portfolio by transferring $580 million of our single family loans to Held for Sale. The sale of these will assist us in achieving our goal of de-emphasizing the mortgage portfolio as a result of the current economy. We continue to focus on originating residential mortgages for sale that conform to secondary marketing credit standards and other criteria set by the capital markets. Dan Cooper, Executive Vice President and Managing Director – Mortgage Banking, leads the mortgage operation and adheres to Franklin’s philosophy of providing personalized service to each customer. Commercial Real Estate Lending Commercial real estate lending is a relatively new product line for Franklin. We pride ourselves on creative, relationship-based lending with an established reputation, prompt delivery and personal service. Our flexible product line features construction, acquisition, rehabilitation and intermediate term loans, as well as secured lines of credit and master credit facilities. “Franklin Bank is currently providing the construction financing for our most recent apartment development in northwest Houston,” said Michael Stevens of Michael Stevens Interests, Inc. “This same management team has previously provided our company with innovative revolving credit lines that were a great asset to “He that can have patience can have what he will.” — Benjamin Franklin The Franklin Family Community Banking Locations Corporate Office 9800 Richmond, Suite 680 Houston, Texas 77042 713-339-8900 4410 Williams Drive Suite 101 Georgetown, Texas 78628 512-869-4160 1007 RR 620 South Suite 100 Lakeway, Texas 78734 512-263-7984 721 Highway 290 West Suite 100 Dripping Springs, Texas 78620 512-858-1256 512-206-1424 499 Highway 71 West Bastrop, Texas 78602 512-303-0238 406 Main Street Smithville, Texas 78957 512-360-4588 1801 Ranch Road 1431 West Kingsland, Texas 78639 325-388-4551 31 North Main Street Elgin, Texas 78621 512-285-3311 106 Roy Rivers Road Elgin, Texas 78621 512-285-3777 Opening in 2007 1807 Slaughter Lane Austin, Texas 78748 Gulf Coast 3434 Twin City Highway Groves, Texas 77619 409-962-8458 6150 Eastex Freeway Beaumont, Texas 77708 409-898-2128 1022 Nederland Avenue Nederland, Texas 77627 409-727-2153 201 West Jackson El Campo, Texas 77437 979-543-3316 104 West Caney Wharton, Texas 77488 979-532-2880 Central Texas 3720 Jefferson Austin, Texas 78731 512-206-1420 3103 Bee Cave Road Suite 110 Austin, Texas 78746 512-330-1790 3401 Northland Drive Austin, Texas 78731 512-458-1384 1701 West Parmer Lane Suite 100 Austin, Texas 78727 512-490-6658 3705 North Main Street Taylor, Texas 76574 512-352-5139 109 Cypress Creek Cedar Park, Texas 78613 512-206-1414 The Franklin Family Community Banking Locations (continued) The Franklin Family of Community Banks is a community based commercial bank located in areas outside the major metropolitan cities. In addition to our corporate office, we had 38 community banking offices in Texas on December 31, 2006, and expect to have 45 by mid-2007. East Texas 539 West I-30 Mount Vernon, Texas 75457 903-588-2243 101 North Main Winnsboro, Texas 75494 903-342-5205 125 North Prairieville Athens, Texas 75751 903-675-8511 617 South Palestine Street Athens, Texas 75751 903-677-2511 203 Neches Jacksonville, Texas 75766 903-586-9861 121 South Market Carthage, Texas 75633 903-693-7161 1412 Judson Road Longview, Texas 75601 903-758-0118 515 East Loop 281 Longview, Texas 75601 903-663-9271 1015 North Church Palestine, Texas 75801 903-729-3228 107 East 4th Street Rusk, Texas 75785 903-683-2287 4803 Old Bullard Road Tyler, Texas 75703 903-534-9144 2507 University Boulevard Tyler, Texas 75701 903-566-5575 207 South Athens Canton, Texas 75103 903-567-4181 213 US Highway 175 West Eustace, Texas 75124 903-425-7031 201 North Gun Barrel Lane Gun Barrel City, Texas 75156 903-887-3333 1716 West Main Street Gun Barrel City, Texas 75156 903-887-6497 601 East Cedar Creek Parkway Seven Points, Texas 75143 903-432-3611 2500 North Tool Drive Tool, Texas 75143 903-432-4181 1101 Northwest 2nd Street Kerens, Texas 75144 903-396-2222 Investor Information Franklin Headquarters 9800 Richmond, Suite 680, Houston, TX 77042 (713) 339-8900 Stock Listing Franklin Bank Corp.’s common stock is traded through NASDAQ’s Global Select Market under the symbol FBTX. Franklin Bank Corp.’s preferred stock is traded through the AMEX under the symbol of FBK-P. Stockholders who have questions regarding their ownership of Franklin Bank Corp. stock should contact the Registrar. Registrar and Transfer Agent Bank of New York P.O. Box 11258, 11th Floor North Church Street Station New York, NY 10286-1258 800-524-4458 212-815-3700 (Outside the U.S. and Canada) 888-269-5211 (Hearing Impaired TTY Phone) E-mail: shareowners@bankofny.com Website: http://www.stockbny.com Send certificates for transfer and address changes to: Receive and Deliver Dept. P.O. Box 11002 Church Street Station New York, NY 10286-1002 SEC Reports and Additional Information Analysts, investors and others seeking copies of the Franklin Bank Corp. Annual Report (Form 10-K) and Quarterly Reports (Form 10-Q), or additional financial information may visit: www.bankfranklin.com Analysts, investors and others desiring additional financial data about Franklin Bank Corp. may contact: Kris Dillon Vice President Director of Investor Relations (713) 339-8999 E-mail: investorrelations@bankfranklin.com Investor Inquiries Independent auditors Deloitte & Touche, LLP 333 Clay Street, Suite 2300 Houston, TX 77002 Annual Meeting The 2007 Annual Meeting of stockholders will be held May 10, 2007, in Houston, Texas. Corporate Headquarters 9800 Richmond Avenue, Suite 680 Houston, TX 77042 (713) 339-8900 www.bankfranklin.com