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Franklin Bank Corp. (FBTX)

Q4 2007 Earnings Call

February 1, 2008 11:00 am ET

Executives

Anthony J. Nocella – CEO

Russell McCann - Chief Financial Officer

Andy Black - President

Analysts

Jon Armstrom - RBC Capital Markets

Barry Mccarver -Stephens Inc.

Brian Klock - Keefe, Bruyette & Woods

TomVan Buskirk - Mcmahan Securities

Henshi Andon - MSP Investors

Annette Frank - Friedman, Billings, Ramsey Group

John Martinez – Commerce Street

Operator

This is the Franklin Bank’s Fourth Quarter 2007 Conference Call.

(Operator Instructions)

Now at this time, it would be my pleasure to turn the conference over to Mr. Anthony Nocella. Please go ahead, sir.

Anthony Nocella

Presenting today with me are Russell McCann, our Chief Financial Officer and Andy Black, our President. We also have with us other members of our executive management team. Before I begin, I would like to let you know that the forward-looking statements are documented within the related press release. As you know, the current market conditions in the economy have evolved a little unstable. The housing markets are in disarray and the economy’s influx. Our builder’s cash flows have declined for the most part as housing sales have declined nationwide. Last night, we announced a loss of approximately $45 million or $1.85 per diluted share for 2007. The loss is primarily the result of our increasing reserves as disclosed in December as well as an impairment on goodwill charge of $65 million or $2.10 per diluted share and as a result of our low stock price which is driven by these current market conditions.

As we have previously announced, we significantly increased our allowance for credit losses by approximately $23.5 million as a result of a detailed portfolio review which I will discuss later. While this reserve increased obviously, had a negative impact on our quarterly and yearly earnings, it was necessary and prudent given the instability in the housing markets nationwide, which has negatively impacted our home builder customers and the single-family homeowners.

We believe that this action better positions us to whether the current challenging economic environment. We have evaluated these recent changes relative to the potential risk that is inherent in our portfolio. As a result of the changing market conditions, we have concluded that we increased our reserves to 1.91% level. As previously discussed, we recorded a non-cash $65 million impairment charge for goodwill. This write down was caused by our low stock price driven down by the current economic environment and resulting volatility in the financial services sector.

Our community banking business continues to grow profitably and to perform well. The goodwill was created by the acquisition of eight community banking franchises and two deposit acquisitions. We believe that the community banking business has been and continuous to be the core value of the company.

For 2007, excluding acquisitions, our total loan growth in the community bank grew 19.9%. Fee income grew in excess of 50% and our deposits grew 5%. With that I would like Russell to discuss our financial results.

Russell McCann

As Tony mentioned, we had a net loss for the fourth quarter of $55.8 million and for the year $45 million. I am going to cover the basics and get you the details of the key items; our credit numbers, the non-cash goodwill impairment, our liquidity and capital.

Recurrent net yield trend down from the third quarter level of $2.19 to $2.02; the primary cause of this is the carry cost of our non-performing assets and initial impact of the decline. In the near-term, we expect our net yield to remain at this level. We continue to see good trends in our fee income line as community banking fees increased from the third quarter. One thing to note that in the end of the third quarter, we reduced our securities and training that are used to offset the market moves on our servicing portfolio and began holding securities available for our sales portfolio to offset these moves.

You can see the effects of this as gain on sales of single-family loans decreased $750,000.00 and gains from the sales of securities increased $630,000.00.

Our community banking fees should continue to grow in 08 with other fees remaining basically flat. Our expenses increased from the third quarter due to increased professional fees, REO expense and other expenses and the goodwill impairment charge. The other expense categories are down or flat. Professional fees were up due to increased audit and legal fees and the increase in others is from the complete utilization of our one-time credit relating to deposit and insurance premium. I will discuss the REO expense and goodwill charge a little later.

We expect our operating expenses to be flat to down in 08 excluding the goodwill charge and REO expense.

During the fourth quarter, we recorded credit expense of $29 million, which increased our allowance for credit losses by 23.5%. This increase in credit cost was based on an ongoing analysis for our loan portfolios and is primarily centered on the builder portfolio and our single-family portfolio. The increase in our allowance is approximately 15% higher than the amount we announced at the end of November and the increase of that amount relates primarily to the increased delinquencies in our single-family portfolio. We looked at all aspects of the loan portfolio and determined the amount of the allowance that we needed based on each geographic area, the type of loan and the status of the loan.

As Tony mentioned, he is going to discuss the detailed methodology that we use that one of the key items in our analysis is to recognize the potential loss as soon as we see the possibility of it occurring. Additionally, based on where we are in the current credit cycle, we do not want current losses taking away from our allowance coverage on our loan portfolio. This increase in the provision covered all our current charge offs.

The increase in provision expense is related to increasing our allowance for long losses due to our single-family coverage of up to 62-basis points and the allowance for our builder to 1.91%. Overall, we are at 1.03% of total loans held for investment.

Let me point out that we have approximately $160 million of loans held for sale that do not have allowance against them, but are carried at lower cost in the market.

As part of our review of the portfolio, we also reviewed our REO. During this review, we established approximately $4 million in reserves for REO to take into account the decline in the net we lost in the value of these assets. The reserve for REO is not carried as part of the allowance for loan losses. That is a reduction in the carrying value of the REO with the existing charge to operating expense. This analysis was prepared based on the fair market valuation of each individual property and expects an additional charge due to the fact that the property’s REO and the 10% selling cost. So in other words, the REO is already marked down to that realizable value.

This analysis led to the increase of the REO expense. Our non-performing loans increased by $55.8 million from the third quarter. This increase was from the bankruptcy trends discussed during our reserve conference call in November. During the fourth quarter, we did see an acceleration in the decline in the home values in our market. As previously discussed, we had two builders that filed bankruptcy, one of which we moved to REO pending foreclosure that occurred in January and we added three other bill of credits to nonperforming. These additions that accounted for $49 million of the increase with the remainder being in the single family portfolio.

We continue to monitor our builder lines closely and will be proactive in recognizing issues in our loan portfolio and taking the appropriate action as soon as we can. While this may cause an increase in our nonperforming loans in the near-term, we believe that this is the most prudent course during today’s environment.

Before I discuss the goodwill impairment, let me talk about liquidity and capital.

Over the last six months, we have been concentrating on increasing the liquidity of the company. We have been doing this by securing the maturities of our wholesale funding sources. This is being done so that we can manage the maturity structure of this funding source and can eliminate the rollover requirements of the company.

Currently, we have just under $1 billion in short term liquidity to meet the funding needs of the company. Additionally, we continue to have a very stable funding source from our community banking business.

We continue to be well capitalized under all regulatory guidelines. At December, our leverage capital was in excess of 7% and our total capital was in excess of 11%. One of the key elements to point out is that we actually increased our total capital at the end of the fourth quarter to over 11% from 10.5% at the end of the third quarter. Our common tangible book value increased in the fourth quarter to $5.32 from $5.15 per share at September.

We believe that we have the capital elements as required for our business now and into the future.

One of the most difficult amounts to identify during the quarter was the impairment of goodwill. As Tony mentioned, our goodwill was created from building our community banking business. Normally, when the company records impairment to goodwill is directly related to the performance of the business line that created the goodwill and could be identified to a particular acquisition or acquisitions that are underperforming. This was not the cause of the impairment of the goodwill as our community banking business continues to grow in profit and market share. However, our counting guidance requires the company to use the quoted market value of the company as the base value in determining if the impairment exists.

Additionally, the valuation is done by reportable segments. Our goodwill is contained in the banking segment and includes our community banking business and our commercial lending operations or our builder line portfolio. The cause of the decline in our market value, the assignable amount of our value to the banking segment did not cover the goodwill that we had recorded from our acquisitions. Because of this, we have recorded an impairment charge of $65 million.

A couple of items to point out; one, this is a non-cash charge that does not negatively affect the tangible capital of the company or the regulatory capital levels of the bank, but part of the charge does create the tax benefit that we will be recognized to do the natures of our acquisitions and we recorded a credit of approximately $13 million.

And finally to stress the point again, the charge was not related to the performance of our community banking franchise.

Let me turn it over to Andy Black, our President who will discuss the community banking business.

Andy Black

Our community bank business is strong. Deposit fees are up 59% over last year and organically, deposits have grown 5% and loans are up 20%. We have fully integrated the First National Bank acquisition in Bryan, Texas and now have 45 branches in 31 communities across Texas. With leaders in market share in these communities and we have one of the largest market shares in small business accounts among community banks in Texas. In addition to the 45 branches, we have three new facilities under construction. Two are in the Bryan-College Station Market and one is in Long View. All should be completed by the end of the first quarter of 2008.

Both those markets at Bryan College-Station and Long View are strong growth markets for us in Texas. We continue to invest in the high growth areas of Texas. We will be adding commercial bankers and expanding our product capabilities.

The profits have grown 38% in 2007. We have got to focus sales effort and expect that growth will continue as we expand our product offering and marketing support. We will be offering some new and expanded deposit products for our retail sales group to help them achieve our growth expectations.

Additionally, we are rolling out a state-wide marketing campaign to support this sales effort. Loans have also grown year-over-year while maintaining solid credit quality. The local market leaders are experienced bankers and understand the managed credit risk. Decisions are made at the local level with support and oversight at centralized credit administration and management. We expect to continue to grow loans across Texas. Our expanded products will focus on traditional commercial, industrial agriculture, small business, oil and gas, healthcare and executive professional.

Our size allows us to provide greater loan capacity than our competition in these communities. Our capacity is attractive to both our customers and our commercial bankers. This ability along with the quality cash management product that we have provide us a competitive edge in our markets.

Finally, banking fees are up 59% over last year. We expect continued benefits of increased fees as we expand our product offering. We also believe there is additional opportunity with our current customer accounts to increase the average fee per customer by cross selling products and services. We have strong leadership in place that we are very proud of and we expect that momentum in 2007 will continue in 2008.

I will turn it back to Tony.

Anthony Nocella

Now, let me just start off by discussing our reserve methodology which we announced at the November conference call. First, let me explain the process. We aggressively stressed the collateral underlying builder finance portfolio and market-to-market both the real estate owned by our geographic location and sub markets. We forecast levels of foreclosure and mark delinquent loans to market. We included selling cost in our market value calculations.

We estimated value decline to as high as 50% in some markets to appraised values. We also forecast default rates as high as 50% in some markets. We then added 75-basis points based on peer group data for these loans, plus we marked our loans to realizable value of the underlying collateral. The resulting reserve for builder finance is 1.91%, in addition, we added $4 million of REO reserves to bring our REO to realizable value. We used qualitative factors such as market data and future job growth to evaluate the economic conditions of the markets.

Our reserves are now 3.1 times our charge offs for 2007. Our single-family loan portfolio was also stressed for increased delinquencies and forecast foreclosures bringing our reserves for this portfolio to 62-basis points compared to 29-basis points at September 30. The single-family loan portfolio is actively managed and aggressively managed to protect our borrowers from foreclosures. We are offering borrowers opportunities to refinance and modify their loans. The effects of recent actions by the President and the Federal Reserve have already been seen. Our locked mortgage applications have already increased this month by 70%.

As more homeowners are being able to buy homes and avoid foreclosures by modifying and refinancing their mortgages. Home builders will begin to see more qualified builders resulting in the decline of the supply of finished homes in the market place. The level of our reserves are adequate for everything we know or can predict to better our portfolio when the markets or our customers are building homes.

At the time of the November conference call, we mentioned two bankruptcies of home builders who have been in the business and banked by us or our officers for many, may years. We believe that our approach to forecasting the decline in the values is prudent. We believe that some builders would seek Chapter 11 protection so they can effectively start over. It was for that reason we established the forward-looking reserve policy knowing that two Chapter 11 bankruptcies had already occurred. Our results for the quarter and the level of loss reserves were higher than expected primarily because of the increase in single-family delinquencies and the fact that we replenished our reserves to the extent of the pre-announced REO that was result of one of these bankruptcies.

Now let me discuss our builder finance lines.

We have reduced our portfolio by $67 million from September 30 and reduced our exposure in Arizona to 8% and our Florida portfolio to 12%. We start with Texas. Thirty percent of our bill to book is in Texas. We have no significant nonperforming loans and have not experienced the types of market declines in values across the country in our Texas markets and the markets that we serve. We have $101 million or 8% of our builder loan portfolio in Arizona. In Arizona, we see good job growth and lower unemployment than national average. Builders have reduced these starts of development in houses. Arizona has $19.2 million of our nonperforming loans.

We also have two other builders in Arizona in our concern loan list. The rest of the portfolio is performing and the credit seems to be weathering the storm. Overall, the market is beginning to stabilize at this level.

We have $149 million or 12% of our bill to book in Florida. $7 million is nonperforming. Florida has had good job growth and lower unemployment than the national average. The builders continue to reduce new starts in building inventories with the decline. This market is still stabilizing and we have three credits on our concern loan list.

We have $68 million or 6% of our builder loan portfolio in Georgia. $15.7 million is nonperforming and it is well capitalized. The lines of job growth continue to improve and the declines in values have stabilized. Other credits in the market are performing well.

We have $48 million in balances or 4% of our builder loan portfolio in Michigan. This market is cautionary and still in the process of stabilization. We have $25.6 million in our nonperforming list and the entire market is in our watch list. We have included in our stress test aggressive declines in the underlying collateral.

We have $43.3 million or 4% of our builder line in California, of which we have one credit currently on our watch list and while the rest of the portfolio is performing and adequately capitalized. All the rest of the markets are stable. The customers are performing and are adequately capitalized.

Our single-family loan balances have also declined by $85 million in the same period. While we have 33% of our single-family mortgages in California, we have no significant concentration in any city in California.

The next largest state in Florida is 7%, while other states represent less than 4% of our single-family portfolio. We have no significant concentration in our single-family loan portfolio in any one city.

Now let me turn to the forward-looking comments.

The big question for Franklin is, can we see the light at the end of the tunnel? As we have said, with all the things that are being done to stimulate the economy, the housing business will begin to improve. Our builders and home owners will stabilize. We believe we have adequately reserved our portfolio and our precision to offset the effects of unforeseen future reserves.

Another question on the blogs by the analysts is have we been examined or not? As you know, that is not public information, but we believe that our reserves are aligned with regulatory guidelines and we remain well capitalized and we are in excess of 7% leverage capital and 11% in total capital. We continue to have a good working relationship with our regulators.

Because of the housing turmoil and the tumultuous economic environment, we will not be giving earnings guidance at this time for next year. However, we expect mortgage originations to increase and our builder finance book to decline. We expect single-family mortgage portfolio to also decline.

There are likely no acquisitions in our near future. With the drop in rates, there will be some markets expansion which will be somewhat offset by the effects of non-accrual loans.

Our provisions will be higher than last year as we continue to replenish the reserves in order to maintain over two times the current charge off level. On the other hand, our company has established a number of targets for the community bank. First, a growth in earnings through significant increases in Texas loans and deposit fees; this will be the result of our new cash management services, state-wide marketing plans for retail and commercial customers, small business lending and deposit products. Our community banking franchise is the solid core of our bank and the value of our franchise.

With that I would like to open the floor to any questions.

Question and Answer Session

Operator

(Operator Instructions)

We will take our first question from Jon Armstrom with RBC Capital Markets, please go ahead.

Jon Armstrom - RBC Capital Markets

Can you talk a little bit about the new bankruptcies that came in and just at this point in time how you expect to resolve them whether it is a sale or you want them to go into REO?

Anthony Nocella

Well, there were two pre-announced Chapter 11 bankruptcies, the ones we had announced back in the November call. It is in effect at December 31 which in itself was foreclosure, so it went into REO. It is at market-to-market value relative to what we believe is a sale to a third party.

The second one is a builder that is located in Georgia and South Carolina. The bundle line collateral is substantial, but that also is a Chapter 11. That one may come out of sort of a pre-packaged bankruptcy. And that is how we based what we have in our listing.

Jon Armstrom - RBC Capital Markets

In terms of the deep dive that you did on your bill to book, what changes in 08 in terms of how you monitor the health of the builders, has anything changed at all or do you feel like you still need to be this aggressive or do you think you have captured everything?

Anthony Nocella

I think that our goals and objectives frankly, they have always been the same. We have looked at the underlying collateral, the difference I think historically, it did not have substantial declines in the underlying market value of collateral. We have consistently looked at collateral. At this point, we are looking at our entire builder finance book, the underlying credits on a weekly basis. We have established sort of a more intense risk management function with actually a loan sub committee which has the basic purpose of being able to monitor each one of the credits against the underlying collaterals. Every single loan we have at the present time is in that committee structure which is on top of the overall credit structure of the bank.

Jon Armstrom - RBC Capital Markets

Russell, I guess the question is, a year ago, you de-leveraged the bid if you will, maybe that is not the right term, but you sold some of your place holders and I guess I am curious with where mortgage rates are at this point in time, is that something that is on the table? I know you said it was going to be lower, but would you look at doing that at this point? Do you feel like you have some gains that you know you could possibly take?

Russell McCann

I am not sure if we are actively considering that right now. I mean, you have got to look at the overall markets to make a meaningful change in our single-family portfolio. You would have to do a bulk sale. I am not sure the market has quite come back for that type of transaction, but we always look at ways to manage our portfolios and do what is best for the company as far as decreasing the size or just managing to run off those portfolios.

Anthony Nocella

I guess, obviously though the drop in interest rates relative to your securities portfolio that the long rates have come down, we will automatically be going to have significant gains in our securities portfolio.

Operator

We will take our next question from Barry Mccarver with Stephens.

Barry Mccarver -Stephens Inc.

Just a follow up on that last question on the mortgage portfolio. The natural run off there, I believe you said about $30 million or $40 million a month as what it was last year, last time we talked, is that still about right?

Anthony Nocella

The biggest thing at the present time that reduces the run off is the lack of refinancing products in the market place caused by the regulatory requirements in the non-traditional mortgage lending. So you are seeing some of that and the liquidity dry up, but like I commented on the call, we have seen and I think this is almost in the last two weeks, three weeks since the interest rates have declined, the mortgage rates have declined, refinancing activity is absolutely robust. The effects are substantial and our applications literally in the last two weeks are 70% above average. So there is almost many refined booms starting at the last couple of weeks.

So the run off could be substantial.

Barry Mccarver -Stephens Inc.

I guess what I am getting to is that that portfolio is going to be coming down at 20% this year.

Anthony Nocella

It very well could be, Barry.

Barry Mccarver -Stephens Inc.

Secondly, on the REO expenses, Russell, in the fourth quarter, could you give us that breakdown again, I could write everything down earlier.

Russell McCann

Sure, if you are looking at REO expenses, we have got a $4 million reserve against our REO and what that does is basically write down the REO’s property and the net realizable value included in to that, and that is where its appraisal and additional of decline due to the fact that it is a bank owned REO property and we are taking additional 10% off that for our selling cost.

Barry Mccarver -Stephens Inc.

So it was about $5.4 million in the quarter in terms of the ongoing run rate, should we just subtract $4 million out of that?

Russell McCann

I think that is probably it. It is probably wise looking at that.

Barry Mccarver -Stephens Inc.

In terms of the impairment during the quarter, first can help me out with the calculation of that and then what could potentially happen or what would have to happen I guess in the future, would there be any reversal?

Russell McCann

One of the things with our impaired goodwill and intangible assets is a one lay impairment. Accounting profession lets you write it down, they do not let you write it back up. There is a permanent reduction in our goodwill and I guess we had a profit estimate.

If you look at the methodology for that calculation, really it is whether your common value in the basic segment will cover your goodwill. It is really what you look at because our three banking business is kind of lumpy with builder business and the overall value and the company’s decline that is what created the goodwill impairment. It is not your traditional impairment where you say, you bought a bunch of banking franchises, they are not performing like you expected to when you paid the price you paid for them. That is just not the case for us. The community banking business is doing exactly what we expected the day when we bought the franchising bank, in most cases, it has been substantially better, so that is why the goodwill impairment that we recorded is a little bit unusual when you compare it to other people’s goodwill impairment.

Barry Mccarver -Stephens Inc.

And just two follow up questions; number one, I am wondering if we could get what gross loan production was during the quarter, I am assuming that is going to all be coming from the community bank.

Russell McCann

Most of it will be coming from the community bank. I mean, we did have some single-family origination through our mortgage segment. They originated about $90 million for the quarter. The total funding, I am going to deduct our mortgage bankrupt finance business because that is kind of off a little bit with about $400 million.

Barry Mccarver -Stephens Inc.

That the total gross was about $400 million.

Russell McCann

So about $300 million in gross production are the commercial side of the business, $100 million out of the single-family side of the business.

Barry Mccarver -Stephens Inc.

Lastly, I am touching on the margin, number one, I guess we saw the full effect of all the nonperformers here in the fourth quarter which is what brought the margin outward, is that fair? Is that correct?

Russell McCann

Yes, I mean, you are seeing the full impact of all the carry costs that is nonperforming assets.

Barry Mccarver -Stephens Inc.

And then I am wondering when the mortgage portfolio for having, if we do have not had that much run off during the year and assuming those are evenly matched up with deposits, what is your thoughts on what the margin would do as that runs off?

Russell McCann

The net interest income as you watched that run off, you will actually see a decline just because the single-family portfolio does have a slight spread in it. On an overall basis, you will actually see our margin kind of pick up. The single family carries significantly what our margins in our community banking booking business.

So you will see an increase and the absolute percentage of our interest income going forward. So the margin could grow upward from that.

Operator

We will take our next question from Brian Klock with Keefe, Bruyette & Woods.

Brian Klock - Keefe, Bruyette & Woods

Russell, with the goodwill impairment. There is no tax deduction on that impairment charge is that correct?

Russell McCann

No, we are getting about 30% deduction on that. It really depends on the nature of how your acquisitions go. If you are able to set a goodwill for tax purposes, we will get some deductions.

Brian Klock - Keefe, Bruyette & Woods

Can you help us with what sort of normalized tax rate would be then going forward?

Russell McCann

I think if you go back to the last quarter, the price is still looking at the right tax rate, it is about 33% on a normalized basis.

There is significant rollover of that in the fourth quarter. I think it is about 19% or 20%.

Brian Klock - Keefe, Bruyette & Woods

I thought I heard you say that there was another tax credit in the fourth quarter?

Russell McCann

No.

Brian Klock - Keefe, Bruyette & Woods

So really, the only tax credit you had here is from the impairment basically.

Russell McCann

That is correct.

Brian Klock - Keefe, Bruyette & Woods

And if I heard you correctly, when you gave sort of the net interest spread guidance, emerging guidance, so it sounds like from here, even though there has been a lot of fed cuts, do you think that you can keep a stable margin at this fourth quarter level?

Russell McCann

I think the fourth quarter level is probably a good level in the near term, while the fed did cut right, you would see some benefits or value to the deposit side. It is not going to come as quickly. Obviously, it is the right decline in the loan side that we process the prime. You will see the benefits as we go through the quarter.

Brian Klock - Keefe, Bruyette & Woods

But really, we should see a couple of basis points either side of the fourth quarter levels.

Russell McCann

I think that is a good number for the first quarter.

Brian Klock - Keefe, Bruyette & Woods

And what is the net charge off in the quarter, I estimated about $5.7 million. Can you give us a little color on where that came from? What loan portfolio and what geographies?

Russell McCann

Sure, I mean, one of them, as we talked in the call when we did our, we observed output in November we talked about two donors that were declaring bankruptcy. One of those, we recorded is an in substance foreclosure in the fourth quarter. We actually foreclosed on that property in January. That was the majority of the write down, it is about $3.2 million, the remainder of the write downs which is related to the single family loans going into foreclosure.

Brian Klock - Keefe, Bruyette & Woods

And in the sense of the foreclosure, can you give us the principal amount of that loan?

Russell McCann

It is approximately $10 million in foreclosure and we are carrying it in REO at $7.2.

Operator

We will take our next question from TomVan Buskirk with Mcmahan Securities

TomVan Buskirk - Mcmahan Securities

Could you guys give me an update on holding company liquidity at this point in time?

Russell McCann

The holding company’s liquidity is still very good. We have managed that in conjunction with managing our bank liquidity.

We do not have any liquidity issues at the holding company if that is your question.

TomVan Buskirk - Mcmahan Securities

In the last quarter, I think it was mentioned that there was $12.7 million in cash there and I think there was about $80-somewhat million in dividend upstreaming capabilities. Can you give us an update on what those numbers are as of the end of the year?

Russell McCann

Our dividend capacity on the upstream basis is sitting right at the $50 million mark. The primary reduction between those two numbers are still off from the fourth quarter. Historically, the bank has paid dividends up to the current company that is $3 million to $4 million range per annum. It does not require a lot of dividends out of the bank that serve as the holding company.

TomVan Buskirk - Mcmahan Securities

And then the cash number?

Russell McCann

The cash number of the holding company is going to be pretty close to the same level it was previously. I would say probably in the $8 million to $10 million range.

TomVan Buskirk - Mcmahan Securities

And then finally on that note, I think back in September, obviously when circumstances were a little different, you had bought back some of the convertibles, and I wonder at some point in time if there would be flexibility whether there would be a desire to repurchase any more of those, they are substantially below par and it might make investors feel better about the remainder of those if you are able to take some of those out.

Russell McCann

We look at that a lot. One of the things we have to be very careful about in making that buying back those property transactions is to make sure we do not create a creeping tender for ourselves and have to deal with the whole issue. So we kind of monitor the price of that. We talked to our market makers that trade or convert and from time to time, it is possible that we could go in the market and repurchase some of that in the future. Right now, we only have plans to do that.

TomVan Buskirk - Mcmahan Securities

I did not recall whether the last transactions you did were unsolicited or not, but it sounds like they were.

Russell McCann

Yes.

Operator

We will take our next question from Henshi Andon (ph) with MSP Investors

Henshi Andon - MSP Investors

I was just wondering if you can kind of give me the dollar amount of mortgage back securities that is being held on your securities book, please.

And then along with that if you can just kind of tell me what sort of mortgage back securities are there and what is the unrealized net loss?

Russell McCann

If you look on the balance sheet, you can see the unrealized net loss. Net of tax is about $1 million on our AFF portfolio or health to maturity portfolio actually has about a million dollar, unrecognized, unrealized profit in it. We have $370 million in health to maturity incurring $74 million mortgage back securities at 12/31.

Henshi Andon - MSP Investors

I am sorry can you say that again, health to maturity is what amount?

Russell McCann

$370 million, available for sale is $274 million, all of these securities are either straight private label pass throughs or agency securities.

Henshi Andon - MSP Investors

Also, what is in other assets than $172 million?

Russell McCann

Okay, hold on for one second. Can I follow up with you on that? I do not really keep a detail on our other assets.

Henshi Andon - MSP Investors

I just saw that it has been increasing, creeping off and I am just wondering what I being put in there.

Russell McCann

Yes I will get back with you on that.

Operator

We will take our next question from Annette Frank with Friedman, Billings.

Annette Frank - Friedman, Billings, Ramsey Group

On the non-performing loans in the single-family loan portfolio, what is the geography on this and also, how much of the MPAs do you expect to cure or, do you think most of what is currently MPA will go into the more severe delinquency bucket?

Anthony Nocella

When I went through the presentation, what I was doing was giving you the non-performings by geography and let me just give it to you again. In Texas we have just about no non-performings. We have $19.2 million in the Arizona area. Invest, approximately $7 million in Florida and $15.7 million in Georgia.

Annette Frank - Friedman, Billings, Ramsey Group

In terms of Q rate do you expect some of these to cure or is that the market so that most of this would go right into the year, 90 day and foreclosure buckets.

Anthony Nocella

These are non-performing loans that are already in the 90-day part of it, they are not necessarily foreclosure because in the example of let us say Chapter 11 bankruptcy, the way it works is, it is possible that the business could startup again and it could come out of the bankruptcy and thus we would actually not have to foreclose on the actual underlying assets. So, that really depends on what is the foreclosure or it is a prepackaged bankruptcy, but we have worked out plans on every item and non of the plans, could actually, if the world is a wonderful place and everything works according to plans, the banks have plans but little time, the plans are all finished up in the next six months, but if you turn back the cash.

Annette Frank - Friedman, Billings, Ramsey Group

You mentioned a potential 20% CPR in the single-family land portfolio in ’08. Could we expect to see a mix just in the mortgage products you originate or given also the potential change of them, the conforming lower limit, any color on there?

Anthony Nocella

I do not think I have mentioned the CPR. Our CPR currently has run in the past at less than 6%, and you heard it hear first. We expect eh CPR to significantly increase as the result of the dropping rates and the recent (inaudible) I do not think that predicted CPRs in the market place, you know in a consensus basis by the investment house is anywhere near 20 at the present time.

We think that we are going to have significant refinancing in our portfolio because in fact we are motivated to refinance those mortgages to prevent future delinquencies.

Annette Frank - Friedman, Billings, Ramsey Group

And any mixtures on the actual loan product?

Anthony Nocella

Well, I think most of our loans are single-family mortgage loans that are adjustable rate mortgages that are all fully indexed. And so, the effect is a fully indexed single-family mortgage has a higher rate than the underlying fixed rates so we would be going from the adjustable rate to the fixed rate and more than likely than selling it in the secondary market.

Operator

We will take our next question from John Martinez with Commerce Street.

John Martinez – Commerce Street

Most of my questions have been answered but just kind of maybe getting here on the community banking side, we now hear the course of the year to pick up in deposits. I am just kind of curious as to what your thoughts for as far as the competitive basis for rates that are being paid and how you have seen that change in your markets that are given in the last minutes by the Fed.

Anthony Nocella

Well, we in obviously a declining rate environment and the problem is that we tend to lag and lowering our rates to keep up with the Fed and competitively a lot of our competitors are even stronger than everybody else and we are happy to be competitive to keep up with their rate in the market. We saw some decline in our CDs because of our decision to lower those rates. However, our expectations are that the rest of the competition is going to follow the rate decline and we will be able to compete favorably with them in the future.

John Martinez – Commerce Street

And just a quick follow-up question on what you are commenting on as far as the refund that you are expecting in your mortgage loan portfolio, as you look at that, do you feel that the mortgages that you have are in better position than maybe the rest of the market to be able to qualify for this revise?

Anthony Nocella

Well, I do not know whether they are better qualified in the market as a whole, I think that our portfolio and our access to, especially the single family loans that we have originated. We know the people on, especially if you look at our taxes, the taxes mortgages in particular, they just have not declined in value. In Texas, the home equity law is such that you must have an 80% loan of the value so you could not be doing any of the 80/20 mortgages behind the first mortgages so, the big advantage is that we were able to reason is, an 80% mortgage so to that extent, the market declines out in a curve and we have a good chance of doing quite a bit of mortgage production in the state of Texas going forward.

Operator

And we will take our final question from Brian Klock.

Brian Klock - Keefe, Bruyette & Woods

I have one quick question, I have noticed that your co-reporter was out today and it looks like the past 230 to 290 day construction portfolio increased from 14.8 million at the end of September to $35 million. I guess it seems like that change is probably, symptomatic of what you have been talking about in increasing the reserve levels for it. I guess will those numbers be included on the watch list numbers you gave us?

Anthony Nocella

Well we call the concern loan not to differentiate it from some of the regulatory word watch. Anybody obviously pays late is on our watch list and we are concerned about that. in some cases they are very well collateralized but in every case anything that is on our concern loan list was part of that stress test that used to label the data and your analysis that we have used as part of our model.

Brian Klock - Keefe, Bruyette & Woods

And I am not sure if you can answer this question, I guess within the 90-days past, in that call report, that one for family increase, the $94 million from $57 million, and I have got to get those, though they are still occurring but I guess those are the ones you are probably focusing on trying to get some modifications on?

Anthony Nocella

Yes, they are called scheduled service by other single-family mortgage loans and yes, that is exactly right.

Operator

I would like to turn the call back over to you Mr. Nocella.

Anthony Nocella

Well, we continue to be confident in our management team in our mission and the business of Franklin Bank our community franchise is the solid core of your business and the value of our franchise and we expect the value to continue the growth of our shareholders. Thank you very much.

Operator

We thank you for your participation and have a nice day.

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Source: Franklin Bank Corp. Q4 2007 Earnings Call Transcript
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