FFHS First Franklin Corp. (MM)

 

 

United States
Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q

þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended September 30, 2010

or

o		Transition Report Pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Period from                      to                     

Commission File Number: 0-16362

FIRST FRANKLIN CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		31-1221029
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

4750 Ashwood Drive, Cincinnati, Ohio 45241

(Address of principal executive offices)

(513) 469-5352

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o		Non accelerated filer o		Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Applicable Only to Corporate Issuers

As of November 15, 2010, there were issued and outstanding 1,685,684 shares of the registrant’s Common Stock.

 

 

FIRST FRANKLIN CORPORATION AND SUBSIDIARIES

INDEX

		Page No.
Part I Financial Information
Item 1. Financial statements
Consolidated Balance Sheets — September 30, 2010 and December 31, 2009			3
Consolidated Statements of Operations and Retained Earnings — Three- and Nine-Month Periods ended September 30, 2010 and 2009			4
Consolidated Statements of Cash Flows — Nine-Month Periods ended September 30, 2010 and 2009			5
Notes to Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			18
Item 3. Quantitative and Qualitative Disclosures about Market Risk			26
Item 4. Controls and Procedures			26
Part II Other Information			27
Item 1. Legal Proceeding			27
Item 1A. Risk Factors			27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			27
Item 3. Defaults Upon Senior Securities			27
Item 4. (Removed and Reserved)			27
Item 5. Other Information			27
Item 6. Exhibits			27
Signatures			28
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

ITEM 1. FINANCIAL STATEMENTS

FIRST FRANKLIN CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

		Sept. 30, 2010				Dec. 31, 2009
		(Unaudited)
ASSETS
Cash, including certificates of deposit and other interest-earning deposits of $100 at 09/30/10 and $100 at 12/31/09		$	4,142			$	6,875
Investment securities:
Securities available-for-sale, at market value (amortized cost of $16,084 at 09/30/10 and $21,185 at 12/31/09)			16,298				20,947
Mortgage-backed securities:
Securities available-for-sale, at market value (amortized cost of $2,158 at 09/30/10 and $2,731 at 12/31/09)			2,231				2,809
Securities held-to-maturity, at amortized cost (market value of $3,271 at 09/30/10 and $4,155 at 12/31/09)			3,070				3,989
Loans held for sale			14,896				7,552
Loans receivable, net			211,207				236,085
Investment in Federal Home Loan Bank of Cincinnati stock, at cost			4,991				4,991
Real estate owned, net			1,915				2,792
Accrued interest receivable			1,080				1,135
Property and equipment, net			3,194				3,448
Bank owned life insurance			6,146				5,983
Other assets			5,686				5,114
Total assets		$	274,856			$	301,720
LIABILITIES
Deposits		$	225,667			$	244,010
Borrowings			23,924				32,419
Advances by borrowers for taxes and insurance			1,562				2,160
Other liabilities			2,472				786
Total liabilities			253,625				279,375
Minority interest in consolidated subsidiary			55				140
STOCKHOLDERS’ EQUITY
Preferred stock — $.01 par value, 500,000 shares authorized, none issued and outstanding							—
Common stock — $.01 par value, 2,500,000 shares authorized, 2,010,867 shares issued at 09/30/10 and 12/31/09			13				13
Additional paid-in capital			6,261				6,189
Treasury stock, at cost — 325,183 shares at 09/30/10 and 330,183 shares at 12/31/09			(3,270	)			(3,270	)
Retained earnings, substantially restricted			17,983				19,378
Accumulated other comprehensive income:
Unrealized gain (loss) on available-for-sale securities, net of taxes of $98 at 09/30/10 and $(48) at 12/31/09			189				(105	)
Total stockholders’ equity			21,176				22,205
		$	274,856			$	301,720

The accompanying notes are an integral part of the consolidated financial statements.

FIRST FRANKLIN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS

(Dollars in thousands, except per share data)

		For the three months ended								For the nine months ended
		Sept. 30, 2010				Sept. 30, 2009				Sept. 30, 2010				Sept. 30, 2009
		(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
Interest income:
Loans receivable		$	2,987			$	3,471			$	9,280			$	10,768
Mortgage-backed securities			62				88				208				286
Investments			151				203				567				635
			3,200				3,762				10,055				11,689
Interest expense:
Deposits			1,246				1,838				3,951				5,587
Borrowings			294				464				1,016				1,598
			1,540				2,302				4,967				7,185
Net interest income			1,660				1,460				5,088				4,504
Provision for loan losses			957				1,651				1,641				1,898
Net interest income (expense) after provision for loan losses			703				(191	)			3,447				2,606
Noninterest income:
Gain on loans sold			986				463				2,093				1,588
Gain on sale of investments			4				—				27				1
Service fees on checking accounts			216				235				644				657
Other income			488				325				1,153				955
			1,694				1,023				3,917				3,201
Noninterest expense:
Salaries and employee benefits			1,636				1,049				4,033				3,134
Occupancy			251				275				797				818
Federal deposit insurance premiums			171				100				512				298
Advertising			31				37				123				94
Service bureau			128				132				388				435
Other			1,355				968				3,718				2,375
			3,572				2,561				9,571				7,154
Loss before federal income taxes			(1,175	)			(1,729	)			(2,207	)			(1,347	)
Benefit for federal income taxes			(420	)			(597	)			(812	)			(482	)
Net Loss		$	(755	)		$	(1,132	)		$	(1,395	)		$	(865	)
Retained Earnings-Beginning of period		$	18,738			$	21,186			$	19,378			$	20,919
Net Loss			(755	)			(1,132	)			(1,395	)			(865	)
Retained Earnings-end of period		$	17,983			$	20,054			$	17,983			$	20,054
Net loss per common share:
Basic		$	(0.45	)		$	(0.68	)		$	(0.83	)		$	(0.52	)
Diluted		$	(0.45	)		$	(0.68	)		$	(0.83	)		$	(0.52	)

The accompanying notes are an integral part of the consolidated financial statements.

FIRST FRANKLIN CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

		For the nine months ended
		Sept. 30, 2010				Sept. 30, 2009
		(unaudited)				(unaudited)
Cash flows from operating activities:
Net loss		$	(1,395	)		$	(865	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for loan losses			1,641				1,898
Gain on sale of investments			(27	)			(1	)
Gain on sale of loans			(2,093	)			(1,588	)
Loss on sale of real estate owned			79				345
Gain on sale of fixed assets			(3	)			—
Provision for real estate owned			12				—
Impairment of mortgage servicing rights			79				—
Depreciation			244				249
Amortization			57				(2	)
Deferred income taxes			(812	)			(816	)
Deferred loan fees			110				3
Proceeds from sale of loans originated for sale			122,233				131,423
Disbursements on loans originated for sale			(129,577	)			(139,326	)
Net change in operating assets and liabilities:
Bank Owned Life Insurance			(163	)			(179	)
Decrease in accrued interest receivable			55				185
Increase in other assets			(50	)			(139	)
Increase in other liabilities			1,686				57
Other, net			(85	)			—
Net cash used by operating activities			(8,009	)			(8,756	)
Cash flows from investing activities:
Net change in loans receivable			22,643				20,301
Principal reduction on mortgage-backed securities			1,492				1,276
Purchase of available-for-sale investment securities:			(14,121	)			(12,174	)
Proceeds from maturities/calls of investment securities:
Available-for-sale			19,250				11,540
Net real estate owned activity			3,363				373
Proceeds for the sale of fixed assets			137				—
Capital expenditures			(124	)			(213	)
Net cash provided by investing activities			32,640				21,103
Cash flows from financing activities:
Net change in deposits			(18,343	)			19,124
Net change in borrowed money			(8,495	)			(32,590	)
Decrease in advances by borrowers for taxes and insurance			(598	)			(734	)
Stock option expense, net			72				—
Net cash used by financing activities			(27,364	)			(14,200	)
Net decrease in cash			(2,733	)			(1,853	)
Cash at beginning of year			6,875				7,438
Cash at end of year		$	4,142			$	5,585
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest, including interest credited to savings accounts			4,950				5,582
Income taxes			—				150
Supplemental disclosure of noncash activities:
Real estate acquired in settlement of loans			2,577				1,433
Change in unrealized gain (loss) on available-for sale securities, net of taxes			294				66

The accompanying notes are an integral part of the consolidated financial statements.

FIRST FRANKLIN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the three and nine months ended September 30, 2010 and 2009

BASIS OF PRESENTATION

The accompanying unaudited interim consolidated financial statements of First Franklin Corporation (the “Company” or “First Franklin”) have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-and nine-month period ended September 30, 2010 are not necessarily indicative of the results that may be expected for the full year. The December 31, 2009 balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.

ORGANIZATION

First Franklin Corporation is a holding company formed in 1987 in conjunction with the conversion of Franklin Savings and Loan Company (“Franklin Savings”) from a mutual to a stock savings and loan association. The Company’s financial statements include the accounts of its wholly-owned subsidiary, Franklin Savings, Franklin Savings’ wholly-owned subsidiary, Madison Service Corporation, and DirectTeller Systems Inc. which is 51% owned by the Company. Minority interest relating to the portion of DirectTeller Systems Inc. has been separately reported in the financial statements. All significant intercompany transactions have been eliminated in consolidation.

Franklin Savings is a state chartered savings and loan, operating seven banking offices in Hamilton County, Ohio through which it offers a full range of consumer banking services. Franklin Savings is a member of the Federal Home Loan Bank (“FHLB”) System and is subject to regulation by the Office of Thrift Supervision (“OTS”), a division of the U.S. Department of Treasury. As a member of the FHLB, Franklin Savings maintains a required investment in capital stock of the FHLB of Cincinnati.

Deposit accounts are insured within certain limitations by the Federal Deposit Insurance Corporation (“FDIC”). An annual premium is required by the FDIC for the insurance of such deposit accounts.

Franklin Savings conducts a general banking business in southwestern Ohio, which consists of attracting deposits from the general public and applying those funds to the origination of loans for residential, consumer and commercial purposes. The Company’s profitability is significantly dependent on its net interest income, which is the difference between interest income generated from interest-earning assets (i.e. loans and investments) and the interest expense paid on interest-bearing liabilities (i.e. customer deposits and borrowed funds). Net interest income is affected by the relative amount of interest-earning assets and interest-bearing liabilities and the interest received or paid on these balances. The level of interest rates paid or received by Franklin Savings can be significantly influenced by a number of environmental factors, such as governmental monetary policy, that are outside of management’s control.

Madison Service Corporation was established to allow for certain types of business that, by regulation, savings and loans were not allowed to conduct. Madison has no operations and its only assets are cash and interest bearing deposits.

DirectTeller Systems developed and marketed a voice response telephone inquiry system to allow financial institution customers to access their account balances via telephone. This system has been in use with a local service bureau. The local service bureau is in the process of transferring its customers to a new product and is phasing out its use of the DirectTeller product.

CRITICAL ACCOUNTING POLICIES

We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. As discussed in our 2009 Annual Report on Form 10-K, we consider the accounting methods used for the allowance for loan losses and fair value disclosures to be our most critical accounting policies.

The allowance for loan losses is the estimated amount considered necessary to cover inherent, but unconfirmed, credit losses in the loan portfolio at the balance sheet date. The allowance is established through the provision for losses on loans which is charged against income. In determining the allowance for loan losses, management makes significant estimates and has identified this policy as one of the most critical accounting policies for the Company.

Management performs a quarterly evaluation of the allowance for loan losses. Consideration is given to a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change.

The analysis has two components, specific and general allocations. Specific percentage allocations are made for losses related to loans that are determined to be impaired. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. If the present value of expected future cash flows or the fair value of the loan is less than the loan’s carrying value, a charge-off is recorded for the difference. The general allocation is determined by segregating the remaining loans by type of loan. Management analyzes historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations. This analysis establishes factors that are applied to the loan groups to determine the amount of the general reserve. Actual loan losses may be significantly more than the allowances established, which could result in a material negative effect on the Company’s financial results.

Fair value disclosures is the Company’s other most critical accounting policy. Investments in debt and equity securities are classified as either held-to-maturity or available-for-sale. Securities classified as held-to maturity are recorded at cost or amortized cost. Available-for-sale securities are carried at fair value. Fair values are obtained from a third party service. The fair value calculations are based on quoted market prices when such prices are available. If quoted market prices are not available, estimates of fair value are computed using a variety of techniques, including extrapolation from the quoted prices of similar instruments or recent trades for thinly traded securities, fundamental analysis, or through obtaining purchase quotes. Due to the subjective nature of the valuation process, it is possible that the actual fair values of these investments could differ from the estimated amounts, thereby affecting the Company’s financial position, results of operations and cash flows. If the estimated value of investments is less than the cost or amortized cost, we evaluate whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the investment. If such an event or change has occurred and we determine that the impairment is other-than-temporary, we expense the impairment of the investment in the period in which the event or change occurred. We also consider how long a security has been in a loss position in determining if it is other than temporarily impaired. Management also assesses the nature of the unrealized losses, taking into consideration factors such as changes in risk-free interest rates; general credit spread widening, market supply and demand, creditworthiness of the issuer, and quality of the underlying collateral.

INVESTMENT AND MORTGAGE-BACKED SECURITIES

The amortized cost and estimated market values of investment securities are as follows:

		September 30, 2010
		(Dollars in thousands)
						Gross				Gross				Estimated
		Amortized				Unrealized				Unrealized				Market
		Cost				Gains				Losses				Value
Available-for-sale:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies		$	13,494				110				—				13,604
Obligations of states and municipalities			1,590				98				7				1,681
Community Reinvestment Act fund			1,000				13				—				1,013
		$	16,084				221				7				16,298

		December 31, 2009
		(Dollars in thousands)
						Gross				Gross				Estimated
		Amortized				Unrealized				Unrealized				Market
		Cost				Gains				Losses				Value
Available-for-sale:
U.S. Treasury securities and obligations of U.S. Government corporations and agencies		$	18,720				16				273				18,463
Obligations of states and municipalities			1,465				31				10				1,486
Community Reinvestment Act fund			1,000				—				2				998
		$	21,185				47				285				20,947

The amortized cost and estimated market value of investment securities at September 30, 2010, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call obligations at par.

						Estimated
						market
		Amortized cost				value
		(Dollars in thousands)
Available-for-sale:
Due in one year or less		$	—				—
Due after one year through five years			100				105
Due after five years thorugh ten years			2,000				2,004
Due after ten years			12,984				13,176
			15,084				15,285
Community Reinvestment Act Fund			1,000				1,013
		$	16,084				16,298

The gross proceeds on sales of investments and mortgage-backed securities were $255,669 for the year ended December 31, 2009. No investments were sold during the nine-months ended September 30, 2010. Gross realized gains for the nine-months ended September 30, 2010 were $27,520 and during the year ended December 31, 2009 were $11,035. The realized gains during the nine-month period ended September 30, 2010 and the year ended December 31, 2009 were the result of investments called prior to maturity. Investment securities with an approximate carrying value of $1,000,000 at September 30, 2010 and $946,308 at December 31, 2009 were pledged to secure an investment in the Senior Housing Crime Prevention Foundation.

The amortized cost and estimated market values of mortgage-backed securities are as follows:

		September 30, 2010
		(Dollars in thousands)
						Gross				Gross				Estimated
		Amortized				Unrealized				Unrealized				Market
		Cost				Gains				Losses				Value
Available-for-sale:
FHLMC certificates		$	579				36				—				615
FNMA certificates			300				8				—				308
GNMA certificates			1,076				25				—				1,101
Collateralized mortgage obligations			203				4				—				207
		$	2,158				73				—				2,231
Held-to-maturity:
FHLMC certificates		$	101				12				—				113
FNMA certificates			2,902				180				—				3,082
GNMA certificates			67				9				—				76
		$	3,070				201				—				3,271

		December 31, 2009
		(Dollars in thousands)
						Gross				Gross				Estimated
		Amortized				Unrealized				Unrealized				Market
		Cost				Gains				Losses				Value
Available-for-sale:
FHLMC certificates		$	956				53				—				1,009
FNMA certificates			338				5				—				343
GNMA certificates			1,203				15				—				1,218
Collateralized mortgage obligations			234				5				—				239
		$	2,731				78				—				2,809
Held-to-maturity:
FHLMC certificates		$	141				14				—				155
FNMA certificates			3,773				144				—				3,917
GNMA certificates			75				8				—				83
		$	3,989				166				—				4,155

The table below indicates the length of time individual investment securities have been in a continuous loss position at September 30, 2010.

September 30, 2010

(Dollars in thousands)

Less than 12 Months

12 Months or Longer

Total

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Value

Losses

Value

Losses

Value

Losses

Obligations of state and municipalities

$

48

7

—

—

48

7

Number of Investments

1

Securities available for sale are reviewed for possible other-than-temporary impairment on a quarterly basis. During this review, management considers the severity and duration of the unrealized losses as well as its intent and ability to hold the securities until recovery, taking into account balance sheet management strategies and market conditions. Management also assesses the nature of the unrealized losses taking into consideration factors such as changes in risk-free interest rates, general credit spread widening, market supply and demand, creditworthiness of the issuer or any credit enhancement providers and the quality of the underlying collateral. Management does not intend to sell any of the securities with an unrealized loss and does not believe that it is more likely than not that the Company will be required to sell a security in an unrealized loss position prior to a recovery in its value. The fair value of these securities is expected to recover as the securities approach maturity. Accordingly, no other-than-temporary impairment has been recognized in our consolidated statements of income.

STOCK OPTION PLAN

The Company has a stock option plan (the 1997 Stock Option and Incentive Plan) for officers, key employees, and directors, under which options to purchase the Company’s common shares were granted at a price no less than the fair market value of the shares at the date of the grant. Options can be exercised during a term to be determined by a committee appointed by the Board of Directors, but in no event more than ten years from the date they were granted. The Company has authorized the issuance of up to 175,984 common shares under the plan.

Transactions involving the 1997 Plan are summarized as follows:

		2010				2009
Options outstanding at the beginning of the year			54,259				71,818
Granted			—				—
Canceled/Forfeited			(30,432	)			(17,559	)
Excercised			—				—
Options outstanding at the end of the year			23,827				54,259

All outstanding options under the 1997 plan have an exercise price between $7.75 and $10.14.

The Company has another stock option plan (the 2002 Stock Option and Incentive Plan) for officers, key employees, and directors, under which options to purchase the Company’s common shares were granted. Options can be exercised during a term to be determined by a committee appointed by the Board of Directors, but in no event more than ten years from the date they were granted. The Company has authorized the issuance of up to approximately 161,000 common shares under the plan.

Transactions involving the 2002 Plan are summarized as follows:

		2010				2009
Options outstanding at the beginning of the year			100,363				105,238
Granted			38,000				—
Canceled/Forfeited			(29,578	)			(4,875	)
Excercised			(5,000	)			—
Options outstanding at the end of the year			103,785				100,363

All outstanding options under the 2002 plan have an exercise price between $0.01 and $20.38.

Additional information regarding stock options outstanding as of September 30, 2010, is as follows:

		Options Outstanding												Excercisable Options
						Weighted
						Average				Weighted								Weighted
						Remaining				Average								Average
						Contractual				Exercise								Exercise
Range of Exercise Price		Shares				Life (Years)				Price				Shares				Price
0.01 to 7.74			33,000				1.80			$	0.01				—			$	—
7.75 to 10.00			7,594				0.50				7.75				7,594				7.75
10.01 to 15.00			49,700				1.30				11.97				49,700				11.97
15.01 to 20.00			17,590				3.50				17.67				17,590				17.67
20.01 to 25.00			19,728				3.70				20.38				19,728				20.38
			127,612				2.16			$	11.56				94,612			$	11.55

In April, 2010 the Company granted stock options that contain vesting restrictions based on the Company achieving a certain share price on the anniversary date of April 1. In 2011 8,000 options will vest if the share price is at or above $9.00 on April 1. In 2012 10,000 options will vest if the share price is at or above $10.00 on April 1 and 15,000 options will vest in 2013 if the share price is at or above $11.00 on April 1. These options will vest in the event of a change of control in the Company.

Compensation cost charged against income was $70,000 for the nine-months ended September 30, 2010. No compensation cost was incurred in 2009. As of September 30, 2010, unrecognized compensation cost of approximately $141,000 is related to non-vested awards granted by the Company. This is anticipated to be recognized over a weighted average of three years, through 2013, commensurate with the vesting schedules.

DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES

Effective January 1, 2008, the Company adopted Accounting Standards Codification Topic (“ASC”) 820-10-50-2, which establishes a framework for measuring fair value and expands disclosures about fair value investments. ASC 820-10-50-2 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820-10-50-2 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1		Quoted prices in active markets for identical assets or liabilities
Level 2		Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
Level 3		Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Fair value methods and assumptions are set forth below for each type of financial instrument held by the Company at September 30, 2010.

Fair value on available for sale securities was based upon a market approach. Securities which are fixed income instruments that are not quoted on an exchange, but are traded in active markets, are valued using prices obtained from the custodian, which used third party data service providers. Available for sale securities includes U.S. agency securities, municipal bonds and mortgage-backed agency securities.

		Fair Value Measurements at
		September 30, 2010
		(Dollars in thousands)
						Quoted
						prices in
						active				Significant				Significant
						markets for				other				other
						identical				observable				unobservable
						assets				inputs				inputs
		Total				(Level 1)				(Level 2)				(Level 3)
U.S. Treasury securities and Obligations of U.S. Government Corporations and agencies		$	13,604				—				13,604				—
Obligations of states and municipalities			1,681				—				1,681				—
FHLMC certificates			615				—				615				—
FNMA certificates			308				—				308				—
GNMA certificates			1,101				—				1,101				—
Collateralized mortgage obligations			207				—				207				—
Community Reinvestment Act fund			1,013				—				1,013				—

		Fair Value Measurements at
		December 31, 2009
		(Dollars in thousands)
						Quoted
						prices in
						active				Significant				Significant
						markets for				other				other
						identical				observable				unobservable
						assets				inputs				inputs
		Total				(Level 1)				(Level 2)				(Level 3)
U.S. Treasury securities and Obligations of U.S. Government Corporations and agencies		$	18,463				—				18,463				—
Obligations of states and municipalities			1,486				—				1,486				—
FHLMC certificates			1,009				—				1,009				—
FNMA certificates			343				—				343				—
GNMA certificates			1,219				—				1,219				—
Collateralized mortgage obligations			239				—				239				—
Community Reinvestment Act fund			998				—				998				—

The Company is predominately an asset-based lender with real estate serving as collateral on a substantial majority of loans. Loans which are deemed to be impaired and other real estate owned are primarily valued on a nonrecurring basis at the fair value of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which the Company considers to be Level 2 inputs. The aggregate carrying amount of impaired loans at September 30, 2010 was approximately $7.29 million, with total loss recognized of approximately $2.10 million. The aggregate carrying amount of impaired loans at December 31, 2009 was $8.00 million with a total loss recognized of approximately $2.00 million. At September 30, 2010 and December 31, 2009 the carrying value of other real estate owned was $1.9 million and $2.8 million, respectively.

Fair Values of Financial Instruments:

ASC 825-10-50-10 requires that the Company disclose estimated fair values for its financial instruments. The following methods and assumptions were used to estimate the fair value of the Company’s financial instruments.

Cash and Cash Equivalents and Investment in FHLB Stock

The carrying value of cash and cash equivalents and the investment in Federal Home Loan Bank (“FHLB”) stock approximates those assets’ fair value.

Investment and Mortgage-Backed Securities

For investment securities (debt instruments) and mortgage-backed securities, fair values are based on quoted market prices, where available. If a quoted market price is not available, fair value is estimated using quoted market prices of comparable instruments.

Loans Receivable

The fair value of the loan portfolio is estimated by evaluating homogeneous categories of loans with similar financial characteristics. Loans are segregated by types, such as residential mortgage, commercial real estate and consumer. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories.

The fair value of performing loans, except residential mortgage loans, is calculated by discounting contractual cash flows using estimated market discount rates, which reflect the credit and interest rate risk inherent in the loan. For performing residential mortgage loans, fair value is estimated by discounting contractual cash flows adjusted for prepayment estimates using discount rates based on secondary market sources. The fair value for significant nonperforming loans is based on recent internal or external appraisals. Assumptions regarding credit risk, cash flow, and discount rates are judgmentally determined by using available market information.

Deposits

The fair values of passbook accounts, demand deposits, and money market savings equal their carrying values. The fair value of fixed-maturity certificates of deposit is estimated using a discounted cash flow calculation that applies interest rates currently offered for deposits of similar remaining maturities.

Borrowed Money

Rates currently available to the Company for borrowings with similar terms and remaining maturities are used to estimate the fair value of existing advances.

Reclassifications

Certain reclassifications have been made to the 2009 financial statements to conform to the 2010 financial statement presentation. These reclassifications had no effect on net income.

Commitments to Extend Credit

The fair value of commitments to extend credit approximates the contractual amount due to the comparability of current levels of interest rates and the committed rates.

The estimated fair values of the Company’s financial instruments at September 30, 2010 are as follows:

		September 30, 2010
		(Dollars in thousands)
		Carrying				Fair
		amount				Value
Financial Assets:
Cash and cash equivalents		$	4,142				4,142
Investment securities			16,298				16,298
Mortgage-backed securities			5,301				5,502
Loans receivable			226,103				232,135
Investments in FHLB Stock			4,991				4,991
Financial liabilities:
Deposits		$	225,667				234,833
Borrowed money			23,924				25,906

		September 30, 2010
		(Dollars in thousands)
		Contractual				Fair
		amount				Value
Unrecognized financial instruments:
Commitements to extend credit		$	2,996				2,996
Unfunded construction loans			362				362
Undisbursed lines of credit			18,203				18,203

SALE-LEASEBACK TRANSACTION

In May 2010, the Company entered into a sale-leaseback arrangement relating to its main office facilities. The Company’s office building and surrounding land, which had a carrying amount of $796,000, were sold to an unrelated third party for $1,260,000 in cash. The Company then leased the property back under a 15 year operating lease that requires annual lease payments of approximately $132,000. In addition, the company has a sublease with a tenant that requires the lessee to make annual lease payments of $48,000 for three years. Due to the sublease payments, the Company is considered to have a continuing involvement which is more than minor, as a result of which the transaction is being treated as a financing transaction with no gain being recognized from the sale. A finance obligation of $1,220,929 for rent payments over the 15 year term of the lease has been recognized as a result of the sale-leaseback transaction.

Future minimum payments under the finance obligation are as follows:

2010		$	5,639
2011			23,860
2012			30,030
2013			35,781
2014			43,259
Thereafter			1,082,360
		$	1,220,929

EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS

In January 2010, the FASB issued ASU No. 2010-01 “Accounting for Distributions to Shareholders with Components of Stock and Cash,” which updated the Codification on accounting for distributions to shareholders that offers them the ability to elect to receive their entire distribution in cash or stock with a potential limitation on the total amount of cash that all shareholders can receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend. The new guidance is effective for interim and annual periods after December 15, 2009, and would be applied on a retrospective basis. The adoption of this guidance did not have any effect on our consolidated financial statements.

In January 2010, the FASB issued ASU No. 2010-06 “Improving Disclosures About Fair Value Measurements,” as the guidance for fair value measurements and disclosures. The guidance in ASU 2010-06 requires a reporting entity to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and to describe the reasons for the transfers. Furthermore, ASU 2010-06 requires a reporting entity to present separately information about purchases, sales, issuances, and settlements in the reconciliation for fair value measurements using significant unobservable inputs; clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value; and amends guidance on employers’ disclosures about postretirement benefit plan assets to require that disclosures be provided by classes of assets instead of by major categories of assets. The new guidance is effective for interim and annual reporting periods beginning January 1, 2010, except for the disclosures about purchases, sales, issuances, and settlements in the rollforward of activity in Level 3 fair value measurements. Those disclosures are effective January 1, 2011 and for interim periods thereafter. In the period of initial adoption, entities will not be required to provide the amended disclosures for any previous periods presented for comparative purposes. Early adoption is permitted. The adoption of this guidance is not expected to significantly impact our annual and interim financial statement disclosures and will not have any impact on our consolidated financial statements.

In February 2010, the FASB issued ASU No. 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. The amendments in the ASU remove the requirement for companies that are subject to the periodic reporting requirements of the Exchange Act to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. generally accepted accounting principles (“U.S. GAAP”). The FASB also clarified that if the financial statements have been revised, then an entity that is not an SEC filer should disclose both the date that the financial statements were issued or available to be issued and the date the revised financial statements were issued or available to be issued. The FASB believes these amendments remove potential conflicts with the SEC’s literature. All of the amendments in the ASU were effective upon issuance, except for the use of the issued date for conduit debt obligors, which will be effective for interim or annual periods ending after June 15, 2010. The adoption of this guidance is not expected to have a material effect on the consolidated financial statements.

In March 2010, the FASB issued ASU No. 2010-11, “Derivatives and Hedging (Topic 815),” which clarifies that the only type of embedded credit derivative feature related to the transfer of credit risk that is exempt from derivative bifurcation requirements is one that is in the form of subordination of one financial instrument to another. As a result, entities that have contracts containing an embedded credit derivative feature in a form other than such subordination will need to assess those embedded credit derivatives to determine if bifurcation and separate accounting as a derivative is required. This guidance is effective on July 1, 2010. Early adoption is permitted at the beginning of an entity’s first interim reporting period beginning after issuance of this guidance. The adoption of this guidance is not expected to have any impact on our consolidated financial statements.

In April, 2010, the FASB issued Codification Accounting Standards Update No. 2010-18 (ASU No. 2010-18) Effect of Loan Modification when the Loan is Part of a Pool that is accounted for as a Single Asset (a consensus of the FASB Emerging Issues Task Force). The amendments in this update affect any entity that acquires loans subject to ASC Subtopic 310-30, that accounts for some or all of those loans within pools, and that subsequently modifies one or more of those loans after acquisition. ASU No. 2010-18 is effective for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the interim period ending September 30, 2010, and the amendments are to be applied prospectively. Management does not anticipate the adopting of this standard will have a material impact on the financial statements.

In July 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The ASU amends FASB Accounting Standards Codification™ (the “Codification” or “ASC”) Topic 310, Receivables, to improve the disclosures about the credit quality of an entity’s financing receivables and the related allowance for credit losses. As a result of these amendments, an entity is required to disaggregate, by portfolio segment or class of financing receivable, certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses.

Existing disclosures are amended to require an entity to provide the following disclosures about its financing receivables on a disaggregated basis:

(1) A rollforward schedule of the allowance for credit losses from the beginning of the reporting period to the end of the reporting period on a portfolio segment basis, with the ending balance further disaggregated on the basis of the impairment method;

(2) For each disaggregated ending balance in item (1) above, the related recorded investment in financing receivables;

(3) The nonaccrual status of financing receivables by class of financing receivables;

(4) Impaired financing receivables by class of financing receivables.

The amendments in the ASU also require an entity to provide the following additional disclosures about its financing receivables:

(1) Credit quality indicators of financing receivables at the end of the reporting period by class of financing receivables;

(2) The aging of past due financing receivables at the end of the reporting period by class of financing receivables;

(3) The nature and extent of troubled debt restructurings that occurred during the period by class of financing receivables and their effect on the allowance for credit losses;

(4) The nature and extent of financing receivables modified as troubled debt restructurings within the previous twelve months that defaulted during the reporting period by class of financing receivables and their effect on the allowance for credit losses; and

(5) Significant purchases and sales of financing receivables during the reporting period disaggregated by portfolio segments.

The disclosures as of the end of a reporting period will be effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period will be effective for interim and annual reporting periods beginning on or after December 15, 2010. As this ASU is disclosure-related only, we do not expect it to have an impact on our financial condition or results of operations.

In October 2010, the FASB issued a proposed Accounting Standards Update (ASU), “Receivables (Topic 310): Clarifications to Accounting for Troubled Debt Restructurings (“TDR”) by Creditors” to assist creditors in determining whether a modification is a TDR. Currently, there is diversity in practice in identifying loan modifications that constitute TDRs, particularly when determining whether a concession has been granted. The clarifications are proposed to be effective for interim and annual periods ending after June 15, 2011, and would be applied retrospectively to restructurings occurring on or after the beginning of the earliest period presented.

SUBSEQUENT EVENTS

The Company evaluates events and transactions occurring subsequent to the date of the financial statements for matters requiring recognition or disclosure in the financial statements.

On October 12, 2010, the Company entered into an Agreement and Plan of Merger with Cheviot Financial Corp. Under the terms of the agreement, which has been unanimously approved by the boards of directors of both companies, stockholders of First Franklin will be entitled to receive $14.50 in cash for each share they hold on the effective date of the merger. The transaction is subject to certain conditions, including regulatory approval and the approval of First Franklin’s stockholders, but is not subject to any financing contingency. It is expected the merger will close during the first quarter of 2011. The Merger Agreement contains certain termination rights for both the Company and Cheviot Financial Corp, including the Company to terminate the Merger Agreement if the Company has received an acquisition proposal determined by the Board to be superior to Cheviot Financial Corp.’s offer. Under certain circumstances, the Company may be required to pay a termination fee to Cheviot Financial of $980,000.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

GENERAL

First Franklin is a savings and loan holding company that was incorporated under the laws of the State of Delaware in September 1987. The Company owns all of the outstanding common stock of The Franklin Savings and Loan Company’s (“Franklin”).

As a Delaware corporation, the Company is authorized to engage in any activity permitted by the Delaware General Corporation Law. As a unitary savings and loan holding company, the Company is subject to examination and supervision by the Office of Thrift Supervision (“OTS”). The Company’s assets consist of cash, interest-earning deposits, investments in Franklin and DirectTeller Systems Inc. (“DirectTeller”). Because the results of operations of DirectTeller were not material to the Company’s operations and financial condition for the periods covered by this report, the following discussion focuses primarily on Franklin.

The Franklin Savings and Loan Company

Franklin is an Ohio chartered stock savings and loan association headquartered in Cincinnati, Ohio. It was originally chartered in 1883 as the Green Street Number 2 Loan and Building Company. Franklin’s business consists primarily of attracting deposits from the general public and using those deposits, together with borrowings and other funds, to originate loans and purchase investments.

Franklin operates seven full-service banking offices and two loan origination offices through which it offers a wide range of consumer and business banking services. The banking products it offers include mortgage loans, commercial loans, consumer loans, credit and debit cards, checking accounts, savings accounts and certificates of deposit. In addition to visiting the Company’s offices, customers can access many of Franklin’s services via automated teller machines, a voice response telephone inquiry system and an internet-based banking system that allows customers to transfer funds between financial institutions, pay bills, transfer funds between Franklin accounts, download account and transaction information into financial management software programs and inquire about account balances and transactions.

To generate additional fee income and enhance the products and services available to its customers, Franklin also offers annuities, mutual funds and discount brokerage services in its offices through an agreement with a third party broker dealer.

Franklin augmented its lending capabilities in February 2009 with the addition to its staff of an experienced team of 21 commission-based mortgage loan originators and began selling fixed-rate mortgage loans with servicing released. The lending effort is focused on increasing the volume of loan originations in communities within a 100 mile radius of Franklin’s Cincinnati headquarters. During periods when fixed-rate loan origination activity is high, typically periods of low interest rates, the Company expects that interest income will decline as more loans are sold with servicing released, but fee income will increase, both as a result of higher volume and the higher premium that is obtained when servicing rights are sold. Since implementation of the secondary market program, Franklin has seen interest income decrease and the gain on sale of loans increase.

Franklin has one wholly owned subsidiary, Madison Service Corporation (“Madison”). At the present time, Madison has no operations, its only assets are cash and interest-earning deposits and its only source of income is the interest earned on its deposits.

Forward-Looking Statements

Statements included in this document which are not historical or current facts are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results. Such statements may be identified by the use of the words “may”, “anticipates”, “expects”, “hopes”, “believes”, “plans”, “intends” and similar expressions. Factors that could cause financial performance to differ materially from that expressed in any forward-looking statement include, but are not limited to, credit risk, interest rate risk, competition, changes in the regulatory environment and changes in general and local business and economic trends.

RECENT DEVELOPMENTS

On October 12, 2010, the Company entered into an Agreement and Plan of Merger with Cheviot Financial Corp. Under the terms of the agreement, which has been unanimously approved by the boards of directors of both companies, stockholders of First Franklin will be entitled to receive $14.50 in cash for each share they hold on the effective date of the merger. The transaction is subject to certain conditions, including regulatory approval and the approval of First Franklin’s stockholders, but is not subject to any financing contingency. It is expected the merger will close during the first quarter of 2011. The Merger Agreement contains certain termination rights for both the Company and Cheviot Financial Corp, including the Company to terminate the Merger Agreement if the Company has received an acquisition proposal determined by the Board to be superior to Cheviot Financial Corp.’s offer. Under certain circumstances, the Company may be required to pay a termination fee to Cheviot Financial of $980,000.

On July 21, 2010, President Obama signed into law the financial regulatory reform act entitled the “Dodd-Frank Wall Street Reform and Consumer Protection Act” that implements changes to the regulation of the financial services industry, including provisions that, among other things will:

•

Centralize responsibility for consumer financial protection by creating a new agency responsible for implementing, examining and enforcing compliance with federal consumer financial laws.

•

Apply the same leverage and risk-based capital requirements that apply to insured depository institutions to bank holding companies.

•

Require the FDIC to seek to make its capital requirements for banks countercyclical so that the amount of capital required to be maintained increases in times of economic expansion and decreases in times of economic contraction.

•

Change the assessment base for federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital.

•

Implement corporate governance revisions, including with regard to executive compensation and proxy access by shareholders, that apply to all public companies, not just financial institutions.

•

Make permanent the $250,000 limit for federal deposit insurance and increase the cash limit of Securities Investor Protection Corporation protection from $100,000 to $250,000, and provide unlimited federal deposit insurance until January 1, 2013, for non-interest bearing demand transaction accounts at all insured depository institutions.

•

Repeal the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.

•

Increase the authority of the Federal Reserve to examine the Company and its non-bank subsidiaries.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Assets

Total assets declined 8.9% to $274.86 million at September 30, 2010, from $301.72 million at year-end 2009. The primary reasons for the $26.86 million decrease were:

•

Cash and investments decreased by $7.38 million. This decrease reflected $35.23 million of loan and mortgage-backed securities repayments and $122.23 million of loan sales, less $139.38 million in loan disbursements, $18.34 million of deposit outflows and $8.50 million of debt repayments.

•

Loans receivable declined by $24.88 million. This reflects the Company’s strategic decision to sell mortgages originated by Franklin and transfer servicing to the purchaser.

Cash and investments

Liquid assets were 7.44% of total assets at September 30, 2010 and 9.22% at December 31, 2009.

The Company’s investment securities and mortgage-backed securities are classified based on the current intention to hold to maturity or have available for sale. The following table shows the gross unrealized gains or losses on mortgage-backed securities and investment securities as of September 30, 2010. No securities are classified as trading. Securities which the Company intends to hold to maturity are carried at either cost or amortized cost. Securities which are held as available-for-sale are carried fair value.

						Gross				Gross				Esitmated
		Amortized				Unrealized				Unrealized				Market
		Cost				Gains				Losses				Value
		(Dollars in thousands)
Available-for-sale:
Investment securities		$	16,084				221				7				16,298
Mortgage-backed securities			2,158				73				—				2,231
Held-to-maturity
Mortgage-backed securities			3,070				201				—				3,271
		$	21,312				495				7				21,800

Management does not intend to sell any of the securities with an unrealized loss and does not believe that it is more likely than not that the Company will be required to sell a security in an unrealized loss position prior to a recovery in its value. The fair value of these securities is expected to recover as the securities approach maturity. Accordingly, no other-than-temporary impairment has been recognized in the consolidated statements of income.

Loans receivable

Loans receivable totaled $211.21 million at September 30, 2010, compared to $236.09 million at December 31, 2009. Loan disbursements of $139.38 million during the current nine-month period were more than offset by loan sales of $122.23 million and loan amortizations and prepayments of $33.74 million. Loan sales consisted primarily of fixed-rate loans which were sold with servicing rights transferred to the purchaser as part of the Company’s mortgage origination and sale program implemented in early 2009. Management expects loans receivable to continue to decline in future quarters, particularly if consumer demand for fixed-rate loans remains high, which may cause outstanding loan balances and interest earned on loans to continue to decline, but which may result in continued growth in origination fees and gain on the sale of loans.

Loan disbursements of $139.38 million occurred during the current nine-month period compared with $164.27 million during the nine months ended September 30, 2009. The decrease is primarily attributable to the prolonged period of low rates, which many people refinanced early in the cycle so the pool of borrowers for whom refinancing makes sense has declined.

At September 30, 2010, the Company had $14.90 million of available-for-sale mortgage loans, carried at the lower of cost or market, which will be sold during the fourth quarter of 2010, compared to $7.55 million of available-for-sale mortgage loans at December 31, 2009.

At September 30, 2010, Franklin had $3.00 million of commitments to originate mortgage loans, $40.39 million of mortgage loans in various stages of processing that have not been committed, $362,000 of undisbursed loan funds held on various construction loans, commitments to sell $58.29 million of mortgage loans and $18.20 million of undisbursed consumer and commercial lines of credit. Management believes that sufficient cash flow and borrowing capacity exist to fund these commitments.

Asset Quality

The allowance for loan losses is maintained at a level believed adequate by management to absorb probable losses in the loan portfolio. It is based on the size and current risk characteristics of the loan portfolio, an assessment of individual problem loans, actual loss experience, current economic events in specific industries and geographical areas, and other pertinent factors including general economic conditions and the regulatory environment. Determination of the allowance is inherently subjective and requires significant estimates that are susceptible to change. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.

Loan losses are charged off against the allowance when in management’s estimation it is unlikely that the loan will be collected; recoveries of amounts previously charged off are credited to the allowance. The provision for loan losses is charged to operations based on management’s periodic evaluation of the factors previously mentioned, as well as other pertinent factors, to maintain the allowance for loan losses at the level deemed adequate by management.

At September 30, 2010, the allowance for loan losses was $5.82 million, representing 2.57% of total loans and 60.14% of nonperforming loans compared to $4.92 million at December 31, 2009, which was 2.02% of total loans and 53.24% of nonperforming loans. Non-performing loans (consisting of non-accruing loans and accruing loans delinquent 90 days or more) were $9.78 million, or 4.33% of total loans, at September 30, 2010, compared to $9.24 million, or 3.79% of total loans, at December 31, 2009. Non-performing assets (consisting of non-performing loans plus repossessed assets) were $11.70 million, or 4.26% of total assets at September 30, 2010, compared to $12.06 million, or 4.00% of total assets, at December 31, 2009. Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, totaled $7.29 million at September 30, 2010, with related reserves of $2.10 million. Impaired loans at December 31, 2009 were $8.00 million with a related reserve of $2.00 million.

In light of continued high unemployment, depressed real estate values and sustained economic weakness in the Company’s market area, management believes that non-performing assets may increase further and is building loan loss reserves, as is discussed further under “Results of Operations.” Resolving these problem assets may be a long-term process.

The following table shows the activity that has occurred in the loss reserves during the nine-months ended September 30, 2010.

		(Dollars in thousands)
Balance at beginning of period		$	4,915
Charge offs			(958	)
Additions charged to operations			1,641
Recoveries			223
Balance at end of period		$	5,821

Net charge-offs for the nine months ended September 30, 2010 were $735,000, or 0.31% of average loans, compared with net charge-offs of $506,000, or 0.18% of average loans, for the first nine months of 2009. The provision for loan losses was $957,000 in the third quarter of 2010, down from $1.65 million in the third quarter of 2009. Total charge-offs consisted of $675,000 of charge-offs on nine commercial loans, $260,000 of charge-offs on four 1-4 family real estate loans and $11,000 of charge-offs on two consumer loans.

In 2010, Franklin has instituted a new loan review program that consists of monthly meetings of a committee, a majority of which is comprised of members of the Franklin Savings Board of Directors. This committee reviews remediation plans internally developed for classified assets, and then reports to the Board of Directors regarding actions taken. A third party has been engaged and is being used on a semiannual basis to review internal loan grading to enhance Franklin’s efforts for earlier identification of asset quality issues.

Liabilities

Total liabilities declined 9.2% to $253.63 million at September 30, 2010, from $279.38 million at year-end 2009. The primary reasons for the $25.75 million decrease were:

•

Deposits decreased by $18.34 million. At September 30, 2010, deposits were $225.67 million compared with $244.01 million at December 31, 2009. During the first nine months of 2010, core deposits decreased $5.18 million, while higher earning certificates decreased $13.16 million. Interest of $3.53 million during the nine months ended September 30, 2010 was credited to accounts. After eliminating the effect of interest credited, deposits decreased $21.87 million from year-end 2009. As Franklin’s funding needs continue to decline because of sales of loans in the secondary market, it has been able to begin lowering the interest rates offered for certificates of deposit. As a result, certificates of deposit declined by 7.96% in the first nine months of 2010, which helped reduce net interest expense.

•

Borrowings decreased by $8.50 million. At September 30, 2010, Franklin had outstanding FHLB advances of $23.92 million at an average cost of 4.22%. During the next twelve months, required principal reduction on these borrowings will be $2.87 million. Management believes that the Company has sufficient cash flow to meet these commitments and maintain desired liquidity levels

Capital Position

The Company’s capital supports business growth, provides protection to depositors, and represents the investment of stockholders. At September 30, 2010, net worth was $21.18 million, or 7.70% of assets, compared to $22.21 million, or 7.36% of assets, at year-end 2009. At September 30, 2010, book value per share was $12.56 compared to $13.21 per share at December 31, 2009.

The following table summarizes Franklin’s regulatory capital position in dollars and as a percentage of assets as of September 30, 2010, December 31, 2009 and September 30, 2009. The modest improvement in the Company’s regulatory capital ratios from the year-ago and year-end levels largely reflected a reduction in assets. Although at these levels Franklin is considered “well capitalized” under federal regulatory standards, Franklin continues to pursue strategies to increase its capital ratios relative to its risk profile.

Capital Standard		Actual				Required				Excess				Actual				Required				Excess
		(Dollars in thousands)
		As of September 30, 2010
Core		$	20,648			$	10,960			$	9,688				7.53	%			4.00	%			3.53	%
Risk-based			23,127				15,830			$	7,297				11.69	%			8.00	%			3.69	%
		As of December 31, 2009
Core		$	21,548			$	12,050			$	9,498				7.15	%			4.00	%			3.15	%
Risk-based			24,107				17,107				7,000				11.27	%			8.00	%			3.27	%
		As of September 30, 2009
Core		$	22,410			$	12,130			$	10,280				7.39	%			4.00	%			3.39	%
Risk-based			24,482				17,403				7,079				11.25	%			8.00	%			3.25	%

RESULTS OF OPERATIONS

The Company had a net loss of $755,000, or $0.45 per basic share, for the quarter ended September 30, 2010 and $1.40 million, or $0.83 per basic share, for the nine-months ended September 30, 2010, compared with net losses of $1.13 million, or $0.68 cent per basic share, for the third quarter 2009 and $865,000, or $0.52 cents per basic share, for the nine-months ended September 30, 2009. The primary reasons for the change were:

•

The provision for loan loss decreased $694,000 for the current quarter and $257,000 for the nine-months ended September 30, 2010. Franklin’s loan portfolio continues to be impacted by the economic downturn of the past two years, which has resulted in declining property values and related borrower defaults. As discussed above, management intends to continue building loan loss reserves for specific loans and the general reserve based on historical losses and economic factors.

•

Federal deposit insurance premiums increased $214,000 for the nine-months ended September 30, 2010. The higher FDIC premiums reflect a substantial increase in the assessment rate.

•

Franklin sustained a loss of $297,000 from a wire transfer fraud scheme which has affected numerous financial institutions in Franklin’s market area. The fraud is currently being investigated by authorities.

•

The Company incurred additional expenses during the quarter of $25,000 for consultants and $60,000 for investment banking services in relation to the Agreement and Plan of Merger dated October 12, 2010 between Cheviot Financial Corp. and First Franklin Corporation.

•

The Company also incurred $118,000 in legal fees related to the Annual Meeting, Proxy Contest, and the Agreement and Plan of Merger.

Net Interest Income

Net interest income, before provisions for loan losses, was $1.66 million for the current quarter and $5.09 million for the first nine months of 2010, compared to $1.46 million and $4.50 million, respectively for the same periods in 2009. The improvement was primarily the result of:

•

Average balances of deposits and borrowings decreased as Franklin’s funding needs have been reduced due to increased loan sales.

•

Interest expense on deposits and borrowings declined due to lower interest rates, in part due to management’s continued effort to add lower-cost checking deposits.

Managing interest rate risk is fundamental to banking. Financial institutions must manage the inherently different maturity and repricing characteristics of their lending and deposit products to achieve a desired level of earnings and to limit their exposure to changes in interest rates. Franklin is subject to interest rate risk to the degree that its interest-bearing liabilities, consisting principally of customer deposits and FHLB advances, mature or reprice more or less frequently, or on a different basis, than its interest-earning assets, which consist primarily of loans, mortgage-backed securities and investment securities. While having assets that mature or reprice more rapidly than liabilities may be beneficial in times of rising interest rates, such an asset/liability structure may have the opposite effect during periods of declining interest rates. Conversely, having liabilities that reprice or mature more rapidly than assets may adversely affect net interest income during periods of rising interest rates. As of September 30, 2010, Franklin was rated in the most favorable interest rate risk category under OTS guidelines.

The following rate/volume analysis describes the extent to which changes in interest rates and the volume of interest related assets and liabilities have affected net interest income during the periods indicated.

		For the nine month periods ended Sept. 30,
		2010 vs 2009
										Total
		Increase (decrease) due to								increase
		Volume				Rate				(decrease)
		(Dollars in thousands)
Interest income attributable to:
Loans receivable (1)		$	(1,216	)		$	(272	)		$	(1,488	)
Mortgage-backed securities			(64	)			(14	)			(78	)
Investment securities			22				(84	)			(62	)
FHLB stock			—				(6	)			(6	)
Total interest-earning assets		$	(1,258	)		$	(376	)		$	(1,634	)
Interest expense attributable to:
Demand deposits		$	(6	)		$	5			$	(1	)
Savings accounts			52				(123	)			(71	)
Certificates			(663	)			(901	)			(1,564	)
FHLB advances and other borrowings			(568	)			(14	)			(582	)
Total interest-bearing liabilities		$	(1,185	)		$	(1,033	)		$	(2,218	)
Increase (decrease) in net interest income		$	(73	)		$	657			$	584

As the table below indicates, Franklin’s interest rate spread (the yield on interest-earning assets less the cost of interest-bearing liabilities) was 2.61% for the nine months ended September 30, 2010, compared to 2.01% for the same period in 2009. The increase in the interest rate spread was the result of a decrease in the cost of interest-bearing liabilities from 3.34% for the nine months ended September 30, 2009, to 2.55% for the same nine-month period in 2010. During the same period, the yield on interest-earning assets decreased from 5.35% to 5.16%. The majority of the decrease in the cost of interest-bearing liabilities is the result of decreases in the costs of savings deposits from 0.82% to 0.43% and certificates from 4.00% to 3.26%. The decrease in the yield on interest-earning assets is the result of a decrease in the yield on loans from 5.44% to 5.30% and investment securities from 4.07% to 3.37%.

		For the nine months ended September 30, 2010
		Average
		outstanding				Yield/cost
		(Dollars in thousands)
Average interest-earning assets
Loans		$	233,342				5.30	%
Mortgage-backed securities			5,846				4.74	%
Investment securities			15,790				3.37	%
FHLB stock			4,991				4.49	%
Total		$	259,969				5.16	%
Average interest-bearing liabilities
Demand deposits		$	40,522				0.38	%
Savings accounts			36,623				0.43	%
Certificates			152,157				3.26	%
FHLB advances			30,364				4.46	%
Total		$	259,666				2.55	%
Net interest-earning assets/interest rate spread		$	303				2.61	%

		For the nine months ended September 30, 2009
		Average
		outstanding				Yield/cost
		(Dollars in thousands)
Average interest-earning assets
Loans		$	263,781				5.44	%
Mortgage-backed securities			7,614				5.01	%
Investment securities			15,102				4.07	%
FHLB stock			4,991				4.65	%
Total		$	291,488				5.35	%
Average interest-bearing liabilities
Demand deposits		$	32,956				0.48	%
Savings accounts			30,410				0.82	%
Certificates			176,157				4.00	%
FHLB advances			47,325				4.50	%
Total		$	286,848				3.34	%
Net interest-earning assets/interest rate spread		$	4,640				2.01	%