<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(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, 1995
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
----------------------------------------------
(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
----------------------------------------------
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, par value $.01 per share
----------------------------------------------
(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 issuer's revenues for its most recent fiscal year were $14.91 million.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the last sale price quoted on the Nasdaq National Market
System as of March 13, 1996, was $11.28 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.)
1,181,518 of the issuer's common shares were issued and outstanding on March
13, 1996.
Documents Incorporated by Reference and Included as Exhibits:
Part II of Form 10-KSB - Portions of 1995 Annual Report to Stockholders
Part III of Form 10-KSB - Portions of Proxy Statement for 1996 Annual Meeting
Stockholders
Index to Exhibits on page 36.
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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 United States Congress is considering legislation which would eliminate
the OTS as a regulator of the Company. See "Regulation - FDIC Deposit
Insurance Assessments." Under that legislation, the Company would become a
bank holding company and would become subject to certain additional limits on
the activities in which the Company may engage, to separate capital
requirements and to other regulations issued by the Board of Governors of the
Federal Reserve System (the "FRB"). Although the activities in which the
Company may engage would be subject to more limitations if such legislation was
adopted, the current activities of the Company would not be materially affected
by the activity limits imposed by the legislation, as currently proposed.
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, 1995,
Franklin had approximately $210 million of assets, deposits of approximately
$185 million and stockholders' equity of approximately $14 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
risk when 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 portions of 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 Financial
Institutions (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
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the 12 regional banks comprising the FHLB System. Franklin is subject to
regulations of the FRB with respect to reserves required to be maintained
against certain deposits and other matters. See "Regulation".
The United States Congress is considering legislation to recapitalize the
SAIF. See "Regulation - Deposit Insurance Assessments." In connection with
such recapitalization, Congress may eliminate the OTS, as a result of which
Franklin would be regulated under federal law as a bank. Such regulation would
impose additional restrictions on the range of activities in which Franklin may
engage and would subject Franklin to more regulation by the FDIC. The current
activities of Franklin would not be materially affected by the activity limits
imposed by the legislation, as currently proposed.
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.
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 1993, Franklin purchases adjustable-rate
mortgage-backed securities to offset the lack of demand in the market area for
ARMs. During 1994 and 1995, 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, 1995, 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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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,
-------------------------------------------------------------------------
1995 1994 1993
------------------- ------------------- ---------------------
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 $119,921 64.43% $116,442 66.38% $115,670 65.71%
Nonresidential 12,453 6.69 11,372 6.48 12,541 7.12
Construction 8,042 4.32 6,596 3.76 4,278 2.43
Consumer and other loans 4,738 2.55 4,862 2.78 4,470 2.54
-------- -------- -------- -------- -------- --------
145,154 77.99 139,272 79.40 136,959 77.80
-------- -------- -------- -------- -------- --------
Loans held for sale - - -
Mortgage-backed securities
Held to maturity 22,258 11.96 14,583 8.32 39,085 22.20
Available for sale 18,701 10.05 21,543 12.28 - -
-------- -------- -------- -------- -------- --------
40,959 22.01 36,126 20.60 39,085 22.20
-------- -------- -------- -------- -------- --------
Total loans receivable
(before net items) $186,113 100.00% $175,398 100.00% $176,044 100.00%
======== ======== ======== ======== ======== ========
Type of rate
- ------------
Fixed rate $ 70,551 37.91% $ 56,891 32.44% $ 56,068 31.85%
Adjustable rate 113,365 60.91 115,193 65.68 114,748 65.18
Passbook adjustable rate(1) 2,197 1.18 3,314 1.88 5,228 2.97
-------- -------- -------- -------- -------- --------
Total loans receivable
(before net items) $186,113 100.00% $175,398 100.00% $176,044 100.00%
======== ======== ======== ======== ======== ========
Type of security
- ----------------
Residential:
Single family $149,019 80.07% $139,581 79.58% $138,545 78.70%
2-4 family 8,078 4.34 7,738 4.41 8,160 4.64
Multi-family 8,914 4.79 9,885 5.64 11,073 6.29
Nonresidential real estate 15,364 8.25 13,332 7.60 13,796 7.84
Student loans 1,210 0.65 1,182 0.67 1,221 0.69
Consumer and other loans 3,528 1.90 3,680 2.10 3,249 1.84
-------- -------- -------- -------- -------- --------
Total loans receivable
(before net items) $186,113 100.00% $175,398 100.00% $176,044 100.00%
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
At December 31,
---------------------------------------------------
1992 1991
-------------------- --------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Type of loan
- ------------
Loans secured by real
estate:
Residential $129,686 69.23% $142,547 81.81%
Nonresidential 11,975 6.39 13,115 7.53
Construction 3,957 2.11 1,839 1.06
Consumer and other loans 5,339 2.85 6,015 3.45
-------- -------- -------- --------
150,957 80.58 163,516 93.85
-------- -------- -------- --------
Loans held for sale - -
Mortgage-backed securities
Held to maturity 36,374 19.42 10,715 6.15
Available for sale - - - -
-------- -------- -------- --------
36,374 19.42 10,715 6.15
-------- -------- -------- --------
Total loans receivable
(before net items) $187,331 100.00% $174,231 100.00%
======== ======== ======== ========
Type of rate
- ------------
Fixed rate $ 45,496 24.29% $ 37,720 21.65%
Adjustable rate 132,726 70.85 123,604 70.94
Passbook adjustable rate(1) 9,109 4.86 12,907 7.41
-------- -------- -------- --------
Total loans receivable
(before net items) $187,331 100.00% $174,231 100.00%
======== ======== ======== ========
Type of security
- ----------------
Residential:
Single family $146,561 78.24% $130,444 74.86%
2-4 family 9,235 4.93 9,003 5.17
Multi-family 14,022 7.49 15,388 8.83
Nonresidential real estate 12,174 6.50 13,381 7.68
Student loans 1,448 0.77 1,672 0.96
Consumer and other loans 3,891 2.07 4,343 2.50
-------- -------- -------- --------
Total loans receivable
(before net items) $187,331 100.00% $174,231 100.00%
======== ======== ======== ========
</TABLE>
(1) Loans have interest rates that adjust in accordance with the rates
paid on Franklin's passbook savings accounts.
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The following table presents a reconciliation of Franklin's loans
receivable and mortgage-backed securities after net items:
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
-------------- -------------- --------------- ------------- --------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Gross loans receivable and
mortgage-backed securities
(before net items) $186,113 $175,398 $176,044 $187,331 $174,231
Less:
Loans in process 4,171 2,933 2,559 1,944 1,150
Deferred loan fees 447 737 959 1,256 1,529
Allowance for possible loan
losses 947 1,256 1,248 1,345 976
Unearned income 170 175 185 45 46
Unrealized (gain) loss on
available for sale mortgage-
backed securities (263) 801 - - -
-------- -------- -------- -------- --------
Total 5,472 5,902 4,951 4,590 3,701
-------- -------- -------- -------- --------
Loans receivable and mortgage-
backed securities - net $180,641 $169,496 $171,093 $182,741 $170,530
======== ======== ======== ======== ========
</TABLE>
The following schedule presents the contractual maturity of Franklin's
loan and mortgage-backed securities portfolio at December 31, 1995. 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, 1996.
<TABLE>
<CAPTION>
One- to-four-family
real estate Other real estate Mortgage-backed Consumer and
mortgage loans mortgage loans securities other loans Total
------------------ ----------------- ------------------ ---------------- ------------------
Weighted Weighted Weighted Weighted Weighted
average average average average average
Amount rate Amount rate Amount rate Amount rate Amount rate
------ ---------- ------ -------- ------ ---------- ------ -------- ------ ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Due during years
ended December 31:
1996 $ 55,509 7.58% $11,578 8.40% $18,097 6.90% $2,460 8.28% $ 87,644 7.57
1997 and 1998 23,928 7.21 6,848 9.11 1,673 6.11 744 8.63 33,193 7.58
1999 and 2000 2,545 7.46 1,015 10.00 2,109 5.33 988 8.49 6,657 7.32
2001 to 2005 2,952 8.25 2,675 8.62 1,843 7.35 365 9.30 7,835 8.21
2006 to 2015 15,403 7.72 551 9.24 8,232 5.87 162 9.05 24,348 7.14
2016 and following 16,831 7.86 581 7.69 9,005 7.29 19 8.49 26,436 7.66
-------- ---- ------- ---- ------- ---- ------ ---- -------- ----
Total $117,168 7.58% $23,248 8.71% $40,959 6.69% $4,738 8.48% $186,113 7.55%
======== ==== ======= ==== ======= ==== ====== ===== ======== ====
</TABLE>
As of December 31, 1995, the total amount of loans and mortgage-backed
securities maturing or repricing after December 31, 1996 consisted of $34.6
million of adjustable-rate loans and $63.9 million of fixed-rate loans.
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The following table shows the loan origination, purchase and sale
activity, including of mortgage-backed securities, by Franklin during the
periods indicated:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Loans originated:
One-to-four-family $27,994 $29,299 $58,452 $ 68,622 $28,453
Multi-family 500 695 919 - 163
Nonresidential 2,335 1,165 4,122 1,522 1,529
Land 293 51 1,025 119 242
Consumer 2,482 2,505 2,651 2,686 2,221
------ ------ ------ ------ ------
Total loans originated 33,604 33,715 67,169 72,949 32,608
====== ====== ====== ======= ======
Mortgage-backed securities
purchased 10,143 2,635 22,246 27,155 9,486
Loans purchased 569 - 406 - -
------ ------ ------ ------- ------
Total loans originated
and mortgage-backed
securities and loans
purchased 44,316 36,350 89,821 100,104 42,094
------ ------ ------ ------- ------
Loans sold:
One-to-four-family 910 3,893 39,849 41,451 16,945
Mortgage-backed securities
sold - - 13,717 - -
Principal reductions and
payoffs 32,691 33,103 47,542 45,553 24,096
------ ------ ------ ------- ------
Increase (decrease) in loans
receivable 10,715 (646) (11,287) 13,100 1,053
Increase (decrease) in net
items 430 (951) (361) (889) 980
------ ------ ------ ------- ------
Net increase (decrease) in
loans receivable $11,145 $(1,597) $(11,648) $12,211 $ 2,033
====== ====== ====== ======= ======
</TABLE>
In addition to interest earned on loans, Franklin receives fees for
loan originations, 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 1995, Franklin sold
approximately $910,000 in fixed-rate residential loans to the Federal Home Loan
Mortgage Corporation ("FHLMC"). At December 31, 1995, Franklin serviced $58.5
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 1995 were $33.6 million, a decrease of less
than 1% from 1994 levels and a 50% decrease from 1993 levels. The decline in
loan originations during 1995 and 1994, as compared to 1993, was the result of
a decrease in loan refinancing due to an increase in interest rates. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS - Asset/Liability Management, and - Liquidity" in the Annual Report.
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 whom must be the Chief Lending Officer, has 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.
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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.
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, 1995,
$157.1 million, or 86.6%, 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.
In order to reduce its exposure to changes in interest rates, Franklin
has attempted to de-emphasize 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. During 1995, as a result of interest rate increases,
originations of ARMs increased. Franklin also originates both thirty-year and
fifteen-year fixed-rate mortgage loans, most of which are 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. Interest rate
increases are generally limited to 2% per adjustment period and 6% over the
life of the loan. At December 31, 1995, ARMs (not including loans with
interest rates tied to the rates paid on Franklin's passbook accounts) totaled
$113.4 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, 1995, $1.5 million of Franklin's ARMs were delinquent
thirty days or more. This represents 1.3% of all ARMs outstanding at that
date, an increase of $400,000, or 36% 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.
MULTI-FAMILY RESIDENTIAL AND NONRESIDENTIAL REAL ESTATE LENDING
As of December 31, 1995, approximately $24.3 million, or 13.4%, 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 been 1.0% of the original loan amount (plus expenses). At December
31, 1995, $22.2 million, or 91.4%, 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).
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<PAGE> 8
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, 1995, two had principal
balances of more than $1.0 million and seven 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, which
is total capital for regulatory purposes plus general valuation reserves not
included in total capital. As computed on the basis of Franklin's unimpaired
capital and surplus at December 31, 1995, this limit was approximately $2.17
million. See "Regulation - OTS Regulatory Capital Requirements and - Lending
Limits." At December 31, 1995, Franklin had six borrowers, or groups of
borrowers, with loans in excess of $1.0 million, for a total of $7.86 million.
The largest amount outstanding to any of these borrowers or groups of borrowers
was approximately $2.01 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, 1995, $4.7 million, or
2.6%, 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,
1995, $892,000 of Franklin's loans and other assets were classified as
"substandard" and $306,000 were classified as "loss." As of such date, no
assets were classified as "doubtful" and $2.3 million were classified "special
mention." At December 31, 1995, $3.5 million, or 2.5%, 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>
At December 31,
-----------------------------------------------------------------------------------
1995 1994 1993 1992 1991
--------------- --------------- --------------- --------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
30-59 days $1,010 $ 889 $1,238 $3,645 $4,364
60-89 days 902 392 1,212 1,355 990
90 days and over 1,017 1,128 2,005 2,269 1,950
------ ------ ------ ------ ------
Total $2,929 $2,409 $4,455 $7,269 $7,304
====== ====== ====== ====== ======
</TABLE>
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 114. "Accounting by Creditors for Impairment of a Loan" on
January 1, 1995. Under the new standard, a loan is considered impaired, based
on current information and events, if it is probable that the Company will be
unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. The measurement of
impaired loans is generally based on the present value of expected future cash
flows discounted at the loan's interest rate, except that all
collateral-dependent loans are measured for impairment based on the fair value
of the collateral. At December 31, 1995, the Company had identified three
multi-family loans with a carrying value of $169,000 as being impaired.
Valuation allowances of $32,000 were established against these loans.
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 valuation allowances which have been established.
-9-
<PAGE> 10
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
Residential real estate $ 368 $ 383 $ 945 $1,167 $ 713
Nonresidential real estate - 138 611 344 278
Consumer 204 354 173 369 242
-------- -------- -------- -------- --------
Total 572 875 1,729 1,880 1,233
-------- -------- -------- -------- --------
Total as a percentage of
total assets 0.27% 0.45% 0.87% 0.90% .60%
Accruing loans delinquent
more than 90 days:
Residential real estate 422 243 273 510 609
Nonresidential real estate - - - - -
Consumer 23 10 3 60 4
-------- -------- -------- -------- --------
Total 445 253 276 570 613
-------- -------- -------- -------- --------
Total as a percentage of
total assets 0.21% 0.13% 0.14% 0.27% 0.30%
Repossessed assets:
Residential real estate - - 54 - 134
Nonresidential real estate - - 435 435 1,643
-------- -------- -------- -------- --------
Total - - 489 435 1,777
-------- -------- -------- -------- --------
Total as a percentage of
total assets - - 0.25% 0.21% 0.87%
Renegotiated loans 355 1,047 1,113 1,455 1,453
-------- -------- -------- -------- --------
Total non-performing
assets $1,372 $2,175 $3,607 $4,340 $5,076
======= ======== ======== ======== ========
Total non-performing assets
as a percentage
of total assets 0.64% 1.13% 1.81% 2.07% 2.48%
======= ======== ======== ======== ========
Other loans of concern:
Residential real estate $ 888 $ 587 $ 411 $1,190 $1,395
Nonresidential real estate 389 - - 61 62
Consumer 9 12 1 23 23
-------- -------- -------- -------- --------
Total $1,286 $ 599 $ 412 $1,274 $1,480
======== ======== ======== ======== ========
Total as a percentage of
total assets 0.60% 0.31% 0.21% 0.61% 0.72%
======== ======== ======== ======== ========
Unallocated allowance for
loan losses $ 525 $ 599 $ 595 $ 350 $ 284
======== ======== ======== ======== ========
Total allowance for loan
losses $ 947 $1,256 $1,248 $1,346 $ 977
======== ======== ======== ======== ========
</TABLE>
For the year ended December 31, 1995, gross interest income which
would have been recorded had the non-accruing loans been current in accordance
with their original terms amounted to $54,000. The amount that was included in
interest income on such loans was $24,000 for the year ended December 31, 1995.
As of December 31, 1995, 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
-10-
<PAGE> 11
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, 1995, there were no concentrations of loans of any
type 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, 1995, consisted of seven
one-to-four-family residential loans with an aggregate book value of $226,000
and two multi-family loans with an aggregate book value of $142,000. At
December 31, 1995, accruing loans delinquent more than 90 days consisted of
eight loans totalling $423,000 secured by one-to-four-family residential real
estate.
Renegotiated loans consisted of 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, 1995, loss reserves of $163,000 had
been established against this loan resulting in a net book value of $192,000.
Other loans of concern at December 31, 1995, included eight loans
totalling $888,000 secured by one-to-four-family residential real estate, one
commercial loan of $389,000 and three consumer loan totalling $9,000.
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, 1995, Franklin had $947,000 of such allowances, $422,000 of
which had been allocated to specific loans or properties. See Note 3 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,
-----------------------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(Dollar in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $1,256 $1,279 $1,345 $2,195 $2,093
Charge-offs:
One-to-four-family 161 67 28 60 71
Multi-family - - 334 - -
Nonresidential real estate - 19 - 1,198 80
Consumer 178 - 30 19 3
-------- -------- -------- -------- --------
Total charge-offs 339 86 392 1,277 154
-------- -------- -------- -------- --------
Recoveries:
One-to-four-family - 1 - - -
Multi-family - - - - 14
Nonresidential real estate - - - 17 -
Consumer - - 1 - -
-------- -------- -------- -------- --------
Total recoveries - 1 1 17 14
-------- -------- -------- -------- --------
Net charge-offs 339 85 391 1,260 140
Additions charged to operations 30 62 325 410 242
-------- -------- -------- -------- --------
Balance at end of period $947 $1,256 $1,279 $1,345 $2,195
======== ======== ======== ======== ========
Ratio of net charge-offs during
the period to average loans
outstanding during the period 0.25% 0.06% 0.28% 0.82% 0.085%
======== ======== ======== ======== ========
Ratio of net charge-offs during
the period to average non-
performing assets 19.11% 2.94% 9.84% 26.76% 3.00%
======== ======== ======== ======== ========
</TABLE>
Included in the above charge-offs incurred in 1995 are $75,000 in
one-to-four-family mortgages and $178,000 in consumer loans, which previously
had specific reserves established against them that were determined to be
uncollectible and charged off.
Repossessed assets at December 31, 1995, 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>
At December 31,
------------------------------------------------------------------------------------
1995 1994 1993
------------------------- ------------------------ -----------------------
Percent of Percent of Percent of
loans in each loans in each loans in each
category category category
Amount to total loans Amount to total loans Amount to total loans
------ -------------- ------ -------------- ------ --------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans:
One-to-four-family $ 14 84.41% $ 31 83.99% $ 12 83.34%
Multi-family 147 4.79 145 5.64 158 6.29
Nonresidential real
estate 187 8.25 262 7.60 262 7.84
Consumer 74 2.55 219 2.77 221 2.53
Unallocated 525 - 599 - 595 -
--- ------ ----- ------ ----- ------
Total loans 947 100.00% 1,256 100.00% 1,248 100.00%
=== ====== ===== ====== ===== ======
Repossessed assets:
One-to-four-family - - 31
Nonresidential real
estate - - -
--- ----- -----
Total repossessed
assets - - 31
--- ----- -----
Total $ 947 $1,256 $1,279
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------
1992 1991
----------------------- -----------------------
Percent of Percent of
loans in each loans in each
category category
Amount to total loans Amount to total loans
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Loans:
One-to-four-family $ 30 83.17% $ 40 80.03%
Multi-family 448 7.49 172 8.83
Nonresidential real
estate 262 6.50 240 7.68
Consumer 255 2.84 241 3.46
Unallocated 350 - 284 -
------ ------ ------- ------
Total loans 1,345 100.00% 977 100.00%
====== ====== ------- ======
Repossessed assets:
One-to-four-family $ - 29
Nonresidential real
estate - 1,189
------ -------
Total repossessed
assets - 1,218
------ -------
Total $ 1,345 $ 2,195
======= =======
</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 and
FHLB overnight funds. 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 Statements 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>
At December 31,
---------------------------------------------------
1995 1994 1993
-------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Investment securities available-for-sale,
at fair value:
U.S. government and agency obligations $17,713 $13,747 $ -
State and local government obligations 1,049 - -
-------- -------- --------
Total investment securities available-for-
sale
$18,762 $13,747 $ -
======= ======= =========
Investment securities held-to-maturity, at
amortized cost:
U.S. Government and agency obligations $ - $ - $14,406
State and local government obligations - 881 1,007
-------- -------- --------
Total investment securities held-to-maturity $ - $ 881 $15,413
======= ======= =========
</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, 1995
------------------------------------------------------------------------------------------------------
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> <C> <C> <C>
U.S. Government and
agency obligations $1,000 $16,884 $ - $ - $17,884 $17,713
State and local
government obligations 185 326 299 145 955 1,049
------ ------- ----- ------- ------- -------
Total investment
securities $1,185 $17,210 $ 299 $ 145 $18,839 $18,762
====== ======= ===== ======= ======== =======
Weighted average yield(1) 5.37% 5.34% 6.84% 6.25% 5.37% -
<FN>
- ----------------------------
(1) Yields reflected have not been computed on a tax equivalent basis.
The following table sets forth the carrying value of the
mortgage-backed securities portfolio at the dates indicated:
</TABLE>
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------
1995 1994 1993
--------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Available-for-sale, at fair value:
FHLMC certificates $ 2,224 $ 2,875 $ -
FNMA certificates 7,639 8,429 -
GNMA certificates 9,101 9,438 -
------- -------- -------
Total mortgage-backed securities
available-for-sale $18,964 $ 20,742 $ -
======= ======== ========
Held-to-maturity, at amortized cost:
FHLMC certificates $12,182 $ 3,543 $ 7,744
FNMA certificates 9,045 9,996 20,003
Collateralized mortgage
obligations 1,031 1,044 1,058
GNMA certificates - - 10,280
------- -------- --------
Total mortgage-backed securities
held-to-maturity $22,258 $ 14,583 $ 39,085
======= ======== ========
</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, 1995
---------------------------------------------------------------------------------------------------
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 $ - $3,178 $ 811 $10,370 $14,359 $14,419
FNMA certificates - - - 16,584 16,584 16,475
Collateralized mortgage
obligations - - 1,031 - 1,031 1,020
GNMA certificates - - - 8,985 8,985 9,101
-------- ------ ------- ------- ------- -------
Total mortgage-backed
securities $ - $3,178 $1,842 $35,939 $40,959 $41,015
======== ====== ====== ======= ======= =======
Weighted average yield - 5.34% 7.35% 6.76% 6.68% -
</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, 1995, are summarized as follows:
<TABLE>
<CAPTION>
Average rate Minimum Amount(1) Percentage of total deposits
------------ ------- --------- -----------------------------
(In thousands)
Savings programs:
<S> <C> <C> <C> <C>
Passbook savings 2.75% $ 100 $ 24,304 49.42%
NOW 2.19 100 13,686
Super NOW 2.62 2,500 2,136 4.34
Money market 2.94 2,500 9,055 18.41
---- ----- ---------- ------
Total regular
accounts 2.62% $ 49,181 100.00%
==== ========== ======
Certificates of
deposit:
7-31 day 3.00% $ 2,500 $ 543 0.40%
91 day 2.80 2,500 101 0.07
Six-months 5.41 2,500 28,517 21.06
One year 5.63 500 22,860 16.88
18 months 6.00 500 15,640 11.55
Two years 5.65 500 11,082 8.19
Thirty-two months 5.37 500 4,313 3.19
Three years 6.27 500 20,683 15.28
Five years 6.34 2,500 28,489 21.04
Jumbo certificates(2) 3.18 100,000 2,879 2.13
Other(2) 6.29 500 286 0.21
---- ---------- -------
Total certificates 5.80% $ 135,393 100.00%
-------------------- ==== ========== ======
</TABLE>
(1) Includes $26.6 million of deposits held in IRA and Keogh accounts.
(2) Maturities vary.
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, 1995, 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>
Year ended December 31,
------------------------------------------------------------
1995 1994 1993
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Opening balance $172,502 $178,550 $189,896
Deposits 302,026 276,504 333,925
Withdrawals 297,779 289,062 352,851
Interest credited 7,825 6,510 7,580
-------- -------- --------
Ending balance $184,574 $172,502 $178,550
======== ======== ========
</TABLE>
The following table sets forth the amount of Franklin's certificates
of deposit by interest rates as of the dates indicated:
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------
1995 1994 1993
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
3.00% and less $ 3,400 $ 1,403 $ 4,138
3.01% - 4.00% 18 14,854 32,326
4.01% - 5.00% 17,096 26,545 14,732
5.01% - 6.00% 81,842 59,750 33,540
6.01% - 7.00% 24,297 517 1,180
7.01% - 8.00% 8,404 11,473 15,659
8.01% - 10.00% 244 1,782 8,196
10.01% and over 92 134 262
-------- ---------- --------
Total $135,393 $ 116,458 $110,033
======== ========== ========
</TABLE>
The following table sets forth, as of December 31, 1995, the amounts
of certificates of deposit maturing during the years indicated:
<TABLE>
<CAPTION>
Amounts maturing in the year
ending December 31,
-------------------------------------------------------------------------
1999 and
1996 1997 1998 thereafter
-------- -------- -------- ----------
(In thousands)
<S> <C> <C> <C> <C>
3.00% and less $ 3,368 $ 5 $ - $ 27
3.01% - 4.00% 18 - - -
4.01% - 5.00% 12,001 3,229 721 1,145
5.01% - 6.00% 53,989 11,470 13,602 2,781
6.01% - 7.00% 8,380 14,061 935 921
7.01% - 8.00% 8,285 112 - 7
8.01% - 10.00% 87 4 101 52
10.01% and over - 50 42 -
------- -------- ------- --------
Total $86,128 $ 28,931 $15,401 $ 4,933
======= ======== ======= ========
</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,
---------------------------------------------------
1995 1994 1993
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Change in deposit
balances:
Passbook savings $(5,049) $(8,969) $ (4,519)
NOW accounts 390 (1,015) (563)
Money market
accounts (2,204) (2,488) 917
Certificates:
7-31 day (224) (101) 255
91 day (168) (187) 111
6 months 18,111 (5,042) (5,544)
One year (1,040) 12,061 (6,821)
18 months 11,800 (1,212) (1,465)
Two years (409) 6,727 (665)
Thirty-two months (9,336) 38 13,611
Three years 6,564 (1,578) 68
Five years (5,973) (3,363) (4,651)
Jumbo certificates (175) (810) (1,833)
Other (215) (108) (247)
------ ------- -------
Total increase
(decrease) $12,072 $(6,047) $(11,346)
======= ======= =========
</TABLE>
The following table sets forth rate and maturity information for
Franklin's certificates of deposits as of December 31, 1995:
<TABLE>
<CAPTION>
Percentage
Amount of deposits Average rate
------ ------------- ------------
(Dollars in thousands)
<S> <C> <C> <C>
Certificates maturing in
quarter ended:
March 31, 1996 $ 29,469 15.97% 5.61%
June 30, 1996 17,768 9.63 5.37
September 30, 1996 17,338 9.39 5.93
December 31, 1996 21,553 11.68 5.84
March 31, 1997 10,598 5.73 5.65
June 30, 1997 1,520 0.83 5.35
September 30, 1997 6,054 3.28 6.64
December 31, 1997 10,759 5.83 6.58
March 31, 1998 1,554 0.84 6.40
June 30, 1998 1,403 0.76 5.93
September 30, 1998 6,546 3.55 5.70
December 31, 1998 5,898 3.20 5.66
Thereafter 4,933 2.66 5.72
Total certificates 135,393 73.35 5.80
------- ----- ----
Other deposits 49,181 26.65 2.62
------- ------ ----
Total deposits $184,574 100.00% 4.95%
======== ====== ====
</TABLE>
-19-
<PAGE> 20
The following table indicates the amount of Franklin's certificates of
deposit by time remaining until maturity as of December 31, 1995:
<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 $26,946 $16,011 $35,214 $42,282 $120,453
Certificates of deposit of
$100,000 or more 2,523 1,757 3,677 6,983 14,940
------- ------- ------- ------- --------
Total certificates of
deposit $29,469 $17,768 $38,891 $49,265 $135,393
======= ======= ======= ======= ========
</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.
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's FHLB advances outstanding at
December 31, 1995, were $7.4 million.
The following table shows the FHLB advances outstanding as of December
31, 1995 by interest rate and maturity date:
<TABLE>
<CAPTION>
Maturity Date Interest Rate Outstanding Balance
------------- ------------- -------------------
<S> <C> <C>
05/01/06 8.15% $ 450
10/01/10 6.35 4,950
12/01/10 6.30 1,993
</TABLE>
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,
---------------------------------------------------------
1995 1994 1993
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Maximum amount outstanding:
FHLB advances $322 $1,763 $74
Other short-term borrowings - - -
Total average amount of short-term
borrowings outstanding during period $113 $309 $61
Weighted average interest cost of
borrowings during the period ended 6.16% 8.67% 8.35%
</TABLE>
-20-
<PAGE> 21
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, 1995, 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, 1995, 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 Company has
a 51% interest in this company and its investment in such company at December
31, 1995, 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, 1995, based on total assets, Franklin was the
seventh largest thrift institution headquartered in Hamilton County, Ohio.
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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, and to regulatory oversight 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 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.
Congress is considering legislation to recapitalize the SAIF. See
"-Deposit Insurance Assessments." In connection with such recapitalization,
Congress may eliminate the OTS, as a result of which Franklin would be
regulated under federal law as a bank. Such regulation would restrict the
range of activities in which Franklin may engage and would subject Franklin to
more regulation by the FDIC. In addition, the Company would become a bank
holding company if such legislation is adopted as proposed and would become
subject to certain additional limits on activities in which the Company may
engage, to separate capital requirements and to other regulations issued by the
FRB. Although this legislation, if adopted as proposed, would increase the
limitations on permissible activities by the Company and Franklin, the current
activities of both the Company and Franklin would not be materially affected by
these additional activity limits.
OHIO REGULATION. The Ohio Superintendent is responsible for the
regulation, examination 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.
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 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 issues
regulations governing the operation of savings associations, regularly examines
such associations and imposes assessments on savings associations based on
their asset size to cover the costs of general supervision and examination.
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 an
association to open a new branch or engage in a merger transaction. Community
reinvestment regulations will evaluate how well and to what extent an
institution lends and invests in its designated service area, with particular
emphasis on low-to-moderate income communities and borrowers in such areas.
Franklin has received a "satisfactory" examination rating under those
regulations.
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<PAGE> 23
OTS 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, 1995, 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, 1995
--------------------
Amount Percent
------ -------
(In thousands)
<S> <C> <C>
Tangible capital $ 13,881 6.61%
Requirement 3,149 1.50
-------- ----
Excess $ 10,732 5.11%
======== ====
Core capital $ 13,881 6.61%
Requirement 6,299 3.00
-------- ----
Excess $ 7,582 3.61%
====
Total capital $ 14,486 15.13%
Risk-based requirement 7,660 8.00
-------- ----
Excess $ 6,826 7.13%
======== ====
</TABLE>
Current capital requirements call for tangible capital (which for
Franklin is equity capital under generally accepted accounting principles less
the unrealized gain on available-for-sale securities) 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 (which for Franklin consists of
core capital plus general valuation reserves of $605,000) 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 6.61% of adjusted total assets.
The OTS has adopted an interest rate risk component to the risk-based
capital requirement, through the implementation of that component has been
delayed. Pursuant to that requirement, a savings association would have to
measure the effect 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 be required to deduct one-half of
that excess exposure from its total capital when determining its level of
risk-based capital. 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. First Federal currently qualifies for such exception.
Pending implementation of the interest rate risk component, the OTS has the
authority to impose a higher individualized capital requirement on any savings
association it deems to have excess interest rate risk. The OTS also 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
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<PAGE> 24
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, 1995, 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 of not less than 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 of Franklin, as computed under current
regulations, at December 31, 1995, was approximately $25.0 million, or 13.6%
and exceeded the 5.0% liquidity requirement by approximately $15.8 million.
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, 1995, Franklin had QTL investments equal to
approximately 91.7% 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, which is total capital for
regulatory purposes 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, 1995, First
Federal 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
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<PAGE> 25
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, 1995.
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,
1995.
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.
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.
In addition, as a subsidiary of the Company, Franklin is required to
give the OTS 30-days' notice prior to declaring any dividend on its stock. The
OTS may object to the distribution during that 30-day period. Franklin paid
dividends of $1.14 million to the Company during fiscal 1995.
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<PAGE> 26
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. Congress is considering
legislation that may require that the Company become a bank holding company
regulated by the FRB. Bank holding companies with more than $150 million in
assets are subject to capital requirements similar to those imposed on Franklin
and have more extensive interstate acquisition authority than savings and loan
holding companies. Bank holding companies are subject to more restrictive
activity and investment limits than savings and loan holding companies. No
assurances can be given that such legislation will be enacted, and the Company
cannot be certain of the legislation's impact on its operations until its
enacted.
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 unitary savings and loan holding
companies and such companies are the only financial institution holding
companies which may engage in commercial activities and expanded securities and
insurance activities. 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, 1995, Franklin met the QTL Test.
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
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<PAGE> 27
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.
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. The FDIC is
required to maintain designated levels of reserves in each fund. The reserves
of the SAIF are below the level required by law, because a significant portion
of the assessments paid into the funds have been and are being used to pay the
cost of prior thrift failures. In May 1995, reserves of the BIF met the level
required by law.
Depository institutions are generally prohibited from converting from
one insurance fund to the other until the SAIF meets 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.
FDIC DEPOSIT INSURANCE ASSESSMENTS. The FDIC is authorized to
establish separate annual assessment rates for deposit insurance 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 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 vary
based on the risk the institution poses to its deposit insurance fund. The
risk level is determined based on the institution's capital level and the
FDIC's level of supervisory concern about the institution.
Because of the differing reserve levels of the funds, deposit
insurance assessments paid by healthy commercial banks were reduced
significantly below the level paid by healthy savings associations effective in
mid-1995. Assessments paid by healthy savings associations exceeded those paid
by healthy commercial banks by approximately $.19 per $100 in deposits in late
1995. This difference in assessment rates equals approximately $.23 per $100
in deposits in 1996. This premium disparity could have a negative competitive
impact on Franklin and other institutions in the SAIF.
Congress is considering legislation to recapitalize the SAIF and to
eliminate this significant premium disparity. Currently, the recapitalization
plan provides for a special assessment of approximately $.85 to $.90 per $100
of SAIF deposits held at March 31, 1995, in order to increase SAIF reserves to
the level required by law. Certain banks holding SAIF deposits would pay a
lower special assessment. In addition, the cost of prior thrift failures would
be shared by both the SAIF and the BIF. Such cost sharing might increase BIF
assessments. SAIF assessments for healthy institutions would be set at a
significantly lower level, but could never be reduced below the level set for
healthy BIF institutions.
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<PAGE> 28
The recapitalization plan also provides for the merger of the SAIF and
BIF on January 1, 1998. As currently proposed, the SAIF recapitalization
legislation provides for the elimination of the federal thrift charter and of
the separate federal regulation of thrifts prior to the merger of the deposit
insurance funds. If such proposal is adopted, Franklin would be regulated as a
bank under federal law. As a result, Franklin would become subject to the more
restrictive activity limits imposed on national banks. In addition, if
required to become a bank holding company, the Company would be subject to more
restrictive activity limits and to capital requirements similar to those
imposed on Franklin. It is not expected that these new activity limits will
have a material effect on the financial condition or operations of the Company
or Franklin.
Under current tax laws, savings associations, including Franklin,
meeting certain requirements have been able to deduct from taxable income
amounts designated as reserved for bad debts. See "Taxation-Federal Taxation"
and Note 7 of the Notes to Consolidated Financial Statements. Currently, if a
savings association converts to a commercial bank charter, certain amounts of
its bad debt reserve must be recaptured as taxable income over a six-year
period, if the association has used the percentage of taxable income method to
compute its reserve (the "Percentage Method"). In connection with the SAIF
recapitalization, Congress is considering eliminating the Percentage Method
effective in 1996 and the recapture of reserves upon conversion to a bank
charger. However, such legislation also would require all savings associations
to include in taxable income over a six-year period, all bad debt reserves
taken after 1987 using the Percentage Method (with all earlier reserves under
the Percentage Method not being subject to recapture), although a two-year
delay in such recapture requirement may be permitted for institutions meeting a
residential mortgage loan origination test. Franklin cannot determine whether
such change will have a material adverse effect on its financial condition or
operations, until the new law, if any, is enacted.
Franklin had $174 million in deposits at March 31, 1995. If the
special assessment is $.85 to $.90 per $100 deposits, Franklin will pay an
additional assessment of $1.48 million to $1.57 million effective on or after
January 2, 1996 (as required by Congress). This assessment should be
tax-deductible, but it will reduce earnings and capital for the quarter in
which it is recorded. It is expected that quarterly SAIF assessments for 1996
would be reduced significantly, after such additional assessment is paid.
No assurance can be given that the SAIF recapitalization plan will be
enacted into law or in what form it may be enacted. In addition, the Company
can give no assurance that the disparity between BIF and SAIF assessments will
be eliminated and that the impact of the Company being regulated as a bank
holding company and Franklin being regulated as a bank will not be material,
until the legislation requiring such changes is enacted.
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 if
they meet their capital requirements, if it is determined that such activities
or investments do not pose a significant risk to the SAIF.
FRB RESERVE REQUIREMENTS. FRB regulations currently require that
reserves of 3% of net transaction accounts (primarily NOW accounts) up to $52.0
million (subject to an exemption of up to $4.3 million), and that reserves of
10% be maintained against that portion of total net transaction accounts in
excess of $52.0 million. At December 31, 1995, Franklin was in compliance with
its reserve requirements.
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, 1995.
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 or
guaranteed by the United States government or an agency thereof; deposits in
any FHLB; or other real estate related
-28-
<PAGE> 29
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 on 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. Legislation pending in
Congress may eliminate this bad debt reserve provision in 1996 and may require
the recapture of post-1987 bad debt reserves over a six-year period beginning
in 1998. See "- FDIC Deposit Insurance Assessments."
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, 1995, 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, 1995, the 6% and
12% limitations did not restrict the percentage bad debt
-29-
<PAGE> 30
deduction available to Franklin. No representation can be made as to whether
Franklin will be affected by these limitations for subsequent taxable years.
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 10 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 1995.
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,
1995, regarding the properties on which the offices of the Company and Franklin
are located:
<TABLE>
<CAPTION>
Lease Date Gross Square
Location Owned or Leased Expiration Date Facility 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>
There are no liens on any of the office locations owned by the
Company. The Company believes all office locations are adequately covered by
insurance. At December 31, 1995, the Company's office premises and equipment
had a net book value of $909,000. For additional information regarding the
Company office premises and equipment, see Notes 4 and 12 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.
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, 1995 (the "Annual Report"), which are included in Exhibit 13, under the
caption "CORPORATE INFORMATION - Market Information; and - Dividends" is
incorporated herein by reference.
-31-
<PAGE> 32
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
1996 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 39, 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 47, 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 twelve years.
MARGARET W. WALTON, age 62, 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 27 years.
HARRY R. BARNACLO, age 64, 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.
ITEM 10. EXECUTIVE COMPENSATION
The information contained in the Proxy Statement under the caption
"Executive Compensation" and "Employment Contract" is incorporated herein by
reference.
-32-
<PAGE> 33
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" and "Election of Directors."
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>
<CAPTION>
(a) Exhibits
<S> <C> <C>
Item 3. (i) Certificate of Incorporation
(ii) Bylaws
Item 10. Employment Contract for Thomas H. Siemers
Stock Option Plan
Item 13. Portions of the Annual Report to Stockholders
Item 20. Proxy Statement
Item 21. Subsidiaries of the Registrant
Item 27. Financial Data Schedule
</TABLE>
(b) No reports on Form 8-K have been filed
during the last quarter of the fiscal
year covered by this Report.
-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 25, 1996 Date: March 25, 1996
By: Richard H. Finan By: James E. Cross
----------------------------------------------- -------------------------------------------------
Richard H. Finan James E. Cross
Director Director
Date: March 25, 1996 Date: March 25, 1996
By: James E. Hoff By: John L. Nolting
----------------------------------------------- -------------------------------------------------
James E. Hoff John L. Nolting
Director Director
Date: March 25, 1996 Date: March 25, 1996
</TABLE>
-34-
<PAGE> 35
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<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 Incorporated by reference to the
H. Siemers 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 Filed herewith
20 Proxy Statement Filed herewith
21 Subsidiaries of First Franklin Filed herewith
Corporation
27 Financial Data Schedule Filed herewith
</TABLE>
-35-
<PAGE> 1
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 services organization 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. 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 operates seven banking offices in Hamilton County, Ohio through which
it offers a full range of consumer banking services, including mortgage loans,
credit and debit cards, checking accounts, auto loans, savings accounts,
automated teller machines and a voice response telephone inquiry system. To
generate additional fee income and enhance the products and services available
to its customers, during the second quarter 1995 Franklin began offering
annuities, mutual funds and discount brokerage services in its offices through
an agreement with a third party. Franklin receives a portion of the sales
commissions earned on these products.
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.
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.
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, 31 of Intrieve's clients, with a combined 650,000 accounts, have
contracted to offer the service. The agreement with Intrieve gives DirectTeller
a portion of the profits generated by the inquiry system.
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
Asset and liability management is the process of balancing the risk/return
factors of a variety of financial decisions. Decisions must be made on the
appropriate level of interest rate risk, prepayment risk and credit risk. In
addition, decisions must be made on the pricing and duration of assets and
liabilities and the amount of liquidity. The overall objective of the asset and
liability management policy is to maximize long-term profitability and return to
investors.
The Company's asset/liability management activities are structured to stabilize
or improve earnings in future periods by managing the amount of asset and
liability growth, determining the type and mix of such assets and liabilities,
managing interest rate risk, offering the products 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.
4
<PAGE> 2
Managing interest rate risk is fundamental to banking. Financial institutions
must manage the inherently different maturity and repricing characteristics of
their lending and deposit products to achieve a desired interest rate
sensitivity position and to limit their exposure to interest rate risk. Franklin
is subject to interest rate risk to the degree that its 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 its interest-earning assets, which consist of mortgage loans,
mortgage-backed securities, consumer loans and U.S. Treasury and agency
securities. While having liabilities that mature or reprice more rapidly than
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 such as was experienced during late 1994 and early 1995. 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 thirty year 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 have
increased from 18.6% of the loan portfolio at December 31, 1984 to 60.9% as of
December 31, 1995.
Although ARMs and adjustable-rate mortgage-backed securities 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, an ARM
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. In 1994 and 1995 interest
rates on fixed-rate mortgages increased substantially above those experienced
during 1993, so consumer demand increased for adjustable-rate mortgages because
their intial interest rate is normally lower than interest rates offerred on
fixed-rate loans. For this reason, Franklin originated and sold only $910,000 of
fixed-rate one-to four-family mortgage loans during 1995 and $3.9 million during
1994. Loans being serviced for others, mainly the Federal Home Loan Mortgage
Corporation, were $58.5 million at December 31,1995 compared to $65.1 million at
December 31, 1994.
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 (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. Consequently, 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. 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 table
indicates the effect of various interest rate changes on Franklin's MVPE and net
interest income.
<TABLE>
<CAPTION>
NET INTEREST INCOME MARKET VALUE OF PORTFOLIO EQUITY
------------------- --------------------------------
CHANGE IN
INTEREST RATES ESTIMATED $ CHANGE % CHANGE ESTIMATED $ CHANGE % CHANGE
(BASIS POINTS) $ VALUE FROM CONSTANT FROM CONSTANT $ VALUE FROM CONSTANT FROM CONSTANT
- -----------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
+400 $5,238 $ (421) (7.4)% $ 8,502 $(6,325) (42.7)%
+300 5,510 (149) (2.6) 11,447 (3,380) (22.8)
+200 5,717 58 1.0 13,463 (1,364) (9.2)
+100 5,780 121 2.1 14,749 (78) (0.5)
0 5,659 14,827
-100 5,336 (323) (5.7) 13,731 (1,096) (7.4)
-200 4,908 (751) (13.3) 11,810 (3,017) (20.3)
-300 4,484 (1,175) (20.8) 10,093 (4,734) (31.9)
-400 3,939 (1,720) (30.4) 8,868 (5,959) (40.2)
</TABLE>
5
<PAGE> 3
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
indicates 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
31,1995. As shown below, the one year cumulative gap is $18.0 million. This
positive gap indicates that more assets are repricing 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 ARM's the opposite is true.
<TABLE>
<CAPTION>
GREATER
THAN
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
------- ------ --------- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS: (DOLLARS IN THOUSANDS)
Real Estate Loans;
One-To-Four Family
Adjustable-Rate $25,328 $21,494 $16,058 $11,065 $ 73,945
Fixed-Rate 1,813 1,725 3,203 10,052 $ 6,756 $ 8,742 $ 3,919 $ 689 36,899
Construction Loans 2,302 536 1,588 11 20 4,457
Multi-family and Non-residential
Adjustable-Rate 2,715 2,614 4,955 6,466 16,750
Fixed-Rate 107 104 201 709 580 1,021 193 2,915
Consumer Loans 2,381 145 282 1,049 671 4,528
Mortgage-backed Securities 7,220 6,988 8,447 5,745 3,835 5,315 3,410 40,960
Investments 9,210 96 715 13,803 550 299 146 24,819
------- ------- ------- ------- ------- -------- ------- ------- --------
Total Rate Sensitive Assets $51,076 $33,702 $35,449 $48,889 $12,392 $ 15,388 $ 7,542 $ 835 $205,273
LIABILITIES:
Fixed Maturity Deposits $29,469 $17,768 $38,891 $44,332 $ 4,933 $135,393
Transaction Accounts 1,389 1,257 2,166 5,385 2,417 $ 1,703 $ 262 $ 5 14,584
Money Market Deposit Accounts 931 842 1,451 3,608 1,620 1,141 176 3 9,772
Passbook Accounts 2,315 2,095 3,610 8,974 4,028 2,838 436 8 24,304
FHLB Advances 7,393 7,393
------- ------- ------- ------- ------- -------- ------- ------- --------
Total Rate Sensitive Liabilities $34,104 $21,962 $46,118 $62,299 $12,998 $ 5,682 $ 8,267 $ 16 $191,446
GAP INFORMATION:
Cumulative Gap $16,972 $28,712 $18,043 $ 4,633 $ 4,027 $ 13,733 $13,008 $13,827
Cumulative Gap as a Percentage
of Total Assets 8.07% 13.65% 8.58% 2.20% 1.91% 6.53% 6.18% 6.57%
</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 prepay at an
annual rate of 20% (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 26% (iii) fixed-rate one-to four-family
residential mortgage loans will prepay at annual rates of 9% to 21% depending on
the stated interest rate and contractual maturity of the loan; (iv) the decay
rate on deposit accounts is 37% per year; and (v) fixed-rate certificates of
deposit will not be withdrawn prior to maturity.
During 1995, Franklin's liquid assets increased to $27.5 million (12.8% of
assets) compared to $18.7 million (9.7% of assets) at December 31,1994.
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, including mortgage-backed securities. It requires that those
investments be classified in one of three categories and accounted for based on
their classification. Those investments classified as held-to-maturity are
reported at amortized cost, those classified as trading are accounted for at
fair value with any gain or loss recognized in the income statement and those
classified as available-for-sale are reported at fair value, with unrealized
gains or losses reported as a separate component of stockholders' equity. Upon
the 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. In 1995, the Financial
Accounting Standard Board ("FASB") released a special report entitled "A Guide
to Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities." This report provided for a one-time opportunity from
November 15 to December 31, 1995, to reclassify securities between
held-to-maturity and available-for-sale. After evaluating its current strategy
for classifying securities, the Company redesignated municipal bonds with a
carrying value of $955,000 and market value of $1.05 million from
held-to-maturity to available-for-sale. All new investments purchased are
evaluated at the time of purchase to determine how they should be classified. At
December 31,1995 the Company had a $185,000 unrealized gain on investments and
mortgage-backed securities classified as available-for-sale.
6
<PAGE> 4
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. As part of an on-going
independent Quality Control program the underwriting standards used on a sample
of the loans originated are reviewed. 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 with the delivery of a late notice 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,
1995 1994
------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Non-accruing loans $ 572 $ 875
Accruing loans delinquent more
than ninety days 445 253
Renegotiated loans 355 1,047
------ ------
Total non-performing assets $1,372 $2,175
====== ======
</TABLE>
As indicated by the table above, significant improvement in the level of
non-performing assets was experienced during 1995. The Company will continue to
strive to reduce the level of these assets during 1996. 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 1995, consisted of a vacant lot in Dayton,
Ohio which is being carried at its estimated fair value of $1.00.
The Asset Classification Committee is responsible for maintaining the reserve
for loan losses at a level sufficient to provide for estimated losses based on
evaluating known and inherent risks in the loan portfolio. Reserves are based on
the Committee's continuing analysis of the pertinent factors underlying the
quality of the loan portfolio. These factors include changes in the size and
composition of the loan portfolio, actual loan loss experience, current and
anticipated economic conditions, and detailed analysis of individual loans for
which full collectibility may not be assured.
When available information confirms that specific loans or portions thereof are
uncollectible, these loans are charged-off or specific reserves are established
for the amount of the estimated loss. The existence of some or all of the
following criteria will generally confirm that a loss has been incurred: the
loan is significantly delinquent and the borrower has not evidenced the ability
or intent to bring the loan current; the Company has no recource to the
borrower, or if it does, the borrower has insufficient assets to pay the debt;
the fair market value of the loan collateral is significantly below the current
loan balance, and there is no near-term prospect for improvement.
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,
1995 1994
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Beginning balance $1,256 $1,279
Charge-offs
One-to four-family 161 67
Multi-family
Non-residential 19
Consumer 178
------ ------
339 86
------ ------
Recoveries
One-to four-family 1
------ ------
1
------ ------
Net Charge-offs 339 85
Additions Charged to Operations 30 62
------ ------
Ending Balance $ 947 $1,256
====== ======
Ratio of Net Charge-offs to
Average Loans Outstanding 0.25% 0.06%
====== ======
Ratio of Net Charge-offs to
Average Non-performing Assets 19.11% 2.94%
====== ======
</TABLE>
Included in the above charge-offs are $75,000 in one-to four-family mortgage
loans and $178,000 in consumer loans, which previously had specific reserves
established against them, that were determined to be uncollectible and charged
off.
RESULTS OF OPERATIONS
Franklin's net income for the year ended December 31,1995 was $1.3 million,
which represents a return on average assets of 0.64% and a return on average
stockholders' equity of 6.70%. Book value per share at December 31, 1995 was
$17.23 and dividends of $0.28 per share were declared during the year. Net
income for the years ended December 31,1994 and 1993 was $1.4 and $1.8 million,
respectively. This represents returns on average assets and average equity of
0.70% and 7.43%, and 0.90% and 10.58% for 1994 and 1993, respectively. The
increased return on average assets and return on average stockholders' equity in
1993 is principally the result of the cumulative effect of the adoption of SFAS
No. 109.
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 10 of the Notes to Consolidated Financial Statements contains
an analysis of the deferred tax assets and liabilities at December 31,1995 and
1994.
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 gain or loss on available-for-sale securities has
been excluded from the calculation of the average outstanding balance. The table
indicates that net interest income declined to $5.6 million in 1995 from $5.8
million in 1994. This decrease in net interest income is mostly due to a decline
in the interest rate spread, the difference between the yield earned on the
assets and the cost of the liabilities, to 2.50% from 2.76%. The following table
also shows an increase in net earning assets from $11.0 million in 1993 to $14.0
million for 1995.
8
<PAGE> 6
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1995 1994 1993
-------------------------------------------------------------------------------------------------
AVERAGE INTEREST AVERAGE INTEREST AVERAGE INTEREST
OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/ OUTSTANDING EARNED/ YIELD/
BALANCE PAID RATE BALANCE PAID RATE BALANCE PAID RATE
----------- -------- ------ ----------- -------- ------ ----------- -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable (1) $134,910 $10,886 8.07% $130,839 $10,223 7.81% $137,181 $11,310 8.24%
Mortgage-backed securities(2) 36,664 2,270 6.19 37,947 2,065 5.44 39,039 1,942 4.97
Investments (2) 22,019 1,282 5.82 17,403 912 5.24 18,880 839 4.44
FHLB stock 1,608 109 6.78 1,643 94 5.72 1,701 76 4.47
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-earning
assets $195,201 $14,547 7.45 $187,832 $13,294 7.08 $196,801 $14,167 7.20
======== ======= ==== ======== ======= ==== ======== ======= ====
INTEREST-BEARING LIABILITIES:
Demand and NOW deposits $ 23,950 $ 586 2.45 $ 28,446 $ 707 2.49 $ 28,702 $ 543 1.89
Savings deposits 25,758 716 2.78 34,155 953 2.79 40,446 1,251 3.09
Certificate accounts 128,988 7,510 5.82 110,426 5,783 5.24 115,238 6,971 6.05
FHLB Advances 2,483 153 6.16 830 72 8.67 1,294 108 8.35
Other borrowings (3) 17 100
-------- ------- ---- -------- ------- ---- -------- ------- ----
Total interest-bearing
liabilities $181,179 $ 8,965 4.95 $173,874 $ 7,515 4.32 $185,780 $ 8,873 4.78
======== ======= ==== ======== ======= ==== ======== ======= ====
Net interest income $ 5,582 $ 5,779 $ 5,294
======= ======= =======
Net interest rate spread 2.50% 2.76% 2.42%
==== ==== ====
Net earning assets $ 14,022 $13,958 $ 11,021
======== ======= ========
Net yield on average
interest-earning assets 2.86% 3.08% 2.69%
==== ==== ====
Average interest-earning
assets to average
interest-bearing liabilities 1.08% 1.08% 1.06%
==== ==== ====
</TABLE>
(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)
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 1995, net interest income decreased
$197,000 compared to a $485,000 increase during 1994. The income earned on
assets increased $1.25 million, due to an increase in the average amount of
interest-earning assets of $7.4 million and an increase in the rates earned on
total interest-earning assets from 7.08% to 7.45%. During the same period,
interest expense increased $1.45 million, due to an increase in the average cost
of funds from 4.32% to 4.95% and an increase in average interest-bearing
liabilities of $7.3 million. During 1995, consumers increased their investment
in certificates of deposit because of the higher rates available from most
financial institutions. Franklin's certificates increased $18.9 during the
current year with the average cost going from 5.24% to 5.82%. This is the major
cause of the increase in the cost of funds.
<TABLE>
<CAPTION>
1995 VS 1994 1994 VS 1993 1993 VS 1992
------------ ------------ ------------
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)
------- ----- ---------- ------ ----- ---------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST INCOME ATTRIBUTABLE TO:
Loans Receivable (1) $ 323 $ 340 $ 663 $(510) $(577) $(1,087) $(1,352) $(1,095) $(2,447)
Mortgage-backed Securities (67) 272 205 (52) 175 123 709 12 721
Investments 261 109 370 (57) 130 73 (35) (308) (343)
FHLB Stock (2) 17 15 (2) 20 18 6 6
------- ----- ------- ----- ----- ------- ------- ------- -------
Total Interest-earning
Assets $ 515 $ 738 $ 1,253 $(621) $(252) $ (873) $ (672) $(1,391) $(2,063)
======= ===== ======= ===== ===== ======= ======= ======= =======
INTEREST EXPENSE ATTRIBUTABLE TO:
Demand and NOW Accounts $ (110) $ (11) $ (121) $ (5) $ 171 $ 166 $ 42 $ (344) $ (302)
Savings Accounts (233) (4) (237) (184) (115) (299) 35 (253) (218)
Certificate Accounts 1,037 690 1,727 (282) (907) (1,189) (324) (792) (1,116)
FHLB Advances 95 (14) 81 (40) 4 (36) (38) 2 (36)
Other Borrowings (2)
------- ----- ------- ----- ----- ------- ------- ------- -------
Total Interest-bearing
Liabilities $ 789 $ 661 $ 1,450 $(511) $(847) $(1,358) $ (285) $(1,387) $(1,672)
======= ===== ======= ===== ===== ======= ======= ======= =======
Increase (Decrease) in
Net Interest Income $ (274) $ 77 $ (197) $(110) $ 595 $ 485 $ (387) $ (4) $ (391)
======= ===== ======= ===== ===== ======= ======= ======= =======
</TABLE>
(1) Includes non-accruing Loans of $572,000
(2) ESOP loan (borrowing costs paid by ESOP)
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,
---------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Weighted Average Yield on:
Loans Receivable (1) 7.78% 7.45% 7.25%
Mortgage-backed Securities 6.68 5.86 5.50
Investments (2) 5.37 5.34 4.81
FHLB Stock 7.00 6.38 4.50
---- ---- ----
Combined Weighted Average Yield on
Interest-earning Assets 7.27 6.95 6.63
---- ---- ----
Weighted Average Rate Paid on:
Demand and NOW Deposits 2.51 2.58 2.50
Savings Deposits 2.75 2.75 2.75
Certificates 5.80 5.42 5.32
Borrowings 6.45 8.15 7.95
---- ---- ----
Combined Weighted Average Rate Paid
on Interest-bearing Liabilities 5.02 4.53 4.32
---- ---- ----
Average Interest Rate Spread 2.25% 2.42% 2.31%
==== ==== ====
</TABLE>
(1) Includes inpact of non-accruing loans.
(2) Yields reflected have not been calculated on a tax equivalent basis.
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
1995, 1994 and 1993 for loan loss reserves were $29,600, $61,800 and $324,921,
respectively. During 1995 assets classified as substandard and loss were reduced
by 50.0% to $1.2 million and non-performing assets were reduced by 36.9% to $1.4
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 1995 were reduced as compared to previous years.
NONINTEREST INCOME. Noninterest income was $362,000 for 1995, compared to
$439,000 for 1994 and $1.19 million for 1993. 1994 income included $58,000 in
profits on the sale of real estate owned. Due to a continuing decline in sales
volume, 1995 profits on the sale of fixed-rate mortgage loans decreased to
$10,000 from $23,000 in 1994 and $564,000 in 1993. 1993 income also included
$219,000 in profits realized on the sale of mortgage-backed securities. No
mortgage-backed securities were sold during 1994 or 1995.
NONINTEREST EXPENSE. Noninterest expense was $3.98 million, $4.15 million and
$4.05 million for the years ended December 31, 1995, 1994, and 1993,
respectively. As a percentage of average assets, noninterest expenses were
1.97%, 2.14%, and 1.98% for the three years. The following table shows the major
noninterest expense items and their percent of change during 1995 and 1994.
<TABLE>
<CAPTION>
PERCENT PERCENT
INCREASE INCREASE
1995 (DECREASE) 1994 (DECREASE) 1993
------- ---------- ------- ---------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Compensation $ 1,333 (6.3)% $ 1,422 12.9% $1,259
Employee Benefits 296 (1.3) 300 28.2 234
Office Occupancy 574 0.3 572 (11.5) 646
FDIC Insurance 403 (0.7) 406 1.8 399
Data Processing 263 4.0 253 4.5 242
Marketing 104 (14.0) 121 63.5 74
Professional Fees 177 13.5 156 (4.9) 164
Supervisory Expense 90 (10.9) 101 9.8 92
Taxes, other than income 157 (20.3) 197 (3.4) 204
Other 584 (5.7) 619 (15.9) 736
------ ----- ------- ----- ------
TOTAL $3,981 (4.0)% $ 4,147 2.4% $4,050
====== ===== ======= ===== ======
</TABLE>
10
<PAGE> 8
Under SFAS No. 91 certain loan origination costs can be capitalized against
specific loans thus reducing compensation expense. These capitalized costs were
$150,000, $156,000 and $314,000 during 1995, 1994 and 1993, respectively. The
decline in these capitalized costs between 1993 and 1994 is the principal cause
of the 1994 increase in compensation. The decline in 1995 compensation reflects
a reduction in staff. Professional fees increased during 1995 due to increased
legal fees. The decline in 1995 taxes, other than income, reflects refunds of
state franchise taxes paid in previous years.
During 1995 the Board of Directors decided to terminate the Company's defined
benefit pension plan effective February 15, 1996. The settlement of the vested
benefit obligation, by lump sum payments to all covered employees, is expected
to be completed during 1996. The Company expects to recognize a settlement loss
of approximately $571,000 when the plan's obligation is settled. The Company
anticipates that it will replace the terminated plan with a new plan during
1996. At this time no decision has been made on the type of plan that will be
created.
PROVISION FOR FEDERAL INCOME TAXES. Provisions for federal income taxes were
$632,035, $654,575, and $703,000 in fiscal 1995, 1994 and 1993, respectively.
The effective federal income tax rates for the years ended December 31, 1995,
1994, and 1993 were 32.7%, 32.6% and 33.4%, respectively. A reconciliation of
statutory federal income tax rates to the effective federal income tax rates is
shown in Note 10 of the Notes to Consolidated Financial Statements.
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. All financial institutions must manage their liquidity to
meet anticipated funding needs at a reasonable cost, as well as having
contingency plans to meet unanticipated funding needs or the loss of a funding
source. Franklin's liquid assets consist of cash, cash equivalents and
investment securities. Liquid assets increased $8.7 million to $27.5 million at
December 31,1995. 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 31,1995 and 1994.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Operating Activities:
Net Income $ 1,300 $ 1,355
Adjustments to reconcile net income
to net cash provided by operating activities (160) 1,554
-------- -------
Net cash provided by operating activities 1,140 2,909
Net cash used in investing activities (14,077) (379)
Net cash provided by (used in) financing activities 18,707 (7,005)
-------- -------
Net increase (decrease) in cash and cash equivalents 5,770 (4,475)
Cash and cash equivalents at beginning of year 2,883 7,358
-------- -------
Cash and cash equivalents at end of year $ 8,653 $ 2,883
======== =======
</TABLE>
Operating activities include the sale of fixed-rate single family mortgage loans
of $910,000 during 1995 and $3.9 million during 1994. 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.
Loan receipts and disbursements are a major component of the investing
activities. Repayments on loans and mortgage-backed securities during the year
ended December 31,1995 totaled $30.8 million compared to $33.0 million during
fiscal 1994. Loan disbursements during 1995 were $32.0 million compared to $33.3
million during 1994. The Company also purchased $10.1 million of mortgage-backed
securities during 1995 and $2.6 million during 1994.
Financing activities include deposit account flows, the use of borrowed funds
and the payment of dividends. Deposits increased $12.1 million to $184.6 million
at December 31,1995 from $172.5 million at December 31, 1994. Net of interest
credited, deposits increased by $4.2 million during 1995 as compared to a $12.6
million decrease during 1994. The table below sets forth the deposit flows by
type of account, including interest credited, during 1995 and 1994.
11
<PAGE> 9
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Passbook Savings $ (5,049) $ (8,969)
NOW / Super NOW Accounts 390 (1,085)
MMDA Accounts (2,204) (2,418)
-------- --------
Total (6,863) (12,472)
-------- --------
Certificates:
7-31 Day (224) (101)
91 Day (168) (187)
Six month 18,111 (5,042)
One year (1,040) 12,061
Eighteen month 11,800 (1,212)
Two year (409) 6,727
Thirty-two month (9,336) 38
Three year 6,564 (1,578)
Five year (5,973) (3,363)
Jumbo certificates (175) (810)
Other (215) (108)
-------- --------
Total 18,935 6,425
-------- --------
Total deposit increase (decrease) $ 12,072 $ (6,047)
======== ========
</TABLE>
At December 31,1995 Franklin had outstanding Federal Home Loan Bank ("FHLB")
advances of $7.4 million. The following table lists those advances by maturity
date:
<TABLE>
<CAPTION>
MATURITY INTEREST OUTSTANDING
DATE RATE BALANCE
-------- -------- -----------
(IN THOUSANDS)
<S> <C> <C>
05/01/06 8.15% $ 450
10/01/10 6.35 4,950
12/01/10 6.30 1,993
------
$7,393
======
</TABLE>
During 1995 Franklin obtained $7.0 million of fifteen year fixed-rate advances
to purchase $7.0 million of thirty year fixed-rate mortgage-backed securities at
a spread of approximately 1.0%. Subject to certain limitations, based on its
current investment in FHLB stock, Franklin is eligible to borrow an additional
$25.6 million from the FHLB.
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 31,1995, Franklin's regulatory liquidity was 13.61%.
At December 31, 1995 Franklin had outstanding commitments to originate or
purchase $1.6 million of mortgage loans or mortgage-backed securities, as
compared to $1.4 million at December 31, 1994. During the next twelve months
approximately $86.1 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 increased approximately $2.4 million during
1995 from $17.9 million at December 31,1994 to $20.3 million at the end of 1995.
Book value per share increased to $17.23 at December 31,1995 from $15.34 at the
end of 1994. This increase in stockholders' equity and book value is primarily
the result of net income for the year of $1.3 million and an increase in
unrealized gains on available-for-sale securities of $1.4 million. As a
percentage of total assets, the Company's stockholders' equity equaled 9.5% and
9.3% at December 31,1995 and 1994, respectively.
Dividends per share of $0.28 and $0.31 were declared in 1995 and 1994,
respectively, resulting in payments of $329,000 in 1995 and $364,000 in 1994.
See Note 7 of the Notes to Consolidated Financial Statements for
12
<PAGE> 10
information regarding regulatory restrictions on dividend payments from Franklin
Savings to the Company. 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:
<TABLE>
<CAPTION>
CAPITAL STANDARD ACTUAL REQUIRED EXCESS ACTUAL REQUIRED EXCESS
------- -------- ------- ------ -------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tangible $13,881 $3,149 $10,732 6.61% 1.50% 5.11%
Core 13,881 6,299 7,582 6.61 3.00 3.61
Risk-based 14,486 7,660 6,826 15.13 8.00 7.13
</TABLE>
The deposit accounts of Franklin Savings and other savings institutions are
insured by the Federal Deposit Insurance Corporation ("FDIC") in the Savings
Association Insurance Fund ("SAIF"). The reserves of the SAIF are below the
level required by law, because a significant portion of the assessments paid
into the fund are used to pay the cost of prior thrift failures. The deposit
accounts of commercial banks are insured by the FDIC in the Bank Insurance Fund
("BIF"), except to the extent such banks have acquired SAIF deposits. The
reserves of the BIF met the level required by law in May 1995. As a result of
the respective reserve levels of the funds, deposit insurance assessments paid
by healthy savings associations exceed those paid by healthy commercial banks by
approximately $0.23 per $100 in deposits. This premium disparity could have a
negative competitive impact on Franklin Savings and other institutions in the
SAIF.
Congress is considering legislation to recapitalize the SAIF and eliminate the
significant premium disparity. Currently, that recapitalization plan provides
for a special assessment of approximately $.85 to $.90 per $100 of SAIF deposits
held at March 31, 1995, in order to increase SAIF reserves to the level required
by law. In addition, the cost of prior thrift failures would be shared by both
the SAIF and the BIF. This would likely increase BIF assessments by $0.02 to
$0.025 per $100 in deposits. SAIF assessments would initially be set at the same
level as BIF assessments and could never be reduced below that level. These
projected assessment levels are subject to change.
The last part of the recapitalization plan provides for the merger of the SAIF
and BIF on January 1, 1998. However, the proposed SAIF recapitalization
legislation currently provides for the elimination of the thrift charter or of
the separate federal regulation of thrifts prior to the merger of the deposit
insurance funds. In such event, Franklin Savings would have to convert to a bank
charter or be regulated as a bank. As a result, it would become subject to the
more restrictive activity limits imposed on national banks, but it would have a
specified period of time to divest any non-comforming assets. If Franklin
Savings is required to convert to a commercial bank charter, it would have to
recapture approximately $3.1 million of its bad debt reserve, unless Congress
amends those recapture provisions. Such a proposal is currently under
consideration. That proposal would eliminate the special thrift method of tax
accounting for bad debt reserves, which Franklin Savings has relied on. In
addition, with any such conversion by Franklin Savings, First Franklin would
become a bank holding company, which would subject it to more restrictive
activity limits and to capital requirements similar to those imposed on Franklin
Savings.
Franklin Savings had $174 million in deposits at March 31, 1995. If the special
assessment is $.85 to $.90 per $100 in deposits, Franklin Savings will pay an
additional assessment of $1.48 to $1.57 million during 1996. This assessment
should be tax-deductible, but it will reduce earnings and capital. It is
expected that quarterly SAIF assessments would be reduced to approximately $.06
to $.065 per $100 in deposits after this assessment is paid. Based on December
31,1995 deposits a reduction to $.065 would reduce the annual cost of FDIC
insurance by approximately $314,000.
No assurances can be given that the SAIF recapitalization plan will be enacted
into law or in what form it may be enacted. In addition, First Franklin can give
no assurances that the disparity between BIF and SAIF assessments will be
eliminated and cannot be certain of the impact of its being regulated as a bank
holding company, Franklin Savings being converted to a bank or the change in tax
accounting for bad debt reserves until the legislation requiring such changes is
enacted.
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 1995, the FASB isssued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets to be Disposed", which is effective for financial statements
for years beginning after December 15, 1995. This statement addresses the
accounting for the impairment of long-lived assets, certain identifiable
intangibles, and goodwill related to those assets to be held and used. It also
addresses the accounting for long-lived assets and certain identifiable
intangibles to be disposed of. It establishes guidance for recognizing and
measuring impairment losses and
13
<PAGE> 11
requires that the carrying amount of impaired assets be reduced to fair value.
Management does not expect this statement to have a significant impact on the
Company's financial statements.
The FASB also issued SFAS No. 122, "Accounting for Mortgage Servicing Rights",
which requires capitalizing as separate assets the rights to service mortgage
loans for others, however those servicing rights are acquired. The statement is
effective for financial statements for years beginning after December 15, 1995.
This statement will affect gains and losses on the sale of mortgage loans, if
any.
Finally, the FASB issued SFAS No. 123, "Accounting for Stock Based
Compensation", which establishes a preferable fair-value-based method of
accounting for stock-based compensation. The statement is applicable to
financial statements for fiscal years beginning after December 15, 1995.
Management does not believe that the adoption of this statement will have a
significant impact on the Company's financial statements.
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 29,1996 there were approximately 472 stockholders of record, not
including those shares held in nominee or street name through various brokerage
firms or banks.
The following table sets forth the high and low sales prices for the Company's
common stock as reported on the Nasdaq National Market System during the
quarters indicated. At February 29,1996 First Franklin's closing sale price as
reported on the Nasdaq National Market System was $15.00
<TABLE>
<CAPTION>
STOCK PRICES
QUARTER ENDED: LOW HIGH
--- ----
<S> <C> <C>
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
March 31,1995 12.00 14.50
June 30,1995 12.00 14.50
September 30,1995 14.75 17.00
December 31,1995 15.75 17.50
</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. The Company declared dividends of $0.28 per
share during 1995 and $0.31 per share during 1994.
Franklin 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 1995 and 1994 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 22,1996 at
3:00 P.M.
FORM 10-KSB:
The Company's 1995 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
14
<PAGE> 12
[COOPERS & LYBRAND LETTERHEAD]
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, 1995 and 1994 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, 1995. 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, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.
As discussed in Notes 1, 2 and 10 to the financial statements, the Company
changed its method of accounting for certain investment securities and income
taxes in 1994 and 1993, respectively.
COOPERS & LYBRAND L.L.P.
Cincinnati, Ohio
February 2, 1996,
except for Note 9, for which
the date is February 20, 1996
15
<PAGE> 13
FIRST FRANKLIN CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1995 1994
---- ----
<S> <C> <C>
Cash, including certificates of deposit and other
interest-earning deposits of $5,895,185 and $827,225
at December 31, 1995 and 1994, respectively $ 8,652,503 $ 2,882,989
Investment securities:
Securities available-for-sale, at market value (amortized
cost of $18,839,227 and $14,899,185 at December 31, 1995
and 1994 respectively) 18,761,867 13,747,326
Securities held-to-maturity, at amortized cost (market value of
$932,862 at December 31, 1994) 880,975
Mortgage-backed securities:
Securities available-for-sale, at market value (amortized
cost of $18,701,025 and $21,543,461 at December 31, 1995
and 1994 respectively) 18,963,734 20,742,338
Securities held-to-maturity, at amortized cost (market value
of $22,051,386 and $13,099,759 at December 31, 1995
and 1994, respectively) 22,257,816 14,582,995
Loans receivable, net 139,419,304 134,170,347
Real estate owned, net 1 1
Investment in Federal Home Loan Bank
of Cincinnati stock, at cost 1,649,700 1,649,200
Accrued interest receivable:
Investment securities 229,388 168,944
Mortgage-backed securities 249,850 189,300
Loans receivable 772,366 662,387
Property and equipment, net 908,662 984,834
Other assets 1,729,447 1,728,732
------------- -------------
$ 213,594,638 $ 192,390,368
============= =============
LIABILITIES
Savings accounts $ 184,574,316 $ 172,501,894
Federal Home Loan Bank advances 7,393,172 596,016
Advances by borrowers for taxes and insurance 1,206,649 1,113,538
Other liabilities 112,875 326,691
------------- -------------
Total liabilities 193,287,012 174,538,139
------------- -------------
Commitments (Notes 12 and 14)
STOCKHOLDERS' EQUITY
Preferred stock - $.01 par value, 500,000 shares
authorized, none issued and outstanding
Common stock - $.01 par value, 2,500,000 shares
authorized, 1,270,164 and 1,255,464 shares
issued in 1995 and 1994, respectively 12,702 12,554
Additional paid-in capital 5,838,118 5,764,766
Treasury stock, at cost - 91,878 shares
in 1995 and 1994 (442,045) (442,045)
Retained earnings, substantially restricted 14,776,527 13,806,036
Unrealized gain (loss) on available-for-sale securities,
net of taxes of $63,025 and $663,900 at
December 31, 1995 and 1994, respectively 122,324 (1,289,082)
------------- -------------
Total stockholders' equity 20,307,626 17,852,229
------------- -------------
$ 213,594,638 $ 192,390,368
============= =============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
16
<PAGE> 14
FIRST FRANKLIN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Interest income:
Loans receivable $10,885,905 $10,222,323 $11,198,085
Investment securities 1,007,724 899,092 839,327
Mortgage-backed securities 2,269,746 2,065,108 1,942,094
Other interest income 383,198 107,294 187,225
----------- ----------- -----------
14,546,573 13,293,817 14,166,731
----------- ----------- -----------
Interest expense:
Savings accounts 8,812,389 7,442,314 8,764,636
Borrowed funds 152,988 73,013 107,896
----------- ----------- -----------
8,965,377 7,515,327 8,872,532
----------- ----------- -----------
Net interest income 5,581,196 5,778,490 5,294,199
Provision for loan losses 29,600 61,800 324,921
Net interest income after
provision for loan losses 5,551,596 5,716,690 4,969,278
----------- ----------- -----------
Noninterest income:
Service fees on NOW accounts 206,546 204,770 221,665
Gain on loans sold 10,142 22,526 563,818
Gain on sale of investments 22 218,646
Other income 145,088 211,736 182,833
----------- ----------- -----------
361,776 439,054 1,186,962
----------- ----------- -----------
Noninterest expense:
Salaries and employee benefits 1,628,664 1,722,326 1,493,122
Occupancy 573,663 572,238 645,676
Federal insurance premiums 402,815 406,047 398,708
Service bureau 263,109 253,349 241,886
Taxes other than income taxes 158,572 196,799 204,112
Other 954,628 995,939 1,066,450
----------- ----------- -----------
3,981,451 4,146,698 4,049,954
----------- ----------- -----------
Income before federal income taxes
and change in accounting principle 1,931,921 2,009,046 2,106,286
Provision for federal income taxes 632,035 654,575 703,000
----------- ----------- -----------
Income before cumulative effect of
change in accounting principle 1,299,886 1,354,471 1,403,286
Cumulative effect of change in
accounting principle 440,712
----------- ----------- -----------
NET INCOME $ 1,299,886 $ 1,354,471 $ 1,843,998
=========== =========== ===========
Earnings per common share:
Income before cumulative effect of
change in accounting principle $ 1.05 $ 1.11 $ 1.16
Cumulative effect of change in
accounting principle .36
----------- ----------- -----------
NET INCOME PER COMMON SHARE $ 1.05 $ 1.11 $ 1.52
=========== =========== ===========
Weighted Average Number of Shares Outstanding 1,175,994 1,160,920 1,159,182
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
17
<PAGE> 15
FIRST FRANKLIN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
NET UNREALIZED
EMPLOYEE GAIN(LOSS) ON
ADDITIONAL STOCK AVAILABLE-
COMMON PAID-IN TREASURY OWNERSHIP FOR-SALE RETAINED
STOCK CAPITAL STOCK PLAN DEBT SECURITIES EARNINGS
----------- ---------- ---------- ------------ -------------- -----------
BALANCE,
<S> <C> <C> <C> <C> <C> <C>
JANUARY 1, 1993 $ 12,482 $5,728,678 $(442,045) $ (125,000) $11,262,086
Repayment of employee
stock ownership plan
debt 25,000
Issuance of 3,232 shares
of common stock 32 16,128
Dividends declared ($.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) 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
change in accounting for 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) $(1,289,082) $13,806,036
Issuance of 14,700 shares
of common stock 148 73,352
Dividends declared ($0.28)
per common share (329,395)
Change in net unrealized
gains on securities
available for sale, net of
deferred tax of $695,209 1,349,841
Redesignation of held-to-
maturity securities to
available-for-sale, net of
deferred tax of $31,716 61,565
Net income for the year
ended December 31, 1995 1,299,886
----------- ---------- --------- ----------- ----------- -----------
BALANCE,
DECEMBER 31, 1995 $ 12,702 $5,838,118 $(442,045) $ 122,324 $14,776,527
=========== ========== ========= =========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
18
<PAGE> 16
FIRST FRANKLIN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,299,886 $ 1,354,471 $ 1,843,998
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 29,600 61,800 324,921
Cumulative effect of change in
accounting for income taxes (440,712)
Depreciation and amortization 206,721 231,904 275,693
Deferred income taxes 173,000 163,292 99,000
Gain on sale of investments and mortgage-backed securities (22) (218,646)
FHLB stock dividends (109,000) (93,800) (75,600)
(Increase) decrease in
accrued interest receivable (230,973) (127,897) 151,454
(Increase) decrease in other assets (42,534) (476,543) 196,658
(Decrease) increase in other liabilities (213,816) 36,377 (223,762)
Other, net 26,987 (179,164) (9,532)
Loans sold 910,340 3,892,766 39,849,482
Disbursements on loans originated for sale (910,340) (1,954,576) (28,781,219)
------------ ------------ ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,139,871 2,908,608 12,991,735
------------ ------------ ------------
Cash flows from investing activities:
Principal reductions on loans
and mortgage-backed securities 30,793,729 33,037,862 45,966,000
Disbursements on mortgage and
other loans originated for investment (31,099,611) (31,385,312) (37,474,314)
Purchase of investment securities:
Available-for-sale (5,585,113) (1,497,500)
Held-to-maturity (13,914,351)
Proceeds from maturities of investment securities:
Available-for-sale 2,525,000 1,000,000
Held-to-maturity 125,000 9,070,000
Purchase of mortgage-backed securities:
Available-for-sale (1,050,313) (2,634,750)
Held-to-maturity (9,092,938) (22,245,710)
Proceeds from sale of mortgage-backed securities 13,936,090
Sale (purchase) of FHLB stock 108,500 187,100 (57,800)
Proceeds from sale of real estate owned 218,816 855,976 195,447
Capital expenditures (907,722) (83,117) (123,114)
Proceeds from sale of fixed asset 12,500 16,000
------------ ------------ ------------
NET CASH USED IN
INVESTING ACTIVITIES (14,077,152) (378,741) (4,647,752)
------------ ------------ ------------
</TABLE>
Continued
The accompanying notes are an integral part
of the consolidated financial statements.
19
<PAGE> 17
FIRST FRANKLIN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Net decrease in passbook accounts
and demand deposits (6,863,091) (12,471,822) (4,165,712)
Proceeds from certificates of deposit 74,551,719 38,021,004 40,466,600
Payments for maturing certificates of deposit (55,616,205) (31,596,862) (47,647,687)
Proceeds from sale of common stock 73,500 20,000 16,160
Payment of dividends (329,395) (364,497) (290,022)
Proceeds from (repayment of) Federal Home
Loan Bank advances, net 6,797,156 (601,266) (484,000)
Increase (decrease) in advances by borrowers
for taxes and insurance 93,111 (11,407) 54,118
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 18,706,795 (7,004,850) (12,050,543)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH 5,769,514 (4,474,983) (3,706,560)
Cash at beginning of year 2,882,989 7,357,972 11,064,532
------------ ------------ ------------
CASH AT END OF YEAR $ 8,652,503 $ 2,882,989 $ 7,357,972
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest, including interest credited
to savings accounts $ 8,976,346 $ 7,510,509 $ 8,873,313
============ ============ ============
Income taxes $ 480,000 $ 537,627 $ 575,000
============ ============ ============
Supplemental disclosure of noncash activities:
Real estate acquired in settlement of loans $ 275,735 $ 359,271 $ 268,605
============ ============ ============
Unrealized gain (loss) on available-for-sale securities $ 185,349 $ (1,952,982)
============ ============
Redesignation of securities to available-for-sale $ 955,376
============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
20
<PAGE> 18
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, operating seven
banking offices in Hamilton County, Ohio through which it offers a full
range of consumer banking services. Franklin Savings is a member of the
Federal Home Loan Bank (FHLB) System, 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 securities are those debt 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, 1995 and 1994, the Company did not hold any
trading securities.
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 Company adopted SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," on January 1, 1995. Under the new standard, a
loan is considered impaired, based on current information and events,
if it is probable that the Company will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. The measurement of impaired
loans is generally based on the present value of expected future cash
flows discounted at the historical effective interest rate, except that
all collateral-dependent loans are measured for impairment based on the
fair value of the collateral. The adoption of SFAS No. 114 had no
impact on the Company's allowance for loan losses determined at January
1, 1995.
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. Changes in the overall local economy in which the Company
operates may impact the allowance for loan losses.
21
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. ORGANIZATION AND ACCOUNTING POLICIES, CONTINUED:
LOANS RECEIVABLE, CONTINUED
Loans, including impaired loans, are generally classified as
non-accrual if they are past due as to maturity or payment of principal
or interest for a period of more than 90 days, unless such loans are
well-secured and in the process of collection. Loans that are on a
current payment status or past due less than 90 days may also be
classified as nonaccrual if repayment in full of principal and/or
interest is in doubt.
Loans may be returned to accrual status when all principal and interest
amounts contractually due (including arrearages) are reasonably assured
of repayment within an acceptable period of time, and there is a
sustained period of repayment performance by the borrower, in
accordance with the contractual terms of interest and principal. While
a loan is classified as non-accrual, interest income is generally
recognized on a cash basis.
The Company's policy is to sell in the secondary market eligible fixed
rate, single family loans originated. Loan sales totaled $910,340
during 1995. The amount of loans held for sale at December 31, 1995 and
1994 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
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. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
EARNINGS PER COMMON SHARE
Earnings per common share have been computed on the basis of the
weighted average number of common shares outstanding.
USE OF ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Estimates used in the
preparation of the financial statements are based on various factors
including the current interest rate environment and the general
strength of the local economy. Changes in the overall interest rate
environment can significantly effect the Company's net interest income
and the value of its recorded assets and liabilities. Actual results
could differ from those estimates used in the preparation of the
financial statements.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to reflect current
year reporting.
22
<PAGE> 20
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, 1995
--------------------------------------------------
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
corporation and agencies $17,883,851 $ 26,680 $ 197,321 $17,713,210
Obligations of states and
municipalities 955,376 93,281 1,048,657
----------- -------- ----------- -----------
$18,839,227 $119,961 $ 197,321 $18,761,867
=========== ======== =========== ===========
<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
corporation and agencies $14,899,185 $ 1,151,859 $13,747,326
=========== =========== ===========
Held-to-maturity:
Obligations of states and
municipalities $ 880,975 $ 57,033 $ 5,146 $ 932,862
=========== ========== =========== ===========
</TABLE>
The amortized cost and estimated market value of investment securities at
December 31, 1995, by contractual maturity, are shown below. Expected
maturities may differ from contractual maturity 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 in one year or less $ 1,184,916 $ 1,195,950
Due after one year through five years 17,210,091 17,075,033
Due after five years through ten years 298,563 335,712
Due after ten years 145,657 155,172
----------- -----------
$18,839,227 $18,761,867
=========== ===========
</TABLE>
The detail of interest and dividends on investment securities (including
dividends on FHLB stock) is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Taxable interest income $ 835,895 $738,431 $694,931
Nontaxable interest income 62,648 66,600 68,708
Dividends 109,181 94,061 75,688
---------- -------- --------
$1,007,724 $899,092 $839,327
========== ======== ========
</TABLE>
23
<PAGE> 21
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, 1995
------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Available-for-sale:
FHLMC certificates $ 2,176,452 $ 47,640 $ 2,224,092
FNMA certificates 7,539,750 103,574 $ 4,544 7,638,780
GNMA certificates 8,984,823 116,039 9,100,862
----------- ----------- ----------- ------------
$18,701,025 $ 267,253 $ 4,544 $18,963,734
=========== =========== =========== ============
Held-to-maturity:
FHLMC certificates $12,182,593 $ 79,307 $ 67,465 $12,194,435
FNMA certificates 9,044,667 207,966 8,836,701
Collateralized mortgage
obligations 1,030,556 10,306 1,020,250
----------- ----------- ----------- ------------
$22,257,816 $ 79,307 $ 285,737 $22,051,386
=========== =========== =========== ============
<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
=========== =========== ============
</TABLE>
As discussed in Note 1, the Company adopted SFAS No. 115 as of January 1,
1994, and investment securities were classified based on the Company's then
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.
In 1995, the Financial Accounting Standards Board ("FASB") released a
special report entitled, "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities." This
report provided for a one-time opportunity from November 15 to December 31,
1995, to reclassify securities between held-to-maturity and
available-for-sale. As a result, the Company redesignated held-to-maturity
investment securities with a carrying value of $955,376 and market value of
$1,048,657 as available-for-sale.
24
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. LOANS RECEIVABLE, NET:
The Company originates primarily single family real estate loans in
southwestern Ohio. Loans are originated on the basis of credit policies
established by the Company's management and are generally collateralized by
first mortgages on the properties. Management believes that the Company has
a diversified loan portfolio and there are no credit concentrations other
than in residential real estate.
Loans receivable, net consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1995 1994
---- ----
<S> <C> <C>
First mortgage loans:
Principal balances:
Collateralized by one-to-four
family residences $ 112,038,326 $ 107,601,352
Collateralized by multi-family properties 7,883,071 8,840,515
Collateralized by other properties 12,453,311 11,372,111
Construction loans 8,041,840 6,595,649
------------- -------------
140,416,548 134,409,627
Less:
Undisbursed portion of construction loans (4,170,902) (2,933,437)
Net deferred loan origination fees (447,177) (737,069)
Unearned discounts (169,981) (174,858)
------------- -------------
TOTAL FIRST MORTGAGE LOANS 135,628,488 130,564,263
============= =============
Consumer and other loans:
Principal balances:
Consumer loans 2,877,456 3,043,058
Loans on savings accounts 650,224 637,360
Student loans 1,210,320 1,181,664
------------- -------------
TOTAL CONSUMER AND OTHER LOANS 4,738,000 4,862,082
------------- -------------
Less allowance for loan losses (947,184) (1,255,998)
------------- -------------
$ 139,419,304 $ 134,170,347
============= =============
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $ 1,255,998 $ 1,248,383 $ 1,345,450
Provision for loan losses 29,600 61,800 324,921
Charge-offs and recoveries, net (338,414) (1,875) (391,288)
Other changes -- (52,310) (30,700)
----------- ----------- -----------
BALANCE, END OF YEAR $ 947,184 $ 1,255,998 $ 1,248,383
=========== =========== ===========
</TABLE>
It is the opinion of management that adequate provisions have been made for
anticipated losses in the loan portfolio. At December 31, 1995 the recorded
investment in loan for which impairment has been recogized was immaterial
to the Company's financial statements.
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of these loans
were approximately $58,477,000, $65,095,000 and $73,513,000 at December 31,
1995, 1994 and 1993, respectively.
In May 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights," which requires financial institutions to capitalize the
costs of rights to service mortgage loans for others. This statement also
requires that a financial institution assess its capitalized mortgage
servicing rights for impairment based on the fair value of those rights.
This statement is required to be adopted as of January 1, 1996 and will
affect gains and losses on sales of mortgage loans, if any.
25
<PAGE> 23
.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. PROPERTY AND EQUIPMENT, NET:
Property and equipment, net consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1995 1994
---- ----
<S> <C> <C>
Buildings and improvements $ 665,457 $ 635,299
Leasehold improvements 963,063 948,647
Furniture, fixtures and equipment 1,443,238 1,432,141
----------- -----------
3,071,758 3,016,087
Accumulated depreciation and amortization (2,317,027) (2,185,184)
----------- -----------
754,731 830,903
Land 153,931 153,931
----------- -----------
$ 908,662 $ 984,834
=========== ===========
</TABLE>
In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed" which
requires that long-lived assets be evaluated for impairment and establishes
guidance for recognizing and measuring impairment losses. This statement
applies to financial statements for fiscal years beginning after December
15, 1995. Management does not believe that the adoption of this statement
will have a significant impact on the Company's financial statements.
5. SAVINGS ACCOUNTS:
Savings accounts consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
-------------------------------------- -----------------------------------
WEIGHTED PERCENT WEIGHTED PERCENT
AVERAGE OF AVERAGE OF
RATE AMOUNT DEPOSITS RATE AMOUNT DEPOSITS
-------- ------------ -------- -------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Passbooks 2.75% $ 24,304,471 13.2% 2.75% $ 29,352,870 17.0%
NOW accounts
and variable rate
money market
savings and
checking accounts 2.52 24,876,768 13.4 2.58 26,691,461 15.5
------------ ----- ------------ -----
49,181,239 26.6 56,044,331 32.5
------------ ----- ------------ -----
Certificates:
1-6 month 5.35 29,160,961 15.8 4.10 11,441,000 6.6
1 year 5.63 22,906,323 12.4 4.79 23,944,998 13.9
18 month 6.00 15,640,081 8.5 4.05 3,839,792 2.2
18 month - 5 years 5.97 36,087,067 19.6 5.35 39,313,172 22.8
5-8 years 6.34 28,719,553 15.5 6.55 34,864,615 20.2
Jumbos 3.18 2,879,092 1.6 4.82 3,053,986 1.8
------------ ----- ------------ -----
135,393,077 73.4 116,457,563 67.5
------------ ----- ------------ -----
TOTAL SAVINGS
ACCOUNTS $184,574,316 100.0% $172,501,894 100.0%
============ ===== ============ =====
</TABLE>
26
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. SAVINGS ACCOUNTS, CONTINUED:
At December 31, 1995, scheduled maturities of certificate accounts are as
follows:
<TABLE>
<S> <C>
1996 $ 86,127,559
1997 28,931,122
1998 15,400,403
1999 2,102,226
2000 2,655,470
Thereafter 176,297
------------
$135,393,077
============
</TABLE>
Interest and dividends paid and accrued on deposits, net of penalties
assessed depositors exercising early certificate withdrawal privileges, are
as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Passbooks $ 716,039 $ 952,438 $1,251,076
NOW and money market accounts 586,222 707,922 542,674
Certificates 7,510,128 5,781,954 6,970,886
---------- ---------- ----------
$8,812,389 $7,442,314 $8,764,636
========== ========== ==========
</TABLE>
6. FEDERAL HOME LOAN BANK ADVANCES:
FHLB advances at December 31, 1995 consist of the following:
<TABLE>
<CAPTION>
INTEREST OUTSTANDING
MATURITY DATE RATE BALANCE
-------------- ---------- -----------
<S> <C> <C>
05/01/06 8.15% $ 450,198
10/01/10 6.35 4,949,677
12/01/10 6.30 1,993,297
----------
$7,393,172
==========
The advances require principal payments as follows:
1996 $ 986,687
1997 882,490
1998 789,615
1999 706,948
2000 633,493
Thereafter 3,393,939
----------
$7,393,172
==========
</TABLE>
As collateral for the advances, the Company has pledged mortgage-backed
securities equal to or greater than 110% of the outstanding balance.
27
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. STOCKHOLDERS' EQUITY:
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 8). At December 31, 1995, the most restrictive
required level of capital to satisfy regulatory requirements was
approximately $7,660,000.
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, 1995, 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.
Congress is currently considering proposed legislation, as part of the
recapitalization plan discussed in Note 15, which would eliminate the
thrift method of tax accounting for bad debt reserves, resulting in a tax
liability in the amount of the tax on this accumulated deduction. No
certainty exists that the pending legislation will be enacted into law.
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 to meet
applicable regulatory capital requirements. OTS regulations utilize a
tiered approach which permits various levels of distributions based
primarily upon an institution's capital level and net income. Based upon
current OTS regulations and its capital structure at December 31, 1995, the
Company may make capital distributions during a year up to the greater of
(i) 100% of its net earnings to date during the calendar year or (ii) 75%
of its net income during the most recent four quarter period. The amount
computed under these OTS regulations cannot reduce the Company's capital
below the liquidation account discussed below.
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.
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>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Options outstanding at beginning of year 86,736 90,736 93,968
Exercised (14,700) (4,000) (3,232)
------- ------ ------
OPTIONS OUTSTANDING AT END OF YEAR 72,036 86,736 90,736
======= ====== ======
</TABLE>
All options outstanding and exercised have an option price of $5.00.
28
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. STOCKHOLDERS' EQUITY, CONTINUED:
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which defines a fair value based method of accounting for
employee stock options or similar equity instruments. However, SFAS No. 123
also allows an entity to continue to account for these plans according to
Accounting Principles Board Opinion No. 25 (APB 25), provided pro forma
disclosures of net income and earnings per share are made as if the fair
value based method of accounting defined by SFAS No. 123 had been applied.
The Company expects to continue to measure compensation cost related to
employee stock purchase options using APB 25 and will provide pro forma
disclosures as required. This statement is effective for the year ending
December 31, 1996.
8. REGULATORY CAPITAL 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, 1995, 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, 1995,
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 $3,149,000 $13,881,000 6.61%
Core capital $6,299,000 $13,881,000 6.61%
Risk-based capital $7,660,000 $14,486,000 15.13%
</TABLE>
9. 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.
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 judgementally determined by using available market
information.
29
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. FAIR VALUES OF FINANCIAL INSTRUMENTS, CONTINUED:
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.
The estimated fair values of the Company's financial instruments at
December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------------------- -------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 8,652,503 $ 8,652,503 $ 2,882,989 $ 2,882,989
Investment securities $ 18,761.867 $ 18,761,867 $ 14,628,301 $ 14,680,188
Mortgage-backed securities $ 41,221,550 $ 41,015,120 $ 35,325,333 $ 33,842,097
Loans receivable $140,983,647 $142,140,000 $136,338,272 $131,936,000
Investment in FHLB stock $ 1,649,700 $ 1,649,700 $ 1,649,200 $ 1,649,200
Financial liabilities:
Savings accounts $184,574,316 $185,225,000 $172,501,894 $171,337,318
FHLB advances $ 7,393,172 $ 7,393,172 $ 596,016 $ 591,000
<CAPTION>
CONTRACTUAL FAIR CONTRACTUAL FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Unrecognized financial
instruments:
Commitments to extend credit $ 1,565,000 $ 1,565,000 $ 1,370,200 $ 1,370,200
Unfunded construction loans $ 4,170,902 $ 4,170,902 $ 2,933,437 $ 2,933,437
</TABLE>
10. FEDERAL INCOME TAXES:
The Company adopted SFAS No. 109 as of the beginning of 1993 which requires
a change from the deferred method to the asset and liability method of
accounting for income taxes. 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.
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Federal:
Current $459,035 $491,283 $604,000
Deferred 173,000 163,292 99,000
-------- -------- --------
Total $632,035 $654,575 $703,000
======== ======== ========
</TABLE>
30
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. FEDERAL INCOME TAXES, CONTINUED:
Total income tax expense differed from the amounts computed by applying the
U.S. federal statutory tax rates to pretax income as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Tax at statutory rates $ 656,853 $ 683,667 $ 716,137
Benefit of tax exempt interest (14,978) (18,034) (23,360)
Other (9,840) (11,058) 10,223
--------- --------- ---------
$ 632,035 $ 654,575 $ 703,000
========= ========= =========
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1995 1994
---- ----
<S> <C> <C>
Deferred tax asset arising from:
Loan loss reserve $ 322,042 $ 377,482
Deferred loan fees and costs 144,542 250,603
Depreciation 38,527 25,761
Unrealized loss on securities -- 663,900
Other, net 6,276 8,769
--------- -----------
TOTAL DEFERRED TAX ASSETS 511,387 1,326,515
--------- -----------
Deferred tax liability arising from:
FHLB stock (283,733) (264,045)
Prepaid pension expense (194,049) (180,379)
Unrealized gain on securities (63,025) --
--------- -----------
TOTAL DEFERRED TAX LIABILITIES (540,807) (444,424)
--------- -----------
NET DEFERRED TAX (LIABILITY) ASSET $ (29,420) $ 882,091
========= ===========
</TABLE>
Net deferred tax (liabilities) assets and federal income tax expense in
future years can be significantly affected by changes in enacted tax rates.
11. 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, 1995 and 1994 measurement dates, as applied to the Company's
year end of December 31, 1995 and 1994:
Actuarial present value of benefit obligations:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Accumulated benefit obligation,
including vested benefits of $1,802,,987 and $1,672,339 $ 1,819,853 $ 1,694,584
=========== ===========
Projected benefit obligation for service rendered to date $ 2,051,806 $ 1,841,888
Plan assets at fair value, primarily certificates of deposit
and net cash surrender values of life insurance policies 2,050,320 2,055,438
----------- -----------
Plan assets (less than) in excess of projected benefit obligation (1,486) 213,550
Unrecognized net loss from past experience
different from that assumed 734,874 499,763
Unrecognized net asset being recognized over fifteen years (162,656) (182,988)
----------- -----------
Prepaid pension cost included in other assets $ 570,732 $ 530,325
=========== ===========
</TABLE>
31
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. BENEFIT PLANS:, CONTINUED:
Net pension cost for the years ending December 31, 1995, 1994 and 1993
included the following components:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Service cost $ 80,921 $ 127,744 $ 81,921
Interest cost 119,237 112,320 89,500
Actual return on plan assets (122,298) (95,070) (116,061)
Net amortization and deferral 9,589 (59,428) (36,838)
--------- --------- ---------
NET PENSION COST $ 87,449 $ 85,566 $ 18,522
========= ========= =========
</TABLE>
At October 15, 1995 and 1994, the discount rate used in determining the
actuarial present value of the projected benefit obligation was 6.5 and 8.0
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 6.5 percent in 1995 and 8.0
percent in 1994 and 1993 .
In November of 1995, the Board of Directors made a decision to terminate
the defined benefit pension plan, effective February 15, 1996. All
participants will become fully vested as of the termination date. The
settlement of the vested benefit obligation, by lump-sum payments to each
covered employee, or the purchasing of individual annuities, is expected to
be completed in 1996. The Company expects to recognize a settlement loss of
approximately $571,000 when the plan's obligation is settled. This event
had no effect on the 1995 financial statements.
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 1995, 1994
and 1993. At December 31, 1995, the ESOP is not 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 1995, 1994 and
1993. The Company's policy is to charge to expense the amount contributed
to the ESOP. At December 31, 1995, the ESOP held 86,074 allocated shares
and 13,500 shares committed to be allocated.
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.
12. LEASE COMMITMENTS:
The Company leases certain facilities under operating leases which expire
over the next fifteen years, with renewal options.
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:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1996 $168,936
1997 162,198
1998 124,346
1999 72,208
` 2000 15,488
Thereafter 149,072
--------
$692,248
========
</TABLE>
Rent expenses were $207,796, $205,379 and $207,777 in 1995, 1994 and 1993,
respectively.
32
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
13. LOANS TO RELATED PARTIES:
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, 1995. The following is an analysis of the
activity of such loans for the years indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $ 557,121 $577,438 $ 564,523
Loans originated 1,425,000 14,000 152,400
Repayments (118,307) (34,317) (139,485)
Commitment to lend (1,146,735)
----------- -------- ---------
BALANCE, END OF YEAR $ 717,079 $557,121 $ 577,438
=========== ======== =========
</TABLE>
14. 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, 1995, the Company's total commitment to extend credit was
approximately $1,565,000, and the Company had commitments to disburse
construction loans of approximately $4,171,000.
15. SAIF ASSESSMENT:
In September 1995, Congress began consideration of a recapitalization plan
for SAIF. Congress' plan, as proposed, provides for a special assessment of
as much as .85% to .90% of deposits to be imposed on all SAIF-insured
institutions to enable the SAIF to achieve its required reserve level. Such
assessment would amount to approximately $1.48 miilion to $1.57 million
before taxes, based on deposits at March 31, 1995 and would be recorded as
a charge to expense at the time of enactment of the legislation. Future
deposit insurance premiums are expected to decrease to .04% from the .23%
of deposits currently paid by the Company.
33
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
16. FIRST FRANKLIN CORPORATION - PARENT COMPANY ONLY FINANCIAL INFORMATION:
The following condensed balance sheets as of December 31, 1995 and 1994 and
condensed statements of operations and cash flows for each of the three
years in the period ended December 31, 1995 for First Franklin Corporation
should be read in conjunction with the consolidated financial statements
and notes thereto.
CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1995 1994
------------ ------------
<S> <C> <C>
Cash $ 1,573,065 $ 430,874
Investment securities:
Available-for-sale 3,561,560 3,383,494
Investment in Franklin Savings 14,059,173 12,763,082
Dividend receivable 324,000 319,000
Other assets 884,206 1,114,753
------------ ------------
$ 20,402,004 $ 18,011,203
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities $ 94,378 $ 158,974
Preferred stock - $.01 par value, 500,000 shares authorized,
none issued and outstanding
Common stock - $.01 par value, 2,500,000 shares authorized,
1,270,164 and 1,255,464 shares issued in 1995 and 1994,
respectively 12,702 12,554
Additional paid-in capital 5,838,118 5,764,766
Treasury stock, at cost - 91,878 shares
in 1995 and 1994 (442,045) (442,045)
Net unrealized gain (loss) on available-for-sale
securities of parent and subsidiary 122,324 (1,289,082)
Retained earnings 14,776,527 13,806,036
------------ ------------
$ 20,402,004 $ 18,011,203
============ ============
</TABLE>
34
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
16. FIRST FRANKLIN CORPORATION - PARENT COMPANY ONLY FINANCIAL INFORMATION,
CONTINUED:
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Equity in earnings of Franklin Savings $ 1,137,999 $ 1,249,495 $ 1,808,396
Interest income 287,968 204,050 83,770
Operating expenses (55,813) (42,361) (30,324)
Other Income (loss) 8,632 (1,738) 256
Federal income tax expense (78,900) (54,975) (18,100)
----------- ----------- -----------
$ 1,299,886 $ 1,354,471 $ 1,843,998
=========== =========== ===========
CONDENSED STATEMENTS OF CASH FLOWS
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,299,886 $ 1,354,471 $ 1,843,998
Equity in earnings of Franklin Savings (1,137,999) (1,249,495) (1,808,396)
Dividends received from Franklin Savings 1,137,000 2,735,000 1,650,000
Change in other assets and liabilities (90,801) 58,056 31,488
----------- ----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,208,086 2,898,032 1,717,090
----------- ----------- -----------
Cash flows from investing activities:
Loan to Franklin Savings 1,000,000 (1,000,000) --
Purchase of investment securities -- (2,147,065) (1,497,955)
Capital expenditures and other (810,000) -- --
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 190,000 (3,147,065) (1,497,955)
----------- ----------- -----------
Cash flows from financing activities:
Payment of dividends (329,395) (364,497) (290,022)
Proceeds from sale of common stock 73,500 20,000 16,160
----------- ----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (255,895) (344,497) (273,862)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH 1,142,191 (593,530) (54,727)
Cash at beginning of year 430,874 1,024,404 1,079,131
----------- ----------- -----------
CASH AT END OF YEAR $ 1,573,065 $ 430,874 $ 1,024,404
=========== =========== ===========
</TABLE>
35
<PAGE> 33
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,
1995, is presented:
BALANCE SHEET
ASSETS
<TABLE>
<S> <C>
Cash $ 188,068
Other assets 15,000
---------
$ 203,068
=========
LIABILITIES AND SHAREHOLDER'S EQUITY
Accrued expenses $ 121
Equity 202,947
---------
$ 203,068
=========
STATEMENT OF OPERATIONS
Revenues:
Interest income $ 5,427
Service fees and other 7,141
Operating expenses (4,812)
---------
Income before federal income tax 7,756
Federal income tax 2,635
---------
NET INCOME $ 5,121
=========
</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 92,947
---------
$ 202,947
=========
</TABLE>
36
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
All adjustments necessary for a fair statement of operations for each
period have been included.
<TABLE>
<CAPTION>
1995
----
(DOLLARS IN THOUSANDS)
----------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Interest income $3,456 $3,557 $3,668 $3,865
Interest expense 2,030 2,168 2,318 2,449
------ ------- ------- ------
Net interest income 1,426 1,389 1,350 1,416
Provision for loan losses 15 -- 5 10
------ ------- ------- ------
Net interest income after
provision for loan losses 1,411 1,389 1,345 1,406
Noninterest income 88 82 98 94
Noninterest expense 1,044 1,004 980 953
------ ------- ------- ------
Income before federal
income taxes 455 467 463 547
Federal income taxes 151 152 155 174
------ ------- ------- ------
NET INCOME $ 304 $ 315 $ 308 $ 373
====== ======= ======= ======
EARNINGS PER COMMON SHARE $ 0.25 $ 0.25 $ 0.25 $ 0.30
====== ======= ======= ======
</TABLE>
37
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED), CONTINUED:
<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 1014 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 $ 0.30 $ 0.27 $ 0.25 $ 0.29
====== ====== ====== ======
</TABLE>
38
<PAGE> 1
FIRST FRANKLIN CORPORATION
401 EAST COURT STREET
CINCINNATI, OHIO 45202
(513) 721-1031
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To be Held on April 22, 1996
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 22, 1996, 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 one director of the Company; and
2. 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 13, 1996,
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.
Cincinnati, Ohio
March 26, 1996
By Order of the Board of Directors
Thomas H. Siemers
President and Chief Executive Officer
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 45202
(513) 721-1031
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
APRIL 22, 1996
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 45202, on April 22, 1996, 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
26, 1996.
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.
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.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Stockholders of record as of the close of business on March 13, 1996,
will be entitled to one vote for each share then held. As of that date,
the Company had 1,181,518 shares of Common Stock issued and outstanding.
The following table sets forth, as of March 13, 1996, 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.
-2-
<PAGE> 3
<TABLE>
<CAPTION>
Shares Beneficially Percent of
Name and Address of Beneficial Owner Owned Class
------------------------------------------------------------ --------------------- ----------
<S> <C> <C>
Thomas H. Siemers(1) 170,824 14.1%
First Franklin Corporation
401 East Court Street
Cincinnati, Ohio 45202
Margaret W. Walton(2) 60,729 5.1
First Franklin Corporation
401 East Court Street
Cincinnati, Ohio 45202
All directors and executive officers of Franklin 361,503 29.0
and the Company as a group (11 persons)(3)
<FN>
- -----------------------------
(1) Mr. Siemers, the President and Chief Executive Officer of the Company,
has sole voting and investment power with respect to 63,380 shares and shared
voting and investment power with his wife for 600 shares. In addition, Mr.
Siemers has options to purchase 28,972 shares granted under First Franklin's
Stock Option Plan. Mr. Siemers has voting power with respect to 22,406 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 40,466
shares of Common Stock held by the 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").
(2) Ms. Walton, a 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 8,529 shares allocated to her account in the ESOP.
(3) Includes shares held directly, shares allocated to executive officers'
accounts in the ESOP, shares subject to options granted under the Company's
Stock Option Plan and shares held by controlled corporations or certain family
members, 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. Share
information for each director of the Company is included under "Election of
Directors."
</TABLE>
ELECTION OF DIRECTORS
The Board of Directors is currently composed of five members.
Directors are 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.
In January 1996, Mary J. Hunter, a director of the Company and
Franklin retired and became a director emeritus of Franklin, who may attend
Board meetings in an advisory capacity. The board appointed James E. Cross, a
director of Franklin, to fill the vacancy created by her retirement for the
remainder of the term.
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 nominee indicated below. If the
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
nominee might be
-3-
<PAGE> 4
unable to serve if elected. Except as disclosed herein, there are no
arrangements or understandings between the nominee and any other person
pursuant to which the nominee was selected.
<TABLE>
<CAPTION>
Positions held with Year first Shares
the Company elected director of Term to beneficially owned Percent
Name Age and Franklin the Company/Franklin expire at March 13, 1996(1) of class
---- --- ------------ -------------------- ---------- ----------------- --------
<S> <C> <C> <C> <C> <C> <C>
NOMINEES
John L. Nolting 63 Director 1987/1981 1999 17,500 1.5%
DIRECTORS REMAINING IN OFFICE
Richard H. Finan 61 Director 1987/1968 1997 51,616 4.4
James E. Cross 60 Director 1996/1978 1997 21,136 1.8
Thomas H. Siemers 62 President, Chief 1987/1953 1998 170,824(2) 14.1
Executive Officer
and Director
James E. Hoff, 63 Director 1993/1993 1998 - -
S.J.
<FN>
- -------------------------------
(1) 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 or certain 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 40,466 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:
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.
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. CROSS is a partner in the Dayton, Ohio law firm of Allbery
Cross Fogarty. He was a member of the Board of Directors of Central Savings in
Dayton, Ohio when it merged with Franklin in 1978, and has served as a director
of Franklin since then.
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
-4-
<PAGE> 5
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.
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.
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, 1995, the Board of
Directors held a total of five 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 only
three 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 1995, 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,
Donald E. Newberry, Sr. and Mary W. Sullivan. Meetings of Franklin's Board of
Directors are generally held on a monthly basis. The Board of Directors held a
total of 12 meetings during 1995. 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. 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 1995.
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 Messrs. Siemers, Finan
and Nolting. One meeting was held by this committee during 1995.
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 1995.
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 and Franklin receive directors' fees 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 $100,000
during the fiscal year.
Summary Compensation Table
--------------------------
<TABLE>
<CAPTION> -----------------------
All other compensation
- ------------------------------------------------------------------------------------------------------------------
Annual compensation
--------------------------------------------------------
Name and principal position Year Salary($) Bonus($) ($)(1)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
THOMAS H. SIEMERS - President, Chief 1995 $204,922 - $14,365
Executive Officer and Director of the 1994 197,047 $10,000 13,359
Company, Franklin and 1993 183,704 25,000 17,834
Madison Service Corporation; Chairman of the
Board of DirectTeller Systems, Inc.
DANIEL T. VOELPEL - Vice President 1995 $97,957 - $9,398
and Chief Financial Officer of the 1994 94,263 $ 7,000 9,018
Company and Franklin and Treasurer 1993 90,135 7,000 8,300
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 1995.
The following table sets forth certain information concerning the number and
value of stock options at December 31, 1995, held by these listed individuals.
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
Value options/SARs at FY-end ($) options/SARs at FY-end ($)(2)
Shares Acquired Realized -------------------------- --------------------------------
Name on Exercise ($) ($)(1) Exercisable Unexercisable Exercisable Unexercisable
- ---- --------------- ------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas H. Siemers 2,500 $30,625 28,972 - $315,215 -
Daniel T. Voelpel - - 12,200 - 132,736 -
- ----------------------------------
<FN>
(1) Value is based upon the sales price of $17.25 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, less
the exercise price of $5.00 per share.
(2) Value is based upon the sales price of $15.88 per share of the
Company's Common Stock as reported on The Nasdaq Stock Market on
December 29, 1995, 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, 1995, at which date the unexpired term of the contract was 52
months, Mr. Siemers could have received a cash payment of up to approximately
$764,100 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.
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.
-7-
<PAGE> 8
Set forth below is certain information at December 31, 1995, as to all
loans made by Franklin to each of its directors or 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, 1994:
<TABLE>
<CAPTION>
Market interest
Largest amount Balance as of rate at the time
Nature of outstanding since December 31, Current interest of
Name Date of loan indebtedness January 1, 1994 1995 rate origination
---- ------------ ------------ ----------------- ------------ ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Richard H. Finan 6/15/84 First mortgage - $89,850 $82,498 8.25% 10.50%
personal residence
Mary J. Hunter 10/29/81 First mortgage - 94,366 - 8.25 12.50
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, 1995.
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, 1995, 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.
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,
1995, all Section 16(a) filing requirements applicable to its officers,
directors and greater than 10% beneficial owners were complied with.
STOCKHOLDER PROPOSALS
To be eligible for inclusion in the Company's proxy materials for next
year's Annual Meeting of Stockholders, any stockholder proposal requesting
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, 1996. Any such
proposal shall be subject to the requirements of the proxy rules adopted under
the Securities Exchange Act of 1934, as amended.
-8-
<PAGE> 9
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.
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 26,1996
-9-
<PAGE> 1
EXHIBIT 21
Subsidiaries of the Registrant
- ------------------------------
The Registrant has two subsidiaries: (1) The Franklin Savings and Loan
Company, a savings and loan association chartered under the laws of the State
of Ohio, and (2) DirectTeller Systems, Inc., an Ohio corporation engaged in
providing computer software services for financial institutions.
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 2,757,318
<INT-BEARING-DEPOSITS> 5,895,185
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 37,725,601
<INVESTMENTS-CARRYING> 22,257,816
<INVESTMENTS-MARKET> 22,051,386
<LOANS> 140,366,488
<ALLOWANCE> 947,184
<TOTAL-ASSETS> 213,594,638
<DEPOSITS> 184,574,316
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,319,524
<LONG-TERM> 7,393,172
<COMMON> 12,702
0
0
<OTHER-SE> 20,294,924
<TOTAL-LIABILITIES-AND-EQUITY> 213,594,638
<INTEREST-LOAN> 10,885,905
<INTEREST-INVEST> 3,277,470
<INTEREST-OTHER> 383,198
<INTEREST-TOTAL> 14,546,573
<INTEREST-DEPOSIT> 8,812,389
<INTEREST-EXPENSE> 8,965,377
<INTEREST-INCOME-NET> 5,581,196
<LOAN-LOSSES> 29,600
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,981,451
<INCOME-PRETAX> 1,931,921
<INCOME-PRE-EXTRAORDINARY> 1,299,886
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,299,886
<EPS-PRIMARY> 1.11
<EPS-DILUTED> 1.05
<YIELD-ACTUAL> 2.86
<LOANS-NON> 572,000
<LOANS-PAST> 445,000
<LOANS-TROUBLED> 355,000
<LOANS-PROBLEM> 1,286,000
<ALLOWANCE-OPEN> 1,256,000
<CHARGE-OFFS> 339,000
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 947,000
<ALLOWANCE-DOMESTIC> 422,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 525,000
</TABLE>
