| FRANKLIN BANK CORP Item 1A Risk Factors An investment in our common stock involves a number of risks |
| We describe below the material risks and uncertainties that affect our business |
| Before making an investment decision, you should carefully consider all of these risks and all other information included or incorporated in this report |
| Additional risks and uncertainties that management is not aware of or that management currently deems immaterial may also impair the Corporation’s business operations |
| This report is qualified in its entirety by these risk factors |
| If any of the following risks occur, our financial condition, liquidity, and results of operations could be materially and adversely affected |
| If this were to happen, the value of our common stock could decline significantly, and you could lose all or a part of your investment |
| Risks Associated with Franklin We may be unable to successfully continue to implement our growth business strategy, which may adversely affect our future prospects and financial performance |
| Our strategic plan is directed toward enhancement of our return to our stockholders through a significant increase in our asset size, the increase in new customer deposit accounts, the expansion of our niche loan products and expansion into growing markets outside metropolitan areas in Texas |
| This requires: • that we find attractive market opportunities so that we may profitably execute our strategic plan; • that we continue to profitably build our products to provide us with the revenue to support our expansion; • the use of a substantial amount of more rate sensitive “brokered” deposits to fund our asset growth |
| Brokered deposits are deposits that we obtain from or through a deposit broker |
| Such deposits constituted approximately 41prca of our total deposits as of December 31, 2005; • that we identify, hire and retain qualified employees, and maintain the information systems, necessary to manage our growth; and • continued compliance with regulatory requirements applicable to our business |
| Changes in the general and regional economic environment, such as an increase in mortgage rates or a decline in the housing market, may prevent us from originating or purchasing loans in volumes and on terms sufficient to support our strategic plan |
| Changes in general market conditions may materially and adversely affect our ability to find the necessary funding to support our growth |
| In addition, we may be unable to find and retain additional staff necessary to support our anticipated growth in our business activities, and the information systems supplied by our vendors may be inadequate to support this growth |
| Finally, because we are a highly regulated institution, our growth strategy could raise regulatory concerns that could in turn prevent us from implementing all or part of our strategic plan |
| Any of these developments could have a material adverse effect on our financial condition, results of operations and cash flows |
| If we are unable to identify and acquire other financial institutions and successfully integrate our business with those of the companies that we have acquired or acquire in the future, our business and earnings may be adversely affected |
| We intend to grow by acquisitions, including but not limited to the acquisition of other financial institutions, branch offices and loan portfolios |
| Since our acquisition of Franklin Bank, we have considered and entered into discussions regarding potential acquisitions |
| On April 30, 2003, we completed the acquisition of Highland Lakes Bancshares Corporation, located in Kingsland, Texas |
| On December 30, 2003, we completed the acquisition of Jacksonville Bancorp, Inc |
| On February 29, 2004, we completed the acquisition of Lost Pines Bancshares, Inc |
| On December 4, 2004, we completed the acquisition of Cedar Creek Bancshares, Inc |
| for approximately dlra11dtta3 million in cash and dlra12dtta3 million in our common stock |
| On May 9, 2005, we completed the acquisition of The First National Bank of Athens for approximately dlra43dtta5 million in cash and dlra14dtta3 million in our common stock |
| On July 15, 2005, we 19 _________________________________________________________________ completed the acquisition of Elgin Bank of Texas for approximately dlra11dtta7 million in cash and dlra11dtta9 million in our common stock |
| On December 2, 2005, we completed the purchase of five banking offices located in the following Texas cities: Beaumont, Groves, Nederland, El Campo and Wharton for a purchase premium of approximately dlra33dtta6 million |
| We intend to continue to consider other potential acquisition opportunities in the future |
| Other potential future transactions may be effected quickly, may occur at any time and may be significant in size relative to our existing assets and operations |
| However, no assurance can be given that we will be able to successfully make such acquisitions on terms acceptable to us |
| The market for acquisition targets is highly competitive, which may adversely affect our ability to find acquisition candidates that fit our growth strategy |
| To the extent that we are unable to find suitable acquisition targets, an important component of our growth strategy may not be realized |
| Acquisitions will be subject to regulatory approval, and we may be unable to obtain such approvals |
| In addition, some acquisitions will likely require us to consolidate data processing operations, combine employee benefit plans, create joint account and lending products and develop unified marketing plans, which could increase our operating costs significantly |
| Furthermore, our ability to grow through acquisitions will depend on our maintaining sufficient regulatory capital levels and on general and regional economic conditions |
| We may also elect to finance future acquisitions with debt financings, which would increase our debt service requirements, or through the issuance of additional common or preferred stock, which could result in dilution to our stockholders |
| There can be no assurance that we will be able to arrange adequate financing for any acquisitions on acceptable terms |
| Our ability to successfully integrate the Athens transaction and other future transactions, will depend primarily on our ability to consolidate operations, systems and procedures and to eliminate redundancies and costs |
| We cannot assure you that we will be able to integrate our operations without encountering difficulties, such as the loss of key employees and customers, the imposition of regulatory restrictions, the disruption of our ongoing business or possible inconsistencies in standards, controls, procedures and policies |
| The integration process also may require significant time and attention from our management that would otherwise be directed at developing our existing business |
| Estimated cost savings projected to come from various areas that we identified through our due diligence and integration planning process may not materialize |
| If we have difficulties with any of these integrations, we might not achieve the economic benefits we expect to result from these acquisitions and this would likely hurt our business and our earnings |
| In addition, we may experience greater than expected costs or difficulties relating to the integration of these operations, and may not realize expected cost savings from these acquisitions within the expected time frames |
| We have a limited operating history, which makes it difficult to predict our future prospects and financial performance |
| We have only been operating as the holding company for Franklin Bank since April 10, 2002 |
| Due to this limited operating history, it may be difficult to evaluate our business prospects |
| We rely, in part, on external financing to fund our operations and the unavailability of such funds in the future could adversely affect our growth strategy and prospects |
| Our ability to implement our business strategy will depend on our ability to obtain funding for acquisitions, loan originations, working capital and other general corporate purposes |
| We do not anticipate that our community banking and commercial deposits will be sufficient to meet our funding needs |
| We therefore rely on wholesale and brokered deposits, Federal Home Loan Bank advances and other wholesale funding sources to obtain the funds necessary to implement our growth strategy |
| Because these funds generally are more sensitive to rates than community banking deposits, they are more likely to move to the highest rate available |
| To the extent we are not successful in obtaining such funding, we will be unable to implement our strategy as planned, which could have a material adverse effect on our financial condition, results of operations and cash flows |
| 20 _________________________________________________________________ Our reliance on brokered deposits to fund our growth may substantially increase our funding costs |
| In addition, regulatory constraints may limit our ability to acquire these deposits |
| Brokered deposits, which are more sensitive to changes in interest rates than are community banking deposits, constituted approximately 41prca of our total deposits at December 31, 2005 |
| Brokered deposits are priced based on the current general level of interest rates and, unlike retail deposits, do not take into account regional pricing |
| Our ability to continue to acquire brokered deposits is subject to our ability to price these deposits at competitive levels, which may substantially increase our funding costs |
| In addition, if our capital levels were to fall below “well capitalized” under the Prompt Corrective Action standards of the Federal Deposit Insurance Corporation, or FDIC, our ability to accept, renew or roll over these deposits would be subject to our receiving a waiver from the FDIC Furthermore, we would be limited on the rate that we could pay for these deposits to 75 basis points over the effective yield on deposits that we offer in our normal market area or the national rate for deposits of comparable maturity |
| Failure to receive a waiver from the FDIC, if required, would have a material adverse impact on our financial condition, results of operations and cash flows |
| Our small business, commercial real estate and consumer loan portfolios have significant geographic concentration and an economic slowdown or depressed real estate market in our primary markets could be detrimental to our financial condition |
| A substantial portion of our small business, commercial real estate and consumer loans are to customers located in Travis, Bastrop, Llano, Cherokee, Gregg, Henderson, Panola and Smith Counties in Texas |
| In addition, since the completion of the purchase in December 2005 of five banking offices in Jefferson and Wharton counties located near the Texas Gulf Coast, our operations in those areas are susceptible to damage associated with hurricanes, such as high winds, flooding, tornados and similar risks |
| The occurrence of a major hurricane on the Texas Gulf Coast could materially and adversely affect our business and results of operations in the areas affected by such storm |
| A deterioration in economic conditions in these counties could have a material adverse effect on the quality of these portfolios and the demand for our products and services |
| In addition, during periods of economic recession, we may experience a decline in collateral values and an increase in delinquencies |
| Accordingly, the ultimate collectability of a substantial portion of our commercial loan portfolio is susceptible to economic changes in these markets |
| A significant downturn in the real estate market in these areas would be detrimental to our financial condition |
| In addition, if any of these developments were to result in losses that materially and adversely affected Franklin Bank’s capital, we and Franklin Bank might be subject to regulatory restrictions on operations and growth and to a requirement to raise additional capital |
| Our loan portfolio may be significantly affected by the economy of California |
| As of December 31, 2005, approximately 26dtta6prca of the principal amount of our loan portfolio was secured by properties located in California |
| Consequently, our financial condition, results of operations and cash flows are likely to be significantly affected by economic conditions in California, particularly those affecting the residential real estate markets |
| In addition, mortgaged properties in California may be particularly susceptible to certain types of uninsurable hazards, such as earthquakes, floods, mudslides or other natural disasters |
| An overall decline in the economy or the residential real estate market, or the occurrence of a natural disaster, in California could materially and adversely affect the value of the mortgaged properties located there and increase the risk of delinquency, foreclosure, bankruptcy or loss on mortgage loans in our portfolio |
| These events could have a material adverse effect on our financial condition, results of operations and cash flows |
| If we are unable to continue to purchase single family loans in bulk from the entities with which we currently have correspondent relationships, or other entities, our business and financial results may suffer |
| Our single family mortgage loans held for investment grew by dlra283dtta2 million to dlra2dtta6 billion at December 31, 2005, from dlra2dtta3 billion at December 31, 2004 |
| This growth is attributable to the purchase of 21 _________________________________________________________________ dlra1dtta2 billion, and the origination of dlra865dtta6 million, of single family mortgage loans |
| The single family loan purchases were primarily through correspondent relationships with Countrywide Home Loans Inc, which accounted for approximately 67prca of total purchases, Residential Funding Corp, which accounted for 15prca, and Morgan Stanley, which accounted for approximately 12prca of total purchases, during the year ended December 31, 2005 |
| We are not contractually obligated to purchase loans from any of these entities on an ongoing basis |
| If we are unable to continue to purchase single family loans in bulk from these or other entities our business and financial results may suffer |
| The majority of our single family loan portfolio consists of newly originated loans which may cause our loan portfolio to experience increased losses as the loans season |
| At December 31, 2005, approximately 89prca of our single family loan portfolio was comprised of single family mortgage loans that are less than three years old |
| Losses on single family mortgage loans generally occur after the loans are three years old |
| Therefore, we may experience a significant increase in losses on our single family mortgage loans as these loans age, and we may have to increase our allowance for credit losses accordingly |
| This may have a material adverse impact on our financial condition, results of operations and cash flows |
| We are subject to losses resulting from fraudulent and negligent acts on the part of loan applicants, mortgage brokers, correspondents or other third parties |
| We rely heavily upon information supplied by third parties, including the information contained in loan applications, property appraisals, title information and employment and income documentation, in deciding which loans we will originate, as well as the terms of those loans |
| Additionally, our mortgage banker finance product poses a particular risk of losses due to fraudulently or improperly documented collateral |
| If any of the information upon which we rely is misrepresented, either fraudulently or inadvertently, and the misrepresentation is not detected prior to loan funding, the value of the loan may be significantly lower than we had expected, or we may fund a loan that we would not have funded or on terms we would not have extended |
| Whether a misrepresentation is made by the loan applicant, the mortgage broker or another third party, we generally bear the risk of loss associated with the misrepresentation |
| A loan subject to a material misrepresentation is typically unsellable or subject to repurchase if it has been sold prior to detection of the misrepresentation |
| After a loss from a misrepresentation occurs, the source is often difficult to locate, and it is often difficult to recover any of the monetary losses we have suffered |
| Although we have controls and processes designed to help us identify misrepresentations contained in information furnished to us in our loan origination operations, we cannot assure you that we have detected or will detect all misrepresentations in our loan origination operations |
| We are subject to losses resulting from the nature of our mortgage banker finance borrowers |
| The small- and medium-sized mortgage companies to which we market our mortgage banker finance products generally tend to be more thinly capitalized than are other commercial borrowers, which increases the risk that these borrowers will become over-leveraged or experience cash flow difficulties |
| Therefore, our lending in this product exposes us to an increased risk that our borrowers may experience financial difficulties and be unable to perform as required under their loans, which could have a material adverse effect on our financial condition, results of operations and cash flows |
| As of December 31, 2005, we had dlra418dtta3 million in warehouse lines committed, of which dlra173dtta8 million was outstanding |
| Our business is subject to interest rate risk and variations in interest rates may adversely affect our financial performance |
| The majority of our assets and liabilities are monetary in nature and subject us to significant risk from changes in interest rates |
| Like most financial institutions, changes in interest rates can impact our net interest income as well as the valuation of our assets and liabilities |
| Based on our one-year cumulative interest rate gap at December 31, 2005 of negative dlra231dtta6 million, an increase in the general level of interest rates may adversely 22 _________________________________________________________________ affect our net yield on interest-earning assets since our interest-bearing liabilities reprice faster than our interest earning assets |
| In addition, due to the periodic caps which limit interest rate changes on our mortgage-backed securities and loans that pay interest at adjustable rates, an increase in rates greater than the periodic interest rate caps on these loans, usually 2prca per year, may adversely affect our interest income earned on these assets |
| It is quite possible that significant changes in interest rates may take place in the future, although we cannot predict the nature or magnitude of such changes or how such changes may affect our business |
| Additionally, an increase in interest rates may, among other things, reduce the demand for loans and our ability to originate loans |
| A decrease in the general level of interest rates may affect us through, among other things, increased prepayments on our loan and mortgage-backed securities portfolios and increased competition for deposits |
| Accordingly, changes in the level of market interest rates affect our net yield on interest-earning assets, loan origination volume, loan and mortgage-backed securities portfolios, and our overall results |
| Our profitability is dependent to a large extent on our net interest income |
| Net interest income is the difference between: • interest income on interest-earning assets, such as loans and investment securities; and • interest expense on interest-bearing liabilities, such as deposits |
| Fluctuations in interest rates are not predictable or controllable |
| Changes in interest rates can have differing effects on various aspects of our business, particularly on our net interest income and the cost of purchasing residential mortgage loans in the secondary market |
| In particular, changes in market interest rates, changes in the relationships between short-term and long-term market interest rates, or changes in the relationships between different interest rate indices, can affect the interest rates charged on interest-earning assets differently than the interest rates paid on interest-bearing liabilities |
| This difference could result in an increase in interest expense relative to interest income and therefore reduce our net interest income |
| Additionally, in periods of rising interest rates mortgage loan originations typically decline, depending on the overall performance of the economy |
| To the extent that our mortgage originations decline, our income from mortgage originations may also decline |
| Our mortgage origination activities are subject to interest rate risk that may adversely affect our earnings |
| We originate single family mortgage loans to be sold into the secondary market |
| As part of this process we may commit to an interest rate to the borrower prior to selling the loan into the secondary market |
| In order to mitigate the risk that a rise in market interest rates will cause a decline in the value of the loan, we may enter into forward sales agreements at the time the loan’s interest rate is set |
| We enter into these forward sales agreements based on the amount of the loans we have committed to make at a particular interest rate and the amount of these commitments we expect to fund |
| Because we use an estimate of the amount of loans that we expect to close, actual funding amounts may vary |
| We tend to close a higher percentage of loans with committed interest rates lower than the current market and lower percentages of loans that have a committed interest rate greater than the current market |
| These variances may have a negative effect on our earnings |
| In addition, because the forward sales agreements may be executed at different rates than the loan commitment, these agreements may not respond to changes in interest rates to the same degree as the mortgage loan |
| As of December 31, 2005, we had dlra26dtta3 million in fixed rate mortgage loans with committed rates that had not closed and dlra29dtta2 million in forward sales agreements allocated to these commitments based on an expected close rate of 65prca |
| We face strong competition from other financial institutions and financial service companies offering services similar to those offered by us, which could hurt our business |
| The banking business is highly competitive, and our profitability will depend principally upon our ability to compete in the markets in which our banking operations are located |
| We compete with thrifts, commercial banks, credit unions, mortgage companies, specialty finance companies, brokerage firms, investment banks, insurance companies and other financial services companies which may offer more favorable financing than we offer |
| Most 23 _________________________________________________________________ of these competitors are more established than we are and have greater financial and other resources |
| We can give you no assurance that we will be able to compete effectively as we seek to implement our growth strategy |
| Federal statutes and rules governing federally chartered banks and thrifts allow those entities to engage in mortgage and other lending in multiple states on a substantially uniform basis and without the need to comply with state licensing and other laws affecting mortgage lenders, including so-called state “predatory lending” laws directed at certain residential mortgage loans that are defined as “high cost” and that have other features found objectionable in such state legislation |
| Accordingly, Franklin Bank, as a state chartered savings bank, may be subject to state legal requirements and legal risks under state laws to which federally chartered competitors are not subject and this disparity may have the effect of giving those entities legal and competitive advantages |
| We are subject to extensive regulation and supervision that could materially and adversely affect our financial performance |
| Savings and loan holding companies and Texas state savings banks operate in a highly regulated environment and are subject to extensive supervision and examination by several state and federal agencies |
| We are subject to examination and supervision by the Office of Thrift Supervision, or OTS, since we elected to be treated as a savings and loan holding company |
| It is possible that the OTS may adopt additional limitations on savings and loan holding companies, although the OTS has not proposed any specific limitations at this time |
| Franklin Bank, as a Texas state savings bank, is subject to regulation and supervision by the Texas Savings and Loan Department, or TSLD Franklin Bank is also regulated by the FDIC, as administrator of the Bank Insurance Fund, or BIF, and with respect to capital distributions, by the OTS These regulations are intended primarily for the protection of depositors and customers, rather than for the benefit of investors |
| We are subject to changes in federal and state laws, as well as changes in regulations and governmental policies, income tax laws and accounting principles |
| The effects of any potential changes cannot be predicted but could materially and adversely affect our business and operations |
| In particular, because we have a high-growth strategy, this regulatory environment could have a material adverse effect on our financial condition, results of operations and cash flows if any of these agencies determines that we must change our strategy or otherwise imposes additional restrictions or requirements that limit our business flexibility |
| We are dependent on key individuals and on our continued ability to attract qualified and experienced personnel |
| The loss of one or more of these key individuals, or our inability to continue to attract such personnel, could curtail our growth and materially and adversely affect our prospects |
| We are dependent on certain members of our management, including Anthony J Nocella, our President and Chief Executive Officer, Daniel E Cooper, our Managing Director of Mortgage Banking, and Michael Davitt, our Managing Director of Commercial Lending |
| The unexpected loss of any of these members of management could have a material adverse effect on us |
| Our success also depends on our continued ability to attract and retain experienced loan officers and support staff, as well as other management personnel |
| We currently do not have employment agreements or non-competition agreements with any of our existing loan officers and the loss of the services of several of such key personnel could materially and adversely affect our growth strategy and prospects to the extent we are unable to replace such personnel |
| Competition for loan officers is strong within builder finance, mortgage banker finance and mortgage banking industries and we may not be successful in attracting or retaining the personnel we require |
| Our allowance for credit losses may be insufficient to cover actual losses, which could materially and adversely affect our financial performance |
| Our allowance for credit losses was dlra13dtta4 million, or 0dtta35prca of total loans outstanding and 51dtta3prca of non-performing loans, as of December 31, 2005 |
| Significant increases to the allowance for credit losses may be necessary if material adverse changes in general economic conditions occur and the performance of our loan portfolio deteriorates |
| 24 _________________________________________________________________ In addition, if we had to foreclose on assets, additional adjustments may be necessary to ensure that the foreclosed assets are carried at the lower of cost or fair value, less estimated cost to dispose of the foreclosed assets |
| As a part of their examinations, the FDIC and TDSML periodically review Franklin Bank’s estimated losses on loans and the carrying value of our assets |
| Increases in the provision for credit losses and other real estate owned could materially and adversely affect our financial condition, results of operations and cash flows |
| An interruption in or breach of our information systems may result in lost business |
| We rely heavily on communications and information systems furnished by third party service providers to conduct our business |
| Any failure or interruption or breach in security of these systems could result in failures or interruptions in our customer relationship management, general ledger, deposit, servicing and/or loan origination systems |
| We cannot assure you that such failures or interruptions will not occur or, if they do occur, that they will be adequately addressed by us or the third parties on which we rely |
| The occurrence of any failures or interruptions could have a material adverse effect on our financial condition, results of operations and cash flows |
| We rely on information system technology from third party service providers, and we may not be able to obtain substitute providers on terms that are as favorable if our relationships with our existing service providers are interrupted |
| We rely on third party service providers for much of our information technology systems, including customer relationship management, general ledger, deposit, servicing and loan origination systems |
| If any of these third party service providers experience financial, operational or technological difficulties, or if there is any other disruption in our relationships with them, we may be required to locate alternative sources of such services, and we cannot assure you that we could negotiate terms that are as favorable to us, or could obtain services with similar functionality as found in our existing systems without the need to expend substantial resources, if at all |
| We are exposed to environmental liabilities with respect to properties to which we take title |
| In the course of our business, we may foreclose on and take title to residential and commercial properties and could be subject to environmental liabilities with respect to these properties |
| We may be held liable to a governmental entity or to third parties for property damage, personal injury and investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances or chemical releases at a property |
| The costs associated with investigation or remediation activities could be substantial |
| In addition, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property |
| If we ever become subject to significant environmental liabilities, our financial condition, results of operations and cash flows could be materially and adversely affected |
| Risks Associated with an Investment in Our Common Stock The market price and trading volume of our common stock may be volatile |
| On December 18, 2003, we completed an initial public offering of our common stock, which is listed on the Nasdaq National Market |
| While there has been an active trading market in our common stock since the initial public offering, we cannot assure you that an active trading market in our common stock will be sustained |
| Even if active trading of our common stock continues, the market price of the common stock may be highly volatile and subject to wide fluctuations |
| In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur |
| If the market price of our common stock declines significantly, you may be unable to resell your shares at or above the price at which the shares were acquired |
| We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future |
| Some of the factors that could adversely affect our share price or result in fluctuations in the price or trading volume of our common stock include: • actual or anticipated fluctuations in our results of operations; 25 _________________________________________________________________ • failure to be covered by securities analysts, or failure by us to meet securities analysts’ expectations; • success of our operating strategies; • realization of any of the risks described in this section; • prevailing interest rates; • decline in the stock price of companies that are our peers; or • general market and economic conditions |
| Because we are a relatively new public company, and prior to our initial public offering there was no active trading market in our common stock, these fluctuations may be more significant for us than they would be for a company whose stock has been publicly traded over an extended period of time |
| In addition, the stock market has experienced in the past, and may in the future experience extreme price and volume fluctuations |
| These market fluctuations may materially and adversely affect the trading price of our common stock, regardless of our actual operating performance |
| We currently do not intend to pay any dividends on our common stock |
| In addition, our future ability to pay dividends is subject to restrictions |
| As a result, capital appreciation, if any, of our common stock will be your sole source of gains for the foreseeable future |
| We currently do not intend to pay any dividends on our common stock |
| In addition, since we are a holding company with no significant assets other than Franklin Bank, we depend upon dividends from Franklin Bank for all of our revenues |
| Accordingly, our ability to pay dividends depends upon our receipt of dividends or other capital distributions from Franklin Bank |
| Additionally, we are restricted from paying any dividends on our common stock if an event of default has occurred on our junior subordinated notes |
| Franklin Bank’s ability to pay dividends or make other capital distributions to us is subject to the regulatory authority of the TDSML, the OTS and the FDIC Under Texas law, a Texas state savings bank is permitted to pay dividends out of current or retained income, although the TDSML reserves the right to restrict dividends for safety and soundness reasons |
| As of December 31, 2005, Franklin Bank could have paid approximately dlra61dtta0 million in dividends without the prior approval of the OTS “Capital distributions” regulated by the OTS include: • distributions of cash or other property to owners made because of their ownership (but not including stock dividends); • payments by a savings association or savings bank holding company to repurchase or otherwise acquire its shares or debt instruments included in total capital; • direct or indirect payments of cash or property made in connection with a restructuring, including payments to stockholders of another entity in a cash merger; and • other distributions charged against capital accounts of an association if, as a result, the savings association would not be well-capitalized |
| Franklin Bank’s ability to make capital distributions is subject to regulatory limitations |
| Generally, Franklin Bank may make a capital distribution without prior OTS review or approval in an amount equal to Franklin Bank’s net income for the current calendar year to date, plus retained net income for the previous two years, provided that Franklin Bank does not become less than well-capitalized as a result of the distribution |
| Franklin Bank’s ability to make such distributions depends on maintaining eligibility for “expedited status |
| ” Franklin Bank currently qualifies for expedited status, but there can be no assurance that it will maintain its current status |
| Additionally, although no prior OTS approval may be necessary, Franklin Bank is required to give the OTS 30 days’ notice before making any capital distribution to us |
| The OTS may object to any capital distribution if it 26 _________________________________________________________________ believes the distribution will be unsafe and unsound |
| Additional capital distributions above the limit for an expedited status institution are possible but require the prior approval of the OTS An application to the FDIC is also necessary if any distribution would cause Franklin Bank to become less than adequately capitalized |
| Neither the OTS nor the FDIC is likely to approve any distribution that would cause Franklin Bank to fail to meet its capital requirements or to become under-capitalized on a pro forma basis after giving effect to the proposed distribution |
| The FDIC has back-up authority to take enforcement action if it believes that a capital distribution by Franklin Bank constitutes an unsafe or unsound action or practice, even if the OTS has approved the distribution |
| Our corporate organizational documents and the provisions of Delaware law to which we are subject may delay or prevent a change in control of us that you may favor |
| Our certificate of incorporation and bylaws contain provisions that, either alone or in combination with the provisions of Delaware law described below, may have the effect of delaying or making it more difficult for another person to acquire us by means of a hostile tender offer, open market purchases, a proxy contest or otherwise |
| These provisions include: • A board of directors classified into three classes of directors with each class having staggered, three-year terms |
| As a result of this provision, at least two annual meetings of stockholders may be required for the stockholders to change a majority of our board of directors |
| • The board’s authority to issue shares of preferred stock without stockholder approval, which preferred stock could have voting, liquidation, dividend or other rights superior to those of our common stock |
| To the extent any such provisions are included in any preferred stock, they could have the effect of delaying, deferring or preventing a change of control |
| • Our stockholders cannot act by less than unanimous written consent and must comply with the provisions of our bylaws requiring advance notification of stockholder nominations and proposals |
| These provisions could have the effect of delaying or impeding a proxy contest for control of us |
| • Provisions of Delaware law, which we did not opt out of in our certificate of incorporation, that restrict business combinations with “interested stockholders” and provide that directors serving on staggered boards of directors, such as ours, may be removed only for cause |
| Any or all of these provisions could discourage tender offers or other business combination transactions that might otherwise result in our stockholders receiving a premium over the then current market price of our common stock |