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Wall Street Journal, May 20, 2008 article


The Wall Street Journal

May 20, 2008


Internal Franklin Probe
Finds Accounting Errors

CEO Nocella to Retire Sooner Than Planned
May 20, 2008 7:35 a.m.

A board probe at Franklin Bank Corp. found accounting errors involving its single-family home-loan business and will result in Chief Executive Anthony J. Nocella retiring sooner than planned.

Chairman Lewis Ranieri will be interim CEO of the Houston bank until a replacement is hired. Mr. Ranieri, former chairman of Salomon Brothers, helped pioneer the bundling of mortgages into marketable securities, a key element of the continuing credit crunch.

The 10-week investigation by the board's audit committee found Franklin didn't properly account for loan-modification programs intended to reduce delinquencies and mitigate foreclosure losses, didn't charge off some uncollectable second-lien loans and didn't record and/or write down some foreclosures and loan losses.

The board launched its investigation after being told of certain issues in mid-February. The six-year-old company then told the Securities and Exchange Commission, which started its own informal inquiry. Franklin publicized its probe in March.

Franklin is in the midst of correcting the quarterly results its Franklin Bank unit gave to the Federal Deposit Insurance Corp. on April 30. At the time, Franklin Bank reported a net loss of $35.2 million amid a $63.4 allowance for credit losses, a $19.8 million provision and $8.5 million of net charge-offs.

Director Alan E. Master will be Franklin's president until the new CEO is hired. He has more than 40 years of banking experience and will leave various board committees while in the executive post.

In addition, a four-person executive committee -- Messrs. Master and Nocella, director Robert A. Perro and Franklin Bank President Andy Black -- is being established and will be responsible for overseeing the bank's day-to-day operations. The audit committee and Franklin will also adopt a formal disclosure-review process for all public statements and review board committee charters and company processes to see if internal-governance strengthening is needed.

As for its delayed 2007 annual report, Franklin said it still doesn't know when it will be filed, nor is there a timeline for amendments to its third-quarter report.

Write to Kevin Kingsbury at kevin.kingsbury@dowjones.com1

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