##### Table of Contents



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
  Delaware
    
    31-1221029(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification Number)
 4750 Ashwood Drive, Cincinnati, Ohio 45241
   (Registrants telephone number, including area code)
 (Former name, former address and former fiscal year, if changed since last report)
 Yes þ No o
 Yes o No o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non accelerated filer o
    
    Smaller reporting company þ
 Yes o No þ
 Applicable Only to Corporate Issuers




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##### 



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




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##### Table of Contents



ITEM 1. FINANCIAL STATEMENTS
 FIRST FRANKLIN CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
  Sept. 30, 2010
    
    
    Dec. 31, 2009(Unaudited)ASSETSCash, including certificates of deposit and other interest-earning
deposits of $100 at 09/30/10 and $100 at 12/31/09
    
    $
    4,142
    
    
    $
    6,875Investment 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
    
    
    
    20,947Mortgage-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
    
    
    
    2,809Securities held-to-maturity, at amortized cost
(market value of $3,271 at 09/30/10 and $4,155 at 12/31/09)
    
    
    3,070
    
    
    
    3,989Loans held for sale
    
    
    14,896
    
    
    
    7,552Loans receivable, net
    
    
    211,207
    
    
    
    236,085Investment in Federal Home Loan Bank of Cincinnati stock, at cost
    
    
    4,991
    
    
    
    4,991Real estate owned, net
    
    
    1,915
    
    
    
    2,792Accrued interest receivable
    
    
    1,080
    
    
    
    1,135Property and equipment, net
    
    
    3,194
    
    
    
    3,448Bank owned life insurance
    
    
    6,146
    
    
    
    5,983Other assets
    
    
    5,686
    
    
    
    5,114Total assets
    
    $
    274,856
    
    
    $
    301,720LIABILITIESDeposits
    
    $
    225,667
    
    
    $
    244,010Borrowings
    
    
    23,924
    
    
    
    32,419Advances by borrowers for taxes and insurance
    
    
    1,562
    
    
    
    2,160Other liabilities
    
    
    2,472
    
    
    
    786Total liabilities
    
    
    253,625
    
    
    
    279,375Minority interest in consolidated subsidiary
    
    
    55
    
    
    
    140STOCKHOLDERS EQUITYPreferred 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
    
    
    
    13Additional paid-in capital
    
    
    6,261
    
    
    
    6,189Treasury 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
    
    
    
    19,378Accumulated 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
   3




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##### Table of Contents



FIRST FRANKLIN CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
  For the three months ended
    
    
    For the nine months endedSept. 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
    
    
    $
    10,768Mortgage-backed securities
    
    
    62
    
    
    
    88
    
    
    
    208
    
    
    
    286Investments
    
    
    151
    
    
    
    203
    
    
    
    567
    
    
    
    6353,200
    
    
    
    3,762
    
    
    
    10,055
    
    
    
    11,689Interest expense:Deposits
    
    
    1,246
    
    
    
    1,838
    
    
    
    3,951
    
    
    
    5,587Borrowings
    
    
    294
    
    
    
    464
    
    
    
    1,016
    
    
    
    1,5981,540
    
    
    
    2,302
    
    
    
    4,967
    
    
    
    7,185Net interest income
    
    
    1,660
    
    
    
    1,460
    
    
    
    5,088
    
    
    
    4,504Provision for loan losses
    
    
    957
    
    
    
    1,651
    
    
    
    1,641
    
    
    
    1,898Net interest income (expense) after
provision for loan losses
    
    
    703
    
    
    
    (191
    )
    
    
    3,447
    
    
    
    2,606Noninterest income:Gain on loans sold
    
    
    986
    
    
    
    463
    
    
    
    2,093
    
    
    
    1,588Gain on sale of investments
    
    
    4
    
    
    
    
    
    
    
    27
    
    
    
    1Service fees on checking accounts
    
    
    216
    
    
    
    235
    
    
    
    644
    
    
    
    657Other income
    
    
    488
    
    
    
    325
    
    
    
    1,153
    
    
    
    9551,694
    
    
    
    1,023
    
    
    
    3,917
    
    
    
    3,201Noninterest expense:Salaries and employee benefits
    
    
    1,636
    
    
    
    1,049
    
    
    
    4,033
    
    
    
    3,134Occupancy
    
    
    251
    
    
    
    275
    
    
    
    797
    
    
    
    818Federal deposit insurance premiums
    
    
    171
    
    
    
    100
    
    
    
    512
    
    
    
    298Advertising
    
    
    31
    
    
    
    37
    
    
    
    123
    
    
    
    94Service bureau
    
    
    128
    
    
    
    132
    
    
    
    388
    
    
    
    435Other
    
    
    1,355
    
    
    
    968
    
    
    
    3,718
    
    
    
    2,3753,572
    
    
    
    2,561
    
    
    
    9,571
    
    
    
    7,154Loss 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
    
    
    $
    20,919Net Loss
    
    
    (755
    )
    
    
    (1,132
    )
    
    
    (1,395
    )
    
    
    (865
    )Retained Earnings-end of period
    
    $
    17,983
    
    
    $
    20,054
    
    
    $
    17,983
    
    
    $
    20,054Net loss per common share:Basic
    
    $
    (0.45
    )
    
    $
    (0.68
    )
    
    $
    (0.83
    )
    
    $
    (0.52
    )Diluted
    
    $
    (0.45
    )
    
    $
    (0.68
    )
    
    $
    (0.83
    )
    
    $
    (0.52
    )
   4




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##### Table of Contents



FIRST FRANKLIN CORPORATION AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
  For the nine months endedSept. 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
    
    
    
    1,898Gain on sale of investments
    
    
    (27
    )
    
    
    (1
    )Gain on sale of loans
    
    
    (2,093
    )
    
    
    (1,588
    )Loss on sale of real estate owned
    
    
    79
    
    
    
    345Gain on sale of fixed assets
    
    
    (3
    )
    
    
    Provision for real estate owned
    
    
    12
    
    
    
    Impairment of mortgage servicing rights
    
    
    79
    
    
    
    Depreciation
    
    
    244
    
    
    
    249Amortization
    
    
    57
    
    
    
    (2
    )Deferred income taxes
    
    
    (812
    )
    
    
    (816
    )Deferred loan fees
    
    
    110
    
    
    
    3Proceeds from sale of loans originated for sale
    
    
    122,233
    
    
    
    131,423Disbursements 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
    
    
    
    185Increase in other assets
    
    
    (50
    )
    
    
    (139
    )Increase in other liabilities
    
    
    1,686
    
    
    
    57Other, net
    
    
    (85
    )
    
    
    Net cash used by operating activities
    
    
    (8,009
    )
    
    
    (8,756
    )Cash flows from investing activities:Net change in loans receivable
    
    
    22,643
    
    
    
    20,301Principal reduction on mortgage-backed securities
    
    
    1,492
    
    
    
    1,276Purchase of available-for-sale investment securities:
    
    
    (14,121
    )
    
    
    (12,174
    )Proceeds from maturities/calls of investment securities:Available-for-sale
    
    
    19,250
    
    
    
    11,540Net real estate owned activity
    
    
    3,363
    
    
    
    373Proceeds for the sale of fixed assets
    
    
    137
    
    
    
    Capital expenditures
    
    
    (124
    )
    
    
    (213
    )Net cash provided by investing activities
    
    
    32,640
    
    
    
    21,103Cash flows from financing activities:Net change in deposits
    
    
    (18,343
    )
    
    
    19,124Net 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
    
    
    
    7,438Cash at end of year
    
    $
    4,142
    
    
    $
    5,585Supplemental disclosure of cash flow information:Cash paid during the year for:Interest, including interest credited to savings accounts
    
    
    4,950
    
    
    
    5,582Income taxes
    
    
    
    
    
    
    150Supplemental disclosure of noncash activities:Real estate acquired in settlement of loans
    
    
    2,577
    
    
    
    1,433Change in unrealized gain (loss) on available-for sale securities, net of taxes
    
    
    294
    
    
    
    66
   5




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FIRST FRANKLIN CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 For the three and nine months ended September 30, 2010 and 2009
 BASIS OF PRESENTATION
  ORGANIZATION
        6




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CRITICAL ACCOUNTING POLICIES
       7




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##### Table of Contents



INVESTMENT AND MORTGAGE-BACKED SECURITIES
  September 30, 2010(Dollars in thousands)Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    MarketCost
    
    
    Gains
    
    
    Losses
    
    
    ValueAvailable-for-sale:U.S. Treasury securities and obligations of U.S.
Government corporations and agencies
    
    $
    13,494
    
    
    
    110
    
    
    
    
    
    
    
    13,604Obligations of states and municipalities
    
    
    1,590
    
    
    
    98
    
    
    
    7
    
    
    
    1,681Community Reinvestment Act fund
    
    
    1,000
    
    
    
    13
    
    
    
    
    
    
    
    1,013$
    16,084
    
    
    
    221
    
    
    
    7
    
    
    
    16,298
 December 31, 2009(Dollars in thousands)Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    MarketCost
    
    
    Gains
    
    
    Losses
    
    
    ValueAvailable-for-sale:U.S. Treasury securities and obligations of U.S.
Government corporations and agencies
    
    $
    18,720
    
    
    
    16
    
    
    
    273
    
    
    
    18,463Obligations of states and municipalities
    
    
    1,465
    
    
    
    31
    
    
    
    10
    
    
    
    1,486Community Reinvestment Act fund
    
    
    1,000
    
    
    
    
    
    
    
    2
    
    
    
    998$
    21,185
    
    
    
    47
    
    
    
    285
    
    
    
    20,947
  EstimatedmarketAmortized cost
    
    
    value(Dollars in thousands)Available-for-sale:Due in one year or less
    
    $
    
    
    
    
    Due after one year through five years
    
    
    100
    
    
    
    105Due after five years thorugh ten years
    
    
    2,000
    
    
    
    2,004Due after ten years
    
    
    12,984
    
    
    
    13,17615,084
    
    
    
    15,285Community Reinvestment Act Fund
    
    
    1,000
    
    
    
    1,013$
    16,084
    
    
    
    16,298
   8




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##### Table of Contents



September 30, 2010(Dollars in thousands)Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    MarketCost
    
    
    Gains
    
    
    Losses
    
    
    ValueAvailable-for-sale:FHLMC certificates
    
    $
    579
    
    
    
    36
    
    
    
    
    
    
    
    615FNMA certificates
    
    
    300
    
    
    
    8
    
    
    
    
    
    
    
    308GNMA certificates
    
    
    1,076
    
    
    
    25
    
    
    
    
    
    
    
    1,101Collateralized mortgage obligations
    
    
    203
    
    
    
    4
    
    
    
    
    
    
    
    207$
    2,158
    
    
    
    73
    
    
    
    
    
    
    
    2,231Held-to-maturity:FHLMC certificates
    
    $
    101
    
    
    
    12
    
    
    
    
    
    
    
    113FNMA certificates
    
    
    2,902
    
    
    
    180
    
    
    
    
    
    
    
    3,082GNMA certificates
    
    
    67
    
    
    
    9
    
    
    
    
    
    
    
    76$
    3,070
    
    
    
    201
    
    
    
    
    
    
    
    3,271
 December 31, 2009(Dollars in thousands)Gross
    
    
    Gross
    
    
    EstimatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    MarketCost
    
    
    Gains
    
    
    Losses
    
    
    ValueAvailable-for-sale:FHLMC certificates
    
    $
    956
    
    
    
    53
    
    
    
    
    
    
    
    1,009FNMA certificates
    
    
    338
    
    
    
    5
    
    
    
    
    
    
    
    343GNMA certificates
    
    
    1,203
    
    
    
    15
    
    
    
    
    
    
    
    1,218Collateralized mortgage obligations
    
    
    234
    
    
    
    5
    
    
    
    
    
    
    
    239$
    2,731
    
    
    
    78
    
    
    
    
    
    
    
    2,809Held-to-maturity:FHLMC certificates
    
    $
    141
    
    
    
    14
    
    
    
    
    
    
    
    155FNMA certificates
    
    
    3,773
    
    
    
    144
    
    
    
    
    
    
    
    3,917GNMA certificates
    
    
    75
    
    
    
    8
    
    
    
    
    
    
    
    83$
    3,989
    
    
    
    166
    
    
    
    
    
    
    
    4,155
  9




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##### Table of Contents



September 30, 2010(Dollars in thousands)Less than 12 Months
    
    
    12 Months or Longer
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesObligations of state and municipalities
    
    $
    48
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    48
    
    
    
    7Number of Investments
    
    
    1
  STOCK OPTION PLAN
   2010
    
    
    2009Options outstanding at the beginning of the year
    
    
    54,259
    
    
    
    71,818Granted
    
    
    
    
    
    
    Canceled/Forfeited
    
    
    (30,432
    )
    
    
    (17,559
    )Excercised
    
    
    
    
    
    
    Options outstanding at the end of the year
    
    
    23,827
    
    
    
    54,259
    10




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##### Table of Contents



2010
    
    
    2009Options outstanding at the beginning of the year
    
    
    100,363
    
    
    
    105,238Granted
    
    
    38,000
    
    
    
    Canceled/Forfeited
    
    
    (29,578
    )
    
    
    (4,875
    )Excercised
    
    
    (5,000
    )
    
    
    Options outstanding at the end of the year
    
    
    103,785
    
    
    
    100,363
   Options Outstanding
    
    
    Excercisable OptionsWeightedAverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedRemaining
    
    
    Average
    
    
    
    
    
    
    AverageContractual
    
    
    Exercise
    
    
    
    
    
    
    ExerciseRange of Exercise Price
    
    Shares
    
    
    Life (Years)
    
    
    Price
    
    
    Shares
    
    
    Price0.01 to 7.74
    
    
    33,000
    
    
    
    1.80
    
    
    $
    0.01
    
    
    
    
    
    
    $
    7.75 to 10.00
    
    
    7,594
    
    
    
    0.50
    
    
    
    7.75
    
    
    
    7,594
    
    
    
    7.7510.01 to 15.00
    
    
    49,700
    
    
    
    1.30
    
    
    
    11.97
    
    
    
    49,700
    
    
    
    11.9715.01 to 20.00
    
    
    17,590
    
    
    
    3.50
    
    
    
    17.67
    
    
    
    17,590
    
    
    
    17.6720.01 to 25.00
    
    
    19,728
    
    
    
    3.70
    
    
    
    20.38
    
    
    
    19,728
    
    
    
    20.38127,612
    
    
    
    2.16
    
    
    $
    11.56
    
    
    
    94,612
    
    
    $
    11.55
     Level 1
    
    Quoted prices in active markets for identical assets or liabilitiesLevel 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 liabilitiesLevel 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.
  11




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Fair Value Measurements atSeptember 30, 2010(Dollars in thousands)Quotedprices inactive
    
    
    Significant
    
    
    Significantmarkets for
    
    
    other
    
    
    otheridentical
    
    
    observable
    
    
    unobservableassets
    
    
    inputs
    
    
    inputsTotal
    
    
    (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 atDecember 31, 2009(Dollars in thousands)Quotedprices inactive
    
    
    Significant
    
    
    Significantmarkets for
    
    
    other
    
    
    otheridentical
    
    
    observable
    
    
    unobservableassets
    
    
    inputs
    
    
    inputsTotal
    
    
    (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
    
    
    
    
  12




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##### Table of Contents



Cash and Cash Equivalents and Investment in FHLB Stock
  Investment and Mortgage-Backed Securities
  Loans Receivable
   Deposits
  Borrowed Money
  Reclassifications
   13




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##### Table of Contents



Commitments to Extend Credit
   September 30, 2010(Dollars in thousands)Carrying
    
    
    Fairamount
    
    
    ValueFinancial Assets:Cash and cash equivalents
    
    $
    4,142
    
    
    
    4,142Investment securities
    
    
    16,298
    
    
    
    16,298Mortgage-backed securities
    
    
    5,301
    
    
    
    5,502Loans receivable
    
    
    226,103
    
    
    
    232,135Investments in FHLB Stock
    
    
    4,991
    
    
    
    4,991Financial liabilities:Deposits
    
    $
    225,667
    
    
    
    234,833Borrowed money
    
    
    23,924
    
    
    
    25,906
 September 30, 2010(Dollars in thousands)Contractual
    
    
    Fairamount
    
    
    ValueUnrecognized financial instruments:Commitements to extend credit
    
    $
    2,996
    
    
    
    2,996Unfunded construction loans
    
    
    362
    
    
    
    362Undisbursed lines of credit
    
    
    18,203
    
    
    
    18,203
  14




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##### Table of Contents



2010
    
    $
    5,6392011
    
    
    23,8602012
    
    
    30,0302013
    
    
    35,7812014
    
    
    43,259Thereafter
    
    
    1,082,360$
    1,220,929
      15




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##### Table of Contents



16




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##### Table of Contents



17




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 GENERAL
   The Franklin Savings and Loan Company
       18




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##### Table of Contents



Forward-Looking Statements
  RECENT DEVELOPMENTS
   
    
    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.
  19




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##### Table of Contents



FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
 Assets
  
    
    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
   Gross
    
    
    Gross
    
    
    EsitmatedAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    MarketCost
    
    
    Gains
    
    
    Losses
    
    
    Value(Dollars in thousands)Available-for-sale:Investment securities
    
    $
    16,084
    
    
    
    221
    
    
    
    7
    
    
    
    16,298Mortgage-backed securities
    
    
    2,158
    
    
    
    73
    
    
    
    
    
    
    
    2,231Held-to-maturityMortgage-backed securities
    
    
    3,070
    
    
    
    201
    
    
    
    
    
    
    
    3,271$
    21,312
    
    
    
    495
    
    
    
    7
    
    
    
    21,800
  Loans receivable
   20




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##### Table of Contents



Asset Quality
      21




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##### Table of Contents



(Dollars in thousands)Balance at beginning of period
    
    $
    4,915Charge offs
    
    
    (958
    )Additions charged to operations
    
    
    1,641Recoveries
    
    
    223Balance at end of period
    
    $
    5,821
   Liabilities
  
    
    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
   22




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##### Table of Contents



Capital Standard
    
    Actual
    
    
    Required
    
    
    Excess
    
    
    Actual
    
    
    Required
    
    
    Excess(Dollars in thousands)As of September 30, 2010Core
    
    $
    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, 2009Core
    
    $
    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, 2009Core
    
    $
    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 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.
  23




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##### Table of Contents



Net Interest Income
  
    
    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.
   For the nine month periods ended Sept. 30,2010 vs 2009TotalIncrease (decrease) due to
    
    
    increaseVolume
    
    
    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
 (1)
    
    Includes non-accruing loans.  24




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##### Table of Contents



For the nine months ended September 30, 2010Averageoutstanding
    
    
    Yield/cost(Dollars in thousands)Average interest-earning assetsLoans
    
    $
    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 liabilitiesDemand 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, 2009Averageoutstanding
    
    
    Yield/cost(Dollars in thousands)Average interest-earning assetsLoans
    
    $
    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 liabilitiesDemand 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
    %
  25




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##### Table of Contents



Noninterest Income and Expense
    COMPREHENSIVE INCOME
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
    26




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##### Table of Contents



(a)
    
    None
 (b)
    
    None
 (c)
    
    None
 
  (a)
    
    None
 (b)
    
    None
 
  
   
  31.1
    
    
    CEO certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    
    CFO certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002.32.1
    
    
    CEO certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    
    CFO certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  27




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##### Table of Contents



FIRST FRANKLIN CORPORATION/s/ John J. KuntzJohn J. KuntzChairman, President and 
Chief Executive Officer/s/ Daniel T. VoelpelDaniel T. VoelpelVice President and Chief Financial Officer
(Principal Financial Officer)
   28