<PAGE> 1
FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
For the Fiscal Year Ended December 31, 1994,
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from______________to___________________
Commission File Number: 0-16362
FIRST FRANKLIN CORPORATION
----------------------------------------------
(Name of small business issuer in its charter)
Delaware 31-1221029
------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
401 East Court Street, Cincinnati, Ohio 45202
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (513) 721-1031
--------------
Securities registered pursuant to Section 12(b) of the Exchange Act:
None
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Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $.01 per share
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or
for such shorter period that the issuer was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes X
No -----
-----
Check if there is no disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
The aggregate market value of the voting stock held by
non-affiliates of the Registrant, computed by reference to the average of the
bid and asked price of such stock as of March 15, 1995, was $10.0 million.
(The exclusion from such amount of the market value of the shares owned by any
person shall not be deemed an admission by the Registrant that such person is
an affiliate of the Registrant.)
The issuer's revenues for the fiscal year ended December 31, 1994,
were $13,732,871.
1,175,786 of the issuer's common shares were issued and outstanding
on March 15, 1995.
<PAGE> 2
PART I
------
ITEM 1. BUSINESS
FIRST FRANKLIN CORPORATION
First Franklin Corporation (the "Company") was incorporated under the laws
of the State of Delaware in September 1987 by authorization of the Board of
Directors of The Franklin Savings and Loan Company ("Franklin") for the purpose
of acquiring and holding all of the outstanding stock of Franklin issued upon
its conversion from an Ohio mutual savings and loan association to an Ohio
stock savings and loan association (the "Conversion"). On January 25, 1988,
the Company acquired all of the shares of Franklin in connection with
Franklin's Conversion.
As a Delaware corporation, the Company is authorized to engage in any
activity permitted by Delaware General Corporation Law. As a unitary savings
and loan holding company, the Company is subject to regulation and examination
by the Office of Thrift Supervision (the "OTS"). The assets of the Company
consist primarily of cash, investment securities and the stock of Franklin and
DirectTeller Systems, Inc.
The executive offices of the Company are located at 401 East Court Street,
Cincinnati, Ohio 45202, and its telephone number is (513) 721-1031.
THE FRANKLIN SAVINGS AND LOAN COMPANY
Franklin, an Ohio chartered stock savings and loan association, conducts
business from its main office in Cincinnati, Ohio, and its seven branch offices
in Hamilton County, Ohio. Franklin was originally chartered under the name
Green Street Number 2 Loan and Building Company in 1883. At December 31, 1994,
Franklin had approximately $189.2 million of assets, deposits of approximately
$173.0 million and stockholders' equity of approximately $12.8 million.
The principal business of Franklin is the acceptance of savings deposits
from the general public and the origination of mortgage loans for the purpose
of financing, refinancing or constructing one- to four-family owner occupied
residential real estate. To a lesser extent, Franklin provides loans secured
by multi-family real estate and nonresidential real estate and for consumer
purposes.
Accepting deposits and originating loans subjects Franklin to interest rate
risks where there is a timing difference between the repricing or maturity of
the deposits and the repricing or maturity of the loans. Franklin originates
adjustable-rate mortgage loans ("ARMs") and purchases adjustable-rate
mortgage-backed securities in order to reduce the gap between the effective
maturities of its liabilities and assets. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Asset/Liability
Management" in the Annual Report to Stockholders (the "Annual Report") attached
hereto as Exhibit 13.
Franklin's income is derived primarily from interest and fees earned in
connection with its lending activities, and its principal expenses are interest
paid on savings deposits and operating expenses.
Franklin's deposits are insured by the Federal Deposit Insurance Corporation
(the "FDIC") in the Savings Association Insurance Fund (the "SAIF") up to
maximum levels permitted. Franklin is subject to examination and comprehensive
regulation by the Ohio Department of Commerce, Division of Savings and Loan
Associations (the "Division"), the OTS and the FDIC. Franklin is also a member
of the Federal Home Loan Bank (the "FHLB") of Cincinnati, which is one of the
12 regional banks comprising the FHLB System. Franklin is subject to
regulations of the Board of Governors of the Federal Reserve System (the "FRB")
with respect to reserves required to be maintained against certain deposits and
other matters. See "Regulation".
Franklin's executive offices are located at 401 East Court Street,
Cincinnati, Ohio 45202, and its telephone number at that address is (513)
721-0808.
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<PAGE> 3
LENDING ACTIVITIES
GENERAL. The primary source of revenue to Franklin is interest and fee
income from lending activities. The principal lending activity of Franklin is
investing in conventional first mortgage real estate loans to enable borrowers
to purchase, refinance or construct one- to four-family residential real
property. Franklin also makes loans secured by multi-family residential and
nonresidential real estate and consumer loans.
Franklin's current lending strategy is to originate and sell fixed-rate
loans, retaining the servicing rights on such loans, and to originate
adjustable-rate loans for retention in its own portfolio. As consumer demand
for ARMs declines, as was the case during 1992 and 1993, Franklin purchases
adjustable-rate mortgage-backed securities to offset the lack of demand in the
market area for ARMs. During 1994, demand for ARMs increased to levels which
allowed Franklin to reduce its purchases of adjustable-rate mortgage-backed
securities. The amount of loans held for sale at December 31, 1994, was less
than one percent of Franklin's entire portfolio and, therefore, is not reported
separately on the Company's balance sheet.
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<PAGE> 4
The following tables set forth information concerning the composition of
Franklin's loan portfolio, including mortgage-backed securities, in dollar
amounts and in percentages, by type of loan and by type of security, and
presents a reconciliation of total loans receivable before net items:
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------
1994 1993 1992
------------------- ------------------- ---------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Type of loan
------------
Loans secured by real
estate:
Residential(1) $152,568 86.98 $154,755 87.91% $166,060 88.65%
Nonresidential 11,372 6.48 12,541 7.12 11,975 6.39
Construction 6,596 3.76 4,278 2.43 3,957 2.11
Consumer and other loans 4,862 2.78 4,470 2.54 5,339 2.85
-------- ------ -------- ------ -------- ------
Total loans receivable
(before net items) $175,398 100.00% $176,044 100.00% $187,331 100.00%
======== ====== ======== ====== ======== ======
Type of rate
------------
Fixed rate $ 56,891 32.44 $ 56,068 31.85% $ 45,496 24.29%
Adjustable rate 115,193 65.68 114,748 65.18 132,726 70.85
Passbook adjustable rate(2) 3,314 1.88 5,228 2.97 9,109 4.86
-------- ------ -------- ------ -------- ------
Total loans receivable
(before net items) $175,398 100.00% $176,044 100.00% $187,331 100.00%
======== ====== ======== ====== ======== ======
Type of security
----------------
Residential:
Single family $139,581 79.58 $138,545 78.70% $146,561 78.24%
2-4 family 7,738 4.41 8,160 4.64 9,235 4.93
Multi-family 9,885 5.64 11,073 6.29 14,022 7.49
Nonresidential real estate 13,332 7.60 13,796 7.84 12,174 6.50
Student loans 1,182 0.67 1,221 0.69 1,448 0.77
Consumer and other loans 3,680 2.10 3,249 1.84 3,891 2.07
-------- ------ -------- ------ -------- ------
Total loans receivable
(before net items) $175,398 100.00% $176,044 100.00% $187,331 100.00%
======== ====== ======== ====== ======== ======
-----------------------------------------------
1991 1990
-------------------- --------------------
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Type of loan
------------
Loans secured by real
estate:
Residential(1) $152,996 87.82% $149,179 86.14%
Nonresidential 13,281 7.62 13,860 8.00
Construction 1,939 1.11 3,832 2.21
Consumer and other loans 6,015 3.45 6,307 3.65
-------- ------ -------- ------
Total loans receivable
(before net items) $174,231 100.00% $173,178 100.00%
======== ====== ======== ======
Type of rate
------------
Fixed rate $ 37,720 21.65% $ 40,302 23.27%
Adjustable rate 123,604 70.94 117,519 67.86
Passbook adjustable rate(2) 12,907 7.41 15,357 8.87
-------- ------ -------- ------
Total loans receivable
(before net items) $174,231 100.00% $173,178 100.00%
======== ====== ======== ======
Type of security
----------------
Residential:
Single family $130,444 74.86% $127,473 73.61%
2-4 family 9,003 5.17 9,726 5.62
Multi-family 15,388 8.83 15,812 9.13
Nonresidential real estate 13,381 7.68 13,860 8.00
Student loans 1,672 0.96 2,067 1.19
Consumer and other loans 4,343 2.50 4,240 2.45
-------- ------ -------- ------
Total loans receivable
(before net items) $174,231 100.00% $173,178 100.00%
======== ====== ======== ======
____________________________________
<FN>
(1) Includes $36.1, $39.1, $36.4, $10.7 and $1.2 million of mortgage-backed securities at December 31, 1994, 1993, 1992,
1991 and 1990, respectively.
(2) Loans have interest rates that adjust in accordance with the rates paid on Franklin's passbook savings accounts.
</TABLE>
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<PAGE> 5
The following table presents a reconciliation of Franklin's loans receivable
and mortgage-backed securities after net items:
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Gross loans receivable and
mortgage-backed securities
(before net items) $175,398 $176,044 $187,331 $174,231 $173,178
Less:
Loans in process 2,933 2,559 1,944 1,150 1,888
Deferred loan fees 737 959 1,256 1,529 1,826
Allowance for possible loan
losses 1,256 1,248 1,345 976 895
Unearned income 175 185 45 46 72
Unrealized loss on available
for sale mortgage-backed
securities 801 - - - -
-------- ---------- ---------- ---------- ----------
Total 5,902 4,951 4,590 3,701 4,681
------- -------- -------- -------- --------
Loans receivable and mortgage-
backed securities - net $169,496 $171,093 $182,741 $170,530 $168,497
======== ======== ======== ======== ========
</TABLE>
The following schedule presents the contractual maturity of Franklin's loan
and mortgage-backed securities portfolio at December 31, 1994. Mortgages which
have adjustable or renegotiable interest rates are shown as maturing in the
period during which the interest rates are subject to change. Loans with
interest rates tied to the interest rates of Franklin's passbook accounts are
included as maturing during the period ended December 31, 1995.
<TABLE>
<CAPTION>
One- to four-family
real estate Other real estate
mortgage loans mortgage loans
and mortgage- and mortgage- Consumer and
backed securities backed securities other loans Total
----------------------- ----------------------- ------------------------ ---------------------
Weighted Weighted Weighted Weighted
average average average average
Amount rate Amount rate Amount rate Amount rate
------ ---------- ------ ---------- ------ ---------- ------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Due during years
ended December 31:
1995 $ 82,920 6.63% $10,560 7.88% $2,908 7.86% $96,388 6.80%
1996 and 1997 18,098 7.04 6,980 8.65 512 8.92 25,590 7.52
1998 and 1999 2,880 7.29 3,492 9.35 816 7.81 7,188 8.35
2000 to 2004 6,346 6.66 1,507 9.20 409 8.97 8,262 7.24
2005 to 2014 24,875 7.03 604 9.33 193 9.14 25,672 7.10
2015 and following 12,200 7.89 74 9.05 24 9.21 12,298 7.90
--------- ---- --------- ----- ------ ---- --------- ----
Total $147,319 6.87% $23,217 8.46% $4,862 8.11% $175,398 7.11%
======== ==== ======= ==== ====== ==== ======== ====
</TABLE>
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<PAGE> 6
As of December 31, 1994, the total amount of loans and mortgage-backed
securities maturing or repricing after December 31, 1995 consisted of $28.0
million of adjustable-rate loans and $51.0 million of fixed-rate loans.
The following table shows the loan origination, purchase and sale activity,
including mortgage-backed securities, of Franklin during the periods indicated:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Loans originated:
One- to four-family $29,299 $58,452 $ 68,622 $28,453 $25,964
Multi-family 695 919 - 163 961
Nonresidential 1,165 4,122 1,522 1,529 610
Land 51 1,025 119 242 167
Consumer 2,505 2,651 2,686 2,221 2,731
-------- -------- -------- -------- --------
Total loans originated 33,715 67,169 72,949 32,608 30,433
-------- -------- -------- -------- --------
Mortgage-backed securities
purchased 2,635 22,246 27,155 9,486 -
Loans purchased - 406 - - -
-------- -------- -------- -------- --------
Total loans originated
and mortgage-backed
securities and loans
purchased 36,350 89,821 100,104 42,094 30,433
-------- -------- -------- -------- --------
Loans sold:
One- to four-family 3,893 39,849 41,451 16,945 6,448
Mortgage-backed securities
sold - 13,717 - - -
Principal reductions and
payoffs 33,103 47,542 45,553 24,096 22,005
-------- -------- -------- -------- --------
Decrease (increase) in loans
receivable (646) (11,287) 13,100 1,053 1,980
Increase (decrease) in net
items (951) (361) (889) 980 (223)
-------- -------- -------- -------- --------
Net increase (decrease) in
loans receivable $(1,597) $(11,648) $12,211 $ 2,033 $ 1,757
========= ======== ======== ======== ========
</TABLE>
In addition to interest earned on loans, Franklin receives fees for loan
originations, prepayments, modifications, late payments, transfers of loans due
to changes of property ownership and other miscellaneous services. The fees
vary from time to time, generally depending on the supply of funds and other
competitive conditions in the mortgage market and the time and costs incurred
by Franklin in processing the request. When loans are sold, Franklin typically
retains the responsibility for servicing the loans. During 1994, Franklin sold
approximately $3.9 million in fixed-rate residential loans to the Federal Home
Loan Mortgage Corporation ("FHLMC"). At December 31, 1994, Franklin serviced
$65.1 million of loans sold to others. Other loan fees and charges
representing servicing costs are recorded as income when collected. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Asset/Liability Management, and -Liquidity" in the Annual Report.
Loan originations during 1994 were $33.7 million, a 49.8% decrease from 1993
levels and a 53.8% decrease from 1992 levels. The decline in loan originations
during 1994 was the result of a decrease in loan refinancing due to an increase
in interest rates during the year. See "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Asset/Liability Management,
and -Liquidity" in the Annual Report.
- 6 -
<PAGE> 7
Loans are originated primarily within 25 miles of Cincinnati and come from
various sources including walk-ins, existing customers, customer referrals,
loan solicitors employed by Franklin, real estate agents and, to a lesser
extent, loan brokers and builders. Loan applications are reviewed by salaried
employees. Franklin's loan committee, comprised of at least two officers, one
of which must be the Chief Lending Officer, have the authority to approve real
estate loans of up to $350,000. The President and Chief Executive Officer has
authority to approve loans in amounts of up to $1.0 million. Other loans must
be approved by the Executive Committee or the Board of Directors. Real estate
pledged to secure a loan is appraised by a designated appraiser. It is
currently the policy of Franklin to obtain title insurance on all first
mortgage loans originated.
All mortgage loans originated by Franklin contain a "due-on-sale" clause
providing that Franklin may declare the unpaid principal balance due and
payable upon the sale or other transfer of the mortgaged property. Franklin
enforces these due-on-sale clauses to the extent permitted by law, taking other
business factors into consideration.
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LENDING
The cornerstone of Franklin's lending program has been the origination of
loans secured by one- to four-family residences. At December 31, 1994, $147.3
million, or 86.4%, of Franklin's real estate loan and mortgage-backed
securities portfolio consisted of loans on one- to four-family residences, the
great majority of which are located in Southwestern Ohio.
Prior to 1983, Franklin originated primarily long-term loans with interest
rates tied to its rate on passbook savings accounts. Under the terms of these
loans, Franklin may increase the note rate to the extent it raises its passbook
rate but is not required to reduce the note rate when it reduces its passbook
rate. At December 31, 1994, the current rate paid on passbook accounts was
2.75% and the average yield on the loans during 1994 was 7.81%. These loans
were originated for retention in the loan portfolio. Following the approval of
the broader lending powers contained in federal legislation and in response to
a more volatile and higher interest rate environment, Franklin commenced
originations of one- to four-family ARMs in 1983.
In order to reduce its exposure to changes in interest rates, Franklin has
attempted to deemphasize the origination of long-term, fixed-rate loans for its
own portfolio and to increase its originations of ARMs when market conditions
are favorable. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Asset/Liability Management" in the Annual
Report. At the present time, as a result of recent interest rate increases,
originations of ARMs are increasing. Franklin also originates both thirty-year
and fifteen-year fixed-rate mortgage loans, most of which will be eligible for
sale in the secondary market.
Franklin currently offers one- to four-family residential ARMs with
adjustment periods ranging from one to three years and interest rate indices
based on U.S. Treasury securities with a comparable term. Currently, most ARMs
have one year adjustment periods. Interest rate increases are generally
limited to 2% per adjustment period and 6% over the life of the loan. At
December 31, 1994, ARMs (not including loans with interest rates tied to the
rates paid on Franklin's passbook accounts) totaled $115.2 million.
Franklin has originated a number of its ARMs with initial interest rates
below those which would be indicated by reference to the repricing index.
Since the interest rate and payment amount on such loans may increase at the
next repricing date, these loans were originally underwritten assuming that the
maximum increase would be experienced at the first adjustment. Notwithstanding
the assumptions made at origination, Franklin could still experience an
increased rate of delinquencies as such loans adjust to the fully-indexed
rates. At December 31, 1994, $1.1 million of Franklin's ARMs were delinquent
thirty days or more. This represents 1.0% of all ARMs outstanding at that
date, a decrease of $900,000, or 45% from the prior year. See "Non-Performing
Assets, Classified Assets, Loan Delinquencies and Defaults."
When making a one- to four-family residential mortgage loan, Franklin
evaluates both the borrower's ability to make principal and interest payments
and the value of the property that will secure the loan. Franklin generally
makes loans on one- to four-family residential property in amounts of 80% or
less of the appraised value thereof. Where loans are made in amounts which
exceed 80% of the appraised value of the underlying real estate, Franklin's
policy is to require private mortgage insurance on a portion of the loan.
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<PAGE> 8
MULTI-FAMILY RESIDENTIAL AND NONRESIDENTIAL REAL ESTATE LENDING
As of December 31, 1994, approximately $23.2 million, or 13.6%, of
Franklin's total real estate loan and mortgage-backed securities portfolio
consisted of real estate loans secured by multi-family residential and
nonresidential properties. Franklin's multi-family residential and
nonresidential real estate loans include permanent and construction loans
secured by liens on apartments, condominiums, office buildings, churches,
warehouses and other commercial properties. Franklin does not generally
require third party takeout commitments prior to originating loans on
construction projects as it typically provides permanent financing on such
projects.
While Franklin's multi-family residential and nonresidential real estate
loans have been originated with a variety of terms, most of such loans mature
or reprice in three years or less. Loan fees on originated loans have
generally ranged from 1.5% to 2.5% of the original loan amount (plus expenses).
At December 31, 1994, $20.4 million, or 87.9%, of Franklin's multi-family
residential or nonresidential real estate loans were secured by properties
located within the State of Ohio or within 25 miles of Cincinnati.
Properties securing multi-family residential and nonresidential real estate
loans originated by Franklin are appraised at the time of the loan by
appraisers designated by Franklin (or the lead lender in the case of a loan
participation).
Franklin currently seeks to invest in loans in amounts of 80% or less of the
appraised value of the property securing the loan. In some cases, Franklin's
collateral includes junior liens on additional properties owned by the
borrower. In underwriting multi-family residential and nonresidential real
estate loans (or evaluating the purchase of a loan participation therein), it
is the policy of Franklin to consider, among other things, the terms of the
loan, the creditworthiness and experience of the borrower, the location and
quality of the collateral, the debt service coverage ratio and, if applicable,
the past performance of the project.
Multi-family residential and nonresidential real estate loans typically
involve large loan balances to single borrowers or groups of borrowers. Of
Franklin's multi-family residential and nonresidential real estate loans and
participations at December 31, 1994, three had principal balances of more than
$1.0 million and nine others had principal balances in excess of $500,000.
Federal regulations limit the amount which Franklin can lend to one borrower,
generally to 15% of unimpaired capital and surplus. As computed on the basis
of Franklin's unimpaired capital and surplus at December 31, 1994, this limit
was approximately $2.18 million. See "Regulation - Lending Limits." At
December 31, 1994, Franklin had five borrowers, or groups of borrowers, with
loans in excess of $1.0 million, for a total of $6.88 million. The largest
amount outstanding to any of these borrowers or groups of borrowers was
approximately $2.18 million.
Multi-family residential and nonresidential real estate loans are made at
higher rates and for shorter terms than those generally obtainable for one- to
four-family residential mortgage loans. Multi-family residential and
nonresidential real estate lending, however, entails additional credit risk as
compared to one- to four-family residential mortgage lending. In addition, the
payment experience on loans secured by income producing properties typically is
dependent on the successful operation of the related project and thus may be
subject to a greater extent to adverse conditions in the real estate market or
in the economy generally. Finally, because of the complexity of many
multi-family residential and nonresidential real estate projects, it may be
difficult to accurately assess the value of the underlying projects. For these
and other reasons, many thrift institutions, including Franklin, could
experience problems in certain of their investments in multi-family residential
and nonresidential real estate loans. See "Non-Performing Assets, Classified
Assets, Loan Delinquencies and Defaults."
CONSUMER LENDING
Franklin originates consumer loans for personal, family or household
purposes, such as the financing of home improvements, automobiles, boats,
recreational vehicles and education. At December 31, 1994, $4.9 million, or
2.8%, of Franklin's total loan and mortgage-backed securities portfolio
consisted of consumer loans. Although consumer loans generally involve a
higher level of risk than one- to four-family residential mortgage loans, they
generally carry higher yields and have shorter terms to maturity than such
loans.
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<PAGE> 9
NON-PERFORMING ASSETS, CLASSIFIED ASSETS, LOAN DELINQUENCIES AND DEFAULTS
When a borrower fails to make a required payment on a loan, Franklin
attempts to cause the delinquency to be cured by contacting the borrower. A
notice is mailed to the borrower after a payment is 15 days past due and again
when the loan is 30 days past due. In most cases, delinquencies are cured
promptly. When deemed appropriate by management, Franklin institutes
appropriate action to foreclose on the property or to acquire it by deed in
lieu of foreclosure. If foreclosed, real property is sold at a public sale and
may be purchased by Franklin.
Federal regulations provide for the classification of loans and other assets
such as debt and equity securities considered by the OTS to be of lesser
quality as "substandard", "doubtful" and "loss" assets. The regulations
require savings associations to classify their own assets and to establish
prudent general allowances for losses for assets classified "substandard" and
"doubtful". For the portion of assets classified as loss, an institution is
required to either establish specific allowances of 100% of the amount
classified or charge off such amount. In addition, the OTS may require the
establishment of a general allowance for loan losses based on the general
quality of the asset portfolio of an institution. Assets which do not
currently expose the institution to sufficient risk to warrant classification
in one of the aforementioned categories but possess potential weaknesses are
required to be designated "special mention" by management. At December 31,
1994, $1.86 million of Franklin's loans and other assets were classified as
"substandard" and $577,000 were classified as "loss." As of such date, no
assets were classified as "doubtful" and $2.88 million were classified "special
mention." At December 31, 1994, $5.32 million, or 3.1%, of Franklin's loans
receivable (net) were classified or special mention assets.
The table below sets forth information concerning delinquent mortgages and
other loans as of the dates indicated. The amounts presented represent the
total remaining principal balances of the related loans, rather than the actual
payment amounts which are overdue.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------
1994 1993
------------------------------ --------------------------
Number Amount Number Amount
------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
30-59 days 51 $ 889 57 $1,238
60-89 days 15 392 43 1,212
90 days and over 82 1,128 80 2,005
--- ------ --- ------
Total 148 $2,409 180 $4,455
=== ====== === ======
</TABLE>
The following table sets forth the amounts and categories of risk elements
in Franklin's loan portfolio. Loans are placed on non-accrual status when the
collection of principal and/or interest becomes doubtful or legal action to
foreclose has commenced. In addition, all loans, except one- to four-family
residential mortgage loans, are placed on non-accrual status when the
uncollected interest becomes greater than ninety days past due. All consumer
loans more than 90 days delinquent are charged against the consumer loan
allowance for loan losses unless payments are currently being received and it
appears likely that the debt will be collected. Repossessed assets include
assets acquired in settlement of loans. All loan amounts reported do not
reflect any specific allowances which have been established.
- 9 -
<PAGE> 10
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
Residential real estate $ 383 $ 945 $1,167 $ 713 $ 388
Nonresidential real estate 138 611 344 278 75
Consumer 354 173 369 242 182
------ ------- ------- ------- -------
Total 875 1,729 1,880 1,233 645
------ ------ ----- ------ -------
Total as a percentage of
total assets 0.45% 0.87% 0.90% 0.60% 0.33%
Accruing loans delinquent
more than 90 days:
Residential real estate 243 273 510 609 403
Nonresidential real estate - - - - 8
Consumer 10 3 60 4 4
------ -------- ------- -------- --------
Total 253 276 570 613 415
------ ------- ------- ------- -------
Total as a percentage of
total assets 0.13% 0.14% 0.27% 0.30% 0.21%
Repossessed assets:
Residential real estate - 54 - 134 40
Nonresidential real estate - 435 435 1,643 1,634
------- ------- ------- ------ ------
Total - 489 435 1,777 1,674
------- ------- ------- ------ ------
Total as a percentage of
total assets 0.25% 0.21% 0.87% 0.86%
Renegotiated loans 1,047 1,113 1,455 1,453 1,525
----- ------ ------ ------ ------
Total non-performing
assets $2,175 $3,607 $4,340 $5,076 $4,259
====== ====== ====== ====== ======
Total non-performing assets
as a percentage
of total assets 1.13% 1.81% 2.07% 2.48% 2.19%
====== ====== ====== ====== ======
Other loans of concern:
Residential real estate $ 587 $ 411 $1,190 $1,395 $ 491
Nonresidential real estate - - 61 62 991
Consumer 12 1 23 23 190
------ -------- -------- ------- ------
Total $ 599 $ 412 $1,274 $1,480 $1,672
===== ====== ====== ====== =====
Total as a percentage of
total assets 0.31% 0.21% 0.61% 0.72% 0.86%
==== ==== ==== ==== ====
Unallocated allowance for
loan losses $ 599 $ 595 $ 350 $ 284 $ 217
===== ====== ======= ====== ======
Total allowance for loan
losses $1,256 $1,248 $1,346 $ 977 $ 895
====== ====== ====== ====== ======
</TABLE>
For the year ended December 31, 1994, gross interest income which would have
been recorded had the non-accruing loans been current in accordance with their
original terms amounted to $68,000. The amount that was included in interest
income on such loans was $27,000 for the year ended December 31, 1994.
- 10 -
<PAGE> 11
As of December 31, 1994, except for other loans of concern discussed herein,
there were no loans which were not included in the table above where known
information about the possible credit problems of borrowers caused management
to have serious doubts as to the ability of the borrower to comply with present
loan repayment terms and which may result in disclosure of such loans in the
future.
As of December 31, 1994, there were no concentrations of loans of any other
types which exceeded 10% of Franklin's total loans that are not included as a
loan category in the table above.
Franklin's non-accruing loans at December 31, 1994, consisted of twelve one-
to four-family residential loans with an aggregate book value of $248,000 and
ten nonresidential and multi-family real estate loans with an aggregate book
value of $273,000. At December 31, 1994, accruing loans delinquent more than
90 days consisted of five loans totalling $243,000 secured by one- to
four-family residential real estate.
Since 1990, the terms of two permanent loans have been renegotiated: a
participation in a multi-family apartment complex in Washington, D.C., with an
outstanding balance of $657,000 and a participation in a hotel located in
Cincinnati, Ohio, with an outstanding balance of $390,000.
At December 31, 1994, Franklin had a $657,000 interest in a $6.05 million
loan secured by a 465 unit apartment complex located in Washington, D.C. This
loan was paid off during February, 1995.
Franklin has a 19.5% interest in a $1.67 million loan, after the reduction
described below, secured by a 50 unit motel located in Cincinnati, Ohio. The
borrower has personally guaranteed $100,000 of this loan. During 1991, the
contractual balance on this loan was reduced by $1.2 million because the
property would not support the higher loan amount. At the time of this
reduction the interest rate was increased from 7.50% to 10% and the term of the
loan shortened from July 1, 2017 to September 1, 1996, with one three year
extension. As of December 31, 1994, loss reserves of $163,000 had been
established against this loan resulting in a net book value of $227,000.
Other loans of concern at December 31, 1994, included thirteen loans
totalling $587,000 secured by one- to four-family residential real estate, and
four consumer loan totalling $12,000.
It is management's policy to establish allowances for credit losses and to
value real estate at the lower of cost or estimated net realizable value when
it determines that losses are expected to be incurred on the underlying
properties. While management believes that it uses the best information
available to make such determinations, future adjustments may be necessary and
net earnings could be significantly affected if circumstances differ
substantially from the assumptions used in making the initial determination.
At December 31, 1994, Franklin had $1.26 million of such allowances, $657,000
of which had been allocated to specific loans or properties. See Notes 3 and 4
of the Notes to the Consolidated Financial Statements and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -
Asset Quality/Credit Risk, and -Results of Operations" in the Annual Report.
- 11 -
<PAGE> 12
The following table sets forth an analysis of Franklin's allowance for
losses on loans and repossessed assets:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
(Dollar in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $1,279 $1,345 $2,195 $2,093 $1,886
Charge-offs:
One- to four-family 67 28 60 71 41
Multi-family - 334 - - 18
Nonresidential real estate 19 - 1,198 80 20
Consumer - 30 19 3 -
-------- -------- ------- -------- --------
Total charge-offs 86 392 1,277 154 79
------- ------- ------ ------- -------
Recoveries:
One- to four-family 1 - - - 3
Multi-family - - - 14 8
Nonresidential real estate - - 17 - 84
Consumer - 1 - - -
-------- -------- -------- -------- --------
Total recoveries 1 1 17 14 95
------- -------- ------- ------- -------
Net charge-offs 85 391 1,260 140 (16)
Additions charged to operations 62 325 410 242 191
------- ------- ------- ------- -------
Balance at end of period $1,256 $1,279 $1,345 $2,195 $2,093
====== ====== ====== ====== ======
Ratio of net charge-offs during
the period to average loans
outstanding during the period 0.06% 0.28% 0.82% 0.085% (0.010)%
==== ==== ==== ===== ======
Ratio of net charge-offs during
the period to average non-
performing assets 2.94% 9.84% 26.76% 3.00% (0.34)%
==== ==== ===== ==== =====
</TABLE>
Repossessed assets at December 31, 1994, consisted of a vacant lot located
in Dayton, Ohio which is being carried at its estimated fair value of $1.00.
- 12 -
<PAGE> 13
The distribution of Franklin's allowance for losses on loans and repossessed
assets at the dates indicated is summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------------------------------
1994 1993 1992 1991
------------------------ ------------------------ ------------------------- ------------------------
Percent of loans Percent of loans Percent of loans Percent of loans
in each catergory in each catergory in each catergory in each catergory
Amount to total loans Amount to total loans Amount to total loans Amount to total loans
------ ---------------- ------ ---------------- ------ ---------------- ------ -----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans:
One- to four-family $ 31 83.99% $ 12 83.34% $ 30 83.17% $ 40 80.03%
Multi-family 145 5.64 158 6.29 448 7.49 172 8.83
Nonresidential real 262 7.60 262 7.84 262 6.50 240 7.68
estate
Consumer 219 2.77 221 2.53 255 2.84 241 3.46
Unallocated 599 - 595 - 350 - 284 -
------ ------ ------ ------ ------ ------ ------ ------
Total loans 1,256 100.00% 1,248 100.00% 1,345 100.00% 977 100.00%
----- ====== ------ ====== ------ ====== ------ ======
Repossessed assets:
One- to four-family - 31 $ - 29
Nonresidential real - - - 1,189
estate ------- -------- ------ -------
Total repossessed - 31 $ - 1,218
assets ------- ------- ------ -------
Total $1,256 $1,279 $1,345 $2,195
====== ====== ====== ======
------------------------
1990
------------------------
Percent of loans
in each catergory
Amount to total loans
------ ----------------
<S> <C> <C>
Loans:
One- to four-family $ 105 79.23%
Multi-family 164 9.13
Nonresidential real 221 8.00
estate
Consumer 188 3.64
Unallocated 217 -
------ ------
Total loans 895 100.00%
------ ======
Repossessed assets:
One- to four-family 9
Nonresidential real 1,189
estate ------
Total repossessed $1,198
assets ------
Total $2,093
======
</TABLE>
- 13 -
<PAGE> 14
INVESTMENT ACTIVITIES
The Company invests primarily in short-term investments, including United
States Treasury and agency securities, bank certificates of deposit, FHLB
overnight funds and bankers' acceptances. Franklin is required by federal
regulations to maintain a minimum amount of liquid assets that may be invested
in specified securities and is also permitted to make certain other securities
investments. The balance of the securities investments maintained by the
Company in excess of regulatory requirements reflects, for the most part,
management's primary investment objective of maintaining a liquidity level that
(i) assures the availability of adequate funds, taking into account anticipated
cash flows and available sources of credit, for meeting withdrawal requests and
loan commitments and making other investments, and (ii) reduces the Company's
vulnerability to changes in interest rates. See Note 2 of the Notes to the
Consolidated Financial Statements and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Asset/Liability Management and
- Liquidity" in the Annual Report.
The OTS also requires depository institutions to establish prudent policies
and strategies for securities transactions, describes securities trading and
sales practices that are unsuitable when conducted in an investment portfolio
and specifies factors that must be considered when evaluating whether the
reporting of an institution's investments is consistent with its intent and
ability to hold such investments. The OTS also establishes a framework for
identifying when certain mortgage derivative products are high-risk mortgage
securities. Franklin believes that it currently holds and reports its
securities and loans in a manner consistent with the OTS requirements. See
Note 1 of the Notes to the Consolidated Financial Statement for a discussion on
the adoption of Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Debt and Equity Securities."
The following table sets forth the carrying value of the Company's
investment portfolio, excluding FHLB of Cincinnati stock, at the dates
indicated:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------
1994 1993 1992
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Investment securities
available-for-sale, at fair value:
U.S. government and
agency obligations $13,737 $ - $ -
State and local
government obligations - - -
------- ------- -------
Total investment securities
available-for-sale $13,737 $ - -
======= ======= =======
Investment securities
held-to-maturity, at amortized cost:
U.S. Government and
agency obligations $ - $14,406 $ 9,524
State and local
government obligations 881 1,007 1,079
------- ------- -------
Total investment securities
held-to-maturity $ 881 $15,413 $10,603
======= ======= =======
</TABLE>
- 14 -
<PAGE> 15
The composition and maturities of the investment securities portfolio,
excluding FHLB of Cincinnati stock, are indicated in the following table:
<TABLE>
<CAPTION>
At December 31, 1994
------------------------------------------------------------------------------------------------------
Less than 1 to 5 5 to 10 Over Total investment
1 year years years 10 years securities
------------ ----------- ------------- ------------ -------------------------------
Amortized Amortized Amortized Amortized Amortized Market
cost cost cost cost cost value
------------ ------------ ------------ ------------ ----------- --------
(Dollars in thousands)
<S> <C> <C> <C>
U.S. Government and
agency obligations $ - $14,399 $ - $500 $14,899 $13,747
State and local
government obligations 185 326 224 146 881 933
--- ------- --- --- ------- -------
Total investment
securities $185 $14,725 $224 $646 $15,780 $14,680
==== ======= ==== ==== ======= =======
Weighted average
yield(1) 4.55% 5.21% 8.10% 7.41% 5.33%
-----------------------------------
<FN>
(1) Yields reflected have not been computed on a tax equivalent basis.
</TABLE>
The following table sets forth the carrying value of the mortgage-backed
securities portfolio at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------
1994 1993 1992
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Available-for-sale, at fair value:
FHLMC certificates $ 2,875
FNMA certificates 8,429
GNMA certificates 9,438
-------
Total mortgage-backed securities
available-for-sale $20,742
=======
Held-to-maturity, at amortized cost:
FHLMC certificates $ 3,543 $ 7,744 $16,289
FNMA certificates 9,996 20,003 12,578
Collateralized mortgage
obligations 1,044 1,058 1,072
GNMA certificates - 10,280 6,435
------- ------- -------
Total mortgage-backed securities
held-to-maturity $14,583 $39,085 $36,374
======= ======= =======
</TABLE>
- 15 -
<PAGE> 16
The composition and contractual maturities of the mortgage-backed securities
portfolio are indicated in the following table:
<TABLE>
<CAPTION>
At December 31, 1994
---------------------------------------------------------------------------------------------------------
Less than 1 to 5 5 to 10 Over 10 Total mortgage-
1 year years years years backed securities
------------- ----------- ----------- ----------- -------------------------------
Amortized Amortized Amortized Amortized Amortized Market
cost cost cost cost cost value
------------ ------------ ------------ ------------ ----------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
FHLMC certificates $ - $1,253 $2,290 $2,924 $6,467 $6,099
FNMA certificates - - 930 17,640 18,570 17,303
Collateralized
mortgage obligations - - 1,044 - 1,044 1,002
GNMA certificates - - - 10,045 10,045 9,438
------ -------- ------- ------- ------ -------
Total mortgage-
backed securities $ - $1,253 $4,264 $30,609 $36,126 $33,842
======= ====== ====== ======= ======= =======
Weighted average
yield -% 5.43% 6.25% 5.83% 5.86%
</TABLE>
SOURCES OF FUNDS
GENERAL. Deposit accounts have traditionally been the principal source of
Franklin's funds for use in lending and for other general business purposes.
In addition to deposits, Franklin derives funds from loan repayments,
borrowings from the FHLB, cash flows generated from operations, which includes
interest credited to deposit accounts, and loan sales. Scheduled loan payments
are a relatively stable source of funds, while deposit inflows and outflows and
the related cost of such funds have varied widely. Borrowings may be used on a
short-term basis to compensate for seasonal reductions in deposits or deposit
inflows at less than projected levels and may be used on a longer term basis to
support expanded lending activities. The availability of funds from loan sales
is influenced by general interest rates. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Liquidity" in the
Annual Report.
DEPOSITS. Franklin attracts both short-term and long-term deposits from the
general public by offering a wide assortment of accounts and rates. Franklin
offers regular passbook accounts, checking accounts, various money market
accounts, fixed interest rate certificates with varying maturities, negotiated
rate $100,000 or above jumbo certificates of deposit ("Jumbo CDs") and
individual retirement accounts and Keogh accounts.
- 16 -
<PAGE> 17
The principal types of savings accounts and rates issued by Franklin at
December 31, 1994, are summarized as follows:
<TABLE>
<CAPTION>
Average rate Minimum Amounts(1) Percentage total
------------ ------- ---------- ----------------
(In thousands)
<S> <C> <C> <C> <C>
Savings programs:
Passbook savings 2.75% $ 100 $ 29,353 52.37%
NOW 2.24 100 13,297 23.73
Super NOW 2.62 2,500 2,262 4.04
Money market 2.95 2,500 11,132 19.86
---- -------- ------
Total regular
accounts 2.66% $ 56,044 100.00%
==== ======== ======
Certificates of
deposit:
7-31 day certificates 3.00% $ 2,500 $767 0.66%
91 day certificates 2.90 2,500 268 0.23
Six-months 4.21 2,500 10,406 8.94
One year 4.80 500 23,900 20.52
18 months 4.05 500 3,840 3.30
Two years 5.31 500 11,491 9.87
Thirty-two months 5.34 500 13,649 11.72
Three years 5.40 500 14,118 12.12
Five years 6.53 2,500 34,462 29.59
Jumbo certificates(2) 4.82 100,000 3,054 2.62
Other(2) 7.28 500 503 0.43
---- -------- ------
Total certificates 5.42% $116,458 100.00%
----------------------------- ==== ======== ======
(1) Includes $25.8 million of deposits held in IRA and Keogh accounts.
(2) Maturities vary.
</TABLE>
All accounts earn interest from the date of deposit to the date of
withdrawal. Interest is compounded daily on all accounts except certificates
which are compounded utilizing a 360 day factor applied over 365 days.
Interest can be credited monthly, quarterly or annually at the customer's
discretion. The interest rate on all accounts is established by the Board of
Directors. At December 31, 1994, such rates were 2.75% per annum for passbook
savings accounts, 2.375% per annum for regular NOW accounts and 2.625% per
annum for Super NOW accounts. The rates paid on Money Market Accounts vary
depending on the balance in the account.
Early withdrawals from certificates of deposit are subject to a penalty of
three months simple interest when the term is from 90 days to one year, six
months simple interest when the term is one year to three years, and one year
simple interest when the term is more than three years.
- 17 -
<PAGE> 18
The following table sets forth information relating to Franklin's savings
flows during the periods shown and total savings at the end of the periods
shown:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------------
1994 1993 1992
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Opening balance $178,550 $189,896 $186,717
Deposits 276,504 333,925 324,303
Withdrawals 289,062 352,851 330,085
Interest credited 6,510 7,580 8,961
-------- -------- --------
Ending balance $172,502 $178,550 $189,896
======== ======== ========
</TABLE>
The following table sets forth the amount of Franklin's certificates of
deposit by interest rates as of the dates indicated:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------
1994 1993 1992
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
3.00% and less $ 1,403 $ 4,138 $ 675
3.01% - 4.00% 14,854 32,326 34,917
4.01% - 5.00% 26,545 14,732 16,733
5.01% - 6.00% 59,750 33,540 12,670
6.01% - 7.00% 517 1,180 4,586
7.01% - 8.00% 11,473 15,659 17,353
8.01% - 10.00% 1,782 8,196 29,812
10.01% and over 134 262 469
-------- ------- --------
Total $116,458 $110,033 $117,215
======== ======== ========
</TABLE>
The following table sets forth, as of December 31, 1994, the amounts of
certificates of deposit maturing during the years indicated:
<TABLE>
<CAPTION>
Amounts maturing in the year
ending December 31,
---------------------------------------------------------------------------------
1998 and
1995 1996 1997 thereafter
-------- -------- -------- ----------
(In thousands)
<S> <C> <C> <C> <C>
3.00% and less $ 1,368 $ - $ 5 $ 30
3.01% - 4.00% 14,854 - - -
4.01% - 5.00% 15,363 5,605 3,286 2,291
5.01% - 6.00% 30,610 9,850 2,489 16,801
6.01% - 7.00% 11 392 80 34
7.01% - 8.00% 3,443 7,923 100 7
8.01% - 10.00% 1,552 86 4 140
10.01% and over 51 - 45 38
------- ------- ------ -------
Total $67,252 $23,856 $6,009 $19,341
======= ======= ====== =======
</TABLE>
- 18 -
<PAGE> 19
The following table sets forth Franklin's savings flows by type of account,
including interest credited, during the periods indicated:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------
1994 1993 1992
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Change in deposit
balances:
Passbook savings $(8,969) $(4,519) $13,367
NOW accounts (1,015) (563) 3,296
Money market
accounts (2,488) 917 99
Certificates:
7-31 day (101) 255 (331)
91 day (187) 111 (242)
6 months (5,042) (5,544) (4,838)
One year 12,061 (6,821) (8,412)
18 months (1,212) (1,465) (4,798)
Two years 6,727 (665) (2,475)
Thirty-two months 38 13,611 -
Three years (1,578) 68 7,076
Five years (3,363) (4,651) 628
Jumbo certificates (810) (1,833) (132)
Other (108) (247) (59)
-------- ---------- ---------
Total increase
(decrease) $(6,047) $(11,346) $ 3,179
======== ========= =======
</TABLE>
- 19 -
<PAGE> 20
The following table sets forth rate and maturity information for Franklin's
certificates of deposits as of December 31, 1994:
<TABLE>
<CAPTION>
Percentage
Amount of deposits Average rate
------ ------------- ------------
(Dollars in thousands)
<S> <C> <C> <C>
Certificates maturing in
quarter ended:
March 31, 1995 $15,792 9.15% 4.38%
June 30, 1995 17,375 10.07 5.00
September 30, 1995 16,751 9.71 5.15
December 31, 1995 17,334 10.05 5.61
March 31, 1996 8,073 4.68 5.82
June 30, 1996 4,370 2.53 7.08
September 30, 1996 8,331 4.83 6.23
December 31, 1996 3,082 1.79 5.76
March 31, 1997 3,720 2.16 5.19
June 30, 1997 714 0.41 5.00
September 30, 1997 722 0.42 5.73
December 31, 1997 853 0.49 5.83
Thereafter 19,341 11.22 5.76
--------- ------- ----
Total certificates 116,458 67.51 5.42
Other deposits 56,044 32.49 2.66
--------- ------- ----
Total deposits $172,502 100.00% 4.52%
======== ====== ====
</TABLE>
The following table indicates the amount of Franklin's certificates of
deposit by time remaining until maturity as of December 31, 1994:
<TABLE>
<CAPTION>
Maturity
-------------------------------------------------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 Months Total
----------- ------ ------ --------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit
less than $100,000 $13,595 $15,901 $31,431 $44,200 $105,127
Certificates of deposit of
$100,000 or more 2,197 1,474 2,654 5,006 11,331
-------- -------- -------- -------- ---------
Total certificates of
deposit $15,792 $17,375 $34,085 $49,206 $116,458
======= ======= ======= ======= ========
</TABLE>
Management believes that the variety of deposit accounts offered by Franklin
has allowed it to be competitive in obtaining funds and to respond with
flexibility (by paying rates of interest more closely approximating market
rates of interest) to reduce, although not eliminate, the threat of
disintermediation (the flow of funds away from depository institutions such as
savings institutions into direct investment vehicles such as government and
corporate securities). In addition, Franklin has become much more subject to
short-term fluctuations in deposit flows, as customers have become more
interest-rate conscious. Therefore, the ability of Franklin to attract and
maintain deposits, and the cost and term of repricing of its funds, has been,
and will continue to be, significantly affected by money market conditions.
- 20 -
<PAGE> 21
BORROWINGS. As a member of the FHLB of Cincinnati, Franklin is required
to own capital stock in the FHLB of Cincinnati and is authorized to apply for
advances from the FHLB of Cincinnati. Each FHLB credit program has its own
interest rate, which may be fixed or variable, and range of maturities. The
FHLB of Cincinnati may prescribe acceptable uses for these advances and
repayment provisions which apply. Franklin only utilizes FHLB advances when
other sources of funds are not available on more attractive terms. Franklin's
long term borrowings outstanding at December 31, 1994, consisted of a 15 year
mortgage-matched advance from the FHLB at a rate of 8.15% with a remaining
balance of $596,000.
The following table sets forth the maximum amount of each category of
short-term borrowings (borrowings with remaining maturities of one year or
less) outstanding at any month-end during the periods shown and the average
aggregate balances of short-term borrowings for such periods:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------
1994 1993 1992
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Maximum amount outstanding:
FHLB advances $1,763 $74 $75
Other short-term borrowings - -
Total average amount of short-term
borrowings outstanding during period 309 61 72
Weighted average interest cost of
borrowings during the period ended 8.15% 8.15% 8.15%
</TABLE>
SUBSIDIARY ACTIVITIES OF FRANKLIN
Franklin has one subsidiary, Madison Service Corporation ("Madison"),
organized February 22, 1972. Madison currently performs loan servicing on a
$2.7 million multi-family loan. As of December 31, 1994, Franklin's investment
in Madison was $110,000.
Ohio law provides that up to 15% of the assets of an institution may be
invested in stock, obligations or other securities of service corporations.
Federal law generally imposes on state-chartered savings associations the
service corporation investment limits applicable to federal associations,
unless a higher level is permitted by the FDIC. Federal associations generally
may invest up to 2% of their assets in service corporations, plus an additional
1% if for community purposes. Franklin's investment in its service corporation
at December 31, 1994, did not exceed these limits.
Franklin is also subject to the equity risk investment limitations imposed
under OTS regulations. In general, OTS regulations provide that insured
institutions which meet their minimum regulatory capital requirements and
have "tangible capital" of 6% of total liabilities or greater, must submit for
prior review aggregate equity risk investments exceeding an amount equal to
three times "tangible capital," defined as equity capital as determined in
accordance with GAAP, qualifying subordinated debt, and nonpermanent preferred
stock, less goodwill and other intangible assets. Because Franklin meets it
regulatory capital requirements, has tangible capital in excess of 6% of total
liabilities and does not have equity risk investments in subsidiary
corporations in excess of three times tangible capital, Franklin is currently
not limited by the OTS regulations in making direct investments in subsidiary
corporations.
SUBSIDIARY ACTIVITIES OF THE COMPANY
In 1989 the Company acquired an interest in DirectTeller Systems, Inc., an
Ohio corporation which is engaged in the development, marketing and sale of
computer software designed to enable customers of financial institutions to
obtain account information directly from the institution's computer via a touch
tone telephone and/or facsimile machine. The
- 21 -
<PAGE> 22
Company has a 51% interest in this company and its investment in such company
at December 31, 1994, was $50,000. At the same date, the Company had no loans
due from DirectTeller.
COMPETITION
Franklin faces strong competition both in originating real estate loans and
in attracting deposits. Competition in originating real estate loans comes
primarily from other savings institutions, commercial banks and mortgage
brokers and bankers who also make loans secured by real estate located in
southwestern Ohio. Franklin competes for real estate loans principally on the
basis of the interest rates and loan fees it charges, the types of loans it
originates and the quality of services it provides to borrowers.
Franklin faces substantial competition in attracting deposits from
commercial banks, other savings institutions, money market and mutual funds,
credit unions and other investment vehicles. The ability of Franklin to
attract and retain deposits depends on its ability to provide an investment
opportunity that satisfies the requirements of investors as to rate of return,
liquidity, risk and other factors. Franklin competes for these deposits by
offering a variety of deposit accounts at competitive rates, convenient
business hours, access to accounts via automated teller machines, convenient
branch locations with inter-branch deposit and withdrawal privileges at each,
and the "DirectTeller" system discussed above.
The authority to offer money market deposits and expanded lending and other
powers authorized for savings institutions have resulted in increased
competition for both deposits and loans between savings institutions and other
financial institutions such as commercial banks.
As of December 31, 1994, based on total assets, Franklin was the seventh
largest thrift institution headquartered in Hamilton County, Ohio.
REGULATION
GENERAL. As a savings and loan association chartered under the laws of
Ohio, Franklin is subject to regulation, examination and oversight by the
Superintendent of the Division (the "Ohio Superintendent"). Because Franklin's
deposits are insured by the FDIC, Franklin also is subject to regulation and
examination by the OTS, as its primary federal regulator, and by the FDIC.
Franklin must file periodic reports with the Ohio Superintendent and the OTS
concerning its activities and financial condition. Examinations are conducted
by regulators periodically to determine whether Franklin is in compliance with
various regulatory requirements and is operating in a safe and sound manner.
Because it accepts federally insured deposits and offers transaction accounts,
Franklin is also subject to certain regulations issued by the Board of
Governors of the Federal Reserve System ("FRB"). Franklin is a member of the
FHLB of Cincinnati.
The Company is a Delaware corporation and is subject to regulation,
examination and oversight by the OTS as the holding company of Franklin and is
required to submit periodic reports to the OTS.
OHIO REGULATION. The Ohio Superintendent is responsible for the regulation
and supervision of Ohio savings and loan associations in accordance with the
laws of the state of Ohio and imposes assessments on Ohio associations based on
their asset size to cover the cost of supervision and examination. Ohio law
prescribes the permissible investments and activities of Ohio savings and loan
associations, including the types of lending that such associations may engage
in and the investments in real estate, subsidiaries and corporate or government
securities that such associations may make. The ability of Ohio associations
to engage in these state-authorized investments and activities is subject to
oversight and approval by the FDIC, if such investments or activities are not
permissible for a federally chartered savings association. See "State
Association Activities."
The Ohio Superintendent also has approval authority over any mergers
involving or acquisitions of control of Ohio savings and loan associations.
The Ohio Superintendent may initiate certain supervisory measures or formal
enforcement actions against Ohio associations. Ultimately, if the grounds
provided by law exist, the Superintendent may place an Ohio association in
conservatorship or receivership.
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The Ohio Superintendent conducts regular examinations of Franklin
approximately once a year. Such examinations are usually conducted jointly
with one or both federal regulators. The Ohio Superintendent imposes
assessments on Ohio associations based on their asset size to cover the cost of
supervision and examination.
In addition to being governed by the laws of Ohio specifically governing
savings and loan associations, Franklin is also governed by Ohio corporate law,
to the extent such law does not conflict with the laws specifically governing
savings and loan associations.
OFFICE OF THRIFT SUPERVISION. The OTS is an office in the Department of the
Treasury and is subject to the general oversight of the Secretary of the
Treasury. The Director of the OTS is responsible for the regulation and
supervision of all federally chartered savings associations and all other
savings associations, the deposits of which are insured by the FDIC in the
SAIF. The OTS imposes assessments on savings associations based on their asset
size to cover the costs of general supervision and examination. The OTS issues
regulations governing the operation of savings associations and regularly
examines such associations. The OTS also may initiate enforcement actions
against savings associations and certain persons affiliated with them for
violations of laws or regulations or for engaging in unsafe or unsound
practices. If the grounds provided by law exist, the OTS may appoint a
conservator or receiver for a savings association.
Savings associations are subject to regulatory oversight under various
consumer protection and fair lending laws. These laws govern, among other
things, truth-in-lending disclosure, equal credit opportunity, fair credit
reporting and community reinvestment. Failure to abide by federal laws and
regulations governing community reinvestment could limit the ability of a
state-chartered savings association to open a new branch or engage in a merger
transaction. The OTS has proposed revised regulations governing community
reinvestment that will evaluate actual lending and investment within an
association's designated service area, with particular emphasis on
low-to-moderate income areas and borrowers. These proposed regulations would
also evaluate an association's service to low-and-moderate income areas in
terms of branch locations. Associations with less than $250 million in assets
would be presumed to be performing satisfactorily under these regulations if
they meet certain designated criteria.
REGULATORY CAPITAL REQUIREMENTS. Franklin is required by OTS regulations to
meet certain minimum capital requirements. The following table sets forth the
amount and percentage level of regulatory capital of Franklin at December 31,
1994, and the amount by which it exceeds the minimum capital requirements.
Tangible and core capital are reflected as a percentage of adjusted total
assets. Total (or risk-based) capital, which consists of core and
supplementary capital, is reflected as a percentage of risk-weighted assets.
Assets are weighted at percentage levels ranging from 0% to 100% depending on
their relative risk.
<TABLE>
<CAPTION>
At December 31, 1994
-------------------------------------------------------
Amount Percent
-------------------- --------------------
(In thousands)
<S> <C> <C>
Tangible capital $13,879 7.30%
Requirement 2,852 1.50
-------- -----
Excess $11,027 5.80%
======= =====
Core capital $13,879 7.30%
Requirement 5,705 3.00
-------- -----
Excess $ 8,174 4.30%
======= =====
Total capital $14,558 16.58%
Risk-based requirement 7,024 8.00
-------- -----
Excess $ 7,534 8.58%
======= =====
</TABLE>
Current capital requirements call for tangible capital (which for Franklin
is GAAP capital) of 1.5% of adjusted total assets, core capital (which for
Franklin consists of tangible capital) of 3.0% of adjusted total assets and
risk-based capital
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<PAGE> 24
(which for Franklin consists of core capital and general valuation reserves of
$679,000) of 8% of risk-weighted assets. The OTS has proposed to amend the
core capital requirement so that those associations that do not have the
highest examination rating and exceed an acceptable level of risk will be
required to maintain core capital of from 4% to 5%, depending on the
association's examination rating and overall risk. Franklin does not
anticipate that it will be adversely affected if the core capital requirement
regulation is amended as proposed. Its current core capital level is 7.30% of
adjusted total assets.
As of September 30, 1994, savings associations became subject to an interest
rate risk component to the risk-based capital requirement. Each savings
association must measure the impact of an immediate 200 basis point change in
interest rates on the value of its portfolio, as determined under the
methodology established by the OTS. If the measured interest rate risk is
above the level deemed normal under the regulation, the association will have
to deduct one-half of that excess exposure from its total capital when
determining its level of risk-based capital. The interest rate risk component
for any quarter will be based on this calculation as of the end of the third
preceding quarter. In general, an association with less than $300 million in
assets and a risk-based capital ratio of greater than 12% will not be subject
to this requirement. Franklin qualifies for this exception. The OTS may
adjust the risk-based capital requirement on an individual basis for any
association to take into account risks due to concentrations of credit and
non-traditional activities.
The OTS has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled savings
associations. At each successively lower defined capital category, an
association is subject to more restrictive and numerous mandatory or
discretionary regulatory actions or limits, and the OTS has less flexibility in
determining how to resolve the problems of the institution. The OTS has
defined these capital levels as follows: (1) well-capitalized associations
must have total risk-based capital of at least 10%, core risk-based capital
(consisting only of items that qualify for inclusion in core capital) of at
least 6% and core capital of at least 5%; (2) adequately capitalized
associations are those that meet the regulatory minimum of total risk-based
capital of at least 8%, core risk-based capital (consisting only of items that
qualify for inclusion in core capital) of at least 4% and core capital of at
least 4% (except for associations receiving the highest examination rating and
with an acceptable level of risk, in which case the level is at least 3%); (3)
undercapitalized associations are those that do not meet regulatory limits, but
that are not significantly undercapitalized; (4) significantly undercapitalized
associations have total risk-based capital of less than 6%, core risk-based
capital (consisting only of items that qualify for inclusion in core capital)
of less than 3% and core capital of less than 3%; and (5) critically
undercapitalized associations are those with core capital of less than 2% of
total assets. In addition, the OTS generally can downgrade an association's
capital category, notwithstanding its capital level, if, after notice and
opportunity for hearing, the association is deemed to be engaging in an unsafe
or unsound practice because it has not corrected deficiencies that resulted in
it receiving a less than satisfactory examination rating on matters other than
capital or it is deemed to be in an unsafe or unsound condition. An
undercapitalized association must submit a capital restoration plan to the OTS
within 45 days after it becomes undercapitalized. Such an association will be
subject to increased monitoring and asset growth restrictions and will be
required to obtain prior approval for acquisitions, branching and engaging in
new lines of business. Furthermore, critically undercapitalized institutions
must be placed in conservatorship or receivership within 90 days of reaching
that capitalization level, except under limited circumstances. Franklin's
capital at December 31, 1994, meets the standards for a well-capitalized
institution.
Federal law prohibits a savings association from making a capital
distribution to anyone or paying management fees to any person having control
of the association if, after such distribution or payment, the association
would be undercapitalized. In addition, each company controlling an
undercapitalized association must guarantee that the association will comply
with its capital plan until the association has been adequately capitalized on
an average during each of four preceding calendar quarters and must provide
adequate assurances of performance. The aggregate liability pursuant to such
guarantee is limited to the lesser of (a) an amount equal to 5% of the
association's total assets at the time the institution became undercapitalized
or (b) the amount that is necessary to bring the association into compliance
with all capital standards applicable to such association at the time the
association fails to comply with its capital restoration plan.
LIQUIDITY. OTS regulations require that savings associations maintain an
average daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances and specified United States government, state or federal agency
obligations) equal to a monthly average of not less than 5% of its net
withdrawable savings deposits plus borrowings payable in one year or less.
Federal regulations also require each association to maintain an average daily
balance of short-term liquid assets at a specified percentage, currently 1%, of
the total of its net withdrawable savings accounts and borrowings payable in one
year or less. Monetary penalties may be imposed upon associations failing to
meet liquidity requirements. The eligible liquidity
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<PAGE> 25
of Franklin, as computed under current regulations, at December 31, 1994, was
approximately $15.4 million, or 8.8% and exceeded the then applicable 5.0%
liquidity requirement by approximately $6.7 million, or 3.8%.
QUALIFIED THRIFT LENDER TEST. Savings associations are required to maintain
a specified level of investments in assets that are designated as qualifying
thrift investments. Such investments are generally related to domestic
residential real estate and manufactured housing and include stock issued by
any FHLB, the FHLMC or the FNMA. Effective December 19, 1991, the QTL test
requires that 65% of an institution's "portfolio assets" (total assets less
goodwill and other intangibles, property used to conduct business and 20% of
liquid assets) consist of qualified thrift investments on a monthly average
basis in 9 out of every 12 months. The OTS may grant exceptions to the QTL
test under certain circumstances. If a savings association fails to meet the
QTL Test, the association and its holding company will be subject to certain
operating and regulatory restrictions. A savings association that fails to
meet the QTL Test will not be eligible for new FHLB advances. See "-Federal
Home Loan Banks." At December 31, 1994, Franklin had QTL investments equal to
approximately 93.5% of its total portfolio assets.
LENDING LIMITS. OTS regulations generally limit the aggregate amount that a
savings association can lend to one borrower to an amount equal to 15% of the
association's unimpaired capital and surplus. Because of recent regulatory
amendments applicable to national banks, this limit is expected to change to
15% of total capital plus any general valuation reserves not included in total
capital. A savings association may lend to one borrower an additional amount
not to exceed 10% of the association's unimpaired capital and surplus, if the
additional amount is fully secured by certain forms of "readily marketable
collateral." Real estate is not considered "readily marketable collateral."
Certain types of loans are not subject to these limits. In applying these
limits, the regulations require that loans to certain related borrowers be
aggregated. Notwithstanding the specified limits, an association may lend to
one borrower up to $500,000 for any purpose. At December 31, 1994, Franklin
was in compliance with these lending limits.
TRANSACTIONS WITH INSIDERS AND AFFILIATES. Loans to executive officers,
directors and principal shareholders and their related interests must conform
to the limits on the amount an institution can lend to one borrower, and the
total of such loans cannot exceed the association's unimpaired capital and
surplus. Most loans to directors, executive officers and principal
shareholders must be approved in advance by a majority of the "disinterested"
members of board of directors of the association with any "interested" director
not participating. All loans to directors, executive officers and principal
shareholders must be made on terms substantially the same as offered in
comparable transactions with the general public. Loans to executive officers
are subject to additional restrictions. Franklin was in compliance with such
restrictions at December 31, 1994.
All transactions between savings associations and their affiliates must
comply with Sections 23A and 23B of the Federal Reserve Act ("FRA"). An
affiliate of a savings association is any company or entity that controls, is
controlled by or is under common control with the savings association. The
Company is an affiliate of Franklin. Generally, Sections 23A and 23B of the
FRA (i) limit the extent to which a savings association or its subsidiaries may
engage in "covered transactions" with any one affiliate to an amount equal to
10% of such institution's capital stock and surplus, (ii) limit the aggregate
of all such transactions with all affiliates to an amount equal to 20% of such
capital stock and surplus, and (iii) require that all such transactions be on
terms substantially the same, or at least as favorable to the association, as
those provided in transactions with a non-affiliate. The term "covered
transaction" includes the making of loans, purchase of assets, issuance of a
guarantee and other similar types of transactions. In addition to the limits
in Sections 23A and 23B, a savings association may not make any loan or other
extension of credit to an affiliate unless the affiliate is engaged only in
activities permissible for a bank holding company and may not purchase or
invest in securities of any affiliate except shares of a subsidiary. Franklin
was in compliance with these requirements and restrictions at December 31,
1994.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. OTS imposes various restrictions or
requirements on the ability of associations to make capital distributions,
including dividend payments. An association is prohibited from declaring or
paying any dividends or from repurchasing any of its stock if, as a result, the
net worth of the association would be reduced below the amount required to be
maintained for the liquidation account established in connection with its
mutual to stock conversion. OTS regulations also establish a system limiting
capital distributions according to ratings of associations based on their
capital level and supervisory condition.
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<PAGE> 26
The first rating category is Tier 1, consisting of associations that, before
and after the proposed distribution, meet their fully phased-in capital
requirements. Associations in this category may make capital distributions
during any calendar year equal to the greater of 100% of net income, current
year-to-date, plus 50% of the amount by which the lesser of the association's
tangible, core or risk-based capital exceeds its fully phased-in capital
requirement for such capital component, as measured at the beginning of the
calendar year, or the amount authorized for a Tier 2 association. A Tier 1
association deemed to be in need of more than normal supervision by the OTS may
be downgraded to a Tier 2 or Tier 3 association. Franklin meets the
requirements for a Tier 1 association and has not been notified of any need for
more than normal supervision. The second category, Tier 2, consists of
associations that before and after the proposed distribution meet their current
minimum, but not fully phased-in, capital requirements. Associations in this
category may make capital distributions of up to 75% of net income over the
most recent quarters. Tier 3 associations do not meet current minimum capital
requirements and must obtain OTS approval of any capital distribution. Tier 2
associations that propose to make a capital distribution in excess of the noted
safe harbor level must also obtain OTS approval. Tier 2 associations proposing
to make a capital distribution within the safe harbor provisions and Tier 1
associations proposing to make any capital distribution need only submit
written notice to the OTS 30 days prior to such distribution. The OTS may
object to the distribution during that 30-day period based on safety and
soundness concerns.
In December 1994, the OTS issued a proposal to amend the capital
distributions limits. Under that proposal, associations which are not owned by
a holding company and which have a CAMEL examination rating of 1 or 2 could
make a capital distribution without notice to the OTS, if they remain
adequately capitalized, as described above, after the distribution is made.
Any other association seeking to make a capital distribution that would not
cause the association to fall below the capital levels to qualify as adequately
capitalized or better, would have to provide notice to the OTS. Except under
limited circumstances and with OTS approval, no capital distributions would be
permitted if it caused the association to become undercapitalized or worse.
HOLDING COMPANY REGULATION. The Company is a savings and loan holding
company within the meaning of the Home Owners' Loan Act (the "HOLA"). As such,
the Company is registered with the OTS and is subject to OTS regulations,
examination, supervision and reporting requirements.
The HOLA generally prohibits a savings and loan holding company from
controlling any other savings association or savings and loan holding company,
without prior approval of the OTS, or from acquiring or retaining more than 5%
of the voting shares of a savings association or holding company thereof, which
is not a subsidiary. Under certain circumstances, a savings and loan holding
company is permitted to acquire, with the approval of the OTS, up to 15% of the
previously unissued voting shares of an undercapitalized savings association
for cash without such savings association being deemed to be controlled by the
holding company. Except with the prior approval of the OTS, no director or
officer of a savings and loan holding company or person owning or controlling
by proxy or otherwise more than 25% of such company's stock may also acquire
control of any savings institution, other than a subsidiary institution, or any
other savings and loan holding company.
The Company is a unitary savings and loan holding company. There are
generally no restrictions on the activities of a unitary savings and loan
holding companies. Congressional legislative proposals that have been
introduced or are under consideration, would either limit unitary savings and
loan holding companies to the same activities as other financial institution
holding companies or would permit certain bank holding companies to engage in
commercial activities and expanded securities and insurance activities. The
Company cannot predict if, and in what form, these proposals might become law.
The broad latitude to engage in activities under current law can be restricted,
if the OTS determines that there is reasonable cause to believe that the
continuation by a savings and loan holding company of an activity constitutes a
serious risk to the financial safety, soundness or stability of its subsidiary
savings association. The OTS may impose such restrictions as deemed necessary
to address such risk, including limiting (i) payment of dividends by the
savings association, (ii) transactions between the savings association and its
affiliates, and (iii) any activities of the savings association that might
create a serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings association. Notwithstanding the
foregoing rules as to permissible business activities of a unitary savings and
loan holding company, if the savings association subsidiary of a holding
company fails to meet the QTL Test, then such unitary holding company would
become subject to the activities restrictions applicable to multiple holding
companies. At December 31, 1994, Franklin met the QTL Test.
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<PAGE> 27
If the Company were to acquire control of another savings institution, other
than through a merger or other business combination with Franklin, the Company
would become a multiple savings and loan holding company. Unless the
acquisition is an emergency thrift acquisition and each subsidiary savings
association meets the QTL Test, the activities of the Company and any of its
subsidiaries (other than Franklin or other subsidiary savings associations)
would thereafter be subject to activity restrictions. The HOLA provides that,
among other things, no multiple savings and loan holding company or subsidiary
thereof that is not a savings institution shall commence or continue for a
limited period of time after becoming a multiple savings and loan holding
company or subsidiary thereof, any business activity other than (i) furnishing
or performing management services for a subsidiary savings institution, (ii)
conducting an insurance agency or escrow business, (iii) holding, managing or
liquidating assets owned by or acquired from a subsidiary savings institution,
(iv) holding or managing properties used or occupied by a subsidiary savings
institution, (v) acting as trustee under deeds of trust, (vi) those activities
previously directly authorized by federal regulation as of March 5, 1987, to be
engaged in by multiple holding companies, or (vii) those activities authorized
by the FRB as permissible for bank holding companies, unless the OTS by
regulation prohibits or limits such activities for savings and loan holding
companies. Those activities described in (vii) above must also be approved by
the OTS prior to being engaged in by a multiple holding company.
The OTS may approve acquisitions resulting in the formation of a multiple
savings and loan holding company that controls savings associations in more
than one state, only if the multiple savings and loan holding company involved
controls a savings association that operated a home or branch office in the
state of the association to be acquired as of March 5, 1987, or if the laws of
the state in which the institution to be acquired is located specifically
permit institutions to be acquired by state-chartered institutions or savings
and loan holding companies located in the state where the acquiring entity is
located (or by a holding company that controls such state-chartered savings
institutions). As under prior law, the OTS may approve an acquisition
resulting in a multiple savings and loan holding company controlling savings
associations in more than one state in the case of certain emergency thrift
acquisitions.
No subsidiary savings association of a savings and loan holding company may
declare or pay a dividend on its permanent or nonwithdrawable stock unless it
first gives the Director of the OTS 30 days' advance notice of such declaration
and payment. Any dividend declared during such period or without the giving of
such notice shall be invalid.
ACQUISITIONS OF CONTROL. Acquisitions of controlling interests of both
Franklin and the Company are subject to limitations in federal and state law.
The federal limitations generally require regulatory approval of acquisitions
at specified levels. State law similarly requires regulatory approval and also
imposes certain anti-takeover limitations.
Pursuant to federal law and regulations, no person, directly or indirectly,
or acting in concert with others, may acquire control of Franklin or the
Company without 60 days prior notice to the OTS. "Control" is generally
defined as having more than 25% ownership or voting power; however, ownership
or voting power of more than 10% may be deemed "control" if certain factors are
present. If the acquisition of control is by a company, the acquiror must
obtain approval, rather than give notice, of the acquisition as a savings and
loan holding company.
Ohio law requires Superintendent approval of any acquisition of control of
Franklin directly or indirectly, including through the Company. Control is
deemed to be at least 15% ownership or voting power. Ohio law permits
acquisitions of control by non-Ohio companies only if the law of the state of
the acquiror permits similar acquisitions in that State by Ohio companies.
Any merger of Franklin must be approved by the OTS and the Superintendent.
Any merger in which the Company is not the resulting company must also be
approved by OTS and the Superintendent as a holding company acquisition.
FEDERAL DEPOSIT INSURANCE CORPORATION. The FDIC is an independent federal
agency that insures the deposits of federally insured banks and thrifts, up to
prescribed statutory limits, and safeguards the safety and soundness of the
banking and thrift industries. The FDIC administers two separate insurance
funds, the Bank Insurance Fund ("BIF") for commercial banks and state savings
banks and the SAIF for savings associations and is required to maintain
designated levels of reserves in each fund. Franklin is a member of the SAIF,
and its deposit accounts are insured by the FDIC, up to the prescribed limits.
The FDIC has examination authority over all insured depository institutions,
including Franklin and has authority to initiate enforcement actions against
federally insured savings associations, if the FDIC does not believe the OTS
has taken appropriate action to safeguard safety and soundness and the deposit
insurance fund.
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Depository institutions are generally prohibited from converting from one
insurance fund to the other until the SAIF fund meets its designated reserve
level, except with the prior approval of the FDIC in certain limited cases,
provided applicable exit and entrance fees are paid. The insurance fund
conversion provisions do not prohibit a SAIF member from converting to a bank
charter or merging with a bank during the moratorium, as long as the resulting
bank continues to pay the applicable insurance assessments to the SAIF during
that period and certain other conditions are met. Franklin has no present
intention to convert to the BIF or to a bank charter.
DEPOSIT INSURANCE ASSESSMENTS. The FDIC is authorized to establish separate
annual assessment rates for deposit insurance each for members of the BIF and
the SAIF. The FDIC may increase assessment rates for either fund if necessary
to restore the fund's ratio of reserves to insured deposits to its target level
within a reasonable time and may decrease such assessment rates if such target
level has been met. The FDIC has established a risk-based assessment system
for both SAIF and BIF members. Under this system, assessments are currently
from .23% to .31% of insured deposits of the institution, based on the risk the
institution poses to its deposit insurance fund. This risk level is determined
based on the institution's capital level and the FDIC's level of supervisory
concern about the institution. Franklin's assessment level for the semi-annual
period beginning January 1, 1995, is .23%.
The BIF is expected to meet its target reserve level in mid-1995, but the
SAIF is not expected to meet its target reserve level until at least 2002. The
FDIC has proposed reducing deposit insurance assessments of BIF members, to be
effective when the target level is met, to $.04 to $.31 per $100 of deposits,
with all levels between the high and low of the range being reduced. It has
also proposed to maintain SAIF premiums at the current $.23 to $.31 per $100 in
deposits. If this proposal is made effective, government officials have
estimated that BIF members will pay an average assessment of $.045 per $100 of
deposits, and SAIF members will pay an average assessment of $.25 per $100
deposits. Such a disparity could negatively impact the ability of SAIF members
to compete with BIF members.
STATE ASSOCIATION ACTIVITIES. All state-chartered associations are
generally limited to activities and investments of the type and in the amount
authorized for federally chartered associations, notwithstanding state law.
The FDIC is authorized to permit such associations to engage in
state-authorized activities or investments that do not meet this standard
(other than non-subsidiary equity investments and investments in junk bonds)
for institutions that meet fully phased-in capital requirements, if it is
determined that such activities or investments do not pose a significant risk
to the SAIF.
FRB RESERVE REQUIREMENTS. The FRA requires savings associations to maintain
reserves against their transaction accounts (primarily NOW accounts) and
non-personal time deposits as required by FRB regulations. Such regulations
currently require that reserves of 3% be maintained against net transaction
accounts up to $54.0 million (subject to an exemption of up to $4.2 million),
and that reserves of 10% be maintained against that portion of total net
transaction accounts in excess of $54.0 million. No reserves currently are
required for non-personal time deposits. These percentages are subject to
adjustment by the FRB. At December 31, 1994, Franklin was in compliance with
its reserve requirements.
TRUTH IN SAVINGS. Pursuant to the Truth in Savings Act, the FRB has issued
regulations providing for clear and uniform disclosure of the rates, fees and
terms of deposit accounts and requiring specific disclosure before an account
is opened, in regularly provided statements and in advertisements,
announcements and solicitations initiated by a depository institution. The
regulations also impose substantive limits on the methods used to determine the
balance of an account on which interest is calculated and prescribe detailed
disclosure of deposit account yield information, minimum balance requirements
and fees.
FEDERAL HOME LOAN BANKS. The FHLBs provide credit to their members in the
form of advances. Franklin is a member of the FHLB of Cincinnati and must
maintain an investment in the capital stock of that FHLB in an amount equal to
the greater of 1.0% of the aggregate outstanding principal amount of Franklin's
residential mortgage loans, home purchase contracts and similar obligations at
the beginning of each year, or 5% of its advances from the FHLB. Franklin is
in compliance with this requirement with an investment in stock of the FHLB of
Cincinnati of $1.65 million at December 31, 1994.
Upon the origination or renewal of a loan or advance, the FHLB of Cincinnati
is required by law to obtain and maintain a security interest in collateral in
one or more of the following categories: fully disbursed, whole first mortgage
loans on improved residential property or securities representing a whole
interest in such loans; securities issued, insured
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<PAGE> 29
or guaranteed by the United States government or an agency thereof; deposits in
any FHLB; or other real estate related collateral (up to 30% of the member
association's capital) acceptable to the applicable FHLB, if such collateral
has a readily ascertainable value and the FHLB can perfect its security
interest in the collateral.
Each FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances from the FHLBs. The standards take into account a member's
performance under the Community Reinvestment Act and its record of lending to
first-time home buyers. All long-term advances by each FHLB must be made only
to provide funds for residential housing finance. The FHLB has established an
"Affordable Housing Program" to subsidize the interest rate of advances to
member associations engaged in lending for long-term, low- and moderate-income,
owner-occupied and affordable rental housing at subsidized rates. The FHLB of
Cincinnati reviews and accepts proposals for subsidies under that program twice
a year. Franklin has participated in this program.
FEDERAL TAXATION. The Company and its subsidiaries file consolidated
federal income tax returns on a calendar year basis using the accrual method of
accounting. With certain exceptions, Franklin is subject to the federal tax
laws and regulations which apply to corporations generally. One such exception
permits thrift institutions which meet certain definitional tests relating to
the composition of assets and other conditions prescribed by the Internal
Revenue Code of 1986, as amended (the "Code"), to establish reserves for bad
debts and to make annual additions thereto which may, within specified limits,
be taken as a deduction in computing taxable income. For purposes of the bad
debt reserve deduction, loans of a savings association are categorized as
"qualifying real property loans," which generally include loans secured by
improved real estate, and "nonqualifying loans," which include all other types
of loans. The amount of the bad debt reserve deduction for "nonqualifying
loans" is computed under the experience method. A thrift institution may elect
annually to compute its allowable addition to its bad debt reserves for
qualifying loans under either the experience method or the percentage of
taxable income method. Franklin generally uses the percentage of taxable
income method.
Under the experience method, the bad debt deduction for an addition to the
reserve for "qualifying real property loans" or "nonqualifying loans" is an
amount (1) determined under a formula based generally upon a moving average of
the bad debts actually sustained by a thrift institution over a period of six
years or (2) necessary to maintain the bad debt reserves at a "minimum reserve
level."
The percentage of specially computed taxable income that is used to compute
the percentage bad debt deduction is 8%. The percentage bad debt deduction
thus computed is reduced by the amount permitted as a deduction for
nonqualifying loans under the experience method. The availability of the
percentage of taxable income method permits qualifying thrift institutions
which utilize the percentage of taxable income method to be taxed at a lower
effective federal income tax rate than that applicable to corporations
generally. The effective maximum federal income tax rate applicable to a
qualifying thrift institution (exclusive of any minimum tax or environmental
tax), assuming the maximum percentage bad debt deduction, is currently 31.28%.
If less than 60% of the total dollar amount of an institution's assets (on a
tax basis) consist of specified assets (generally, loans secured by residential
real estate or deposits, educational loans, cash and certain governmental
obligations), such institution may not deduct any addition to a bad debt
reserve and generally must include reserves in income over a four-year period.
In January 1992 the IRS proposed regulations which, if adopted as proposed,
will affect the period in which to include reserves in income. Such
regulations will not be effective until published as final regulations. At
December 31, 1994, at least 60% of Franklin's total assets were specified
assets. No representation can be made as to whether Franklin will meet the 60%
test for subsequent taxable years.
Under the percentage of taxable income method, the percentage bad debt
deduction cannot exceed the amount necessary to increase the balance in the
reserve for "qualifying real property loans" to an amount equal to 6% of such
loans outstanding at the end of the taxable year. Additionally, the total bad
debt deduction attributable to "qualifying real property loans" cannot exceed
the greater of (i) the amount deductible under the experience method or (ii)
the amount which when added to the bad debt deduction for "nonqualifying loans"
equals the amount by which 12% of the amount comprising savings and other
withdrawable accounts at year-end exceeds the sum of surplus, undivided profits
and reserves at the beginning of the year. At December 31, 1994, the 6% and
12% limitations did not restrict the percentage bad debt deduction available to
Franklin. No representation can be made as to whether Franklin will be
affected by these limitations for subsequent taxable years.
- 29 -
<PAGE> 30
In addition to the regular income tax, corporations, including the Company
and Franklin, generally are subject to a minimum tax. An alternative minimum
tax is currently imposed at a minimum tax rate of 20% on alternative minimum
taxable income (which is the sum of a corporation's regular taxable income,
with certain adjustments, and tax preference items), less any available
exemption. Such tax preference items include, but are not limited to, (i) 100%
of the excess of a thrift institution's regular income tax bad debt deduction
over the amount that would have been allowable based on actual experience, and
(ii) interest on certain tax-exempt bonds issued after August 7, 1986. In
addition, for tax years that began in 1987, 1988 and 1989, 50% of the amount by
which a corporation's pre-tax book income exceeds its alternative minimum
taxable income computed without regard to this preference item and prior to
reduction by net operating losses, is included in alternative minimum taxable
income. After 1989, this computation was changed to use 75% of the excess of
adjusted current earnings over such specially computed alternative minimum
taxable income. For any taxable year beginning after 1986, net operating
losses can offset no more than 90% of alternative minimum taxable income. The
alternative minimum tax is imposed to the extent it exceeds the corporation's
regular income tax. Payments of alternative minimum tax may be used as credits
against regular tax liabilities in future years. In addition, for taxable
years beginning after 1986 and before 1996, corporations, including the Company
and Franklin, are also subject to an environmental tax equal to 0.12% of the
excess of alternative minimum taxable income for the taxable year (determined
without regard to net operating losses and the deduction for the environmental
tax) over $2,000,000.
To the extent earnings appropriated to a thrift institution's bad debt
reserves for qualifying real property loans and deducted for federal income tax
purposes exceed the allowable amount of such reserves computed under the
experience method, and to the extent of the institution's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for payment of cash dividends or other distributions
to a shareholder (including distributions in dissolution or liquidation) or for
any other purpose (except to absorb bad debt losses).
The Company has been audited or its books closed without audit by the IRS
with respect to federal income tax returns through December 31, 1993. In the
opinion of management, any examination of open returns would not result in a
deficiency which could have a material adverse effect on the financial
condition of the Company. See Note 11 of Notes to Consolidated Financial
Statements for additional information regarding income taxes of the Company.
OHIO TAXATION. The Company is subject to an Ohio franchise tax based on the
higher of the tax computed on its (1) adjusted net worth or (2) adjusted
federal taxable income.
Franklin is subject to an Ohio franchise tax based on its adjusted net worth
(including certain reserves). The resultant net taxable value of capital is
taxed at a rate of 1.5% for 1994.
DELAWARE TAXATION. As a Delaware corporation, the Company is subject to an
annual franchise tax based on the quantity and par value of its authorized
capital stock and its gross assets. As a savings and loan holding company, the
Company is exempt from Delaware corporate income tax.
- 30 -
<PAGE> 31
ITEM 2. DESCRIPTION OF PROPERTY
The following table sets forth certain information at December 31, 1994,
regarding the properties on which the offices of the Company and Franklin are
located:
<TABLE>
<CAPTION>
Lease Date
Expiration Facility Gross Square
Location Owned or Leased Date Opened Footage
-------- --------------- ---- ------ -------
<S> <C> <C> <C> <C>
Corporate Office:
----------------
401 East Court Street Leased 9/97 9/92 7,980
Cincinnati, Ohio 45202
Full Service Branch Office:
--------------------------
45 East Fourth Street Leased 10/99 10/92 2,485
Cincinnati, Ohio 45202
2000 Madison Road Owned N/A 1/81 2,991
Cincinnati, Ohio 45208
1100 West Kemper Road Leased 4/99 1/84 4,080
Cincinnati, Ohio 45240
7615 Reading Road Leased 1/98 9/71 2,400
Cincinnati, Ohio 45237
11186 Reading Road Owned N/A 6/74 1,800
Cincinnati, Ohio 45241
5015 Delhi Pike Owned 7/10 12/76 1,675
Cincinnati, Ohio 45238 (Land is leased)
5119 Glenway Avenue Owned N/A 6/74 2,525
Cincinnati, Ohio 45238
</TABLE>
At December 31, 1994, the Company's office premises and equipment had a net
book value of $985,000. For additional information regarding the Company office
premises and equipment, see Notes 5 and 13 of Notes to Consolidated Financial
Statements.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor Franklin is presently involved in any legal
proceedings of a material nature. From time to time, Franklin is a party to
legal proceedings incidental to its business to enforce its security interest
in collateral pledged to secure loans made by Franklin.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
- 31 -
<PAGE> 32
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The information contained in those portions of the First Franklin
Corporation Annual Report to Stockholders for the fiscal year ended December
31, 1994 (the "Annual Report"), which are included in Exhibit 13, under the
caption "CORPORATE INFORMATION - Market Information; and - Dividends" is
incorporated herein by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
The information contained in those portions of the Annual Report, which are
included in Exhibit 13, under the caption "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" is incorporated herein by
reference.
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements and Notes to Consolidated Financial
Statements contained in those portions of the Annual Report, which are included
in Exhibit 13, are incorporated herein by reference.
ITEM 8. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information contained in the definitive Proxy Statement for the 1995
Annual Meeting of Stockholders of First Franklin Corporation (the "Proxy
Statement") under the captions "Election Of Directors" and "Transactions with
Management and Indebtedness of Management" is incorporated herein by reference.
The following information as to the business experience during the past five
years is supplied with respect to executive officers of the Company and
Franklin who do not serve on the Company's Board of Directors. Each officer is
elected annually to serve until his or her successor shall have been elected
and qualified, or until he or she shall resign or be removed by the Board of
Directors. There are no arrangements or understandings between the persons
named and any other person pursuant to which such officers were selected.
GRETCHEN J. SCHMIDT, age 38, has been the Corporate Secretary/Treasurer of
the Company since 1988. She also serves as Vice President of Retail Banking of
Franklin. Ms. Schmidt has held a variety of part-time positions with Franklin
since 1971, and full-time positions since in 1978. Ms. Schmidt is the daughter
of President Siemers. Currently, she is responsible for customer service and
branch operations.
DANIEL T. VOELPEL, age 46, has been Vice President/Chief Financial Officer
of the Company since 1988. He also serves as Vice President/Chief Financial
Officer of Franklin and Treasurer of DirectTeller Systems, Inc., and Franklin's
subsidiary, Madison Service Corporation. He has been with Franklin for eleven
years.
MARGARET W. WALTON, age 61, has been Vice President of the Company since
1988. She also serves as Vice President/Administration and Corporate Secretary
of Franklin. She is responsible for overall administration and is a Director
of Madison Service Corporation and Corporate Secretary of DirectTeller Systems,
Inc. Ms. Walton has been with Franklin for 26 years.
HARRY R. BARNACLO, age 63, joined Franklin in 1992 as Vice President/Chief
Lending Officer. Prior to joining Franklin, Mr. Barnaclo had been an
independent mortgage broker for 18 years.
- 32 -
<PAGE> 33
ITEM 10. EXECUTIVE COMPENSATION
The information contained in the Proxy Statement under the caption
"Executive Compensation," "Employment Contract" and "Pension Plan" is
incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the Proxy Statement under the caption "Voting
Securities and Principal Holders Thereof" is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained in the Proxy Statement under the caption
"Transactions with Management and Indebtedness of Management" is incorporated
herein by reference.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<S> <C>
(a) Exhibits
Item 3. (i) Certificate of Incorporation (incorporated by reference)
(ii) Bylaws (incorporated by reference)
Item 10. Employment Contract for Thomas H. Siemers (incorporated by reference)
Stock Option Plan (incorporated by reference)
Item 13. Portions of the Annual Report to Stockholders
Item 20. Proxy Statement
Item 21. Subsidiaries of the Registrant
Item 23. Consent of Accountant
Item 27. Financial Data Schedule
(b) No reports on Form 8-K have been filed during the last quarter of the fiscal year covered by this Report.
</TABLE>
- 33 -
<PAGE> 34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
First Franklin Corporation
By Thomas H. Siemers
-----------------------------------------
Thomas H. Siemers
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been duly signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
By Thomas H. Siemers By Daniel T. Voelpel
-------------------------------------------------------- ---------------------------------------------------------
Thomas H. Siemers Daniel T. Voelpel
President, Chief Executive Officer and a Director Vice President and Chief Financial Officer
(Principal Accounting Officer)
Date: March 27, 1995 Date: March 27, 1995
By Richard H. Finan By Mary J. Hunter
-------------------------------------------------------- ---------------------------------------------------------
Richard H. Finan Mary J. Hunter
Director Director
Date: March 27, 1995 Date: March 27, 1995
By James E. Hoff By John L. Nolting
-------------------------------------------------------- ---------------------------------------------------------
James E. Hoff John L. Nolting
Director Director
Date: March 27, 1995 Date: March 27, 1995
</TABLE>
- 34 -
<PAGE> 35
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
------ ----------- -----------
<S> <C> <C>
3(i) Certificate of Incorporation Incorporated by reference to the Form 10-K filed by the
Registrant with the Securities and Exchange Commission for the
fiscal year ended December 31, 1992 (the "1992 Form 10-K")
3(ii) Bylaws Incorporated by reference to the Form 10-K filed by the
Registrant with the Securities and Exchange Commission for the
fiscal year ended December 31, 1991.
10 Employment Contract for Thomas H. Siemers Incorporated by reference to the Registrant's Registration Statement
on Form S-1 (File No. 33-17417)
Stock Option Plan Incorporated by reference to the 1992 Form 10-K
13 Portions of the Annual Report
20 Proxy Statement
21 Subsidiaries of First Franklin Corporation
23 Consent of Accountant
27 Financial Data Schedule
</TABLE>
32795/WP52/WD35A/CN005076 - 35 -
<PAGE> 1
Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
First Franklin Corporation ("Company") is a savings and loan holding company
which was incorporated under the laws of the State of Delaware in September
1987 by authorization of the Board of Directors of the Franklin Savings and
Loan Company ("Franklin"). The Company applied for and received regulatory
approval to acquire all the common stock of Franklin to be outstanding upon its
conversion from the mutual to stock form of ownership. This conversion was
completed on January 25,1988.
The Company's operating philosophy is to be an efficient and profitable
financial institution with a professional staff committed to maximizing
shareholder value by structuring and delivering quality services that attract
customers and satisfy their needs and preferences. Management's goal has been
to maintain profitability and a strong capital position. It seeks to accomplish
this goal by pursuing the following strategies; (i) emphasizing lending in the
one-to four family residential mortgage market, (ii) managing deposit pricing,
(iii) controlling interest rate risk, (iv) controlling operating expenses (v)
controlling asset growth, and (vi) maintaining asset quality.
As a Delaware corporation, First Franklin is authorized to engage in any
activity permitted by Delaware General Corporate Law. As a unitary savings and
loan holding company, the Company is subject to examination and supervision by
the Office of Thrift Supervision ("OTS"), although the Company's activities are
not limited by the OTS as long as certain conditions are met. The Company's
assets consist of cash, investment securities, and investments in Franklin and
DirectTeller Systems Inc. ("DirectTeller").
Franklin is an Ohio chartered stock savings and loan headquartered in
Cincinnati, Ohio. It was originally chartered in 1883 as the Green Street
Number 2 Loan and Building Company. Franklin operates seven banking offices in
Hamilton County, Ohio through which it offers a full range of consumer banking
services, including mortgage loans, credit cards, checking accounts, auto
loans, savings accounts, automated teller machines and a voice response
telephone inquiry system. The business of Franklin consists primarily of
attracting deposits from the general public and using those deposits, together
with borrowings and other funds, to originate and purchase investments and real
estate loans for retention in its portfolio and sale in the secondary market.
Franklin has one subsidiary, Madison Service Corporation ("Madison"). Madison
was formed on February 22,1972 by Franklin which owns 100% of its outstanding
stock. At the present time, Madison's only activity is the servicing of a $2.7
million multi-family mortgage loan. Madison had net income of $12,372 for 1994
and $3,519 for 1993. The majority of Madison's income is derived from loan
servicing fees and interest income. The 1994 increase in net income reflects
the collection of $10,000 in fees.
DirectTeller was formed in 1989 by the Company and DataTech Services Inc. to
develop and market a voice response telephone inquiry system to allow financial
institution customers to access information about their accounts via the
telephone and a facsimile machine. Franklin currently offers this service to
its customers. First Franklin owns 51% of DirectTeller's outstanding common
stock. The Company's share of DirectTeller's operating loss was $1,738 for
1994. The Company's share of DirectTeller's 1993 operating profit was $256. In
1993, DirectTeller completed the installation of the inquiry system at
Intrieve, a computer service bureau specializing in savings and loans. At the
present time, fourteen of Intrieve's clients, with a combined 500,000 accounts,
have contracted to offer the service. The agreement with Intrieve gives
DirectTeller a portion of the future profits generated by the inquiry system.
It is anticipated that DirectTeller will begin to receive revenue under this
agreement during the first half of 1995.
On December 19,1994 the Board of Directors declared a two-for-one stock split
as of January 10,1995. All references to the number of common shares and per
share amounts for previous years have been restated to reflect the stock split.
Common shares and additional paid in capital have also been adjusted to reflect
the split.
Since the results of operations of DirectTeller have not been material to the
operations and financial condition of the Company, the following discussion
focuses primarily on Franklin.
ASSET/LIABILITY MANAGEMENT
A major objective of the Company's asset/liability management activities is to
stabilize or improve earnings in future periods by managing the amount of asset
and liability growth, determining the type and mix of such
4
<PAGE> 2
assets and liabilities, managing interest rate risk, offering the product and
services which meet the needs of its customers, and analyzing operating costs
and efficiencies in order to institute changes when necessary to increase
profitability. Another objective of asset/liability management is structuring
the balance sheet to assist the Company in maintaining compliance with its
regulatory capital requirements and maintaining investments in certain asset
categories within regulatory limits.
Financial institutions, such as Franklin, are subject to interest rate risk to
the degree that their interest-bearing liabilities, consisting principally of
customer deposits and Federal Home Loan Bank advances, mature or reprice more
or less frequently, or on a different basis from their interest-earning assets,
which generally consist of mortgage loans, mortgage-backed securities, consumer
loans and U.S. Treasury and agency securities. While having liabilities that
mature or reprice in a different manner from assets may be beneficial in times
of declining interest rates, such an asset/liability structure may have the
opposite effect during periods of rising interest rates. Franklin actively
pursues investment strategies to reduce the sensitivity of its earnings to
interest rate fluctuations. These strategies take into consideration both the
variability of rates and the maturities of various investments and deposits.
Franklin constantly seeks to reduce its interest rate risk by increasing the
percentage of interest sensitive assets held in its portfolio. The principal
strategies employed by Franklin to decrease the interest rate risk of its
assets and liabilities have been the origination of adjustable rate mortgage
loans ("ARMs") for its own portfolio, the purchase of adjustable rate
mortgage-backed securities when market conditions are not favorable for
originating ARMs, the sale of fixed-rate mortgage loans originated, the
maintenance of short term liquid assets at or above required levels and, as
market conditions permit, the lengthening of certificate maturities. Franklin's
ARMs (which do not include those loans with a passbook escalator clause which
allows Franklin to increase the interest rate by the amount of any increase in
the passbook savings rate but does not require the rate to be decreased by any
reductions in the passbook rate), have increased from 18.6% of the loan
portfolio at December 31, 1984 to 65.7% as of December 31, 1994.
Although ARMs originated and the adjustable rate mortgage-backed securities
purchased are more interest rate sensitive than fixed-rate loans, they are
subject to certain limits on the periodic interest rate adjustments. In a
period of rising interest rates, ARMs could reach a periodic adjustment cap
while still at a rate below existing market rates. Likewise, this cap could
limit the downward rate adjustment during a decline in rates.
The sale of fixed-rate loans originated allows Franklin to either increase or
maintain at current levels the percentage of adjustable rate loans in its
portfolio during times when market conditions are not favorable for originating
adjustable rate loans, as was the case during 1993. Rising interest rates
during 1994 increased consumer demand for adjustable rate mortgages because
their intial interest rate is normally lower than interest rates offerred on
fixed rate loans. For this reason, Franklin only sold $3.9 million of
fixed-rate one-to four- family mortgage loans during 1994 compared to $39.8
million during 1993. Loans being serviced for others, mainly the Federal Home
Loan Mortgage Corporation, were $65.1 million at December 31,1994. A portion of
the proceeds from the sale of loans during 1993 was used to purchase $22.2
million of adjustable rate, ten and fifteen year fixed-rate and five year
balloon mortgage-backed securities. Also during 1993, Franklin sold $13.7
million of adjustable rate and five year balloon mortgage-backed securities at
a profit of $219,000, and invested the proceeds in ten and fifteen year
fixed-rate mortgage-backed securities. During 1994 Franklin purchased $2.6
million of adjustable rate mortgage-backed securities. No mortgage-backed
securities were sold during 1994.
During 1994, Franklin's liquid assets decreased to $18.7 million (9.7% of
assets) compared to $22.8 million (11.4% of assets) at December 31,1993.
Management believes that the current liquidity level is sufficient to allow it
to react to changes in interest rates and meet the funding needs of our
borrowers and savers.
The Company adopted Statement of Financial Accounting Standard (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" during 1994.
This statement addresses accounting and reporting for (1) investments in equity
securities that have readily determinable fair values and (2) all investments
in debt securities. It requires that those investments be classified in one of
three categories (Held-to- Maturity, Available-for-Sale, or Trading) and
accounted for based on their classification. Those investments classified as
held-to-maturity will be reported at amortized cost, those classified as
trading will be accounted for at fair value with any gain or loss recognized in
the income statement and those classified as available-for-sale will be
reported at fair value, with unrealized gains or losses reported as a separate
component of stockholders' equity. Upon adoption of SFAS No. 115, the Company
classified all adjustable rate mortgage-backed securities and U.S. Government
and agency securities as available-for-sale and municipal bonds, certificates
of deposit and fixed-rate mortgage-backed securities as held-to-maturity. All
new investments purchased are evaluated at the time of purchase to determine
how they should be classified. At December 31,1994 the Company had a $1.3
million unrealized loss on investments classified as available-for-sale.
The Board and management have established an interest rate risk policy, and
procedures for monitoring compliance with this policy. The policy requires an
estimate of the change in the market value of portfolio equity
5
<PAGE> 3
(net value of interest sensitive assets and liabilities) and net interest
income under different interest rate scenarios. Specifically, a projection is
made of the market value of portfolio equity ("MVPE") and net interest income
that would result from an instantaneous shift in the Treasury yield curve of
plus or minus 100, 200, 300 and 400 basis points.
The changes in MVPE and net interest income shown in the table below were
calculated using data submitted by Franklin on its regulatory reports and a
simulation program. These exposure estimates are not exact measures of
Franklin's actual interest rate risk. They are only indicators of rate risk
designed to show a magnified sensitivity to changes in rates. The simulation
uses assumptions, which may or may not prove to be accurate, concerning
interest rates, loan prepayment rates, growth, and the rollover of maturing
assets and liabilities consistent with the current economic environment. The
table indicates the effect of various interest rate changes on Franklin's MVPE
and net interest income.
<TABLE>
<CAPTION>
CHANGE IN NET INTEREST INCOME MARKET VALUE OF PORTFOLIO EQUITY
INTEREST ----------------------------------------------- --------------------------------------------------
RATES $ CHANGE % CHANGE $ CHANGE % CHANGE
(BASIS ESTIMATED FROM FROM ESTIMATED FROM FROM
POINTS) $ VALUE CONSTANT CONSTANT $ VALUE CONSTANT CONSTANT
-------- --------- -------- -------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
+400 $4,744 $(1,290) (21.4)% $ (2,999) $(11,343) (135.9)%
+300 5,039 (995) (16.5)% 271 (8,073) (96.8)%
+200 5,482 (552) (9.1)% 3,468 (4,876) (58.4)%
+100 5,702 (331) (5.5)% 5,418 (2,926) (35.1)%
0 6,034 0 0 8,344 0 0
-100 5,878 (156) (2.6)% 9,379 1,035 12.4%
-200 5,774 (260) (4.3)% 10,932 2,588 31.0%
-300 5,614 (420) (7.0)% 11,648 3,304 39.6%
-400 5,508 (526) (8.7)% 12,721 4,377 52.5%
</TABLE>
The sensitivity of earnings to interest rate changes is often measured by the
difference, or "gap", between the amount of assets and liabilities scheduled to
reprice within the same period expressed as a percentage of assets, based on
certain assumptions. Generally, the lower the amount of this gap, the less
sensitive are the Company's earnings to interest rate changes. A positive gap
means an excess of assets over liabilities repricing during the same period.
However, this method of measuring interest rate sensitivity does not take into
account the differing repricing characteristics of the various types of assets
and liabilities. Certain assets and liabilities that have similar maturities or
periods to repricing may react differently to changes in market interest rates.
The table below sets forth Franklin's interest rate sensitivity as of December
31,1994. As shown below, the one year cumulative gap is $3.3 million.This
positive gap indicates that more assets reprice during the next year than
liabilities. Generally, this would indicate that net interest income would
increase as rates rise, but as the table above indicates, due to the adjustment
caps on ARMs the opposite is true.
<TABLE>
<CAPTION>
3 MONTHS 3 TO 6 6 MONTHS 1 TO 3 3 TO 5 5 TO 10 10 TO 20 >20
OR LESS MONTHS TO 1 YEAR YEARS YEARS YEARS YEARS YEARS TOTAL
------- ------- ------- ------- ------- ------- ------ ------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Real Estate Loans and
Mortgage-backed securities:
One-to-four family
Adjustable Rate $23,234 $38,993 $21,146 $14,662 $ 680 $ 0 $ 0 $ 0 $ 98,715
Fixed-Rate 2,175 1,851 2,884 9,349 7,581 12,472 8,118 1,370 45,800
Multi-family and
Non-Residential
Adjustable Rate 2,814 2,979 3,248 5,861 2,042 0 0 0 16,944
Fixed-Rate 263 76 927 1,082 997 1,166 237 0 4,748
Consumer Loans 2,483 286 361 814 324 184 53 3 4,508
Investments 2,274 0 525 2,635 8,023 225 0 146 13,828
------- ------- ------- ------- ------- ------- ------ ------ --------
Total Rate Sensitive Assets $33,243 $44,185 $29,091 $34,403 $19,647 $14,047 $8,408 $1,519 $184,543
LIABILITIES:
Fixed Maturity Deposits $35,309 $16,621 $32,142 $24,446 $ 7,940 $ 0 $ 0 $ 0 $116,458
Transaction Accounts 778 739 1,552 12,492 0 0 0 0 15,561
Money Market Deposit
Accounts 3,012 3,128 3,128 2,317 0 0 0 0 11,585
Passbook Accounts 1,468 1,394 2,928 23,563 0 0 0 0 29,353
FHLB Advances 8 8 17 75 89 296 103 0 596
Other Borrowings 1,000 0 0 0 0 0 0 0 1,000
------- ------- ------- ------- ------- ------- ------ ------ --------
Total Rate Sensitive
Liabilities $41,575 $21,890 $39,767 $62,893 $8,029 $296 $103 $0 $174,553
GAP INFORMATION:
Cumulative Gap $(8,332) $13,963 $3,287 $(25,203) $(13,585) $166 $8,471 $9,990
Cumulative Gap as a
Percentage of Total
Assets (4.40)% 7.38% 1.74% (13.32)% (7.18)% 0.09% 4.48% 5.28%
</TABLE>
In preparing the above table, it has been assumed that (i) adjustable rate
one-to four-family residential mortgage loans and mortgage-backed securities
with a current market index (Treasury yields, LIBOR, prime) will
6
<PAGE> 4
prepay at an annual rate of 19% (ii) adjustable rate one-to four-family
residential mortgage loans with a lagging market index (cost of funds, national
average contract rate) will prepay at an annual rate of 12% (iii) fixed-rate
one-to four-family residential mortgage loans will prepay at annual rates of 6%
to 12% depending on the stated interest rate and contractual maturity of the
loan; (iv) the decay rate on deposit accounts is 40%; and (v) fixed-rate
certificates of deposit will not be withdrawn prior to maturity.
ASSET QUALITY/CREDIT RISK
Credit risk refers to the potential for losses on assets due to a borrower's
default or to the decline in the value of the collateral supporting that asset.
Franklin has taken various steps to reduce credit risk and to maintain the
quality of its assets. The lending program is focused towards relatively low
risk single-family first mortgage loans which are underwritten using standards
acceptable to the Federal Home Loan Mortgage Corporation. An independent
Quality Control program has been established to review the underwriting
standards used on a sample of the loans originated. The results of these
reviews are reported to the Chief Executive Officer. Franklin closely monitors
delinquencies as a means of maintaining asset quality and reducing credit risk.
Collection efforts begin fifteen days after a payment is due. All borrowers
whose loans are more than thirty days past due are contacted by the Collection
Manager in an effort to correct the problem. The Asset Classification Committee
meets on a regular basis, at least quarterly, to determine if all assets are
being valued fairly and properly classified for regulatory purposes. All
mortgage loans in excess of $250,000, consumer loans in excess of $50,000, and
repossessed assets are reviewed annually. In addition, any loan delinquent more
than ninety days is reviewed on a quarterly basis. Other assets are reviewed at
the discretion of the committee members.
Loans are placed on a non-accrual status when the collection of principal
and/or interest becomes doubtful or legal action to foreclose has commenced. In
addition, all loans, except one-to four-family residential mortgage loans, are
placed on a non-accrual status when the uncollected interest becomes greater
than ninety days past due. Consumer loans more than ninety days delinquent are
charged against the consumer loan allowance for loan losses unless payments are
currently being received and it appears likely that the debt will be collected.
The following table sets forth Franklin's non-performing assets as of the dates
indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
1994 1993
---- ----
(IN THOUSANDS)
<S> <C> <C>
Non-accruing Loans $ 875 $ 1,729
Accruing Loans Delinquent more
than Ninety Days 253 276
Repossessed Assets 489
Renegotiated Loans 1,047 1,113
-------- --------
Total Non-performing Assets $ 2,175 $ 3,607
======== ========
</TABLE>
As indicated by the table above, significant improvement in the level of
non-performing assets was experienced during 1994. The Company will continue to
strive to reduce the level of these assets during 1995.
Renegotiated loans consist of loans whose terms have been modified due to the
borrowers inability to perform under the original agreement.
Repossessed assets, at the end of 1994, consisted of a vacant lot in Dayton,
Ohio which is being carried for its estimated fair value of $1.00. All other
reposessed asset being carried at December 31,1993 or acquired during 1994 were
disposed of during 1994.
The Asset Classification Committee is responsible for ensuring that adequate
specific and general loss reserves are maintained. Specific reserves are
established for credit losses or to value real estate at the lower of cost or
estimated net realizable value. General reserves are determined by evaluating
past loss experience on similar types of assets. The following table is an
analysis of the loss reserve activity on loans and repossessed assets during
the past two years. In management's opinion, to the extent that economic and
regulatory conditions remain constant, these reserves are adequate to protect
Franklin against reasonably foreseeable losses.
7
<PAGE> 5
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1994 1993
---- ----
(IN THOUSANDS)
<S> <C> <C>
Beginning balance $ 1,279 $ 1,345
Charge-offs
One-to four-Family 67 28
Multi-family 0 334
Non-residential 19 0
Consumer 0 30
-------- --------
86 392
-------- --------
Recoveries
One-to four-Family 1 0
Multi-family 0 0
Non-residential 0 0
Consumer 0 1
-------- --------
1 1
-------- --------
Net Charge-offs 85 391
Additions Charged to Operations 62 325
-------- --------
Ending Balance $ 1,256 $ 1,279
======== ========
Ratio of Net Charge-offs to
Average Loans Outstanding 0.06% 0.28%
======== ========
Ratio of Net Charge-offs to
Average Non-performing Assets 2.94% 9.84%
========= ========
</TABLE>
RESULTS OF OPERATIONS
Franklin's net income for the year ended December 31,1994 was $1.4 million,
which represents a return on average assets of 0.70% and a return on average
stockholders' equity of 7.43%. Book value per share at December 31, 1994 was
$15.34 and dividends of $0.31 per share were declared and paid during the year.
Net income for the years ended December 31,1993 and 1992 was $1.8 and $1.6
million, respectively. This represents returns on average assets and average
equity of 0.90% and 10.58%, and 0.79% and 10.34% for 1993 and 1992,
respectively. The decline in return on average assets and return on average
stockholders' equity between 1994 and 1993 is principally the result of the
cumulative effect of the adoption of SFAS No. 109 during 1993.
During the first quarter of 1993, the Company adopted the provisions of SFAS
No. 109, "Accounting for Income Taxes", as required. The effect of the
accounting change was a cumulative effect adjustment which increased the
Company's net income by $441,000 ($0.36 per share), resulting primarily from
the recognition of a deferred tax asset relating to provisions for losses on
loans and real estate owned. Note 11 of the Notes to Consolidated Financial
Statements contains an analysis of the deferred tax assets and liabilities at
December 31,1994 and 1993.
NET INTEREST INCOME. Net interest income, the difference between interest
earned on interest-earning assets and the interest paid on interest-bearing
liabilities, is the Company's primary source of earnings. The amount of net
interest income depends on the volume of interest-earning assets and
interest-bearing liabilities and the level of rates earned or paid on those
assets or liabilities. The following table presents the interest income earned
on average interest-earning assets and the resultant yields, as well as the
interest expense on average interest-bearing liabilities and their resultant
costs. Average balances shown are the average of the month end balances for
each category and non-accruing loans have been included as loans carrying a
zero yield. Also, the unrealized loss on available-for-sale securities have
been excluded from the calculation of the average outstanding balance. The
table indicates that net interest income increased to $5.8 million in 1994 from
$5.3 million in 1993. This increase in net interest income is mostly due to a
increase in the interest rate spread, the difference between the yield earned on
the assets and the cost of the liabilities, to 2.76% from 2.42%. The following
table also shows an increase in net earnings assets to $14.0 million for
1994. Because of the rising interest rates experienced during 1994 and
expected during 1995, management anticipates a slight decline in net interest
income for 1995.
8
<PAGE> 6
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1994 1993 1992
---------------------------------------------------------------------------------------------------------
AVERAGE INTEREST AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE BALANCE PAID RATE
----------- -------- ------ ----------- ------- ------ ----------- ------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable (1) $ 130,839 $10,223 7.81% $ 137,181 $ 11,310 8.24% $ 152,938 $ 13,757 9.00%
Mortgage-backed
securities(2) 37,947 2,065 5.44 39,039 1,942 4.97 24,783 1,221 4.93
Investments (2) 17,403 912 5.24 18,880 839 4.44 19,480 1,182 6.07
FHLB stock 1,643 94 5.72 1,701 76 4.47 1,571 70 4.46
--------- ------- --------- -------- --------- --------
Total interest-
earning assets $ 187,832 $13,294 7.08 $ 196,801 $ 14,167 7.20 $ 198,772 $ 16,230 8.17
========= ======= ========= ======== ========= ========
INTEREST-BEARING
LIABILITIES:
Demand and NOW deposits $ 28,446 $ 707 2.49 $ 28,702 $ 543 1.89 $ 27,420 $ 845 3.08
Savings deposits 34,155 953 2.79 40,446 1,251 3.09 39,527 1,469 3.72
Certificate accounts 110,426 5,783 5.24 115,238 6,971 6.05 120,196 8,087 6.73
FHLB Advances 830 72 8.67 1,294 108 8.35 1,746 144 8.25
Other borrowings (3) 17 100 125
--------- ------- --------- -------- --------- --------
Total interest-bearing
liabilities $ 173,874 $ 7,515 4.32 $ 185,780 $ 8,873 4.78 $ 189,014 $ 10,545 5.58
========= ======= ========= ======== ========= ========
Net interest income $ 5,779 $ 5,294 $ 5,685
======= ======== ========
Net interest rate spread 2.76% 2.42% 2.59%
==== ==== ====
Net earning assets $ 13,958 $ 11,021 $ 9,758
========= ========= =========
Net yield on average
interest-earning assets 3.08% 2.69% 2.86%
==== ==== ====
Average interest-earning
assets to average
interest-bearing
liabilities 1.08% 1.06% 1.05%
======= ======== ========
<FN>
(1) Calculated net of deferred loan fees, loan discounts, loans in process and loss reserves.
(2) Investments classified as available-for-sale included at amortized cost not fair value.
(3) ESOP Loan (borrowing costs paid by ESOP)
</TABLE>
RATE/VOLUME ANALYSIS. The most significant impact on the Company's net
interest income between periods is derived from the interaction of changes in
the volume of and rates earned or paid on interest-earning assets and
interest-bearing liabilities. 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 each category of interest-earning assets and interest-bearing
liabilities, the information is provided on changes attributable to (i) changes
in volume (change in volume multiplied by prior year's rate), (ii) changes in
rate (change in rate multiplied by prior year's volume) and (iii) total changes
in rate and volume. The combined effect of changes in both rate and volume,
which cannot be separately identified, has been allocated proportionately to
the change due to volume and the change due to rate. During 1994, net interest
income increased $485,000 compared to a $391,000 decline during 1993. The
income earned on assets decreased $873,000, mostly due to a decline in the
average amount of interest-earning assets of $9.0 million and to a lesser
extent, a decrease in the rates earned on total interest-earning assets from
7.20% to 7.08%. During the same period, interest expense decreased $1.4
million. This decrease is the result of a decrease in the average cost of funds
from 4.78% to 4.32% and a decline in average interest-bearing liabilities of
$11.9 million.
<TABLE>
<CAPTION>
1994 VS 1993 1993 VS 1992 1992 VS 1991
------------ ------------ -------------
INCREASE INCREASE INCREASE
(DECREASE) TOTAL (DECREASE) TOTAL (DECREASE) TOTAL
DUE TO INCREASE DUE TO INCREASE DUE TO INCREASE
VOLUME RATE (DECREASE) VOLUME RATE (DECREASE) VOLUME RATE (DECREASE)
------ ---- -------- ------ ----- -------- ------ ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME ATTRIBUTABLE TO:
Loans receivable (1) $ (510) $ (577) $ (1,087) $ (1,352) $ (1,095) $ (2,447) $ (1,157) $ (1,147) $ (2,304)
Mortgage-backed
securities (52) 175 123 709 12 721 1,082 (24) 1,058
Investments (57) 130 73 (35) (308) (343) (230) (139) (369)
FHLB stock (2) 20 18 6 0 6 1 (31) (30)
------- ------- -------- -------- -------- -------- -------- -------- --------
Total interest-earning
assets $ (621) $ (252) $ (873) $ (672) $ (1,391) $ (2,063) $ (304) $ (1,341) $ (1,645)
======= ======= ======== ======== ======== ======== ======== ======== ========
INTEREST EXPENSE ATTRIBUTABLE TO:
Demand and NOW deposits $ (5) $ 171 $ 166 $ 42 $ (344) $ (302) $ 135 $ (486) $ (351)
Savings deposits (184) (115) (299) 35 (253) (218) 637 (178) 459
Certificate accounts (282) (907) (1,189) (324) (792) (1,116) (1,249) (1,270) (2,519)
FHLB advances (40) 4 (36) (38) 2 (36) 21 15 36
Other borrowings (2)
------- ------- -------- -------- -------- -------- -------- -------- --------
Total interest-bearing
liabilities $ (511) $ (847) $ (1,358) $ (285) $ (1,387) $ (1,672) $ (456) $ (1,919) $ (2,375)
======= ======= ======== ======== ======== ======== ======== ======== ========
Increase (Decrease) in
net interest income $ (110) $ 595 $ 485 $ (387) $ (4) $ (391) $ 152 $ 578 $ 730
======= ======= ======== ======== ======== ======== ======== ======== ========
<FN>
(1) Includes Non-accruing Loans of $875,000
(2) ESOP Loan (borrowing costs paid by ESOP)
</TABLE>
9
<PAGE> 7
AVERAGE YIELDS AND RATES PAID. The following table sets forth the average
yields earned on loans and other investments and the average rate paid on
savings accounts and borrowings and the average interest rate spread at the end
of each of the past three years.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Weighted Average Yield on:
Loans Receivable (1) 7.45% 7.25% 7.96%
Mortgage-backed Securities 5.86 5.50 5.13
Investments (2) 5.34 4.81 5.20
FHLB Stock 6.38 4.50 4.50
---- ---- ----
Combined Weighted Average Yield on
Interest-earning Assets 6.95 6.63 7.20
---- ---- ----
Weighted Average Rate Paid on:
Demand and NOW Deposits 2.58 2.50 2.77
Savings Deposits 2.75 2.75 3.50
Certificates 5.42 5.32 6.08
Borrowings 8.15 7.95 7.99
---- ---- ----
Combined Weighted Average Rate Paid
on Interest-bearing Liabilities 4.53 4.32 5.01
---- ---- ----
Average Interest Rate Spread 2.42% 2.31% 2.19%
==== ==== ====
<FN>
(1) Includes inpact of non-accruing loans.
(2) Yields reflected have not been calculated on a tax equivalent basis.
</TABLE>
PROVISION FOR LOAN LOSSES. Management determines the amount of the loan loss
provisions to be expensed each year based on previous loan loss experience,
current economic conditions, the composition of the loan portfolio and the
current level of loan loss reserves. Charges against current operations during
1994, 1993 and 1992 for loan loss reserves were $61,800, $324,921 and $410,125,
respectively. During 1994 assets classified as substandard and loss were
reduced by 8.2% to $2.4 million and non-performing assets were reduced by 39.7%
to $2.2 million. Accordingly, because of the quality of the loan portfolio and
management's belief that the level of general reserves is adequate to protect
Franklin against reasonally foreseeable losses, the charges against current
operations during 1994 were reduced as compared to previous years.
NONINTEREST INCOME. Noninterest income was $439,000 for 1994, compared to $1.19
million for 1993 and $1.06 million for 1992. The reduction in 1994 income is
the result of a decline in profits on the sale of fixed-rate mortgage loans,
due to a substantial decrease in sales volume, to $23,000 from $564,000 in 1993
and $640,000 in 1992. The 1993 income also included $219,000 in profits
realized on the sale of mortgage-backed securities. No mortgage-backed
securities were sold during 1994.
NONINTEREST EXPENSES. Noninterest expenses were $4.15 million, $4.05 million
and $3.77 million for the years ended December 31, 1994, 1993, and 1992,
respectively. As a percentage of average assets, noninterest expenses were
2.14%, 1.98%, and 1.83% for the three years. Under SFAS No. 91 certain loan
origination costs can be capitalized against specific loans thus reducing
current noninterest expenses. These capitalized costs were $156,000, $314,000
and $385,000 during 1994, 1993 and 1992, respectively. Noninterest expenses
before this reduction for capitalized loan origination costs declined to $4.30
million in 1994 from $4.36 million in 1993. During 1994, occupancy expense
declined $70,000 because rental improvements at the corporate office were fully
depreciated during 1993, salaries and employee benefits, prior to the
adjustment for loan origination costs, increased less than five percent.
PROVISION FOR FEDERAL INCOME TAXES. Provisions for federal income taxes were
$654,575, $703,000, and $923,000 in fiscal 1994, 1993 and 1992, respectively.
The effective federal income tax rates for the years ended December 31, 1994,
1993, and 1992 were 32.6%, 33.4% and 36.0%, respectively. A reconciliation of
statutory federal income tax rates to the effective federal income tax rates is
shown in Note 11 of the Notes to Consolidated Financial Statements. See Note 1
of the Notes to Consolidated Financial Statements for a discussion of the
adoption of SFAS No. 109, "Accounting for Income Taxes".
LIQUIDITY
Liquidity refers to the ability of a financial institution to generate
sufficient cash to fund current loan demand, meet savings withdrawals and pay
operating expenses. Franklin's liquid assets consist of cash, cash equivalents
and investment securities. Liquid assets declined $4.1 million to $18.7 million
at December 31,1994. The change in cash and cash equivalents is caused by one
of three activities: operations, investing or financing. These activities are
summarized below for the years ended December 31,1994 and 1993.
10
<PAGE> 8
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1994 1993
---- ----
(IN THOUSANDS)
<S> <C> <C>
Operating Activities:
Net Income $ 1,355 $ 1,844
Adjustments to reconcile net income to net cash
provided by operating activities 1,554 11,148
--------- ---------
Net cash provided by operating activities 2,909 12,992
Net cash used in investing activities (379) (4,649)
Net cash used in financing activities (7,005) (12,050)
--------- ---------
Net decrease in cash and cash equivalents (4,475) (3,707)
Cash and cash equivalents at beginning of year 7,358 11,065
--------- ---------
Cash and cash equivalents at end of year $ 2,883 $ 7,358
========= =========
</TABLE>
Operating activities include the sale of fixed-rate single family mortgage
loans of $3.9 million during 1994 and $39.8 million during 1993. The Company's
policy is to sell, in the secondary market, eligible fixed-rate single family
mortgage loans originated and any adjustable rate loans exercising their
conversion privilege. The decline in net cash provided by operating activities
during 1994 is the result of this reduction in loan sales.
Loan receipts and disbursements are a major component of the investing
activities. Repayments on loans and mortgage-backed securities during the year
ended December 31,1994 totaled $33.0 million compared to $46.0 million during
fiscal 1993. Loan disbursements during 1994 were $33.3 million compared to
$66.3 million during 1993. The Company also purchased $2.6 million of
mortgage-backed securities during 1994 and $22.2 million during 1993.
Financing activities include deposit account flows, the use of borrowed funds
and the payment of dividends. Deposits decreased $6.0 million to $172.6 million
at December 31,1994 from $178.6 million at December 31, 1993. Net of interest
credited, deposits decreased by $12.6 million during 1994 as compared to a
$18.9 million decrease during 1993. This decrease in deposit flows in 1994 and
1993 reflects management's desire to reduce the cost of funds by not
aggressively pricing deposit products because of a lack of profitable
investment alternatives. The table below sets forth the deposit flows by type
of account, including interest credited, during 1994 and 1993.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1994 1993
---- ----
(IN THOUSANDS)
<S> <C> <C>
Passbook Savings $ (8,969) $ (4,519)
NOW/Super NOW Accounts (1,085) (563)
MMDA Accounts (2,418) 917
--------- ---------
Total (12,472) (4,165)
--------- ---------
Certificates:
7-31 Day (101) 255
91 Day (187) 111
Six month (5,042) (5,544)
One year 12,061 (6,821)
Eighteen month (1,212) (1,465)
Two year 6,727 (665)
Thirty-two month 38 13,611
Three year (1,578) 68
Five year (3,363) (4,651)
Jumbo certificates (810) (1,833)
Other (108) (247)
--------- ---------
Total 6,425 (7,181)
--------- ---------
Total deposit decrease $ (6,047) $ (11,346)
========= =========
</TABLE>
At December 31,1994 Franklin's only borrowing was a Federal Home Loan Bank
("FHLB") advance of $596,000 at 8.15% The advance is being amortized monthly
for fifteen years, with the option of making annual prepayments in an amount
determined by the FHLB. Subject to certain limitations, based on its current
investment in FHLB stock, Franklin is eligible to borrow an additional $32.3
million from the FHLB.
11
<PAGE> 9
The OTS requires minimum levels of liquid assets ranging between four and ten
percent. Current OTS regulations require Franklin to maintain an average daily
balance of liquid assets (U.S. Treasury, federal agency, and other investments
having a maturity of five years or less) equal to at least 5% of the sum of its
average daily balance of net deposit accounts and borrowing payable in one year
or less. At December 31,1994, Franklin's regulatory liquidity was 9.51%.
At December 31, 1994 Franklin had outstanding commitments to originate or
purchase $1.4 million of mortgage loans or mortgage-backed securities, as
compared to $4.9 million at December 31, 1993. During the next twelve months
approximately $67.3 million of certificates of deposit are scheduled to mature.
Based on past history, it can be anticipated that the majority of the maturing
certificates will either be renewed or transferred to other Franklin accounts.
Management believes that the Company has sufficient cash flow and borrowing
capacity to meet these commitments and maintain desired liquidity levels.
CAPITAL
The Company's capital supports business growth, provides protection to
depositors, and represents the investment of stockholders on which management
strives to achieve adequate returns. The capital adequacy objectives of the
Company have been developed to meet these needs. These objectives are to
maintain a capital base reasonably commensurate with the overall risk profile
of the Company, to maintain strong capital ratios, and to meet all regulatory
guidelines. Management believes that a strong capital base is instrumental in
achieving enhanced stockholder returns over the long term.
The Company's stockholders' equity decreased approximately $100,000 during 1994
from $18.0 million at December 31,1993 to $17.9 million at the end of 1994.
Book value per share declined to $15.34 at December 31,1994 from $15.55 at the
end of 1993. This decline in stockholders' equity and book value is primarily
the result of the implementation of SFAS No. 115 which resulted in unrealized
losses on available-for-sale securities at December 31, 1994 of $1.3 million.
As a percentage of total assets, the Company's stockholders' equity equaled
9.3% and 9.1% at December 31,1994 and 1993, respectively.
Dividends per share of $0.31 in 1994 and $0.25 in 1993 were declared, resulting
in payments of $365,000 in 1994 and $290,000 in 1993. See Note 8 of the Notes
to Consolidated Financial Statements for information regarding regulatory
restrictions on dividend payments from Franklin Savings to the Company.
<TABLE>
For regulatory purposes, Franklin is subject to a tangible capital, a leverage
ratio (core capital) and a risk-based capital requirement. The following table
summarizes Franklin's current regulatory capital position:
<CAPTION>
CAPITAL STANDARD ACTUAL REQUIRED EXCESS ACTUAL REQUIRED EXCESS
--------- ---------- ---------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tangible $ 13,879 $ 2,852 $ 11,027 7.30% 1.50% 5.80%
Core 13,879 5,705 8,174 7.30 3.00 4.30
Risk-based 14,558 7,024 7,534 16.58 8.00 8.58
</TABLE>
IMPACT OF INFLATION ON CHANGING PRICES
The consolidated financial statements and related data presented herein have
been prepared in accordance with generally accepted accounting principles,
which require measurement of financial position and operating results in terms
of historical dollars, without considering changes in relative purchasing power
over time due to inflation.
Unlike most industrial companies, virtually all of the assets and liabilities
of the Company are monetary in nature. As a result, interest rates generally
have a more significant impact on the Company's performance than does the
effect of inflation.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 1993, the Financial Accounting Standards Board issue Statement of
Financial Accounting Standard (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan". The statement, as amended by SFAS No. 118, applies to
financial statements for fiscal years beginning after December 15,1994 and
requires that certain impaired loans be recorded at either the present value of
expected future cash flows discounted at the loan's effective interest rate,
the loan's market price, or the fair value of the collateral for collateral
dependent loans. Management does not believe that the adoption of this
statement will have a significant impact on the financial statements.
12
<PAGE> 10
CORPORATE INFORMATION
MARKET INFORMATION
The Company's common stock is traded in the over-the-counter market and is
quoted through the National Association of Securities Dealers Automated
Quotations ("Nasdaq") National Market System under the trading symbol "FFHS".
As of February 28,1995 there were approximately 483 stockholders of record, not
including those shares held in nominee or street name through various brokerage
firms or banks.
<TABLE>
The following table sets forth the high and low sales prices for First
Franklin's common stock as reported on the Nasdaq National Market System during
the quarters indicated. At February 28,1995 First Franklin's closing sale
price as reported on the Nasdaq National Market System was $13.50.
<CAPTION>
STOCK PRICES (1)
QUARTER ENDED: LOW HIGH
------ ------
<S> <C> <C>
March 31,1993 $10.50 $13.00
June 30,1993 10.50 12.00
September 30,1993 11.25 14.00
December 31,1993 12.50 14.00
March 31,1994 13.25 14.25
June 30,1994 13.00 14.50
September 30,1994 13.25 15.00
December 31,1994 13.50 15.13
<FN>
(1) Prices have been adjusted for a two-for-one stock
split effective January 10, 1995.
</TABLE>
DIVIDENDS
Dividends are paid upon the determination of the Board of Directors that such
payment is consistent with the long-term interests of the Company. The factors
affecting this determination include Franklin's current and projected earnings,
operating results, financial condition, regulatory restrictions, future growth
plans and other relevant factors. First Franklin Corporation paid dividends of
$0.31 per share during 1994 and $0.25 per share during 1993. At this time, it
is anticipated that the annual dividend amount will be increased to $0.28 per
share beginning the first quarter of 1995.
Franklin Savings may not declare or pay a cash dividend to the Company or
repurchase shares of its stock from the Company if the effect thereof would be
to cause its regulatory capital to be reduced below the amount required for the
liquidation account established by Franklin in connection with the Conversion
or to meet applicable regulatory capital requirements. Federal regulations
limit Franklin's capital distributions during a calendar year to one hundred
percent of its net income plus one-half of its capital surplus ratio at the
beginning of the calendar year. In addition, Franklin must give the OTS thirty
days notice prior to the declaration of a dividend to the Company. In both 1994
and 1993 Franklin paid a dividend to the Company of approximately one hundred
percent of its net income for those years. There is no federal regulatory
restriction on the payment of dividends by the Company. However, the Company is
subject to the requirements of Delaware law which generally limit dividends to
an amount equal to the excess of a corporation's net assets over paid in
capital; or if there is no such excess, to its net profits for the current and
immediately preceding fiscal year.
TRANSFER AGENT:
Fifth Third Bank, Cincinnati, Ohio
SPECIAL COUNSEL:
Vorys, Sater, Seymour and Pease, Cincinnati, Ohio
ANNUAL MEETING:
The Annual Meeting of Stockholders will be held at the corporate office of the
Company located at 401 East Court Street, Cincinnati, Ohio, on April 24,1995 at
3:00 P.M.
FORM 10-KSB:
First Franklin Corporation's 1994 Annual Report on Form 10-KSB as filed with
the Securities and Exchange Commission will be furnished without charge to any
shareholder who contacts:
Investor Relations Department
First Franklin Corporation
401 East Court Street
Cincinnati, Ohio 45202
13
<PAGE> 11
| Coopers | COOPERS & LYBRAND L.L.P.
| & Lybrand |
| a professional services firm
REPORT OF INDEPENDENT ACCOUNTANTS
---------------------------------
To the Board of Directors
First Franklin Corporation and Subsidiary
Cincinnati, Ohio
We have audited the accompanying consolidated balance sheets of First Franklin
Corporation and Subsidiary as of December 31, 1994 and 1993 and the related
consolidated statements of operations, changes in stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1994.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of First Franklin
Corporation and Subsidiary as of December 31, 1994 and 1993, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles.
As discussed in Notes 1, 2 and 11 to the financial statements, the Company
changed its method of accounting for certain investment securities in 1994 and
for income taxes in 1993.
/S/ Coopers & Lybrand L.L.P.
Cincinnati, Ohio
January 31, 1995,
except for Note 10, for which
the date is February 24, 1995
15
<PAGE> 12
<TABLE>
FIRST FRANKLIN CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<CAPTION>
ASSETS
DECEMBER 31,
-----------------------------------------
1994 1993
---- ----
<S> <C> <C>
Cash, including certificates of deposit and other
interest-earning deposits of $827,225 and $3,679,100
at December 31, 1994 and 1993, respectively $ 2,882,989 $ 7,357,972
Investment securities:
Securities available-for-sale, at market value (amortized
cost of $14,899,185 at December 31, 1994) 13,747,326
Securities held-to-maturity, at amortized cost (market value of
$932,862 and $15,543,651 at December 31, 1994 and 1993,
respectively) 880,975 15,412,929
Mortgage-backed securities:
Securities available-for-sale, at market value (amortized
cost of $21,543,461 at December 31, 1994) 20,742,338
Securities held-to-maturity, at amortized cost (market value
of $13,099,759 and $39,399,642 at December 31, 1994 14,582,995 39,085,097
and 1993, respectively)
Loans receivable, net 134,170,347 132,007,505
Real estate owned, net 1 458,246
Investment in Federal Home Loan Bank
of Cincinnati stock, at cost 1,649,200 1,742,500
Accrued interest receivable:
Investment securities 168,944 166,539
Mortgage-backed securities 189,300 195,500
Loans receivable 662,387 530,695
Property and equipment, net 984,834 1,084,280
Other assets 1,728,732 1,252,189
------------------- ---------------------
$ 192,390,368 $ 199,293,452
=================== =====================
LIABILITIES
Savings accounts $ 172,501,894 $ 178,549,574
Federal Home Loan Bank advances 596,016 1,197,282
Advances by borrowers for taxes and insurance 1,113,538 1,124,945
Employee stock ownership plan debt 100,000
Other liabilities 326,691 290,314
------------------- ---------------------
Total liabilities 174,538,139 181,262,115
------------------- ---------------------
Commitments (Notes 13 and 15)
STOCKHOLDERS' EQUITY
Preferred stock - $.01 par value, 500,000 shares
authorized, none issued and outstanding
Common stock - $.01 par value, 1,500,000 shares
authorized, 1,255,464 and 1,251,464 shares
issued in 1994 and 1993, respectively 12,554 12,514
Additional paid-in capital 5,764,766 5,744,806
Treasury stock, at cost - 91,878 shares
in 1994 and 1993 (442,045) (442,045)
Employee stock ownership plan debt (100,000)
Retained earnings, substantially restricted 13,806,036 12,816,062
Unrealized loss on available-for-sale securities,
net of taxes of $663,900 (1,289,082)
------------------- ---------------------
Total stockholders' equity 17,852,229 18,031,337
------------------- ---------------------
$ 192,390,368 $ 199,293,452
==================== =====================
<FN>
The accompanying notes are an integral part
of the consolidated financial statements.
</TABLE>
16
<PAGE> 13
<TABLE>
FIRST FRANKLIN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Interest income:
Loans receivable $ 10,222,323 $ 11,198,085 $ 13,755,815
Investment securities 899,092 839,327 1,074,231
Mortgage-backed securities 2,065,108 1,942,094 1,220,696
Other interest income 107,294 187,225 178,959
------------------ ------------------- -------------------
13,293,817 14,166,731 16,229,701
------------------ ------------------- -------------------
Interest expense:
Savings accounts 7,442,314 8,764,636 10,400,543
Borrowed funds 73,013 107,896 144,097
------------------ ------------------- -------------------
7,515,327 8,872,532 10,544,640
------------------ ------------------- -------------------
Net interest income 5,778,490 5,294,199 5,685,061
Provision for loan losses 61,800 324,921 410,125
------------------ ------------------- -------------------
Net interest income after
provision for loan losses 5,716,690 4,969,278 5,274,936
------------------ ------------------- -------------------
Noninterest income:
Service fees on NOW accounts 204,770 221,665 225,951
Gain on loans sold 22,526 563,818 640,277
Gain on sale of investments 22 218,646
Other income 211,736 182,833 194,218
------------------ ------------------- -------------------
439,054 1,186,962 1,060,446
------------------ ------------------- -------------------
Noninterest expense:
Salaries and employee benefits 1,722,326 1,493,122 1,358,916
Occupancy 572,238 645,676 603,478
Federal insurance premiums 406,047 398,708 418,909
Service bureau 253,349 241,886 227,058
Taxes other than income taxes 196,799 204,112 234,660
Other 995,939 1,066,450 929,073
------------------ ------------------- -------------------
4,146,698 4,049,954 3,772,094
------------------ ------------------- -------------------
Income before federal income taxes
and change in accounting principle 2,009,046 2,106,286 2,563,288
Provision for federal income taxes 654,575 703,000 923,000
------------------ ------------------- -------------------
Income before cumulative effect of
change in accounting principle 1,354,471 1,403,286 1,640,288
Cumulative effect of change in
accounting principle 440,712
------------------ ------------------- -------------------
NET INCOME $ 1,354,471 $ 1,843,998 $ 1,640,288
================== =================== ===================
Earnings per common share:
Income before cumulative effect of
change in accounting principle $ 1.11 $ 1.16 $ 1.42
Cumulative effect of change in
accounting principle .36
------------------ ------------------ -----------------
NET INCOME PER COMMON SHARE $ 1.11 $ 1.52 $ 1.42
================== =================== ===================
<FN>
The accompanying notes are an integral part
of the consolidated financial statements.
</TABLE>
17
<PAGE> 14
FIRST FRANKLIN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
EMPLOYEE NET UNREALIZED
ADDITIONAL STOCK GAIN(LOSS) ON
COMMON PAID-IN TREASURY OWNERSHIP AVAILABLE-FOR-SALE RETAINED
STOCK CAPITAL STOCK PLAN DEBT SECURITIES EARNINGS
------- ----------- -------- --------- ------------------ ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
DECEMBER 31, 1991,
AS PREVIOUSLY REPORTED $ 6,233 $ 5,726,847 $ (439,693) $ (150,000) $ 0 $ 9,910,662
Two-for-one common
stock split (Note 8) 6,233 (6,233)
---------- -------------- ------------ ------------- ----------- ---------------
BALANCE,
DECEMBER 31, 1991
AS ADJUSTED 12,466 5,720,614 (439,693) (150,000) 0 9,910,662
Repayment of employee
stock ownership plan
debt 25,000
Purchase of 400 shares
of common stock (2,352)
Issuance of 1,616 shares
of common stock 16 8,064
Dividends declared ($.25
per common share) (288,864)
Net income for
the year ended
December 31, 1992 1,640,288
----------- -------------- ------------ ------------- ----------- --------------
BALANCE, 12,482 5,728,678 (442,045) (125,000) 0 11,262,086
DECEMBER 31, 1992
Repayment of employee
stock ownership plan
debt 25,000
Issuance of 3,232 shares
of common stock 32 16,128
Dividends declared ($.25
per common share) (290,022)
Net income for
the year ended
December 31, 1993 1,843,998
----------- -------------- ------------ ------------- ----------- --------------
BALANCE,
DECEMBER 31, 1993 12,514 5,744,806 (442,045) (100,000) 0 12,816,062
Repayment of employee
stock ownership plan debt 100,000
Issuance of 4,000 shares
of common stock 40 19,960
Dividends declared ($.31
per common share) (364,497)
Cumulative effect as of
January 1, 1994 of net
unrealized gains on
securities available for
sale, net of deferred tax
of $211,499 410,678
Change in net unrealized
losses on securities avai-
lable forsale, net of
deferred tax of $875,399 (1,699,760)
Net income for the year
ended December 31, 1994 1,354,471
----------- -------------- ------------ ------------- ----------- --------------
BALANCE,
DECEMBER 31, 1994 $ 12,554 $ 5,764,766 $ (442,045) $ 0 $ (1,289,082) $ 13,806,036
=========== ============== ============ ============= ============ =============
<FN>
The accompanying notes are an integral part
of the consolidated financial statements.
</TABLE>
18
<PAGE> 15
<TABLE>
FIRST FRANKLIN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Years Ended December 31,
----------------------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,354,471 $ 1,843,998 $ 1,640,288
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 61,800 324,921 410,125
Cumulative effect of change in
accounting for income taxes (440,712)
Depreciation and amortization 231,904 275,693 166,791
Deferred income taxes 163,292 99,000 129,000
Gain on sale of investments (22)
Gain on sale of mortgage-backed securities (218,646)
Gain on disposal of fixed asset (3,478)
FHLB stock dividends (93,800) (75,600) (70,200)
(Increase) decrease in
accrued interest receivable (127,897) 151,454 257,312
(Increase) decrease in other assets (476,543) 196,658 (207,841)
Increase (decrease) in other liabilities 36,377 (223,762) 275,651
Other, net (175,686) (9,532) (11,892)
Loans sold 3,892,766 39,849,482 41,451,253
Disbursements on loans originated for sale (1,954,576) (28,781,219) (33,736,233)
---------- ---------- ----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 2,908,608 12,991,735 10,304,254
---------- ---------- ----------
Cash flows from investing activities:
Principal reductions on loans
and mortgage-backed securities 33,037,862 45,966,000 45,067,861
Disbursements on mortgage and
other loans originated for investment (31,385,312) (37,474,314) (38,615,426)
Purchase of investment securities:
Available-for-sale (1,497,500)
Held-to-maturity (13,914,351) (6,620,892)
Proceeds from maturities of investment securities:
Available-for-sale 1,000,000
Held-to-maturity 125,000 9,070,000 16,081,845
Purchase of mortgage-backed securities:
Available-for-sale (2,634,750)
Held-to-maturity (22,245,710) (27,155,346)
Proceeds from sale of mortgage-backed securities:
Held-to-maturity 13,936,090
Sale (Purchase) of FHLB stock 187,100 (57,800) 69,900
Proceeds from sale of real estate owned 855,976 195,447 373,617
Capital expenditures (83,117) (123,114) (427,251)
Proceeds from sale of fixed asset 16,000
---------- ---------- ----------
NET CASH USED IN
INVESTING ACTIVITIES (378,741) (4,647,752) (11,225,692)
---------- ---------- ----------
Continued
The accompanying notes are an integral part
of the consolidated financial statements.
</TABLE>
19
<PAGE> 16
FIRST FRANKLIN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1994 1993 1992
<S> <C> <C> <C>
Cash flows from financing activities:
Net (decrease) increase in passbook accounts
and demand deposits $ (12,471,822) $ (4,165,712) $ 16,762,425
Proceeds from certificates of deposit 38,021,004 40,466,600 35,756,696
Payments for maturing certificates of deposit (31,596,862) (47,647,687) (49,340,081)
Proceeds from sale of common stock 20,000 16,160 8,080
Payment of dividends (364,497) (290,022) (288,864)
Treasury stock acquired (2,352)
Repayments of Federal Home
Loan Bank advances (601,266) (484,000) (271,992)
(Decrease) increase in advances by borrowers
for taxes and insurance (11,407) 54,118 186,466
------------- ------------ -------------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (7,004,850) (12,050,543) 2,810,378
------------- ------------ -------------
NET (DECREASE) INCREASE IN CASH (4,474,983) (3,706,560) 1,888,940
Cash at beginning of year 7,357,972 11,064,532 9,175,592
------------- ------------ -------------
CASH AT END OF YEAR $ 2,882,989 $ 7,357,972 $ 11,064,532
============= ============ =============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 7,510,509 $ 8,873,313 $ 10,566,842
============= ============ =============
Income taxes $ 537,627 $ 575,000 $ 1,012,500
============= ============ =============
Supplemental disclosure of noncash activities:
Real estate acquired in settlement of loans $ 359,271 $ 268,605 $ 261,060
============= ============ =============
Unrealized loss on available-for-sale securities $ 1,952,982
=============
The accompanying notes are an integral part
of the consolidated financial statements.
</TABLE>
20
<PAGE> 17
FIRST FRANKLIN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND ACCOUNTING POLICIES:
The following describes the organization and the significant accounting
policies followed in the preparation of these financial statements.
ORGANIZATION
First Franklin Corporation (the "Company") is a holding company formed in
1988 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, and Franklin Savings' wholly-owned subsidiary,
Madison Service Corporation. All significant intercompany transactions have
been eliminated in consolidation.
Franklin Savings is a state chartered savings and loan and a member of the
Federal Home Loan Bank ("FHLB") System and subject to regulation by the
Office of Thrift Supervision ("OTS"), a division of the U.S. Government
Department of Treasury. As a member of this system, Franklin Savings
maintains a required investment in capital stock of the FHLB of Cincinnati.
Savings accounts are insured within certain limitations by the Savings
Association Insurance Fund ("SAIF"), which is administered by the Federal
Deposit Insurance Corporation ("FDIC"). An annual premium is required by the
SAIF for the insurance of such savings accounts.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, cash includes certificates of
deposit and other interest-earning deposits.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities". Under the provisions of SFAS No. 115,
investment securities are classified upon acquisition into one of three
categories: held-to-maturity, available-for-sale, or trading (see Note 2).
Held-to-maturity debt securities are those securities that the Company has
the positive intent and ability to hold to maturity and are recorded at
amortized cost. Available-for-sale securities are those debt and equity
securities that are available to be sold in the future in response to the
Company's liquidity needs, changes in market interest rates, asset-liability
management strategies, and other reasons. Available-for-sale securities are
reported at fair value, with unrealized holding gains and losses excluded
from earnings and reported as a separate component of stockholders' equity,
net of applicable taxes. At December 31, 1994, the Company did not hold any
trading securities.
Prior to adoption of SFAS No. 115, securities purchased, where the Company
had both the intent and ability to hold for the foreseeable future, were
recorded at cost adjusted for accumulated amortization of premium and
accretion of discount. Securities purchased, which the Company intended to
sell prior to maturity, were classified as held for sale and recorded at the
lower of amortized cost or fair value.
Gains and losses realized on the sale of investment securities are
accounted for on the trade date using the specific identification method.
LOANS RECEIVABLE
Loans receivable are stated at unpaid principal balance, less the allowance
for loan losses and net deferred loan origination fees and discounts.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on the Company's past
loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, the estimated
value of any underlying collateral, and current economic conditions.
Continued
21
<PAGE> 18
FIRST FRANKLIN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
1. ORGANIZATION AND ACCOUNTING POLICIES, Continued:
LOANS RECEIVABLE, CONTINUED
Accrual of interest income on loans receivable is discontinued when a
reasonable doubt exists as to the collection thereof.
The Company's policy is to sell in the secondary market eligible fixed rate,
single family loans originated. Loan sales totalled $3,892,766 during
1994. The amount of loans held for sale at December 31, 1994 and 1993 is not
material to the loan portfolio and thus is not reported separately in the
Company's balance sheet. It is generally management's intention to hold all
other loans originated to maturity or earlier repayment.
The Company defers all loan origination fees, net of certain direct loan
origination costs, and amortizes them over the life of the loan as an
adjustment of yield.
REAL ESTATE OWNED
Real estate owned is initially carried at fair value less cost to sell at
the date acquired in settlement of loans (the date the Company takes title
to the property). Valuations are periodically performed by management, and
an allowance for losses is established by a charge to operations if the
carrying value of a property exceeds its estimated fair value at the
acquisition date. Costs relating to the holding of such properties are
expensed as incurred.
PROPERTY AND EQUIPMENT
Land is carried at cost. Property and equipment are stated at cost less
accumulated depreciation. Depreciation is computed on the straight-line
method over the estimated useful lives of the related assets. The cost of
leasehold improvements is amortized using the straight-line method over the
terms of the related leases.
INCOME TAXES
The Financial Accounting Standards Board ("FASB") issued SFAS No. 109,
"Accounting for Income Taxes", which requires a change from the deferred
method to the asset and liability method of accounting for income taxes.
Under the asset and liability method, deferred income taxes are recognized
for the tax consequences of "temporary differences" by applying enacted
statutory tax rates applicable to future years to differences between the
financial statement carrying amounts and the tax bases of existing assets
and liabilities. Under SFAS No. 109, the effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes the
enactment date. Under the deferred method, deferred taxes were recognized
using the tax rate applicable to the year of the calculation and were not
adjusted for subsequent changes in tax rates.
The Company adopted SFAS No. 109 in 1993 and has reported the cumulative
effect of the change in the method of accounting for income taxes as of the
beginning of 1993 in the statement of operations.
EARNINGS PER COMMON SHARE
Earnings per common share have been computed on the basis of the weighted
average number of common shares outstanding. The weighted average number
of shares outstanding in 1994, 1993 and 1992 were 1,160,920, 1,159,182 and
1,155,546, respectively. The weighted average number of shares has been
adjusted to reflect the stock split as discussed in Note 8.
Continued
22
<PAGE> 19
FIRST FRANKLIN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. INVESTMENT AND MORTGAGE-BACKED SECURITIES:
The amortized cost and estimated market values of investment securities are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $14,899,185 $ 0 $ 1,151,859 $13,747,326
=========== =========== =========== ===========
Held-to-maturity:
Obligations of states and
municipalities $ 880,975 $ 57,033 $ 5,146 $ 932,862
=========== =========== =========== ===========
DECEMBER 31, 1993
------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ----------- ----------- -----------
Held-to-maturity:
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $14,405,952 $ 81,485 $ 94,462 $14,392,975
Obligations of states and
municipalities 1,006,977 143,699 1,150,676
----------- ----------- ----------- -----------
$15,412,929 $ 225,184 $ 94,462 $15,543,651
=========== =========== =========== ===========
</TABLE>
The amortized cost and estimated market value of investment securities at
December 31, 1994, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturities because issuers may have the
right to call obligations at par.
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED MARKET
COST VALUE
----------- -----------
<S> <C> <C>
Available-for-sale:
Due after one year through five years $14,399,185 $13,269,326
Due after ten years 500,000 478,000
----------- -----------
$14,899,185 $13,747,326
=========== ===========
Held-to-maturity:
Due in one year of less $ 184,753 $ 189,800
Due after one year through five years 326,359 355,785
Due after five years through ten years 224,343 246,903
Due after ten years 145,520 140,374
----------- -----------
$ 880,975 $ 932,862
=========== ===========
</TABLE>
<TABLE>
The detail of interest and dividends on investment securities (including dividends on FHLB stock) is as follows:
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Taxable interest income $ 738,431 $ 694,931 $ 931,241
Nontaxable interest income 66,600 68,708 72,577
Dividends 94,061 75,688 70,413
---------- ---------- ----------
$ 899,092 $ 839,327 $1,074,231
========== ========== ==========
</TABLE>
Continued
23
<PAGE> 20
FIRST FRANKLIN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. INVESTMENT AND MORTGAGE-BACKED SECURITIES, CONTINUED:
The amortized cost and estimated market values of mortgage-backed securities
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994
------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Available-for-sale:
FHLMC certificates $ 2,924,233 $ 1,616 $ 50,432 $ 2,875,417
FNMA certificates 8,574,573 1,895 147,879 8,428,589
GNMA certificates 10,044,655 606,323 9,438,332
------------ ------------ ------------ ------------
$ 21,543,461 $ 3,511 $ 804,634 $ 20,742,338
============ ============ ============ ============
Held-to-maturity:
FHLMC certificates $ 3,542,829 $ $ 319,189 $ 3,223,640
FNMA certificates 9,995,980 1,122,280 8,873,700
Collateralized mortgage
obligations 1,044,186 41,767 1,002,419
------------ ------------ ------------ ------------
$ 14,582,995 $ $ 1,483,236 $ 13,099,759
============ ============ ============ ============
DECEMBER 31, 1993
------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ ------------ ------------ ------------
Held-to-maturity:
FHLMC certificates $ 7,744,151 $ 99,906 $ 38,694 $ 7,805,363
FNMA certificates 20,003,472 213,815 170,681 20,046,606
Collateralized mortgage
obligations 1,057,864 52,893 1,004,971
GNMA certificates 10,279,610 263,092 10,542,702
------------ ------------ ------------ ------------
$ 39,085,097 $ 576,813 $ 262,268 $ 39,399,642
============ ============ ============ ============
</TABLE>
As discussed in Note 1, the Corporation adopted SFAS No. 115 as of January 1,
1994, and investment securities were classified based on the Corporation's
current intent. The impact of adopting the new standard resulted in an
increase in the carrying value of investments by $622,177 to reflect the
unrealized holding gain at January 1, 1994 for securities classified as
available for sale. Additionally, stockholders' equity was increased by
$410,678 to reflect the unrealized holding gain as a separate component of
stockholders' equity, net of taxes of $211,499. SFAS No. 115 had no impact
on earnings for the year ended December 31, 1994.
3. LOANS RECEIVABLE, NET:
The Company grants primarily single family real estate loans in southwestern
Ohio. Loans are granted on the basis of credit policies established by the
Company's management and are generally collateralized by first mortgages on
the property. Management believes that the Company has a diversified loan
portfolio and there are no credit concentrations other than in residential
real estate.
Continued
24
<PAGE> 21
FIRST FRANKLIN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Loans Receivable, Net, Continued:
Loans receivable, net consists of the following:
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1994 1993
---- ----
<S> <C> <C>
First mortgage loans:
Principal balances:
Collateralized by one-to-four
family residences $ 107,601,352 $ 105,654,182
Collateralized by multi-family properties 8,840,515 10,015,290
Collateralized by other properties 11,372,111 12,541,265
Construction loans 6,595,649 4,278,260
------------------ ------------------
134,409,627 132,488,997
Less:
Undisbursed portion of construction loans (2,933,437) (2,558,616)
Net deferred loan origination fees (737,069) (959,475)
Unearned discounts (174,858) (184,700)
------------------ ------------------
TOTAL FIRST MORTGAGE LOANS 130,564,263 128,786,206
------------------ ------------------
Consumer and other loans:
Principal balances:
Consumer loans 3,043,058 2,459,355
Loans on savings accounts 637,360 789,558
Student loans 1,181,664 1,220,769
------------------ ------------------
TOTAL CONSUMER AND OTHER LOANS 4,862,082 4,469,682
------------------ ------------------
Less allowance for loan losses (1,255,998) (1,248,383)
------------------ ------------------
$ 134,170,347 $ 132,007,505
================== ==================
</TABLE>
<TABLE>
Activity in the allowance for loan losses is summarized as follows:
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $ 1,248,383 $ 1,345,450 $ 976,599
Provision for loan losses 61,800 324,921 410,125
Charge-offs and recoveries, net (1,875) (391,288) (78,508)
Other changes (52,310) (30,700) 37,234
----------------- ------------------ ------------------
BALANCE, END OF YEAR $ 1,255,998 $ 1,248,383 $ 1,345,450
================= ================== ==================
</TABLE>
It is the opinion of management that adequate provisions have been made for
anticipated losses in the loan portfolio.
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of these loans were
approximately $65,095,000, $73,513,000 and $66,164,000 at December 31, 1994,
1993 and 1992, respectively.
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors
for Impairment of a Loan." This statement as amended by SFAS No. 118, applies
to financial statements for fiscal years beginning after December 15, 1994 and
requires that certain impaired loans be recorded at either the present value of
expected future cash flows discounted at the loan's effective interest rate,
the loan's market price, or the fair value of the collateral for collateral
dependent loans. Management does not believe that the adoption of this
statement will have a significant impact on the financial statements.
Continued
25
<PAGE> 22
FIRST FRANKLIN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
<TABLE>
4. REAL ESTATE OWNED:
Real estate owned consists of the following:
<CAPTION>
DECEMBER 31,
--------------------------------------
1994 1993
---- ----
<S> <C> <C>
Real estate owned $ 1 $ 488,946
Less allowance for losses 0 (30,700)
---------------- ----------------
$ 1 $ 458,246
================ ================
</TABLE>
<TABLE>
Activity in the allowance for losses on real estate owned is summarized as follows:
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $ 30,700 $ 0 $ 1,218,156
Write-down of properties (1,198,127)
Reserve utilized in sale of real estate owned (83,010) (35,229)
Other changes 52,310 30,700 15,200
-------------- ---------------- ----------------
BALANCE, END OF YEAR $ 0 $ 30,700 $ 0
============== ================ ================
</TABLE>
Real estate owned at December 31, 1993 included a land development
project (known as Heatherstone) consisting of undeveloped acreage, which was
subsequentially sold for cash during 1994. It is the opinion of management that
adequate provisions have been made for losses on real estate owned.
<TABLE>
5. PROPERTY AND EQUIPMENT, NET:
Property and equipment, net consists of the following:
<CAPTION>
DECEMBER 31,
--------------------------------------
1994 1993
---- ----
<S> <C> <C>
Buildings and improvements $ 635,299 $ 635,299
Leasehold improvements 948,647 903,771
Furniture, fixtures and equipment 1,432,141 1,430,515
--------------- ---------------
3,016,087 2,969,585
Accumulated depreciation and amortization (2,185,184) (2,039,236)
--------------- ---------------
830,903 930,349
--------------- ---------------
Land 153,931 153,931
--------------- ---------------
$ 984,834 $ 1,084,280
============== ===============
</TABLE>
26
<PAGE> 23
FIRST FRANKLIN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
<TABLE>
6. SAVINGS ACCOUNTS:
Savings accounts consist of the following:
<CAPTION>
December 31, 1994 December 31, 1993
------------------------------------------ -------------------------------------------
Weighted Percent Weighted Percent
Average of Average of
Rate Amount Deposits Rate Amount Deposits
--------- ------------------- ----------- ---------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Passbooks 2.75% $ 29,352,870 17.0% 2.75% $ 38,321,970 21.5%
NOW accounts
and variable rate
money market
savings and
checking accounts 2.58 26,691,461 15.5 2.50 30,194,183 16.9
----------------- ----------- --------------- -----------
56,044,331 32.5 68,516,153 38.4
----------------- ----------- --------------- -----------
Certificates:
1-6 month 4.10 11,441,000 6.6 3.26 16,770,878 9.4
1 year 4.79 23,944,998 13.9 3.69 11,905,474 6.7
18 month 4.05 3,839,792 2.2 3.96 5,052,119 2.8
18 month - 5 years 5.35 39,313,172 22.8 5.53 34,153,212 19.1
5-8 years 6.55 34,864,615 20.2 6.93 38,287,682 21.4
Jumbos 4.82 3,053,986 1.8 3.33 3,864,056 2.2
----------------- ----------- --------------- -----------
116,457,563 67.5 110,033,421 61.6
----------------- ----------- --------------- -----------
TOTAL SAVINGS
ACCOUNTS $ 172,501,894 100.0% $ 178,549,574 100.0%
================ =========== =============== ===========
At December 31, 1994, scheduled maturities of certificate accounts are as follows:
1995 $ 67,251,725
1996 23,855,910
1997 6,008,113
1998 15,732,867
1999 3,608,948
------------------
$ 116,457,563
==================
Interest and dividends paid and accrued on deposits, net of penalties assessed depositors exercising early certificate withdrawal
privileges, are as follows:
Years Ended December 31,
-------------------------------------------------------------
1994 1993 1992
---- ---- ----
Passbooks $ 952,438 $ 1,251,076 $ 1,464,374
NOW and money market accounts 707,922 542,674 846,102
Certificates 5,781,954 6,970,886 8,090,067
--------------- ----------------- ------------------
$ 7,442,314 $ 8,764,636 $ 10,400,543
=============== ================= ==================
</TABLE>
27
<PAGE> 24
FIRST FRANKLIN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. FEDERAL HOME LOAN BANK ADVANCES:
FHLB advances at December 31, 1994 consist of a 15-year note, maturing
on May 1, 2006 with interest at 8.15%. The note requires principal payments
as follows:
<TABLE>
<S> <C>
1995 $ 33,384
1996 36,209
1997 39,272
1998 42,595
1999 46,200
Thereafter 398,356
---------
$ 596,016
=========
</TABLE>
As collateral for the advance, the Company has pledged an investment
in a security equal to or greater than 150% of outstanding FHLB advances.
8. STOCKHOLDERS' EQUITY:
On January 10, 1995, a two-for-one stock split took place. All references
in the accompanying financial statements to the number of common shares
and per share amounts have been adjusted to reflect the stock split. Common
shares and additional paid-in capital have been adjusted to reflect the
stock split.
Retained earnings are restricted by regulatory requirements and federal
income tax requirements.
In connection with the insurance of savings deposits by SAIF, Franklin
Savings is required to maintain specified capital levels based on OTS
regulations (see Note 9). At December 31, 1994, the most restrictive
required level of capital to satisfy regulatory requirements was
approximately $7,024,000.
Federal income tax included in the consolidated statements of operations
has been computed giving effect to the special bad debt deduction
available to savings and loan organizations under the Internal Revenue Code
if certain conditions are met. In general, the deduction represents eight
percent of otherwise taxable income. Each year the excess of the percentage
of income bad debt deduction over the deduction which would have been
allowable had the Company maintained its reserve on the basis of actual
loss experience is a tax preference item, subject to the alternative
minimum tax. If, in the future, these accumulated deductions are used for
any purpose other than to absorb losses on loans and real estate owned, a
tax liability will be imposed upon the Company at the then current federal
income tax rates. At December 31, 1994, the accumulated deduction, which is
a component of the Company's retained earnings and for which no provision
for federal income tax has been made, amounted to approximately $3,124,000.
Payment of dividends on the common stock of the Company could be subject to
the availability of funds from dividend distributions of Franklin Savings,
which are subject to various restrictions. Under regulations of the OTS,
Franklin Savings is not permitted to pay dividends on its common stock if
its regulatory capital is reduced below the amount required for the
"Liquidation Account" (discussed below) or to meet applicable regulatory
capital requirements.
In accordance with regulatory requirements upon completion of its
conversion to a stock savings and loan association, Franklin Savings
established a special "Liquidation Account" for the benefit of certain
savings account holders of record at the conversion date (Eligible Account
Holders), in an amount equal to the regulatory capital of Franklin Savings
as of September 30, 1987 of $8.1 million. In the event of a complete
liquidation of Franklin Savings, each Eligible Account Holder would be
entitled to his interest in the Liquidation Account prior to any payment to
holders of common stock, but after payments of any amounts due to the
creditors of Franklin Savings (including those persons having savings
accounts with Franklin Savings). The amount of the Liquidation Account is
subject to reduction as a result of savings account withdrawals by Eligible
Account Holders after the conversion. Any assets remaining after the
payments of creditors and the above liquidation rights of Eligible Account
Holders would be distributed to the holders of common stock in proportion
to their stock holdings.
Continued
28
<PAGE> 25
FIRST FRANKLIN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. STOCKHOLDERS' EQUITY, CONTINUED:
During 1991, the Company initiated a program to repurchase shares of its
common stock as market conditions warrant. As part of this program, the
Company repurchased 400 and 91,478 common shares for $2,352 and $439,693 in
1992 and 1991, respectively. On December 31, 1992, the Company announced
the extension of this program, permitting the repurchase of up to an
additional five percent of the Company's outstanding shares through June
1993, subject to future market conditions and operating results. During
1994 and 1993, no shares were repurchased.
The Company has a stock option plan (the 1987 Stock Option and Incentive
Plan) for officers, key employees, and directors, under which options to
purchase the Company's common shares are granted at a price no less than
the fair market value of the shares at the date of the grant. Options may
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
are granted. The Company has authorized the issuance of up to 124,400
common shares under the plan. Transactions involving the Plan are
summarized as follows:
<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Options outstanding at beginning of year 90,736 93,968 99,584
Exercised (4,000) (3,232) (1,616)
Canceled (4,000)
------ ------ ------
OPTIONS OUTSTANDING AT END OF YEAR 86,736 90,736 93,968
====== ====== ======
</TABLE>
All options outstanding and exercised have an option price of $5.00.
9. REGULATORY CAPIAL REQUIREMENTS:
The OTS has promulgated regulations implementing uniform capital standards
for federally insured savings associations. In general, the capital
standards established for savings institutions must be no less stringent
than capital standards applicable to national banks set by the Office of
the Comptroller of the Currency. At December 31, 1994, the capital standards
include a 1.5% tangible capital requirement, a 3.0% leverage ratio (core
capital requirement), and a risk-based capital requirement (computed on a
risk-adjusted asset base) of 8.0%. At December 31, 1994, Franklin Savings
meets each of the capital requirements as follows:
<TABLE>
<CAPTION>
FRANKLIN'S COMPUTED
CAPITAL AS A
COMPUTED FRANKLIN'S PERCENT OF
REGULATORY COMPUTED TOTAL ASSETS OR
REQUIREMENTS CAPITAL RISK-ADJUSTED ASSETS
---------------- ---------------- --------------------
<S> <C> <C> <C>
Tangible capital $ 2,852,000 $ 13,879,000 7.30%
Core capital $ 5,705,000 $ 13,879,000 7.30%
Risk-based capital $ 7,024,000 $ 14,558,000 16.58%
</TABLE>
10. FAIR VALUES OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments", 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
FHLB stock approximates those assets' fair value.
Continued
29
<PAGE> 26
FIRST FRANKLIN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
10. FAIR VALUES OF FINANCIAL INSTRUMENTS, Continued:
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.
SAVINGS ACCOUNTS
The fair values of passbook accounts, NOW accounts, and money market savings
and demand deposits 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.
LONG-TERM BORROWINGS
Rates currently available to the Company for debt with similar terms and
remaining maturities are used to estimate the fair value of existing debt.
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.
<TABLE>
The estimated fair values of the Company's financial instruments at
December 31, 1994 are as follows:
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
-------------------------------- ---------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 2,882,989 $ 2,882,989 $ 7,357,972 $ 7,357,972
Investment securities $ 14,628,301 $ 14,680,188 $ 15,412,929 $ 15,543,651
Mortgage-backed securities $ 35,325,333 $ 33,842,097 $ 39,085,097 $ 39,399,642
Loans receivable $ 136,338,272 $ 131,936,000 $ 134,400,063 $ 134,888,000
Investment in FHLB stock $ 1,649,200 $ 1,649,200 $ 1,742,500 $ 1,742,500
Financial liabilities:
Savings accounts $ 172,501,894 $ 171,337,318 $ 178,549,574 $ 183,240,574
FHLB advances $ 596,016 $ 591,000 $ 1,197,282 $ 1,438,000
ESOP debt $ 100,000 $ 100,000
<CAPTION>
CONTRACTUAL FAIR CONTRACTUAL FAIR
AMOUNT VALUE AMOUNT VALUE
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Unrecognized financial
instruments:
Commitments to extend credit $ 1,370,200 $ 1,370,200 $ 4,367,200 $ 4,367,200
</TABLE>
Continued
30
<PAGE> 27
FIRST FRANKLIN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
11. FEDERAL INCOME TAXES:
As discussed in Note 1, Summary of Significant Policies, the Company adopted
SFAS No. 109 as of the beginning of 1993. The cumulative effect on prior years
of adopting this change in accounting principle increased net income by
$440,712 ($.36 per share) and is reported separately in the consolidated
statement of operations for the year ended December 31, 1993.
<TABLE>
The components of income tax expense are as follows:
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Federal:
Current $ 491,283 $ 604,000 $ 794,000
Deferred 163,292 99,000 129,000
---------- ---------- ----------
Total $ 654,575 $ 703,000 $ 923,000
========== ========== ==========
</TABLE>
<TABLE>
Total income tax expense differed from the amounts computed by applying the
U.S. federal statutory tax rates to pretax income as follows:
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Tax at statutory rates $ 683,667 $ 716,137 $ 871,520
Benefit of tax exempt investment interest (18,034) (23,360) (16,551)
Effect of allowable federal tax bad debt deduction 68,642
Other (11,058) 10,223 (611)
---------- ---------- ----------
$ 654,575 $ 703,000 $ 923,000
========== ========== ==========
</TABLE>
<TABLE>
The tax effects of temporary differences that give rise to significant portions
of deferred tax assets and deferred tax liabilities are as follows:
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1994 1993
---------- ----------
<S> <C> <C>
Deferred tax asset arising from:
Loan loss reserve $ 427,038 $ 424,450
Basis of real estate owned 64,130
Deferred loan fees and costs 250,603 326,221
Depreciation 25,761 13,682
Unrealized loss on securities 663,900
Other, net 8,769
---------- ----------
TOTAL DEFERRED TAX ASSETS 1,376,071 828,483
---------- ----------
Deferred tax liability arising from:
FHLB stock (264,045) (260,540)
Prepaid pension expense (180,379) (160,875)
Other, net (49,556) (14,077)
---------- ----------
TOTAL DEFERRED TAX LIABILITIES (493,980) (435,492)
---------- ----------
NET DEFERRED TAX ASSET $ 882,091 $ 392,991
========== ==========
</TABLE>
The Company has not recorded a valuation allowance, as the deferred tax assets
are considered by management to be realizable. Net deferred tax assets and
federal income tax expense in future years can be significantly affected by
changes in enacted tax rates.
Continued
31
<PAGE> 28
FIRST FRANKLIN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
11. FEDERAL INCOME TAXES, Continued:
<TABLE>
The tax effects of temporary differences that give rise to significant portions
of deferred tax expense for the year ended December 31, 1992 are as follows:
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1992
----------
<S> <C>
Loan fees deferred for financial reporting purposes $ 92,791
FHLB stock dividend 23,868
Taxable gain on sale of FHLB stock (9,542)
Other 21,883
----------
$ 129,000
==========
</TABLE>
12. BENEFIT PLANS:
The Company has a defined benefit pension plan covering substantially all its
full-time employees, with benefits based on years of service and an employee's
five-year average salary. The Company's funding policy is to contribute
annually an amount that can be deducted for federal income tax purposes and
that meets minimum funding standards, using a different actuarial cost
method and different assumptions from those used for financial reporting.
The following table sets forth the plan's funded status and amounts recognized
in the Company's consolidated balance sheet at the plan's October 15, 1994 and
1993 measurement dates, as applied to the Company's year end of December 31,
1994 and 1993:
<TABLE>
Actuarial present value of benefit obligations:
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Accumulated benefit obligation,
including vested benefits of $1,672,339 and $1,416,569 $ 1,694,584 $ 1,420,328
=========== ===========
Projected benefit obligation for service rendered to date $ 1,841,888 $ 1,582,166
Plan assets at fair value, primarily certificates of deposit
and net cash surrender values of life insurance policies 2,055,438 1,861,457
----------- -----------
Plan assets in excess of projected benefit obligation 213,550 279,291
Unrecognized net loss from past experience
different from that assumed 499,763 397,190
Unrecognized net asset being recognized over fifteen years (182,988) (203,320)
----------- -----------
Prepaid pension cost included in other assets $ 530,325 $ 473,161
=========== ===========
</TABLE>
<TABLE>
Net pension cost for the years ending December 31, 1994, 1993 and 1992 included
the following components:
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Service cost $ 127,744 $ 81,921 $ 98,991
Interest cost 112,320 89,500 89,863
Actual return on plan assets (95,070) (116,061) (129,865)
Net amortization and deferral (59,428) (36,838) (8,434)
---------- ---------- ----------
NET PENSION COST $ 85,566 $ 18,522 $ 50,555
========== ========== ==========
</TABLE>
Continued
32
<PAGE> 29
FIRST FRANKLIN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
12. BENEFIT PLANS, Continued:
At October 15, 1994 and 1993, the discount rate used in determining the
actuarial present value of the projected benefit obligation was 8.0 and 7.0
percent, respectively and the rate of increase in future compensation levels
was 4.5 percent. The expected long-term rate of return on assets used in
determining net pension cost was 8.0 percent in 1994, 1993 and 1992.
The Company also has an employee stock ownership plan (ESOP). All full-time
employees of the Company are eligible to participate in the ESOP after
attaining age twenty-one and completing one year of service. Each participant
is assigned an account which is credited with cash and shares of common stock
of the Company based upon compensation earned, subject to vesting on a
graduated scale over six years. Contributions to the ESOP are made by the
Company and can be in the form of either cash or common stock of the employer.
The Company contributed $100,000 to the ESOP in 1994, 1993 and 1992. At
December 31, 1994, the ESOP is no longer leveraged, and all shares are
allocated or committed to be allocated. All ESOP shares are considered
outstanding for purposes of computing earnings per share for 1994, 1993 and
1992. The Company's policy is to charge to expense the amount contributed to
the ESOP. At December 31, 1994, the ESOP held 80,120 allocated shares and
17,172 committed to be allocated shares.
At the date of the formation of the holding company in 1988, the ESOP purchased
50,000 shares of the Company, financed by a commercial borrowing collateralized
by the shares purchased. The outstanding balance due on this loan was repaid
in full during 1994.
13. LEASE COMMITMENTS:
The Company leases certain facilities under operating leases which expire
over the next sixteen years, with renewal options.
<TABLE>
The following is a schedule, by years, of future minimum rental payments
required under operating leases during the remaining noncancellable portion
of the lease terms:
<S> <C>
Year ending December 31:
1995 $ 167,614
1996 168,938
1997 162,198
1998 124,346
1999 72,208
Thereafter 164,560
-----------
TOTAL MINIMUM PAYMENTS REQUIRED $ 859,864
===========
</TABLE>
Rent expenses were $205,379, $207,777 and $202,325 in 1994, 1993 and 1992,
respectively.
14. LOANS TO RELATED PARTIES:
<TABLE>
Certain officers and directors of the Company, including their families, had
loans outstanding exceeding $60,000 individually during the three-year period
ended December 31, 1994. The following is an analysis of the activity of
such loans for the years indicated:
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Balance, beginning of year $ 577,438 $ 564,523 $ 421,641
Adjustment to beginning balance for directors
who exceeded $60,000 in loans during the year 132,940
Loans originated 14,000 152,400 125,000
Repayments (34,317) (139,485) (115,058)
---------- ---------- ----------
BALANCE, END OF YEAR $ 557,121 $ 577,438 $ 564,523
========== ========== ==========
</TABLE>
Continued
33
<PAGE> 30
FIRST FRANKLIN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
15. LOAN COMMITMENTS:
In the ordinary course of business, the Company has various outstanding
commitments to extend credit that are not reflected in the accompanying
consolidated financial statements. These commitments involve elements of credit
risk in excess of the amount recognized in the balance sheet.
The Company uses the same credit policies in making commitments for loans as it
does for loans that have been disbursed and recorded in the consolidated
balance sheet. The Company generally requires collateral when it makes loan
commitments, which generally consists of the right to receive first mortgages
on improved or unimproved real estate when performance under the contract
occurs.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some portion of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Certain of these commitments
are for fixed rate loans, and, therefore, their value is subject to market
risk as well as credit risk.
At December 31, 1994, the Company's total commitment to extend credit was
approximately $1,370,200.
16. FIRST FRANKLIN CORPORATION - PARENT COMPANY ONLY FINANCIAL INFORMATION
The following condensed balance sheets as of December 31, 1994 and 1993 and
condensed statements of operations and cash flows for each of the three years
in the period ended December 31, 1994 for First Franklin Corporation should be
read in conjunction with the consolidated financial statements and notes
thereto.
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
------------------------
ASSETS
DECEMBER 31,
------------------------------
1994 1993
----------- -----------
<S> <C> <C>
Cash $ 430,874 $ 1,024,404
Investment securities:
Available-for-sale 3,383,494
Held-to-maturity 1,497,955
Investment in Franklin Savings 12,763,082 13,423,892
Dividend receivable 319,000 2,160,000
Other assets 1,114,753 15,376
----------- -----------
$18,011,203 $18,121,627
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities $ 158,974 $ 90,290
Preferred stock - $.01 par value, 500,000 shares authorized,
none issued and outstanding
Common stock - $.01 par value, 1,500,000 shares authorized,
1,255,464 and 1,251,464 shares issued in 1994 and 1993,
respectively 12,554 12,514
Additional paid-in capital 5,764,766 5,744,806
Treasury stock, at cost - 91,878 shares
in 1994 and 1993 (442,045) (442,045)
Net unrealized loss on available-for-sale
securities of parent and subsidiary (1,289,082)
Retained earnings 13,806,036 12,716,062
----------- -----------
$18,011,203 $18,121,627
=========== ===========
</TABLE>
Continued
34
<PAGE> 31
FIRST FRANKLIN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
16. FIRST FRANKLIN CORPORATION - PARENT COMPANY ONLY FINANCIAL
INFORMATION, Continued:
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF OPERATIONS
----------------------------------
YEARS ENDED DECEMBER 31,
----------------------------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Equity in earnings of Franklin Savings $ 1,249,495 $ 1,808,396 $ 1,653,555
Interest income 204,050 83,770 39,715
Operating expenses (42,361) (30,324) (64,863)
Other (loss) income (1,738) 256 3,316
Federal income tax (expense) benefit (54,975) (18,100) 8,565
----------- ----------- -----------
$ 1,354,471 $ 1,843,998 $ 1,640,288
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
----------------------------------
YEARS ENDED DECEMBER 31,
----------------------------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,354,471 $ 1,843,998 $ 1,640,288
Equity in earnings of Franklin Savings (1,249,495) (1,808,396) (1,653,555)
Dividends received from Franklin Savings 2,735,000 1,650,000 680,000
Change in other assets and liabilities (30,693) 31,488 (22,236)
Deferred income taxes 88,749
----------- ----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 2,898,032 1,717,090 644,497
----------- ----------- -----------
Cash flows from investing activities:
Loan to Franklin savings (1,000,000)
Purchase of investment securities (2,147,065) (1,497,955)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (3,147,065) (1,497,955)
----------- ----------- -----------
Cash flows from financing activities:
Payment of dividends (364,497) (290,022) (288,864)
Treasury stock acquired (2,352)
Proceeds from sale of common stock 20,000 16,160 8,080
----------- ----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (344,497) (273,862) (283,136)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH (593,530) (54,727) 361,361
Cash at beginning of year 1,024,404 1,079,131 717,770
----------- ----------- -----------
CASH AT END OF YEAR $ 430,874 $ 1,024,404 $ 1,079,131
=========== =========== ===========
</TABLE>
Continued
35
<PAGE> 32
FIRST FRANKLIN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
17. MADISON SERVICE CORPORATION:
In accordance with OTS requirements, the following summary of
financial information of Madison Service Corporation for the
year ended December 31, 1994, is presented:
<TABLE>
<CAPTION>
BALANCE SHEET
ASSETS
<S> <C>
Cash $ 182,837
First mortgage loan 2,693,435
Participation sold (2,693,435)
Other assets 15,000
----------
$ 197,837
==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Accrued expenses $ 11
Equity 197,826
----------
$ 197,837
==========
STATEMENT OF OPERATIONS
Revenues:
Interest income $ 5,505
Service fees and other income 19,277
Operating expenses 6,036
----------
Income before federal income tax 18,746
Federal income tax 6,375
----------
NET INCOME $ 12,371
==========
</TABLE>
a. Summary of significant accounting policies:
The accounting policies followed in the preparation of the financial
statements of Madison Service Corporation are included in Note 1.
b. Intercompany transactions:
Intercompany transactions with Franklin Savings, which are not
material, have been eliminated in consolidation.
c. Franklin Savings' investment in Madison Service Corporation consists
of:
<TABLE>
<S> <C>
Common stock, 220 shares issued and outstanding $ 110,000
Retained earnings 87,826
----------
$ 197,826
==========
</TABLE>
Continued
36
<PAGE> 33
FIRST FRANKLIN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
18. RECONCILIATION TO REGULATORY REPORT:
Net income and stockholders' equity reported in these audited
financial statements differ in certain respects from reports filed
with the OTS as follows:
<TABLE>
<CAPTION>
1994 1993
---- ----
STOCKHOLDERS' STOCKHOLDERS'
NET INCOME EQUITY NET INCOME EQUITY
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance as reported to OTS $ 1,249,495 $ 12,763,082 $ 2,162,067 $ 13,777,563
Adjustment to deferred
taxes for basis in
real estate owned (353,671) (353,671)
Amounts included in consoli-
dated financial statements for
First Franklin Corporation
(Holding Company) 104,976 5,089,147 35,602 4,607,445
------------ ------------ ------------ ------------
BALANCES PER FINANCIAL
STATEMENTS $ 1,354,471 $ 17,852,229 $ 1,843,998 $ 18,031,337
============ ============ ============ ============
</TABLE>
Continued
37
<PAGE> 34
FIRST FRANKLIN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
19. QUARTERLY FINANCIAL INFORMATION (Unaudited):
All adjustments necessary for a fair statement of operations for each
period have been included.
<TABLE>
<CAPTION>
1994
----
(DOLLARS IN THOUSANDS)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income $ 3,379 $ 3,239 $ 3,247 $ 3,428
Interest expense 1,858 1,799 1,872 1,986
------------ ------------ ------------ ------------
Net interest income 1,521 1,440 1,375 1,442
Provision for loan losses 31 31
------------ ------------ ------------ ------------
Net interest income after
provision for loan losses 1,490 1,409 1,375 1,442
Noninterest income 139 149 101 51
Noninterest expense 1,082 1,065 1,014 986
------------ ------------ ------------ ------------
Income before federal
income taxes 547 493 462 507
Federal income taxes 185 163 152 155
------------ ------------ ------------ ------------
NET INCOME $ 362 $ 330 $ 310 $ 352
============ ============ ============ ============
EARNINGS PER COMMON SHARE (1) $ 0.30 $ 0.27 $ 0.25 $ 0.29
============ ============ ============ ============
<FN>
(1) Adjusted to reflect a two-for-one stock split, effective January 10, 1995.
</TABLE>
Continued
38
<PAGE> 35
FIRST FRANKLIN CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
19. QUARTERLY FINANCIAL INFORMATION (Unaudited), Continued:
<TABLE>
<CAPTION>
1993
----
(DOLLARS IN THOUSANDS)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income $ 3,670 $ 3,624 $ 3,488 $ 3,385
Interest expense 2,317 2,265 2,209 2,082
------------ ------------ ------------ ------------
Net interest income 1,353 1,359 1,279 1,303
Provision for loan losses 31 121 87 86
------------ ------------ ------------ ------------
Net interest income after
provision for loan losses 1,322 1,238 1,192 1,217
Noninterest income 258 239 497 194
Noninterest expense 1,109 990 1,049 902
------------ ------------ ------------ ------------
Income before federal income
taxes and cumulative effect
of change in accounting
principle 471 487 640 509
Federal income taxes 143 176 213 171
------------ ------------ ------------ ------------
Net income before cumulative
effect of change in accounting
principle 328 311 427 338
Cumulative effect of change
in accounting principle 441 0 0 0
------------ ------------ ------------ ------------
NET INCOME $ 769 $ 311 $ 427 $ 338
============ ============ ============ ============
Earnings per common share:
Income before cumulative
effect of change in
accounting principle (1) $ .27 $ .26 $ .35 $ .28
Cumulative effect of change
in accounting principle (1) .36
------------ ------------ ------------ ------------
NET INCOME
PER COMMON SHARE (1) $ .63 $ .26 $ .35 $ .28
============ ============ ============ ============
<FN>
(1) Adjusted to reflect the two-for-one stock split, effective January 10, 1995.
</TABLE>
39
<PAGE> 1
Exhibit 20
FIRST FRANKLIN CORPORATION
401 EAST COURT STREET
CINCINNATI, OHIO
(513) 721-1031
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To be Held on April 24, 1995
Notice is hereby given that the Annual Meeting of Stockholders (the
"Meeting") of First Franklin Corporation ("First Franklin" or the "Company"),
the holding company for The Franklin Savings and Loan Company ("Franklin"),
will be held at the corporate office of the Company located at 401 East Court
Street, Cincinnati, Ohio 45202 on April 24, 1995, at 3:00 p.m.
A Proxy Card and a Proxy Statement for the Meeting are enclosed.
The Meeting is for the purpose of considering and acting upon:
1. The election of two directors of the Company;
2. A proposed amendment to Section 4 of the Certificate of
Incorporation of the Company to increase the authorized number
of shares of common stock from 1,500,000 to 2,500,000, as set
forth in the Proxy Statement attached hereto;
3. The ratification of the appointment of Coopers & Lybrand as
independent accountants for the Company for the fiscal year
ending December 31, 1995; and
4. Such other matters as may properly come before the Meeting or any
adjournments thereof.
The Board of Directors is not aware of any other business to come before
the Meeting.
Any action may be taken on the foregoing proposals at the Meeting on the
date specified above, or on any date or dates to which the Meeting may be
adjourned. Stockholders of record at the close of business on March 15, 1995,
are the stockholders entitled to vote at the Meeting and any adjournments
thereof.
You are requested to fill in and sign the enclosed form of Proxy, which is
solicited on behalf of the Board of Directors, and to mail it promptly in the
enclosed envelope. The Proxy will not be used if you give a later dated proxy
or if you attend and vote at the Meeting in person.
By Order of the Board of Directors
Thomas H. Siemers
President and Chief Executive Officer
Cincinnati, Ohio
March 28, 1995
IMPORTANT: THE PROMPT RETURN OF PROXIES WILL SAVE THE COMPANY THE EXPENSE
OF FURTHER REQUESTS FOR PROXIES TO ENSURE A QUORUM AT THE MEETING. A
SELF-ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. NO POSTAGE IS
REQUIRED IF MAILED WITHIN THE UNITED STATES.
<PAGE> 2
FIRST FRANKLIN CORPORATION
401 EAST COURT STREET
CINCINNATI, OHIO
(513) 721-1031
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
APRIL 24, 1995
This Proxy Statement is furnished in connection with the solicitation on
behalf of the Board of Directors of First Franklin Corporation ("First
Franklin" or the "Company") of proxies to be used at the Annual Meeting of
Stockholders of the Company (the "Meeting") which will be held at the corporate
office of the Company located at 401 East Court Street, Cincinnati, Ohio, on
April 24, 1995, at 3:00 p.m., and at all adjournments of the Meeting. The
accompanying Notice of Annual Meeting of Stockholders and this Proxy Statement
are first being mailed to stockholders on or about March 28, 1995.
Stockholders who execute proxies retain the right to revoke them at any time.
Unless so revoked, the shares represented by such proxies will be voted at the
Meeting and all adjournments thereof. Proxies may be revoked by the filing of
a later-dated proxy prior to a vote being taken on a particular proposal at the
Meeting or by attending the Meeting and voting in person. Proxies solicited on
behalf of the Board of Directors of the Company will be voted in accordance
with the directions given therein and, where no instructions are indicated,
will be voted "FOR" the nominees and the adoption of the proposals discussed
herein.
Proxies marked to abstain with respect to a proposal have the same effect as
votes against the proposal. Broker non-votes are treated as absentions and
have no effect on the vote, unless the vote needed for approval of a matter is
a percentage of all the shares entitled to vote. In such case, broker
non-votes have the effect of a vote in opposition. A majority of the shares of
the Company's issued and outstanding common stock, (the "Common Stock") present
in person or represented by proxy, shall constitute a quorum for purposes of
the Meeting. Abstentions and broker non-votes are counted for purposes of
determining a quorum.
VOTE REQUIRED FOR APPROVAL OF THE PROPOSALS
Directors shall be elected by a plurality of the shares present in person or
represented by proxy at the Meeting and entitled to vote on the election of
directors. The approval of the proposed amendment to Section 4 of the
Certificate of Incorporation of the Company to increase the authorized number
of shares of Common Stock from 1,500,000 to 2,500,000 requires the affirmative
vote of the holders of a majority of the shares entitled to vote on the matter.
The ratification of the appointment of Coopers & Lybrand as independent
accountants for the fiscal year ending December 31, 1995, requires the
affirmative vote of the holders of a majority of the shares present in person
or represented by proxy at the Meeting and entitled to vote on the matter.
-2-
<PAGE> 3
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Stockholders of record as of the close of business on March 15, 1995, will be
entitled to one vote for each share then held. As of that date, the Company
had 1,175,786 shares of Common Stock issued and outstanding.
The following table sets forth, as of March 15, 1995, share information
regarding (i) those persons or entities who were known by management to
beneficially own more than five percent of the outstanding shares of the
Company's Common Stock; and (ii) all directors and executive officers of the
Company and The Franklin Savings and Loan Company ("Franklin") as a group.
<TABLE>
<CAPTION>
Shares Beneficially Percent of
Beneficial Owner Owned(1) Class
------------------------------------------------ ------------------- ----------
<S> <C> <C>
Thomas H. Siemers(2) 167,589 13.9%
First Franklin Corporation
401 East Court Street
Cincinnati, Ohio 45202
Margaret W. Walton(3) 59,683 5.0
First Franklin Corporation
401 East Court Street
Cincinnati, Ohio 45202
All directors and executive officers of Franklin 463,479 37.1
and the Company as a group (11 persons)(4)
<FN>
-----------------------------
(1) Reflects two-for-one stock split effective January 10, 1995.
(2) Mr. Siemers, the President and Chief Executive Officer of the Company, has
sole voting and investment power with respect to 62,180 shares and shared
voting and investment power with his wife for 600 shares. In addition,
Mr. Siemers has options to purchase 31,472 shares granted under First
Franklin's Stock Option Plan. Mr. Siemers has voting power with respect
to 19,930 shares allocated to his account in The Franklin Savings and Loan
Company Employee Stock Ownership Plan ("ESOP"). Finally, as a trustee,
Mr. Siemers may be deemed to have voting and/or investment power with
respect to another 38,407 shares of Common Stock held by ESOP, which have
not been allocated to the accounts of individual participants, or which
have been allocated to the accounts of individual participants, but may
still be sold by the trustee, and with respect to the 15,000 shares held
by Franklin's Defined Benefit Pension Plan ("Pension Plan").
(3) Ms. Walton, the Vice President of the Company, has sole voting and
investment power with respect to 40,000 shares and has options to purchase
12,200 shares granted under First Franklin's Stock Option Plan. Ms.
Walton has voting power with respect to 7,483 shares allocated to her
account in the ESOP.
(4) Includes shares held directly, shares allocated to such individuals'
accounts in the ESOP, shares subject to options granted under the
Company's Stock Option Plan and shares held by controlled corporations or
spouses and minor children, over which shares the specified individuals or
group effectively exercise sole or shared voting and investment power.
Such amount also includes the shares that may be deemed to be beneficially
owned by Mr. Siemers, as trustee of the ESOP and the Defined Benefit
Pension Plan of Franklin.
</TABLE>
PROPOSAL I -- ELECTION OF DIRECTORS
The Board of Directors is currently composed of five members. Directors are
generally elected to serve for three year terms or until their respective
successors are elected and qualified. Approximately one-third of the Board of
Directors of the Company is elected annually.
The following table sets forth certain information regarding the composition
of the Company's Board of Directors, including terms of office. It is intended
that the proxies solicited on behalf of the Board of Directors (other than
proxies in which the vote is withheld as to the nominee) will be voted at this
Meeting for the election of the nominees indicated below. If any nominee is
unable to serve, the shares represented by all valid proxies will be voted for
the election of such substitute as the Board of Directors may recommend. At
this time, the Board of Directors knows of no reason why the nominees might be
unable to serve if elected. Except as disclosed herein, there are no
arrangements or understandings between any nominee and any other person
pursuant to which such nominee was selected.
-3-
<PAGE> 4
<TABLE>
<CAPTION>
Shares
Positions held with Year first beneficially
the Company elected director of Term to owned at Percent
Name Age and Franklin the Company/Franklin expire March 15, 1994(i) of class
---- --- ------------------- -------------------- ------ ----------------- --------
<S> <C> <C> <C> <C> <C> <C>
NOMINEES
Thomas H. Siemers 61 President, Chief 1987/1953 1998 167,589(2) 13.9%
Executive Officer
and Director
James E. Hoff, S.J. 62 Director 1993/1993 1998 - -
DIRECTORS REMAINING IN OFFICE
Richard H. Finan 60 Director 1987/1968 1997 51,616 4.4
Mary J. Hunter 76 Director 1987/1970 1997 51,616 4.4
John L. Nolting 62 Director 1987/1981 1996 31,116 2.6
<FN>
---------------------------------------
(1) Reflects two-for-one stock split effective January 10, 1995. May include
shares held directly, shares allocated under the ESOP to the accounts of
directors who are full-time employees of Franklin, shares subject to
options granted under the Company's Stock Option Plan and shares held by
controlled corporations and family members with respect to which shares
the listed individuals or group members may be deemed to have sole or
shared voting and investment power.
(2) Includes 15,000 shares held by Franklin's Pension Plan, of which Mr.
Siemers is the trustee, and 38,407 shares held by the Company's ESOP which
have not been allocated to the account of any participant or have been
allocated, but over which Mr. Siemers, as trustee, retains investment
power.
</TABLE>
The business experience of each director during the last five years is as
follows:
THOMAS H. SIEMERS has been employed by Franklin since 1949, has been a
director of Franklin since 1953, and has served as President and Chief
Executive Officer since 1968. From 1978 to 1983, Mr. Siemers served as a
director of the Federal Home Loan Bank of Cincinnati. Mr. Siemers also served
as the Chairman of the Ohio Savings and Loan League in 1981 and 1982 and on the
Executive Committee of the U.S. League of Savings Institutions from 1982 to
1985. President Siemers served as a director and Secretary to the Ohio
Financial Service Corporation, Columbus, Ohio for approximately 17 years until
his resignation in June, 1987.
RICHARD H. FINAN has been an Ohio State Senator since 1978 and a lawyer
practicing in Sharonville, Ohio, since 1961. Director Finan also serves as
counsel of record for Madison Service Corporation, Franklin's wholly-owned
subsidiary, and DirectTeller Systems, Inc., a joint venture between the Company
and DataTech Services, Inc.
JAMES E. HOFF, S.J., has been President of Xavier University in Cincinnati,
Ohio, since 1991. Prior to his arrival at Xavier, Fr. Hoff was President of
the Creighton Foundation and Vice President of University Relations at
Creighton University.
MARY J. HUNTER was a member of the Board of Directors of Orpheum Federal
Savings from 1964 until it merged into Franklin on September 30, 1970. Ms.
Hunter, RN-BSN retired, is currently a homemaker.
JOHN L. NOLTING has been the President and Chief Executive Officer of
DataTech Services, Inc., a computer service company located in Cincinnati,
since 1974, President and Chief Executive Officer of Queen City Leasing, an
automobile leasing company located in Cincinnati, since 1980, and Director and
President of DirectTeller Systems, Inc.
-4-
<PAGE> 5
MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES
Meetings of the Company's Board of Directors are held regularly on a
quarterly basis. During the year ended December 31, 1994, the Board of
Directors held a total of six regular and special meetings. No incumbent
director of the Company attended fewer than 75% of the total meetings of the
Board of Directors during this period, except for Fr. Hoff, who attended four
meetings.
The Company has no standing audit, compensation or nominating committees.
The full Board of Directors acts as the nominating committee for the annual
selection of its nominees for election of directors and, with the exception of
Mr. Siemers, as the audit committee. During 1994, the Board of Directors met
once acting as a nominating committee and once acting as the audit committee.
While the Board of Directors will consider nominees recommended by
stockholders, it has not actively solicited nominations nor established any
procedures for this purpose.
The Board of Directors of Franklin, the principal subsidiary of the Company,
consists of the five directors of the Company and Francis J. Macke, James E.
Cross and William G. Roedersheimer. Meetings of Franklin's Board of Directors
are generally held on a monthly basis. The Board of Directors held a total of
13 meetings during 1994. No director attended fewer than 75% of the total
number of meetings of the Board of Directors and meetings held by all
committees of the Board of Directors on which he served, except Fr. Hoff, who
attended nine meetings The Board of Directors of Franklin has standing
executive, compensation and loan committees.
The Executive Committee consists of the President and one member of the
Board of Directors who is selected weekly on an alternating basis from the
entire Board. This committee meets weekly (except during weeks when the full
Board meets) and exercises the power of the Board of Directors between regular
Board meetings. All actions of this committee are reviewed and ratified by the
full Board of Directors. This committee met 40 times during 1994.
The Compensation Committee reviews and makes recommendations to the Board of
Directors with respect to executive compensation and other benefit programs.
The Compensation Committee is comprised of Mrs. Hunter and Messrs. Siemers,
Finan and Nolting. One meeting was held by this committee during 1994.
The Loan Committee recommends policies on residential, commercial and
consumer lending to the Board of Directors and reviews loan applications. The
Loan Committee has authority to approve loans in amounts of up to $350,000.
Members of this committee are Mr. Siemers, Mr. Harry Barnaclo and Ms. Margaret
Walton. The committee met approximately 65 times during 1994.
The full Board of Directors appoints a nominating committee for the annual
selection of its nominees for election of directors. While the nominating
committee and the Board of Directors will consider nominees recommended by
others, it has not actively solicited nominations nor established any
procedures for this purpose.
COMPENSATION OF THE BOARD OF DIRECTORS
Directors of the Company received directors' fees of $1,000 per meeting,
beginning in March 1994. Prior to that time, they received no fees for serving
as directors. Directors of Franklin are paid a fee of $1,000 per meeting. No
fees are currently paid by the Company or Franklin for committee membership.
-5-
<PAGE> 6
EXECUTIVE COMPENSATION
The Company currently does not pay any compensation to its executive
officers. The following table shows the compensation paid or granted by
Franklin and its subsidiaries for services rendered during the periods
indicated to any executive officer whose annual compensation exceeded
$100,000 during the fiscal year.
<TABLE>
<CAPTION>
Summary Compensation Table
--------------------------
All other compensation
Annual compensation ----------------------
-------------------
Name and principal position Year Salary($) Bonus($) ($)(1)
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
THOMAS H. SIEMERS - President, 1994 $197,047 $10,000 $13,359
Chief Executive Officer and Director of 1993 183,704 25,000 17,834
the Company, Franklin and 1992 170,862 20,000 18,042
Madison Service Corporation; Chairman of
the Board of DirectTeller Systems, Inc.
DANIEL T. VOELPEL - Vice President 1994 $94,263 $ 7,000 $ 9,018
and Chief Financial Officer of the 1993 90,135 7,000 8,300
Company and Franklin and Treasurer 1992 85,320 5,000 8,731
of Madison Service Corporation and
DirectTeller Systems, Inc.
<FN>
-------------------------------
(1) Represents the Company's contributions to the ESOP on behalf of
Mr. Siemers and Mr. Voelpel.
</TABLE>
No stock options were awarded under the Stock Option Plan during 1994. The
following table sets forth certain information concerning the number and value
of stock options at December 31, 1994, held by these listed individuals, as
adjusted to reflect the two-for-one stock split effective January 10, 1995. No
stock appreciation rights or limited stock appreciation rights have been
granted to any director or executive officer under the Company's Stock Option
Plan.
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
--------------------------------------------------------------------------------
Number of unexercised Value of unexercised in-the-money
options/SARs at FY-end (#) options/SARs at FY-end ($)(1)
Shares Acquired Value --------------------------- ---------------------------------
Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
----- --------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas H. Siemers 4,000 $34,000 31,472 - $282,248 -
Daniel T. Voelpel - - 12,200 - 109,800 -
<FN>
-----------------------------
(1) Value is based upon the sales price of $27.00 per share of the Company's
Common Stock as reported on the Nasdaq Stock Market at the time of the
trade closest in time to the exercise of the options, adjusted to $13.50 to
reflect the stock split, less the exercise price of $5.00 per share.
(2) Value is based upon the sales price of $28.00 per share of the Company's
Common Stock as reported on the Nasdaq Stock Market on December 31, 1994,
adjusted to $14.00 to reflect the stock split, less the exercise price of
$5.00 per share.
</TABLE>
-6-
<PAGE> 7
EMPLOYMENT CONTRACT
On May 1, 1984, the Board of Directors of Franklin approved a five year
employment agreement with Mr. Siemers. The contract provides for automatic
extensions of one year each upon the expiration of one year of the contract,
until either Franklin or the employee gives written notice to the contrary.
The contract provides for termination upon the employee's death, for cause or
in certain events specified by federal regulations. The contract is terminable
by the employee upon 90 days' notice to Franklin.
The employment agreement provides for a salary as determined by the Board of
Directors but not less than the employee's current annual salary. Salary
increases will be reviewed not less often than annually thereafter and are
subject to the sole discretion of the Board of Directors.
The contract provides for payment to the employee of an amount equal to the
present value of the employee's salary for the unexpired term of the contract
in the event there is a change in control of Franklin where employment
terminates involuntarily in connection with such change of control or within
six months thereafter. If Mr. Siemers' employment were terminated in
connection with a change in control while earning his current salary as of
December 31, 1994, at which date the unexpired term of the contract was 52
months, Mr. Siemers could have received a cash payment of up to approximately
$734,700 pursuant to his contract. Such termination payments are provided on a
similar basis in connection with a voluntary termination of employment in
connection with a change in control which was at any time opposed by Franklin's
Board of Directors. The contract provides, among other things, for
participation in an equitable manner in employee benefits applicable to
executive personnel.
-7-
<PAGE> 8
TRANSACTIONS WITH MANAGEMENT AND INDEBTEDNESS OF MANAGEMENT
Franklin, like many financial institutions, has followed the policy of
granting to its officers, directors and employees loans for the financing and
improvement of their personal residences and consumer loans for other purposes.
Except as set forth below, such loans are made in the ordinary course of
business and are made on substantially the same terms and collateral, except
for loan fees and interest rates on loans to employees who are not officers or
directors, as those of comparable transactions prevailing at the time, and do
not involve more than the normal risk of collectibility or present other
unfavorable features. Currently, for employees who are not directors, officers
or principal shareholders of the Company or Franklin, interest rates are
generally set at 1% over Franklin's cost of funds, subject to adjustment to
market rates in the event that the employment relationship is terminated.
Interest rates on loans originated after August 9, 1989, are set at market
rates for directors, officers and principal shareholders. Except for loans
made to directors, officers and principal shareholders, loan fees on mortgage
loans are generally waived except to the extent of direct loan origination
expenses incurred by Franklin.
Franklin's policy is to grant certain consumer loans to employees, other than
officers, directors, and principal shareholders, at the prevailing market rate
and modify them to 1% over Franklin's cost of funds. If the employment
relationship is terminated, the rate will revert to the contract rate and the
modification will be cancelled. Other loans are reviewed on an individual
basis and any preferential treatment given is based on the employees length of
service, work performance and past credit history. All loans by Franklin to
its directors and executive officers are subject to regulations requiring that
loans and other transactions involving directors, executive officers and
principal shareholders be on terms and conditions comparable to those for
similar transactions with non-affiliates.
<TABLE>
Set forth below is certain information at December 31, 1994, as to all loans
made by Franklin to each of its directors and executive officers, which were
granted prior to August 9, 1989 at less than market rates and which for any one
individual resulted in an aggregate indebtedness to Franklin exceeding $60,000
at any time since January 1, 1993:
<CAPTION>
Largest amount
outstanding Balance as of Current Market interest
Nature of since December 31, interest rate at the time
Name Date of loan indebtedness January 1, 1994 rate of origination
---- ------------ ------------ ------------ ------------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Richard H. Finan 6/15/84 First mortgage $92,076 $86,131 8.25% 10.50%
- personal
residence
Mary J. Hunter 10/29/81 First mortgage 98,344 90,047 8.25 12.50
- personal
residence
David T. Voelpel 8/27/87 First mortgage 112,921 -0- 8.00 10.00
- personal
residence
</TABLE>
In 1989, the Company entered into a joint venture called DirectTeller
Systems, Inc. ("DirectTeller"), with DataTech Services, Inc. ("DataTech"), for
the purpose of marketing computer software developed by DataTech to financial
institutions. Director Nolting is the President and Chief Executive Officer of
DataTech. When this venture was approved by the Board of Directors of the
Company, Director Nolting abstained from voting on the matter. The Company
initially contributed $50,000 and DataTech contributed the software it
developed to the initial capitalization of DirectTeller. Under the terms of
the joint venture, the Company is responsible for maintaining the financial
records of DirectTeller and DataTech is obligated to manage the day to day
operations of DirectTeller, including software maintenance and marketing.
DataTech does not receive a management fee for performing these services. The
Company currently owns a 51% interest in DirectTeller. The Company's
investment in such venture was $50,000 at December 31, 1994.
Director Finan is an attorney at law who from time to time provides legal
services to Madison Service Corporation and DirectTeller. During the year
ended December 31, 1994, fees paid by the subsidiaries of Franklin and the
Company did not exceed five percent of Mr. Finan's gross revenues for the last
fiscal year.
-8-
<PAGE> 9
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers and persons who own more than 10% of a registered class of
the Company's equity securities to file with the SEC initial reports of
ownership and reports of changes in the Company by the tenth day of the month
following a change. Officers, directors and greater than 10% stockholders are
required by SEC regulation to furnish the Company with copies of all Section
16(a) forms they file. To the Company's knowledge, based solely on a review of
the copies of such reports furnished to the Company and written representations
that no other reports were required, during the fiscal year ended December 31,
1994, all Section 16(a) filing requirements applicable to its officers,
directors and greater than 10% beneficial owners were complied with.
PROPOSAL II -- PROPOSED AMENDMENT TO THE COMPANY'S
CERTIFICATE OF INCORPORATION TO INCREASE THE
AUTHORIZED NUMBER OF SHARES OF COMMON STOCK
The Certificate of Incorporation of First Franklin currently authorizes
2,000,000 shares of capital stock, divided into 1,500,000 shares of Common
Stock, $.01 par value per share, and 500,000 shares of preferred stock, $.01
par value per share. As of March 15, 1994, there were 1,175,786 shares of
Common Stock issued and outstanding, 91,878 shares of Common Stock held by the
Company as treasury stock and no shares of preferred stock issued. Each share
of Common Stock entitles the holder thereof to one vote on each matter properly
submitted to the stockholders for their vote. In addition, 74,536 shares of
Common Stock are reserved for issuance upon the exercise of stock options
issued by the Company.
The shareholders approved a reduction in the number of authorized shares of
capital stock in 1992 in order to reduce state franchise taxes paid by the
Company. After that reduction, there were still over 600,000 authorized shares
of Common Stock available for issuance for purposes, other than stock option
exercises. The two-for-one stock split effected January 10, 1995, doubled the
number of issued and outstanding shares of Common Stock and reduced to 249,678
shares available for issuance as Common Stock.
The Board believes an increase in the total authorized Common Shares
will enable First Franklin to better meet its future business needs,
particularly in view of the stock split which reduced significantly the number
of shares available for such purposes. In order to have sufficient authorized
but unissued shares available for any possible acquisitions of other financial
distributions or for other corporate purposes, such as stock dividends or stock
options, the Board of Directors believes it is advisable to increase the
authorized number of shares of Common Stock by 1,000,000 to 2,500,000. The
proposed increase in the number of authorized shares will give First Franklin
greater flexibility in responding quickly to advantageous business
opportunities. First Franklin has no agreements with respect to the issuance of
shares of Common Stock at the present time. Any acquisition of another financial
institution would be subject to the approval of one or more financial
institution regulators. Depending on the means by which the acquisition is
completed, the stockholders may not be required to vote on the acquisition.
The stockholders need to approve any proposed amendment to the Certificate
of Incorporation before it can be effective. Therefore, the Board of Directors
of First Franklin recommends that the stockholders approve the following
resolution:
Resolved, that Paragraph 1 of Section 4 of the Certificate of Incorporation
of First Franklin be amended to increase the authorized number of Common
Stock by 1,000,000 to 2,500,000 and to read as follows:
Section 4. CAPITAL STOCK. The total number of shares of capital
stock which the Corporation has authority to issue shall be three
million (3,000,000), of which two million five hundred thousand
(2,500,000) shall be common stock, par value $.01 per share, and five
hundred thousand (500,000) of which shall be preferred stock, par
-9-
<PAGE> 10
value $.01 per share, with rights and preferences to be determined by
the board of directors upon issuance.
Since authorized shares of capital stock of the Company can be issued without
further stockholder approval or pre-emptive rights in existing stockholders,
the Board of Directors could dilute the voting power of existing stockholders
and the voting power of the shares of Common Stock and increase the number of
shares which would have to be purchased to obtain control of the Company. One
effect may be to discourage certain potential business combinations which some
stockholders may believe to be in their best interest and to make more
difficult management changes which might occur if the potential business
combination were successful. In addition, Sections 9, 10 and 11 of the
Company's Certificate of Incorporation contain provisions that could delay,
defer or prevent a change in control of the Company.
Pursuant to Section 9 of the Company's Certificate of Incorporation, no
person may make an offer to acquire beneficial ownership of more than 10% of
the voting shares of the Company, if the Common Stock is exchanged or quoted on
Nasdaq, unless such offer has been approved by two- thirds of the Company's
directors or the person has already obtained regulatory approval to acquire
control of the Company. That provision also prohibits the acquisition of
beneficial ownership of more than 10% of the voting shares of the Company,
unless that acquisition of control is preapproved by (i) two-thirds of the
directors of the Company and the holders of a majority of the outstanding
voting shares of the Company, or (ii) the holders of two-thirds of the
outstanding voting shares of the Company.
If any person acquires any shares of capital stock of the Company in violation
of Section 9, all such shares which are in excess of 10% beneficial ownership
may no longer be voted by the owner nor be transferred without approval of the
Board of the Company or a trustee appointed by the Board for those excess
shares. Those excess shares also are not to be included in determining the
total number of outstanding shares. Any trustee appointed by the Board will be
authorized to sell the excess shares in the open market, with the owner
receiving only a return of its federal tax basis in the shares, after the
payment of the trustee's expenses. Any additional funds received are
maintained by the Company. Any amendment of Section 9 must be approved by the
holders of two-thirds of the voting shares of the Company.
Section 10 of the Certificate of Incorporation imposes restrictions on any
business combination or acquisition of the Company or Franklin by or with one
or more persons which have beneficial ownership of more than 10% of the voting
shares of the Company. In general, such transactions must be approved or
authorized by the holders of 80% of the outstanding voting shares of the
Company. However, the required stockholder vote is whatever is required by
applicable law or other relevant provision of the Certificate of Incorporation,
if the following conditions are (i) two-thirds of all directors who are not
related to the stockholder-acquiror and who have served as a director since
before the stockholder-acquiror acquired any shares of the Company (the
"Continuing Directors") vote in favor of the transaction; (ii) the
consideration paid for shares of capital stock of the Company must be at least
equal to the highest of (a) the highest market value during the one year
preceding the announcement of the transaction, (b) the highest price previously
paid for Company stock by the stockholder-acquiror or (c) the book value per
share at the end of the month preceding the announcement of the transaction;
(iii) such consideration generally must be of the type paid by the
stockholder-acquiror when purchasing its existing shares of capital stock of
the Company; and (iv) whether or not required by law, the stockholders must
receive a proxy statement which is prepared in accordance with the requirements
of Section 14 of the Securities Exchange Act of 1934, whether or not such
provisions actually apply to the Company, and which contains a fairness opinion
and the recommendation of the Continuing Directors. Section 10 may only be
amended by vote of two-thirds of the directors and, if 75% of the Continuing
Directors do not approve the amendment, holders of 80% of the voting shares of
the Company.
Pursuant to Section 11 of the Certificate of Incorporation, any repurchase of
shares held for less than two years by a beneficial owner of at least 5% of the
voting shares of the Company must be approved by the holders of a majority of
the voting shares of the Company, excluding the stockholder whose shares are to
be repurchased. Any amendment of Section 11 must be approved by the holders of
two-thirds of the voting shares of the Company.
-10-
<PAGE> 11
All shares of the Company's Common Stock, including those now authorized and
those which would be authorized by the proposed amendment, are equal in rank
and have the same voting, dividend, and liquidation rights. Holders of the
Company's Common Stock do not have preemptive rights.
The affirmative vote of the holders of a majority of the outstanding shares
of First Franklin's Common Stock is required for the adoption of the proposed
amendment.
THE BOARD OF DIRECTORS OF FIRST FRANKLIN RECOMMENDS THAT THE SHAREHOLDERS OF
FIRST FRANKLIN VOTE FOR THE AMENDMENT TO THE CERTIFICATE OF INCORPORATION.
UNLESS A CONTRARY CHOICE IS SPECIFIED, PROXIES SOLICITED BY THE BOARD WILL BE
VOTED FOR THE AMENDMENT.
PROPOSAL III -- RATIFICATION OF APPOINTMENT OF
INDEPENDENT ACCOUNTANTS
The Board of Directors has renewed the Company's arrangement for Coopers &
Lybrand to be its independent accountants for 1995, subject to the ratification
of the appointment by the Company's stockholders. A representative of Coopers
& Lybrand is expected to attend the Meeting to respond to appropriate questions
and will have an opportunity to make a statement if he so desires.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE
RATIFICATION OF COOPERS & LYBRAND AS THE COMPANY'S INDEPENDENT ACCOUNTANTS FOR
THE FISCAL YEAR ENDING DECEMBER 31, 1995.
STOCKHOLDER PROPOSALS
To be eligible for inclusion in the Company's proxy materials for next year's
Annual Meeting of Stockholders, any stockholder proposal to take action at such
meeting must be received at the Company's main office, 401 East Court Street,
Cincinnati, Ohio 45202, no later than December 1, 1995. Any such proposal
shall be subject to the requirements of the proxy rules adopted under the
Securities Exchange Act of 1934, as amended.
OTHER MATTERS
The Board of Directors is not aware of any business to come before the
Meeting other than those matters described above in this Proxy Statement.
However, if any other matter should properly come before the Meeting, it is
intended that holders of the proxies will act in accordance with their best
judgment.
The cost of solicitation of proxies will be borne by the Company. The
Company will reimburse brokerage firms and other custodians, nominees and
fiduciaries for reasonable expenses incurred by them in sending proxy materials
to the beneficial owners of Common Stock. In addition to solicitation by mail,
directors, officers and regular employees of the Company may solicit proxies
personally or by telegraph or telephone without additional compensation.
-11-
<PAGE> 12
The Company's Annual Report to Stockholders, including financial statements,
is also enclosed. Any stockholders who have not received a copy of such Annual
Report may obtain a copy by writing to the Company. Such Annual Report is not
to be treated as part of the proxy solicitation materials, nor as having been
incorporated herein by reference.
BY ORDER OF THE BOARD OF DIRECTORS
Thomas H. Siemers
President and Chief Executive Officer
Cincinnati, Ohio
March 28, 1995
-12-
<PAGE> 1
Exhibit 21
Subsidiaries of First
Franklin Corporation
Name State of Incorporation
---- ----------------------
The Franklin Savings Ohio
and Loan Company
DirectTeller Systems, Inc. (1) Ohio
Madison Service Corporation (2) Ohio
_______________
(1) The Registrant owns 51% of the issued and outstanding shares of
DirectTeller Systems, Inc.
(2) Madison Service Corporation is a wholly-owned subsidiary of The
Franklin Savings and Loan Company.
<PAGE> 1
Exhibit 23
to
Form 10-KSB for 1994
FIRST FRANKLIN CORPORATION
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
First Franklin Corporation on Form S-8 (File No. 33-87618) of our report dated
January 31, 1995, except for Note 10, for which the date is February 24, 1995,
on our audits of the consolidated financial statements of First Franklin
Corporation as of December 31, 1994 and 1993, and for each of the three years
in the period ended December 31, 1994, which report is included in this Annual
Report on Form 10-KSB.
/s/ Coopers & Lybrand L.L.P.
----------------------------
Coopers & Lybrand L.L.P.
Cincinnati, Ohio
March 29, 1995
<TABLE> <S> <C>
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 2,055,764
<INT-BEARING-DEPOSITS> 827,225
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 34,489,664
<INVESTMENTS-CARRYING> 15,463,970
<INVESTMENTS-MARKET> 14,032,621
<LOANS> 135,426,345
<ALLOWANCE> 1,255,998
<TOTAL-ASSETS> 192,390,368
<DEPOSITS> 172,501,894
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,440,229
<LONG-TERM> 596,016
<COMMON> 12,554
0
0
<OTHER-SE> 17,839,675
<TOTAL-LIABILITIES-AND-EQUITY> 192,390,368
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<INTEREST-TOTAL> 13,293,817
<INTEREST-DEPOSIT> 7,442,314
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<INTEREST-INCOME-NET> 5,778,490
<LOAN-LOSSES> 61,800
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<EXPENSE-OTHER> 4,146,698
<INCOME-PRETAX> 2,009,046
<INCOME-PRE-EXTRAORDINARY> 1,354,471
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,354,471
<EPS-PRIMARY> 1.17
<EPS-DILUTED> 1.11
<YIELD-ACTUAL> 3.08
<LOANS-NON> 875,000
<LOANS-PAST> 253,000
<LOANS-TROUBLED> 1,047,000
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