<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
For the Fiscal Year Ended December 31, 1996
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from______________to___________________
Commission File Number: 0-16362
-------
FIRST FRANKLIN CORPORATION
--------------------------
(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)
4750 Ashwood Drive, Cincinnati, Ohio 45241
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (513) 469-5352
--------------
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) has 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 $16.3 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
as of March 12, 1997, was $14.5 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.)
1,173,234 of the issuer's common shares were issued and outstanding on March 12,
1997.
Documents Incorporated by Reference and Included as Exhibits:
Part II of Form 10-KSB - Portions of 1996 Annual Report to Stockholders
Part III of Form 10-KSB - Portions of Proxy Statement for
1997 Annual Meeting of Stockholders
Transitional Small Business Disclosure Format Yes No X
--- ---
Index to Exhibits on page 35
<PAGE> 2
PART I
------
ITEM 1. BUSINESS
FIRST FRANKLIN CORPORATION
First Franklin Corporation (the "Company") was incorporated under the
laws of the State of Delaware in September 1987 by authorization of the Board of
Directors of The Franklin Savings and Loan Company ("Franklin") for the purpose
of acquiring and holding all of the outstanding stock of Franklin issued upon
its conversion from an Ohio mutual savings and loan association to an Ohio stock
savings and loan association (the "Conversion"). On January 25, 1988, the
Company acquired all of the shares of Franklin in connection with Franklin's
Conversion.
As a Delaware corporation, the Company is authorized to engage in any
activity permitted by Delaware General Corporation Law. As a unitary savings and
loan holding company, the Company is subject to regulation and examination by
the Office of Thrift Supervision (the "OTS"). The assets of the Company consist
primarily of cash, investment securities and the stock of Franklin and
DirectTeller Systems, Inc.
Congress is considering legislation to eliminate the separate federal
regulation of savings and loan associations, and the Department of the Treasury
is preparing a report for Congress on the development of a common charter for
all financial institutions. As a result, the Company might become subject to a
different form of holding company regulation, which may limit the activities in
which it may engage and subject it to other additional regulatory requirements,
including separate capital requirements. The Company cannot predict when or
whether Congress may actually pass such legislation or whether such legislation
will actually change the regulation and permissible activities of the Company.
Although such legislation may change the activities in which the Company may
engage, it is not anticipated that its current activities will be materially
affected by those activity limits.
The executive offices of the Company are located at 4750 Ashwood Drive,
Cincinnati, Ohio 45241, and its telephone number is (513) 469-5352.
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,
1996, Franklin had approximately $216.9 million of assets, deposits of
approximately $194.9 million and stockholders' equity of approximately $14.1
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 loans 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.
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. The primary component of its
net income is its net interest income, which is the difference between interest
income from loans and investments and interest expense on deposits and
borrowings. The interest income and interest expense of Franklin change as the
interest rates on mortgages, securities and other assets and on deposits and
other liabilities change. Interest rates may change because of general economic
conditions, the policies of various regulatory authorities and other factors
beyond Franklin's control. The interest rates on specific assets and liabilities
of Franklin will change or "reprice" in accordance with the contractual terms of
the asset or liability instrument and in accordance with customer reaction to
general economic trends. In a rising interest rate environment, loans tend to
prepay slowly and new loans at higher rates increase slowly, while interest paid
on deposits increases rapidly because the terms to maturity of deposits tend to
be shorter than the terms to maturity or prepayment of loans. Such differences
in the adjustment of interest rates on assets and liabilities may negatively
affect Franklin's income.
-2-
<PAGE> 3
Moreover, rising interest rates tend to decrease loan demand in general,
negatively affecting Franklin's income. 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 attached hereto
as Exhibit 13 (the "Annual Report") for additional information regarding this
maturity or repricing timing difference and the impact of interest rates on
Franklin's operating results.
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 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."
Congress is considering legislation to eliminate the federal savings
and loan charter and the separate federal regulation of savings and loan
associations, and the Department of the Treasury is preparing a report for
Congress on the development of a common charter for all financial institutions.
As a result, Congress may eliminate the OTS, and Franklin may be regulated under
federal law as a bank or may be required to change its charter. Such change in
regulation or charter would likely change the range of activities in which
Franklin may engage and would probably subject Franklin to more regulation by
the FDIC. Franklin and the Company cannot predict when or whether Congress may
actually pass legislation regarding Franklin's regulatory requirements or
charter. Although such legislation may change the activities in which Franklin
may engage, it is not anticipated that its current activities will be materially
affected by those activity limits.
Franklin's executive offices are located at 4750 Ashwood Drive,
Cincinnati, Ohio 45241, and its telephone number at that address is (513)
469-8000.
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, while retaining the servicing rights on such loans, and to originate
adjustable-rate loans for retention in its own portfolio. When consumer demand
for ARMs declines, 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. During 1996, interest
rates offered on fixed-rate loans declined from levels experienced during 1995,
so demand for fixed-rate mortgage loans increased. Loan sales increased to $4.1
million during 1996 from $910,000 in 1995. The amount of loans held for sale at
December 31, 1996, was less than one percent of Franklin's entire portfolio and,
therefore, is not reported separately on the Company's balance sheet.
During 1996, Franklin entered into an agreement with the Student Loan
Funding Corporation to sell all student loans that are in the repayment stage.
Loans totaling $842,000 were sold under that agreement in 1996 at a profit of
$11,000.
-3-
<PAGE> 4
The following tables set forth information concerning the composition
of Franklin's loan portfolio, including mortgage-backed securities, in dollar
amounts and in percentages, by type of loan and by type of security, and
presents a reconciliation of total loans receivable before net items:
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------------------------------------------------------------------------
(Dollars in thousands)
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Type of loan
- ------------
Loans secured by real estate:
Residential $127,046 65.92% $119,921 64.43% $116,442 66.38%
Nonresidential 15,126 7.85 12,453 6.69 11,372 6.48
Construction 7,719 4.00 8,042 4.32 6,596 3.76
Consumer and other loans 4,120 2.14 4,738 2.55 4,862 2.78
---------- --------- ---------- -------- ---------- --------
154,011 79.91 145,154 77.99 139,272 79.40
-------- -------- -------- ------- -------- -------
Loans held for sale - - - - - -
Mortgage-backed securities
Held to maturity 19,622 10.18 22,258 11.96 14,583 8.32
Available for sale 19,107 9.91 18,701 10.05 21,543 12.28
---------- --------- --------- ------- ---------- -------
38,729 20.09 40,959 22.01 36,126 20.60
---------- -------- --------- ------- ---------- -------
Total loans receivable
(before net items) $192,740 100.00% $186,113 100.00% $175,398 100.00%
======== ====== ======== ====== ======== ======
Type of rate
- ------------
Fixed rate $ 78,677 40.82% $ 70,551 37.91% $ 56,891 32.44%
Adjustable rate 112,123 58.17 113,365 60.91 115,193 65.68
Passbook adjustable rate(1) 1,940 1.01 2,197 1.18 3,314 1.88
----------- -------- ---------- ------- ---------- --------
Total loans receivable
(before net items) $192,740 100.00% $186,113 100.00% $175,398 100.00%
======== ====== ======== ====== ======== ======
Type of security
- ----------------
Residential:
Single family $154,136 79.97% $149,019 80.07% $139,581 79.58%
2-4 family 8,214 4.26 8,078 4.34 7,738 4.41
Multi-family 8,781 4.56 8,914 4.79 9,885 5.64
Nonresidential real estate 17,489 9.07 15,364 8.25 13,332 7.60
Student loans 533 .28 1,210 0.65 1,182 0.67
Consumer and other loans 3,587 1.86 3,528 1.90 3,680 2.10
----------- -------- ----------- -------- ---------- ---------
Total loans receivable
(before net items) $192,740 100.00% $186,113 100.00% $175,398 100.00%
======== ====== ======== ====== ======== ======
- ----------------------------
<FN>
(1) Loans have interest rates that adjust in accordance with the rates paid
on Franklin's passbook savings accounts.
</TABLE>
-4-
<PAGE> 5
The following table presents a reconciliation of Franklin's loans
receivable and mortgage-backed securities after net items:
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------
1996 1995 1994
---------- ---------- ---------
(In thousands)
<S> <C> <C> <C>
Gross loans receivable and
mortgage-backed securities
(before net items) $ 192,740 $ 186,113 $ 175,398
Less:
Loans in process 2,708 4,171 2,933
Deferred loan fees 241 447 737
Allowance for possible loan
losses 929 947 1,256
Unearned (expense) income (3) 170 175
Unrealized (gain) loss on
available for sale
mortgage-backed securities (395) (263) 801
--------- --------- ---------
Total 3,480 5,472 5,902
--------- --------- ---------
Loans receivable and
mortgage-backed securities - net $ 189,260 $ 180,641 $ 169,496
========= ========= =========
</TABLE>
The following schedule presents the contractual maturity of Franklin's
loan and mortgage-backed securities portfolio at December 31, 1996. 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 ending December 31, 1997.
<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)
Due during years
ending December 31:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 $50,733 7.39% $11,317 8.53% $17,386 6.93% $2,146 7.68% $81,582 7.46%
1998 and 1999 26,627 7.54 8,484 8.65 639 5.42 682 8.55 36,432 7.78
2000 and 2001 1,821 8.04 2,492 8.32 1,907 5.35 916 8.67 7,136 7.50
2002 to 2006 4,422 7.77 2,005 9.23 1,163 6.92 232 9.14 7,822 8.06
2007 to 2016 17,093 7.57 636 8.52 8,288 6.08 126 9.07 26,143 7.13
2017 and following 23,404 7.73 857 7.93 9,346 7.24 18 8.50 33,625 7.60
-------- ---- -------- ---- -------- ---- ------- ---- -------- ----
Total $124,100 7.54% $25,791 8.59% $38,729 6.72% $4,120 8.17% $192,740 7.53%
======== ==== ======= ==== ======= ===== ====== ==== ======== ====
</TABLE>
As of December 31, 1996, the total amount of loans and mortgage-backed
securities maturing or repricing after December 31, 1997 consisted of $37.2
million of adjustable-rate loans and $74.0 million of fixed-rate loans.
-5-
<PAGE> 6
The following table shows the loan origination, purchase and sale
activity, including mortgage-backed securities, of Franklin during the periods
indicated:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Loans originated:
One- to four-family $ 34,598 $ 27,994 $ 29,299
Multi-family 2,405 500 695
Nonresidential 1,047 2,335 1,165
Land 612 293 51
Consumer 2,718 2,482 2,505
-------- -------- --------
Total loans originated 41,380 33,604 33,715
-------- -------- --------
Mortgage-backed securities
purchased 4,005 10,143 2,635
Loans purchased 1,058 569 --
-------- -------- --------
Total loans originated
and mortgage-backed
securities and loans
purchased 46,443 44,316 36,350
-------- -------- --------
Loans sold:
One- to four-family 3,444 910 3,893
Multi-family 608 -- --
Student 842
Principal reductions and
payoffs 34,922 32,691 33,103
-------- -------- --------
Increase (decrease) in loans
receivable 6,627 10,715 (646)
Increase (decrease) in net
items 1,992 430 (951)
-------- -------- --------
Net increase (decrease) in
loans receivable $ 8,619 $ 11,145 $ (1,597)
======== ======== ========
</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 1996, Franklin sold
approximately $4.1 in fixed-rate residential loans to the Federal Home Loan
Mortgage Corporation ("FHLMC") and other financial institutions. At December 31,
1996, Franklin serviced $54.3 million in loans previously sold to others. Other
loan fees and charges representing servicing costs are recorded as income when
collected. Loan originations during 1996 were $41.4 million, an increase of 23%
above 1995 and 1994 levels. This increase in loan originations was the result of
a favorable interest rate environment and a more aggressive loan origination
strategy. 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 in, and within 25 miles of, Cincinnati
and come from various sources, including walk-in and 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 has the authority
to approve loans in amounts of up to $1.0 million. Other loans must be approved
by the Executive Committee or the Board of Directors. Real estate pledged to
secure a loan is appraised by a designated appraiser.
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.
-6-
<PAGE> 7
FEDERAL LENDING LIMIT. OTS regulations impose a lending limit on the
aggregate amount that a savings association can lend to one borrower (the
"Lending Limit") to an amount equal to 15% of the association's total capital
for risk-based capital purposes plus any loan reserves not already included in
total capital (the "Lending Limit Capital"). A savings association may loan to
one borrower an additional amount not to exceed 10% of the association's Lending
Limit Capital, if the additional amount is fully secured by certain forms of
"readily marketable collateral." Real estate is not considered "readily
marketable collateral." An exception to the Lending Limit permits loans of any
type to one borrower of up to $500,000. In addition, the OTS, under certain
circumstances, may permit exceptions to the Lending Limit on a case-by-case
basis. In applying the Lending Limit, loans to certain related or affiliated
borrowers are aggregated.
Based on the 15% Lending Limit, Franklin was able to lend approximately
$2.16 million to one borrower at December 31, 1996. Franklin had no outstanding
loans in excess of such limit at December 31, 1996.
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, 1996, $162.4 million, or 86.1%, 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 1996, as a result of declining interest rates, originations of
ARMs decreased and originations of thirty-year and fifteen-year fixed-rate
mortgage loans, most of which are eligible for sale in the secondary market,
increased. Origination and retention of fixed-rate loans tends to increase
Franklin's exposure to changes in interest rates but also increases interest
income because of the higher yields on fixed-rate loans.
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, 1996, ARMs (not including loans with interest rates
tied to the rates paid on Franklin's passbook accounts) totaled $112.1 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, 1996, $1.6 million of Franklin's ARMs were delinquent thirty
days or more. This represents 1.4% of all ARMs outstanding at that date, an
increase of $100,000, or 6.7% 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, 1996, approximately $26.3 million, or 13.9%, 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
-7-
<PAGE> 8
1.0% of the original loan amount (plus expenses). At December 31, 1996, $24.7
million, or 93.9%, of Franklin's multi-family residential or nonresidential real
estate loans were secured by properties located within the State of Ohio or in
locations within 25 miles of Cincinnati.
Properties securing multi-family residential and nonresidential real
estate loans originated by Franklin are appraised at the time of the loan by
appraisers designated by Franklin (or the lead lender in the case of a loan
participation).
Franklin currently seeks to invest in loans in amounts of 80% or less
of the appraised value of the property securing the loan. In some cases,
Franklin's collateral includes junior liens on additional properties owned by
the borrower. In underwriting multi-family residential and nonresidential real
estate loans (or evaluating the purchase of a loan participation therein), it is
the policy of Franklin to consider, among other things, the terms of the loan,
the creditworthiness and experience of the borrower, the location and quality of
the collateral, the debt service coverage ratio and, if applicable, the past
performance of the project.
Multi-family residential and nonresidential real estate loans typically
involve large loan balances to single borrowers or groups of borrowers. Of
Franklin's multi-family residential and nonresidential real estate loans and
participations at December 31, 1996, one had a principal balance of more than
$1.0 million and nine others had principal balances in excess of $500,000. At
December 31, 1996, Franklin had six borrowers, or groups of borrowers, with
loans in excess of $1.0 million, for a total of $8.8 million. The largest amount
outstanding to any of these borrowers or groups of borrowers was approximately
$2.0 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, and the borrower
typically depends upon income generated by the collateral real estate project to
cover operating expenses and debt service. Therefore, 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."
Federal regulations limit the amount of nonresidential mortgage loans
which Franklin may make to 400% of total capital, unless otherwise permitted by
the FDIC. At December 31, 1996, Franklin's nonresidential mortgage loan
portfolio was $17.5 million or 124.1% of its total capital.
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, 1996,
$4.1 million, or 2.1%, 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.
MORTGAGE-BACKED SECURITIES. In recent years, Franklin has purchased
mortgage-backed securities insured or guaranteed by government agencies at times
when loan demand declines. Franklin intends to continue to purchase such
mortgage-backed securities when conditions favor such a portfolio investment. At
December 31, 1996, mortgage-backed securities totaled approximately $38.7
million, or 20.1% of total loans and mortgage-backed securities, of which $19.6
million were designated as being held to maturity. In accordance with Statement
of Financial Accounting Standards ("SFAS") No. 115, those mortgage-backed
securities designated as being held to maturity are carried on Franklin's
balance sheet at cost. The market value of the $19.6 million in mortgage-backed
securities designated as being held to maturity as of December 31, 1996, was
$19.2 million. The remaining $19.1 million in mortgage-backed securities held at
December 31, 1996, was designated as available for sale. In accordance with SFAS
No. 115, the mortgage-backed securities available for sale are carried on
Franklin's balance sheet at market value, with unrealized gains or losses
carried as an adjustment to shareholders' equity, net of applicable taxes.
-8-
<PAGE> 9
Franklin maintains a significant portfolio of mortgage-backed
pass-through securities in the form of Federal Home Loan Mortgage Corporation
("FHLMC"), Federal National Mortgage Association ("FNMA") and Government
National Mortgage Association ("GNMA") participation certificates.
Mortgage-backed pass-through securities generally entitle Franklin to receive a
portion of the cash flows from an identified pool of mortgages and gives
Franklin an interest in that pool of mortgages. FHLMC, FNMA and GNMA securities
are each guaranteed by their respective agencies as to principal and interest.
Franklin has also invested $478,000 in a collateralized mortgage
obligation ("CMO"), which is secured by mortgages on multi-family apartment
complexes. Although it can be used for hedging and investment, a CMO can expose
investors to higher risk of loss than direct investments in mortgage-backed
pass-through securities, particularly with respect to price volatility and the
lack of a broad secondary market in such securities. The OTS has deemed certain
CMOs and other mortgage derivative products to be "high-risk." Franklin's CMO is
not in such "high-risk" category.
Mortgage-backed securities generally yield less than loans directly
originated by Franklin. However, these securities present less credit risk,
because they are guaranteed as to principal repayment by the issuing corporation
or by the underlying collateral. Although CMOs and other mortgage-backed
securities designated as available for sale are a potential source of liquid
funds for loan originations and deposit withdrawals, the prospect of a loss on
the sale of such investments limits the usefulness of these investments for
liquidity purposes.
At December 31, 1996, Franklin had $21.6 million, or 55.8%, in fixed
rate mortgage-backed securities. Because they do not adjust relative to current
interest rates, retention of these fixed-rate mortgage-backed securities could
adversely impact Franklin's earnings, particularly in a rising interest rate
environment.
At December 31, 1996, $17.1 million, or 44.2%, of Franklin's
mortgage-backed securities had adjustable rates. Although adjustable-rate
securities generally have a lower yield at the time of origination than
fixed-rate securities, the interest rate risk associated with adjustable-rate
securities is lower. In addition, Franklin has purchased adjustable-rate
mortgage-backed securities as part of its effort to reduce its interest rate
risk. In a period of declining interest rates, Franklin is subject to prepayment
risk on such adjustable-rate mortgage-backed securities. Franklin attempts to
mitigate this prepayment risk by purchasing mortgage-backed securities at or
near par. If interest rates rise in general, the interest rates on the loans
backing the mortgage-backed securities will also adjust upward, subject to the
interest rate caps in the underlying adjustable-rate mortgage loans. However,
Franklin is still subject to interest rate risk on such securities if interest
rates rise faster than the 1% to 2% maximum annual interest rate adjustments on
the underlying loans. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Asset/Liability Management" in the Annual
Report.
-9-
<PAGE> 10
The following table sets forth certain information regarding Franklin's
investment in mortgage-backed securities at the dates indicated:
<TABLE>
<CAPTION>
At December 31, 1996 At December 31, 1995
------------------------------------------ -------------------------------------------
(In thousands)
Gross Gross Gross Gross
Amortized unrealized unrealized Estimated Amortized unrealized unrealized Estimated
cost gains losses fair value cost gains losses fair value
--------- ---------- ---------- ---------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgaged-backed securities held to
maturity:
FHLMC participation $11,198 $ - $ 113 $11,085 $12,183 $ 78 $ 67 $12,194
certificates
FNMA participation 7,946 - 260 7,686 9,044 - 208 8,836
certificates
CMOs 478 - - 478 1,031 - 10 1,021
------- ------- ------- ------- ------- ------- ------- -------
$19,622 $ - $ 373 $19,249 $22,258 $ 78 $ 285 $22,051
======= ======= ======= ======= ======= ======= ======= =======
Mortgage-backed securities available for
sale:
FHLMC participation $ 3,628 $ 92 $ - $ 3,720 $ 2,176 $ 48 $ - $ 2,224
certificates
FNMA participation 5,909 113 8 6,014 7,540 104 5 7,639
certificates
GNMA participation 9,570 199 - 9,769 8,985 116 - 9,101
------- ------- ------- ------- ------- ------- ------- -------
certificates
$19,107 $ 404 $ 8 $19,503 $18,701 $ 268 $ 5 $18,964
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
The combined amortized cost of mortgage-backed and related securities
designated as held to maturity or available for sale at December 31, 1996 and
1995, by contractual terms to maturity are shown below. Actual maturities will
differ from contractual maturities because borrowers generally may prepay
obligations without prepayment penalties. Also, the timing of cash flows will be
affected by management's intent to sell securities designated as available for
sale under certain economic conditions.
<TABLE>
<CAPTION>
Amortized cost at Amortized cost at
December 31, 1996 December 31, 1995
------------------ -----------------
(In thousands)
<S> <C> <C>
Due within one year $ 272 $ -
Due after one through three years 639 1,673
Due after three years through five years 1,907 2,109
Due after five years through ten years 1,163 1,843
Due after ten years through twenty years 8,288 8,232
Due after twenty years 26,460 27,102
------- -------
$38,729 $40,959
======= =======
</TABLE>
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 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 a specific allowance 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, 1996, $1.4 of
Franklin's loans and other assets were classified as "substandard," $344,000
were classified as "loss," no assets were classified as "doubtful" and $2.5
million were classified "special mention," for a total $4.3 million, or 2.9%, of
Franklin's loans receivable (net) designated as classified or special mention
assets.
-10-
<PAGE> 11
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,
----------------------------------------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
30-59 days $2,551 $1,010 $ 889 $1,238 $3,645
60-89 days 699 902 392 1,212 1,355
90 days and over 694 1,017 1,128 2,005 2,269
------ ------ ------ ------ ------
Total $3,944 $2,929 $2,409 $4,455 $7,269
====== ====== ====== ====== ======
</TABLE>
The Company adopted SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan" on January 1, 1995. Under that 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, 1996, the Company had not identified
any loans as impaired.
The following table sets forth the amounts of Franklin's non-performing
assets, which include non-accruing loans, accruing loans which are delinquent 90
days or more, repossessed assets and renegotiated loans. 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.
-11-
<PAGE> 12
<TABLE>
<CAPTION>
At December 31,
------------------------------------------------
(Dollars in thousands)
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
Residential real estate $ 154 $ 368 $ 383 $ 945 $1,167
Nonresidential real estate -- -- 138 611 344
Consumer 214 204 354 173 369
------ ------ ------ ------ ------
Total 368 572 875 1,729 1,880
------ ------ ------ ------ ------
Total as a percentage of
total assets 0.17% 0.27% 0.45% 0.87% 0.90%
Accruing loans delinquent
more than 90 days:
Residential real estate 325 422 243 273 510
Nonresidential real estate -- -- -- -- --
Consumer -- 23 10 3 60
------ ------ ------ ------ ------
Total 325 445 253 276 570
------ ------ ------ ------ ------
Total as a percentage of
total assets 0.15% 0.21% 0.13% 0.14% 0.27%
Repossessed assets:
Residential real estate 233 -- -- 54 --
Nonresidential real estate -- -- -- 435 435
------ ------ ------ ------ ------
Total 233 -- -- 489 435
------ ------ ------ ------ ------
Total as a percentage of
total assets 0.10% -- -- 0.25% 0.21%
Renegotiated loans 321 355 1,047 1,113 1,455
------ ------ ------ ------ ------
Total non-performing
assets $1,247 $1,372 $2,175 $3,607 $4,340
====== ====== ====== ====== ======
Total non-performing assets
as a percentage
of total assets 0.56% 0.64% 1.13% 1.81% 2.07%
====== ====== ====== ====== ======
Other loans of concern:
Residential real estate $ 224 $ 888 $ 587 $ 411 $1,190
Nonresidential real estate 355 389 -- -- 61
Consumer 2 9 12 1 23
------ ------ ------ ------ ------
Total $ 581 $1,286 $ 599 $ 412 $1,274
====== ====== ====== ====== ======
Total as a percentage of
total assets 0.26% 0.60% 0.31% 0.21% 0.61%
====== ====== ====== ====== ======
Unallocated allowance for
loan losses $ 557 $ 525 $ 599 $ 595 $ 350
====== ====== ====== ====== ======
Total allowance for loan
losses $ 929 $ 947 $1,256 $1,248 $1,346
====== ====== ====== ====== ======
</TABLE>
For the year ended December 31, 1996, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $16,000. The amount which was included in
interest income on such loans was $23,000 for the year ended December 31, 1996.
As of December 31, 1996, 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
-12-
<PAGE> 13
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, 1996, 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, 1996, consisted of three
one- to four-family residential loans with an aggregate book value of $154,000
and twenty consumer loans with an aggregate book value of $214,000. At December
31, 1996, accruing loans delinquent more than 90 days consisted of ten loans
totaling $325,000 secured by one- to four-family residential real estate.
Renegotiated loans consisted of a $320,000 interest in a $1.63 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, which has been made. As of December 31, 1996, loss reserves of
$163,000 had been established against this loan resulting in a net book value of
$157,000.
Other loans of concern at December 31, 1996, included eight loans
totaling $224,000 secured by one- to four-family residential real estate, one
commercial loan of $355,000 and one consumer loan totaling $2,000.
It is management's policy to establish allowances for loan 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. In establishing such loan losses or reevaluating real estate values,
Franklin considers a number of factors, including, but not limited to, trends in
the level of nonperforming assets and classified loans, current and anticipated
economic conditions in its primary lending area, past loss experience, possible
losses arising from specific problem assets and changes in Franklin's loan
portfolio. 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,
1996, Franklin had $929,000 of such allowances, $372,000 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.
-13-
<PAGE> 14
The following table sets forth an analysis of Franklin's allowance for
loan losses and repossessed assets:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(Dollar in thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 947 $1,256 $1,279 $1,345 $2,195
Charge-offs:
One- to four-family 31 161 67 28 60
Multi-family 16 -- -- 334 --
Nonresidential real estate -- -- 19 -- 1,198
Consumer 11 178 -- 30 19
------ ------ ------ ------ ------
Total charge-offs 58 339 86 392 1,277
------ ------ ------ ------ ------
Recoveries:
One- to four-family -- -- 1 -- --
Multi-family -- -- -- -- --
Nonresidential real estate -- -- -- -- 17
Consumer -- -- -- 1 --
------ ------ ------ ------ ------
Total recoveries -- -- 1 1 17
------ ------ ------ ------ ------
Net charge-offs 58 339 85 391 1,260
Additions charged to operations 92 30 62 325 410
------ ------ ------ ------ ------
Balance at end of period $ 981 $ 947 $1,256 $1,279 $1,345
====== ====== ====== ====== ======
Ratio of net charge-offs during
the period to average loans
outstanding during the period 0.04% 0.25% 0.06% 0.28% 0.82%
====== ====== ====== ====== ======
Ratio of net charge-offs during
the period to average non-
performing assets 4.52% 19.11% 2.94% 9.84% 26.76%
====== ====== ====== ====== ======
</TABLE>
Repossessed assets, at the end of 1996, consisted of four properties,
all of which are located in southwestern Ohio. A single family home with an
estimated fair value of $54,000, a four-family property with an estimated fair
value of $42,000, a multi-family property being carried at an estimated fair
value of $85,000 and a vacant lot with an estimated fair value of $1.00.
-14-
<PAGE> 15
The distribution of Franklin's allowance for loan losses and
repossessed assets at the dates indicated is summarized as follows:
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
-------------------- -------------------- ------------------- -------------------- -------------------
Percent of Percent of Percent of Percent of Percent of
loans in each loans in each loans in each loans in each loans in each
category category category category category
Amount to total Amount to total Amount to total Amount to total Amount to total
loans loans loans loans loans
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loan(s):
One- to four-family -- 84.23% $ 14 84.41% $ 31 83.99% $ 12 83.34% $ 30 83.17%
Multi-family 115 4.56 147 4.79 145 5.64 158 6.29 448 7.49
Nonresidential real
estate 187 9.07 187 8.25 262 7.60 262 7.84 262 6.50
Consumer 70 2.14 74 2.55 219 2.77 221 2.53 255 2.84
Unallocated 557 -- 525 -- 599 -- 595 -- 350 --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total loans 929 100.00% 947 100.00% 1,256 100.00% 1,248 100.00% 1,345 100.00%
------ ====== ------ ====== ------ ====== ------ ====== ------ ======
Repossessed assets:
One- to four-family 52 - - 31 $ -
Nonresidential real
estate - - - - -
------ ------ ------ ------ ------
Total repossessed
assets 52 - - 31 -
------ ------ ------ ------ ------
Total $981 $947 $1,256 $1,279 $1,345
==== ==== ====== ====== ======
- ---------------------
<FN>
(1) All allowances for loan losses are specific allowances, except for the
unallocated category.
</TABLE>
-15-
<PAGE> 16
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. Franklin believes that it currently holds and
reports its securities in a manner consistent with the OTS requirements. See
Note 1 of the Notes to the Consolidated Financial Statements in the Annual
Report 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 presents the amortized cost and market values of
Franklin's investment securities, including those securities designated as
available for sale and excluding FHLB of Cincinnati stock, at the dates
indicated:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------
1996 1995 1994
------------------- ---------------------- --------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
--------- ------ --------- ------ --------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Available for sale:
U.S. Government and agency
obligations $16,394 $16,285 $17,884 $17,713 $14,899 $13,747
Obligations of states and
municipalities 1,030 1,073 955 1,049 -- --
------- ------- ------- ------- ------- -------
17,424 17,358 18,839 18,762 14,899 13,747
------- ------- ------- ------- ------- -------
Held to maturity:
U.S. Government and agency
obligations -- -- -- -- -- --
Obligations of states and
municipalities -- -- -- -- 881 933
------- ------- ------- ------- ------- -------
-- -- -- -- 881 933
------- ------- ------- ------- ------- -------
Total $17,424 $17,358 $18,839 $18,762 $15,780 $14,680
======= ======= ======= ======= ======= =======
</TABLE>
-16-
<PAGE> 17
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, 1996
------------------------------------------------------------------------------
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 $ 4,000 $12,394 $ -- $ -- $16,394 $16,285
obligations
Obligations of states and
municipalities 185 326 274 245 1,030 1,073
------- ------- ------- ------- ------- -------
Total investment $ 4,185 $12,720 $ 274 $ 245 $17,424 $17,358
securities ======= ======= ======= ======= ======= =======
Weighted average yield(1) 5.30% 5.34% 6.62% 5.62% 5.35%
- ----------------
<FN>
(1) Yields reflected have not been computed on a tax equivalent basis.
</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. During the year ended
December 31, 1996, Franklin assumed $5.3 million in deposits from the downtown
location of Suburban Federal Savings Bank in exchange for $5.1 million in cash.
-17-
<PAGE> 18
The principal types of savings accounts and rates held by Franklin at
December 31, 1996, are summarized as follows:
<TABLE>
<CAPTION>
Average rate Minimum deposit Amount(1) Percentage of total deposits
------------ --------------- --------- ----------------------------
(In thousands)
<S> <C> <C> <C> <C>
Savings programs:
Passbook savings 2.75% $ 100 $24,127 49.17%
NOW 1.77 100 13,458 27.43
Super NOW 2.10 2,500 2,069 4.22
Money market 2.96 2,500 9,418 19.18
---- ------- -----
Total regular
accounts 2.50% $49,072 100.00%
==== ======= ======
Certificates of
deposit:
7-31 day 3.00% $ 2,500 $ 580 0.40%
91 day 2.81 2,500 134 0.09
Six months 5.45 2,500 33,444 22.97
One year 5.26 500 26,169 17.98
18 months 5.89 500 23,407 16.08
Two years 5.79 500 14,111 9.69
Three years 6.37 500 20,110 13.81
Five years 5.75 2,500 23,857 16.39
Jumbo certificates(2) 5.17 100,000 3,188 2.19
Other(2) 4.29 500 576 0.40
---- -------- ------
Total certificates 5.68% $145,576 100.00%
==== ======== ======
- -----------------------------
<FN>
(1) Includes $28.5 million of deposits held in IRA and Keogh accounts.
(2) Maturities vary.
</TABLE>
All accounts earn interest from the date of deposit to the date of
withdrawal. Interest is compounded daily on all accounts except certificates
which are compounded utilizing a 360 day factor applied over 365 days. Interest
can be credited monthly, quarterly or annually at the customer's discretion. At
December 31, 1996, such rates were 2.75% per annum for passbook savings
accounts, 1.99% per annum for regular NOW accounts and 2.11% 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.
-18-
<PAGE> 19
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,
--------------------------------------------
1996 1995 1994
--------- ---------- --------
(In thousands)
<S> <C> <C> <C>
Opening balance $184,574 $172,502 $178,550
Deposits 321,414 302,026 276,504
Withdrawals 319,646 297,779 289,062
Interest credited 8,306 7,825 6,510
-------- -------- --------
Ending balance $194,648 $184,574 $172,502
======== ======== ========
</TABLE>
The following table sets forth, as of December 31, 1996, the amounts of
certificates of deposit maturing during the years indicated:
<TABLE>
<CAPTION>
Amounts maturing in the year
ending December 31,
------------------------------------------------
2000 and
1997 1998 1999 thereafter
------- ------- ------- ----------
(In thousands)
<S> <C> <C> <C> <C>
4.00% and less $ 882 $ -- $ -- $ 6
4.01% - 5.00% 17,401 726 967 --
5.01% - 6.00% 61,007 39,740 1,828 5,312
6.01% - 7.00% 14,414 1,124 428 852
7.01% - 8.00% 218 110 9 72
8.01% - 10.00% 149 109 42 78
10.01% and over 56 46 -- --
------- ------- ------- -------
Total $94,127 $41,855 $ 3,274 $ 6,320
======= ======= ======= =======
</TABLE>
-19-
<PAGE> 20
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,
----------------------------------------
1996 1995 1994
-------- -------- ------
(In thousands)
Change in deposit
balances:
<S> <C> <C> <C>
Passbook savings $ (177) $ (5,049) $ (8,969)
NOW accounts (228) 390 (1,015)
Money market
accounts 296 (2,204) (2,488)
Certificates:
7-31 day 37 (224) (101)
91 day 34 (168) (187)
6 months 4,927 18,111 (5,042)
One year 3,309 (1,040) 12,061
18 months 7,767 11,800 (1,212)
Two years 3,029 (409) 6,727
Thirty-two months (4,289) (9,336) 38
Three years (573) 6,564 (1,578)
Five years (4,632) (5,973) (3,363)
Jumbo certificates 309 (175) (810)
Other 265 (215) (108)
-------- -------- --------
Total increase
(decrease) $ 10,074 $ 12,072 $ (6,047)
======== ======== ========
</TABLE>
The following table indicates the amount of Franklin's certificates of
deposit by time remaining until maturity as of December 31, 1996:
<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 $ 23,746 $ 27,345 $ 30,222 $ 47,018 $128,331
Certificates of deposit of
$100,000 or more 3,832 3,778 5,204 4,431 17,245
-------- -------- -------- -------- --------
Total certificates of
deposit $ 27,578 $ 31,123 $ 35,426 $ 51,449 $145,576
======== ======== ======== ======== ========
</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) and to reduce, although not eliminate, the flow of funds away from
depository institutions such as savings institutions into alternative investment
vehicles such as government and corporate securities. In addition, Franklin has
become much more subject to short-term fluctuations in deposit flows, as
customers have become more interest-rate conscious. Therefore, the ability of
Franklin to attract and maintain deposits, and the cost and term of repricing of
its funds, has been, and will continue to be, significantly affected by money
market conditions.
-20-
<PAGE> 21
BORROWINGS. As a member of the FHLB of Cincinnati, Franklin is required
to own capital stock in the FHLB of Cincinnati and is authorized to apply for
advances from the FHLB of Cincinnati. Each FHLB credit program has its own
interest rate, which may be fixed or variable, and range of maturities. The FHLB
of Cincinnati may prescribe acceptable uses for these advances and repayment
provisions which apply. Franklin's FHLB advances outstanding at December 31,
1996, were $6.4 million.
The following table shows the FHLB advances outstanding as of December
31, 1996 by interest rate and maturity date:
<TABLE>
<CAPTION>
Maturity Date Interest Rate Outstanding balance
------------- ------------- -------------------
(In thousands)
<S> <C> <C>
05/01/06 8.15% $ 421
10/01/10 6.35 4,283
12/01/10 6.30 1,719
-------
$ 6,423
=======
</TABLE>
Franklin's only short-term borrowings during the year were FHLB
advances. The following table sets forth the maximum amount of short-term FHLB
advances (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 FHLB advances for such periods:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------
1996 1995 1994
-------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C>
Maximum amount outstanding:
FHLB advances $883 $322 $1,763
Total average amount of short-term
borrowings outstanding during period $443 $113 $309
Weighted average interest cost of
borrowings during the period ended 6.47% 6.16% 8.67%
</TABLE>
SUBSIDIARY ACTIVITIES OF FRANKLIN
Franklin has one subsidiary, Madison Service Corporation ("Madison"),
organized February 22, 1972. Madison's only activity is its contract with a
third party registered broker dealer which offers brokerage services at offices
of Franklin. As of December 31, 1996, 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, 1996, 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.
-21-
<PAGE> 22
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 DirectTeller at December 31, 1996, was
$50,000.
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, 1996, based on total assets, Franklin was the
seventh largest thrift institution headquartered in Hamilton County, Ohio.
REGULATION
GENERAL. As a savings and loan association chartered under the laws of
Ohio, Franklin is subject to regulation, examination and oversight by the
Superintendent of the Division (the "Ohio Superintendent"). Because Franklin's
deposits are insured by the FDIC, Franklin also is subject to regulation and
examination by the OTS 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 eliminate the federal savings and
loan charter and the separate federal regulation of savings and loan
associations and the Department of the Treasury is preparing a report for
Congress on the development of a common charter for all financial institutions.
Pursuant to such legislation, Congress may eliminate the OTS and Franklin may be
regulated under federal law as a bank or may be required to change its charter.
Such change in regulation or charter would likely change the range of activities
in which Franklin may engage and would probably subject Franklin to more
regulation by the FDIC.
In addition, the Company might become subject to a different form of
holding company regulation which may limit the activities in which the Company
may engage and subject the Company to additional regulatory requirements,
including separate capital requirements. The Company cannot predict when or
whether Congress may actually pass legislation regarding the Company's and
Franklin's regulatory requirements or charter. Although such legislation may
change the activities in which the Company and Franklin may engage, it is not
anticipated that the current activities of either the Company or Franklin will
be materially affected by those activity limits.
-22-
<PAGE> 23
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 "Federal Deposit Insurance Corporation." 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 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.
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, 1996, 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, 1996
--------------------
Amount Percent
------ -------
(In thousands)
<S> <C> <C>
Tangible capital $13,734 6.34%
Requirement 3,248 1.50
------- -----
Excess $10,486 4.84%
======= =====
Core capital $13,734 6.34%
Requirement 6,495 3.00
------- -----
Excess $ 7,239 3.34%
======= =====
Total capital $14,371 14.68%
Risk-based requirement 7,830 8.00
------- -----
Excess $ 6,541 6.68%
======= =====
</TABLE>
-23-
<PAGE> 24
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 $637,000) 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
6.34% of adjusted total assets.
The OTS has adopted an interest rate risk component to the risk-based
capital requirement, though 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. Franklin 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 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,
1996, 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
-24-
<PAGE> 25
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, 1996, was approximately
$24.9 million, or 12.96% and exceeded the 5.0% liquidity requirement by
approximately $15.3 million.
QUALIFIED THRIFT LENDER TEST. Savings associations are required to meet
the QTL test. Prior to September 30, 1996, there was only one QTL test which
required savings associations to maintain a specified level of investments in
assets that are designated as qualifying thrift investments ("QTI"), which are
generally related to domestic residential real estate and manufactured housing
and include credit card, student and small business loans, stock issued by any
FHLB, the FHLMC or the FNMA. Under this test 65% of an institution's "portfolio
assets" (total assets less goodwill and other intangibles, property used to
conduct business and 20% of liquid assets) must consist of QTI on a monthly
average basis in 9 out of every 12 months. Congress created a second QTL test,
effective September 30, 1996, pursuant to which a savings association may also
meet the QTL test under the Internal Revenue Code of 1986, as amended (the
"Code"), for thrift institution status. According to the test under the Code, at
least 60% of the institution's assets (on a tax basis) must consist of specified
assets (generally loans secured by residential real estate or deposits,
educational loans, cash and certain governmental obligations). 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 become
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. At
December 31, 1996, Franklin met the QTL test.
TRANSACTIONS WITH INSIDERS AND AFFILIATES. Loans to executive officers,
directors and principal shareholders and their related interests must conform to
the Lending Limit, and the total of such loans cannot exceed the association's
Lending Limit Capital. Most loans to directors, executive officers and principal
shareholders must be approved in advance by a majority of the "disinterested"
members of board of directors of the association with any "interested" director
not participating. All loans to directors, executive officers and principal
shareholders must be made on terms substantially the same as offered in
comparable transactions with the general public or as offered to all employees
in a company-wide benefit program. Loans to executive officers are subject to
additional restrictions. Franklin was in compliance with such restrictions at
December 31, 1996.
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, 1996.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. The OTS imposes various
restrictions or requirements on the ability of associations to make capital
distributions, including dividend payments. An association which has converted
to stock form 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 three-tier system limiting capital distributions
according to ratings of associations based on their capital level and
supervisory condition.
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
-25-
<PAGE> 26
for a Tier 1 association and has not been notified of any need for more than
normal supervision. 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 1 and Tier 2 associations proposing to make a capital
distribution within the safe harbor provisions 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 $140,000 to the Company during 1996.
HOLDING COMPANY REGULATION. The Company is a unitary 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.
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, 1996, Franklin met the
QTL Test.
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.
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
-26-
<PAGE> 27
business, (iii) holding, managing or liquidating assets owned by or acquired
from a subsidiary savings institution, (iv) holding or managing properties used
or occupied by a subsidiary savings institution, (v) acting as trustee under
deeds of trust, (vi) those activities previously directly authorized by federal
regulation as of March 5, 1987, to be engaged in by multiple holding companies,
or (vii) those activities authorized by the FRB as permissible for bank holding
companies, unless the OTS by regulation prohibits or limits such activities for
savings and loan holding companies. Those activities described in (vii) above
must also be approved by the OTS prior to being engaged in by a multiple holding
company.
The OTS may approve acquisitions resulting in the formation of a
multiple savings and loan holding company that controls savings associations in
more than one state, only if the multiple savings and loan holding company
involved controls a savings association that operated a home or branch office in
the state of the association to be acquired as of March 5, 1987, or if the laws
of the state in which the institution to be acquired is located specifically
permit institutions to be acquired by state-chartered institutions or savings
and loan holding companies located in the state where the acquiring entity is
located (or by a holding company that controls such state-chartered savings
institutions). As under prior law, the OTS may approve an acquisition resulting
in a multiple savings and loan holding company controlling savings associations
in more than one state in the case of certain emergency thrift acquisitions.
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.
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. Franklin is a member of the SAIF
and its deposit accounts are insured by the FDIC, up to the prescribed limits.
The FDIC has examination authority over all insured depository institutions,
including Franklin, and has authority to initiate enforcement actions against
federally insured savings associations, if the FDIC does not believe the OTS has
taken appropriate action to safeguard safety and soundness and the deposit
insurance fund.
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.
-27-
<PAGE> 28
The FDIC is required to maintain designated levels of reserves in each
fund. 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 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. Such excess equaled
approximately $.23 per $100 in deposits beginning in 1996. This premium
disparity had a negative competitive impact on Franklin and other institutions
in the SAIF.
Federal legislation, which was effective September 30, 1996, provided
for the recapitalization of the SAIF by means of a special assessment of $.657
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 are
required to pay the same special assessment on 80% of deposits at March 31,
1995. In addition, part of the cost of prior thrift failures, which had
previously been paid only by SAIF members, will be paid by BIF members. As a
result of such cost sharing, BIF assessments for healthy banks in 1997 will be
$.013 per $100 in deposits and SAIF assessments for healthy institutions in 1997
will be $.064 per $100 in deposits.
Franklin had $174.2 million in deposits at March 31, 1995. Franklin paid
a special assessment of $1.14 million on November 27, 1996, which was accounted
for and recorded as of September 30, 1996. This assessment is tax-deductible,
but has reduced earnings for the year ended December 31, 1996.
FRB RESERVE REQUIREMENTS. FRB regulations currently require that
reserves of 3% of net transaction accounts (primarily NOW accounts) up to $49.3
million (subject to an exemption of up to $4.4 million), and that reserves of
10% be maintained against that portion of total net transaction accounts in
excess of $49.3 million. At December 31, 1996, 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 $1.75 million at December 31, 1996.
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 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 Franklin are both subject to the
federal tax laws and regulations which apply to corporations generally. Prior to
the enactment of the Small Business Jobs Protection Act (the "Act"), which was
signed into law on August 21, 1996, certain thrift institutions, such as
Franklin, were allowed deductions for bad debts under methods more favorable
than those granted to other taxpayers. Qualified thrift institutions could
compute deductions for bad debts using either the specific charge off method,
the "percentage of taxable income" method applicable only to
-28-
<PAGE> 29
thrift institutions, or the "experience" method that also was available to small
banks. Under the "percentage of taxable income" method, a thrift institution
generally was allowed a deduction for an addition to its bad debt reserve equal
to 8% of its taxable income (determined without regard to this deduction and
with additional adjustments). Under the experience method, a thrift institution
was generally allowed a deduction for an addition to its bad debt reserve equal
to the greater of (i) an amount based on its actual average experience for
losses in the current and five preceding taxable years, or (ii) an amount
necessary to restore the reserve to its balance as of the close of the base
year. A thrift institution could elect annually to compute its allowable
addition to bad debt reserves for qualifying loans either under the experience
method or the percentage of taxable income method. For tax years 1995 and 1994,
Franklin used the percentage of taxable income method because such method
provided a higher bad debt deduction than the experience method.
The Act eliminated the "percentage of taxable income" method of
accounting for bad debts by thrift institutions, effective for taxable years
beginning after 1995. Thrift institutions that are treated as small banks are
allowed to utilize the experience method applicable to such institutions, while
thrift institutions that are treated as large banks are required to use only the
specific charge off method.
A thrift institution required to change its method of computing
reserves for bad debt will treat such change as a change in the method of
accounting, initiated by the taxpayer and having been made with the consent of
the Secretary of the Treasury. Section 481(a) of the Code requires certain
amounts to be recaptured with respect to such change. Generally, the amounts to
be recaptured will be determined solely with respect to the "applicable excess
reserves" of the taxpayer. The amount of the applicable excess reserves will be
taken into account ratably over a six-taxable year period, beginning with the
first taxable year beginning after 1995, subject to the residential loan
requirement described below. In the case of a thrift institution that is treated
as a large bank, the amount of the institution's applicable excess reserves
generally is the excess of (i) the balances of its reserve for losses on
qualifying real property loans (generally loans secured by improved real estate)
and its reserve for losses on nonqualifying loans (all other types of loans) as
of the close of its last taxable year beginning before January 1, 1996, over
(ii) the balances of such reserves as of the close of its last taxable year
beginning before January 1, 1988 (i.e., the "pre-1988 reserves"). In the case of
a thrift institution that is treated as a small bank, like Franklin, the amount
of the institution's applicable excess reserves generally is the excess of (i)
the balances of its reserve for losses on qualifying real property loans and its
reserve for losses on nonqualifying loans as of the close of its last taxable
year beginning before January 1, 1996, over (ii) the greater of the balance of
(a) its pre-1988 reserves or (b) what the thrift's reserves would have been at
the close of its last year beginning before January 1, 1996, had the thrift
always used the experience method.
For taxable years that begin after December 31, 1995, and before
January 1, 1998, if a thrift meets the residential loan requirement for a tax
year, the recapture of the applicable excess reserves otherwise required to be
taken into account as a Code Section 481(a) adjustment for the year will be
suspended. A thrift meets the residential loan requirement if, for the tax year,
the principal amount of residential loans made by the thrift during the year is
not less than its base amount. The "base amount" generally is the average of the
principal amounts of the residential loans made by the thrift during the six
most recent tax years beginning before January 1, 1996.
A residential loan is a loan as described in Section 7701(a)(19)(C)(v)
(generally a loan secured by residential or church property and certain mobile
homes), but only to the extent that the loan is made to the owner of the
property.
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e), as modified by the Act, which requires recapture in the case of
certain excessive distributions to shareholders. The pre-1988 reserves may not
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). Distribution of a cash
dividend by a thrift institution to a shareholder is treated as made: first, out
of the institution's post-1951 accumulated earnings and profits; second, out of
the pre-1988 reserves; and third, out of such other accounts as may be proper.
To the extent a distribution by Franklin to the Company is deemed paid out of
its pre-1988 reserves under these rules, the pre-1988 reserves would be reduced
and Franklin's gross income for tax purposes would be increased by the amount
which, when reduced by the income tax, if any, attributable to the inclusion of
such amount in its gross income, equals the amount deemed paid out of the
pre-1988 reserves. As of December 31, 1996, Franklin's pre-1988 reserves for tax
purposes totaled approximately $3.2 million. Franklin believes it had
approximately $4.4 million of accumulated earnings and profits for tax purposes
as of December 31, 1996, which would be available for dividend distributions,
provided regulatory restrictions applicable to the payment of dividends are met.
No representation can be made as to whether Franklin will have current or
accumulated earnings and profits in subsequent years.
-29-
<PAGE> 30
In addition to the regular income tax, the Company and Franklin are
subject to the alternative minimum tax which is 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 interest on
certain tax-exempt bonds issued after August 7, 1986. In addition, 75% of the
amount by which a corporation's "adjusted current earnings" 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. 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 after 1986 and before 1996, 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 $2.0 million.
The tax returns of Franklin have been audited or closed without audit
through fiscal year 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 Franklin.
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 1996.
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,
1996, 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
- -------- --------------- --------------- --------------- -------
Corporate Office:
- -----------------
<S> <C> <C> <C> <C>
4750 Ashwood Drive Owned N/A 10/96 19,446
Cincinnati, Ohio 45241
Full Service Branch Offices:
- ----------------------------
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, 1996, the Company's office premises and equipment had a net book
value of $1.9 million. For additional information regarding the Company office
premises and equipment, see Notes 5 and 13 of Notes to Consolidated Financial
Statements in the Annual Report.
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 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. CONSOLIDATED 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
The disclosure regarding the change in accountants is incorporated
herein by reference from the Form 8-K/A dated September 27, 1996, filed by the
Company with the Securities and Exchange Commission on October 16, 1996.
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
1997 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," which is included in Exhibit 20, 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 40, 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 1978. Ms. Schmidt is the daughter of
President Siemers. Currently, she is responsible for customer service and branch
operations.
-32-
<PAGE> 33
DANIEL T. VOELPEL, age 48, 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
since 1983.
MARGARET W. WALTON, age 63, 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 28 years.
HARRY R. BARNACLO, age 65, 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," which is included in Exhibit
20, is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the Proxy Statement under the caption
"Voting Securities and Principal Holders Thereof" and "Election of Directors,"
which is included in Exhibit 20, 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," which is included
in Exhibit 20, is incorporated herein by reference.
-33-
<PAGE> 34
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3(a) Certificate of Incorporation of the Company
3(b) Bylaws of the Company
10(a) Employment Contract for Thomas H. Siemers
10(b) First Franklin Corporation 1988 Stock Option
and Incentive Plan
10(c) First Franklin Corporation 1997 Stock Option
and Incentive Plan
13 Portions of the Annual Report to
Stockholders
16 Letter from Coopers & Lybrand L.L.P.
regarding change in certifying accountants
20 Proxy Statement
21 Subsidiaries of the Registrant
27 Financial Data Schedule
99 Reissued report of Coopers & Lybrand L.L.P.
(b) A report on Form 8-K dated September 27, 1996 was
filed during the last quarter of the fiscal year
under Item 4 to report a change in the Company's
certifying accountant.
-34-
<PAGE> 35
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>
<CAPTION>
<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 24, 1997 Date: March 24, 1997
By: Richard H. Finan By: James E. Cross
--------------------------------------------- --------------------------------
Richard H. Finan James E. Cross
Director Director
Date: March 24, 1997 Date: March 24, 1997
By: James E. Hoff By: John L. Nolting
--------------------------------------------- -------------------------------
James E. Hoff John L. Nolting
Director Director
Date: March 24, 1997 Date: March 24, 1997
</TABLE>
-35-
<PAGE> 36
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C> <C>
3(a) Certificate of Incorporation Included herewith
3(b) Bylaws Incorporated by reference to the 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") filed by
the Registrant with the Securities and
Exchange Commission for the fiscal year
ended December 31, 1991.
10(a) Employment Contract for Thomas H. Incorporated by reference to the
Siemers Registrant's Registration Statement on
Form S-1 (File No. 33-17417)
10(b) First Franklin Corporation 1988 Stock Incorporated by reference to the 1992
Option and Incentive Plan Form 10-K
10(c) First Franklin Corporation 1997 Stock Included herewith
Option and Incentive Plan
13 Portions of the Annual Report Included herewith
16 Letter from Coopers & Lybrand L.L.P. Incorporated by reference to the report
regarding change in certifying filed on October 16, 1996, by the Registrant
accountant on Form 8-K/A dated September 27, 1996
20 Proxy Statement Included herewith
21 Subsidiaries of First Franklin Included herewith
Corporation
27 Financial Data Schedule Included herewith
99 Reissued report of Coopers & Lybrand Included herewith
L.L.P.
</TABLE>
<PAGE> 1
Exhibit 3a
STATE OF DELAWARE
CERTIFICATE OF INCORPORATION
OF
FIRST FRANKLIN CORPORATION
Section 1. CORPORATE TITLE. The name of the Corporation is First
Franklin Corporation.
Section 2. DURATION. The duration of the Corporation is perpetual.
Section 3. POWERS. The purpose or purposes for which the Corporation is
organized are to engage in any lawful act or activity for which corporations may
be organized under the General Corporation Law of Delaware.
Section 4. CAPITAL STOCK. The total number of shares of capital stock
which the Corporation has authority to issue shall be twelve million
(12,000,000), of which ten million (10,000,000) shall be common stock, par value
$.0l per share, and two million (2,000,000) of which shall be preferred stock,
par value $.01 per share, with rights and preferences to be determined by the
board of directors upon issuance.
The authorized shares may be issued by the Corporation from time to
time as approved by its board of directors without the approval of its
stockholders. The consideration for the issuance of the shares shall be paid in
full before their issuance and shall not be less than the par value per share.
Except as permitted by Delaware law, neither promissory notes nor future
services shall constitute payment or part payment for the issuance of the shares
of the Corporation. The consideration for the shares shall be cash, tangible or
intangible property, labor or services actually performed for the Corporation or
any combination of the foregoing. In the absence of actual fraud in the
transaction, the value of such property, labor or services, as determined by the
board of directors of the Corporation, shall be conclusive. Upon payment of such
consideration such shares shall be deemed to be fully paid and nonassessable. In
the case of the issuance of a stock dividend on the capital stock, that part of
the surplus of the Corporation which is transferred to stated capital upon the
issuance of shares as a share dividend shall be deemed to be the consideration
for their issuance.
Section 5. PREEMPTIVE RIGHTS. Holders of the capital stock of the
Corporation shall not be entitled to preemptive rights with respect to any
shares or other securities of the Corporation which may be issued.
<PAGE> 2
Section 6. INTERNAL AFFAIRS. The Corporation shall be under the
direction of a board of directors. The board of directors shall consist of not
less than seven nor more than fifteen directors. The number of directors shall
be as stated in the Corporation's bylaws, as may be amended from time to time.
The board of directors shall divide the directors into three classes and, when
the number of directors is changed, shall determine the class or classes to
which the increased or decreased number of directors shall be apportioned;
provided, that the directors in each class shall be as nearly equal in number as
possible; and provided, further, that no decrease in the number of directors
shall affect the term of any director then in office.
Vacancies in the board of directors, however caused, shall be filled by
a majority vote of the directors then in office, whether or not a quorum, and
any directors so chosen shall hold office for a term expiring at the annual
meeting of stockholders at which the term of the class to which he has been
chosen expires and when his successor is elected and qualified.
The board of directors or the stockholders may adopt, alter, amend or
repeal the bylaws of the Corporation. Such action by the board of directors
shall require the affirmative vote of at least two-thirds of the directors then
in office at a duly constituted meeting of the board of directors called
expressly for such purpose. Such action by the stockholders shall require the
affirmative vote of at least two-thirds of the total votes eligible to be cast
by stockholders at a duly constituted meeting of stockholders called expressly
for such purpose.
No director shall be removed except for cause and then only by
affirmative vote of at least two-thirds of the total votes eligible to be cast
by the stockholders at a duly constituted meeting of stockholders called
expressly for such purpose. At least 20 days prior to such meeting of
stockholders, written notice shall be sent to the director or directors whose
removal will be considered at such meeting.
All actions required or permitted to be taken by the stockholders shall
be voted upon at an annual or special meeting of the stockholders rather than by
written consent in lieu of a meeting.
Section 7. REGISTERED OFFICE. The street address of the Corporation's
registered office in the State of Delaware is 1209 Orange Street, in the City of
Wilmington, County of New Castle, and the name of its registered agent at such
address is The Corporation Trust Company.
-2-
<PAGE> 3
Section 8. CALL OF SPECIAL MEETINGS. Special meetings of the
stockholders for any purpose or purposes may be called at any time by the
chairman of the board, the president or a majority of the directors then in
office.
Section 9. APPROVAL FOR ACQUISITIONS OF CONTROL AND OFFERS TO ACQUIRE
CONTROL. The provisions of this Section 9 shall become effective upon the
consummation of the conversion of Franklin Savings and Loan Company (the
"Company") to a capital stock savings and loan association and the Company
concurrently becoming a wholly owned subsidiary of the Corporation. In the event
that thereafter the Company (or any successor institution) ceases to be a
majority-owned subsidiary of the Corporation, this Section 9 shall thereupon
cease to be effective.
Subsection 1. Five-Year Restrictions on Acquisitions of
Control and Offers to Acquire Control.
For a period of five years after the consummation of
the conversion of the Company to a capital stock savings and
loan association, no Person (as defined in Section 10 hereof)
shall acquire control of the Corporation, or make any Offer to
acquire Control of the Corporation, unless such acquisition or
Offer has received the prior approval of at least two-thirds
of the directors then in office at a duly constituted meeting
of the board of directors of the Corporation called for such
purpose. The terms "Control" and "Offer" as used in this
Section 9 are defined in Subsection 5 hereof. The term
"Person" as used in this Section 9 is defined in Section 10
hereof.
Subsection 2. Shareholder Vote and Regulatory Approval
Required for Acquisition of Control at any Time.
No Person shall acquire Control of the Corporation at
any time, unless such acquisition has been approved prior to
its consummation either by the affirmative vote of the holders
of at least two-thirds of the outstanding Voting Shares or, in
the event the acquisition has been approved by at least
two-thirds of the directors then in office at a duly
constituted meeting of the board called for that purpose, by
the affirmative vote of the holders of at least a majority of
the outstanding Voting Shares, in either case at a duly
constituted meeting of shareholders called for such purpose.
In addition, no Person shall acquire
-3-
<PAGE> 4
Control of the Corporation at any time without obtaining prior
thereto all federal regulatory approvals required under the
Change in Savings and Loan Control Act (the "Control Act") and
the Savings and Loan Holding Company Act (the "Holding Company
Act"), or any successor provisions of law, and in the manner
provided by all applicable regulations of the Federal Savings
and Loan Insurance Corporation (the "FSLIC"). In the event
that Control is acquired without obtaining all such regulatory
approvals, such acquisition shall constitute a violation of
this Section 9 and the Corporation shall be entitled to
institute a private right of action to enforce such statutory
and regulatory provisions. The term "Voting Shares" as used in
this Section 9 is defined in Section 10 hereof.
Subsection 3. Excess Shares.
In the event that Control of the Corporation is
acquired in violation of this Section 9, all Voting Shares
owned by the Person so acquiring Control in excess of the
number of shares the beneficial ownership of which is deemed
under Subsection 5 hereof to confer Control of the Corporation
shall be considered from and after the date of their
acquisition by such Person to be "excess shares" for purposes
of this Section 9. Such excess shares shall thereafter no
longer (i) be entitled to vote on any matter, (ii) be entitled
to take other shareholder action, (iii) be entitled to be
counted in determining the total number of outstanding shares
for purposes of any matter involving shareholder action, or
(iv) be transferable except with the approval of the board of
directors or by an independent trustee appointed by the board
of directors for the purpose of having such excess shares sold
on the open market or otherwise. The proceeds from the sale by
the trustee of such excess shares shall be paid (i) first, to
the trustee in an amount equal to the trustee's reasonable
fees and expenses, (ii) second, to the beneficial owner of
such excess shares in an amount up to such owner's federal
income tax basis in such excess shares, and (iii) third, to
the Corporation as to any remaining balance.
Subsection 4. Approval Required for Offers to Acquire Control
after Five Years.
After five years from the consummation of the conversion of
the Company to a capital stock savings
-4-
<PAGE> 5
and loan association, no Person shall make any Offer to
acquire Control of the Corporation, if the common stock is
then traded on a national securities exchange or quoted on the
National Association of Securities Dealers Automated Quotation
System, unless such Person has received prior approval to make
such Offer by complying with either of the following
procedures:
(1) The Offer shall have been approved by at
least two-thirds of the directors then in office at a
duly constituted meeting of the board of directors of
the Corporation called for such purpose, or
(2) The Person proposing to make such Offer
shall have obtained approval from the FSLIC, pursuant
to the Control Act, the Holding Company Act, or any
successor provisions of law, to acquire control of
the Corporation.
Subsection 5. Certain Definitions.
For purposes of this Section 9 the following terms
shall be defined as follows:
A. The term "Control" shall mean the sole or
shared power to vote or to direct the voting of, or
to dispose or to direct the disposition of, 10
percent or more of the Voting Shares; provided, that
the solicitation, holding and voting of proxies
obtained by the board of directors of the Corporation
pursuant to a solicitation under Regulation 14A of
the General Rules and Regulations under the
Securities Exchange Act of 1934, as amended (the
"Exchange Act") shall not constitute "Control."
B. The term "Offer" shall mean every offer
to buy or acquire, solicitation of an offer to sell,
tender offer for, or request or invitation for tender
of, Voting Shares.
Subsection 6. Inapplicability to Public Offering or Employee
Stock Benefit Plans.
This Section 9 shall not apply to an acquisition or
Offer to acquire securities of the Corporation (i) by
underwriters in connection with a public offering of such
securities, or (ii) by an employee stock purchase
-5-
<PAGE> 6
plan or other employee benefit plan of the Corporation or any
of its subsidiaries.
Subsection 7. References to FSLIC.
In the event that the accounts of the Company (or any
successor institution) become insured by the Federal Deposit
Insurance Corporation ("FDIC") in lieu of the FSLIC, all
references in this Section 9 to the FSLIC shall be deemed to
refer to the FDIC, and related references to the Control Act
and the Holding Company Act shall be deemed to be references
to applicable statutes relating to banks the accounts of which
are insured by the FDIC.
Section 10. Business Combinations.
---------------------
Subsection l. Rights of Stockholders.
The affirmative vote of the holders of 80 percent or
more of the outstanding Voting Shares, voting as a single
class, shall be required for the approval or authorization of
any Business Combination, provided, however, that the 80
percent voting requirement shall not be applicable and such
Business Combination shall be approved by the vote required by
law or by any other provision of this Certificate of
Incorporation if either:
(l) The Business Combination is approved by
the board of directors of the Corporation by the
affirmative vote of at least two-thirds of the
Continuing Directors, or
(2) All of the following conditions are
satisfied:
(a) The aggregate amount of the cash
and the fair market value (as determined by
two-thirds of the Continuing Directors) of the
property, securities or other consideration to be
received per share of capital stock of the
Corporation in the Business Combination by the
holders of capital stock of the Corporation, other
than the Related Person involved in the Business
Combination, shall not be less than the highest of
(i) the highest per share price (including brokerage
commissions, soliciting dealers' fees, and
dealer-management compensation, and with appropriate
adjustments for recapitalizations,
-6-
<PAGE> 7
stock splits, stock dividends and like transactions
and distributions) paid by such Related Person in
acquiring any of its holdings of such class or series
of capital stock, (ii) the highest per share Market
Value of such class or series of capital stock within
the 12-month period immediately preceding the date
the proposal for such Business Combination was first
publicly announced or (iii) the book value per share
of such class or series of capital stock, determined
in accordance with generally accepted accounting
principles, as of the last day of the month
immediately preceding the date the proposal for such
Business Combination was first publicly announced;
and
(b) The consideration to be received
in such Business Combination by holders of capital
stock other than the Related Person involved shall,
except to the extent that a stockholder agrees
otherwise as to all or part of the shares which he or
she owns, be in the same form and of the same kind as
the consideration paid by the Related person in
acquiring capital stock already owned by it,
provided, however, if the Related Person has paid for
shares of capital stock with varying forms of
consideration, the form of consideration for shares
of capital stock acquired in the Business Combination
by the Related Person shall be either cash or the
form used to acquire the largest number of shares of
capital stock previously acquired by it; and
(c) A proxy statement responsive to
the requirements of the Exchange Act and regulations
promulgated thereunder, whether or not the
Corporation is then subject to such requirements,
shall be mailed to the stockholders of the
Corporation for the purpose of soliciting stockholder
approval of such Business Combination and shall
contain at the front thereof, in a prominent place
(i) any recommendations as to the advisability (or
inadvisability) of the Business Combination which the
Continuing Directors may choose to state, and (ii)
the opinion of a reputable investment banking firm
selected by the Continuing Directors as to the
fairness of the terms of such Business Combination,
from a financial point of view, to the public
-7-
<PAGE> 8
stockholders (other than the Related Person) of the
Corporation.
Subsection 2. Definitions and Terms.
(1) Definitions with Respect to Section.
For purposes of this Section 10, the following terms
shall be defined as follows:
(a) The term "Business Combination" shall
mean (i) any merger or consolidation of the
Corporation or a Subsidiary with a Related Person,
(ii) any sale, lease, exchange, mortgage, pledge,
transfer or other disposition in a single transaction
or series of related transactions, other than in the
ordinary course of business (as determined by
two-thirds of the Continuing Directors) to or with a
Related Person of any assets of the Corporation or a
Subsidiary having an aggregate fair market value (as
determined by two-thirds of the Continuing Directors)
of $1,000,000 or more, (iii) the issuance or transfer
by the Corporation of any Voting Shares or securities
convertible into such shares (other than by way of
pro rata distribution to all stockholders) to a
Related Person, (iv) any recapitalization, merger or
consolidation that would have the effect of
increasing the voting power of a Related Person, (v)
the adoption of any plan or proposal for the
liquidation or dissolution of the Corporation or a
Subsidiary proposed, directly or indirectly, by or on
behalf of a Related Person, (vi) any merger or
consolidation of the Corporation with another Person
proposed, directly or indirectly, by or on behalf of
a Related Person unless the entity surviving or
resulting from such merger or consolidation has a
provision in its certificate or articles of
incorporation, charter or similar governing
instrument, which is substantially identical to this
Section 10, and (vii) any agreement, contract or
other arrangement or understanding providing,
directly or indirectly, for any of the transactions
described in this Subsection 2(1)(a).
(b) The term "Related Person" shall mean any
individual, partnership, corporation, trust or other
Person which, together with its "affiliates"
-8-
<PAGE> 9
and "associates," as defined in Rule 12b-2 of the
General Rules and Regulations under the Exchange Act
as in effect on April 1, 1987, and together with any
other individual, partnership, corporation, trust or
other Person with which it or they have any
agreement, contract or other arrangement or
understanding with respect to acquiring, holding,
voting or disposition of Voting Shares, "beneficially
owns" (within the meaning of Rule 13d-3 under the
Exchange Act as in effect on said date) an aggregate
of ten percent or more of the outstanding Voting
Shares of the Corporation. A related Person, its
affiliates and associates and all such other
individuals, partnerships, corporations and other
Persons with whom it or they have any such
arrangement, contract or other arrangement or
understanding shall be deemed a single Related Person
for purposes of this Section 10, provided, however,
that the members of the board of directors of the
Corporation shall not be deemed to be associates or
otherwise to constitute a Related Person solely by
reason of their board membership. A person who is a
Related Person as of either (i) the time any
definitive agreement relating to a Business
Combination is entered into, or (ii) the record date
for the determination of stockholders entitled to
notice of and to vote on a Business Combination, or
(iii) immediately prior to the consummation of a
Business Combination shall be deemed a Related Person
for purposes of this Section 10.
(c) The term "Continuing Director" shall
mean any member of the board of directors of the
Corporation who is unaffiliated with the Related
Person referred to in Subsection 2(1)(a) of this
Section 10 and was a member of the board of directors
prior to the time that such Related Person became a
Related Person, and any successor of a Continuing
Director who is unaffiliated with such Related Person
and is recommended to succeed a Continuing Director
by a majority of the Continuing Directors.
(d) The term "Person" shall mean any
individual, firm, corporation or other entity
including a group acting in concert.
-9-
<PAGE> 10
(e) The term "Subsidiary" shall mean any
corporation or other entity of which the Person in
question owns not less than 50 percent of any class
of equity securities, directly or indirectly.
(f) The term "Voting Shares" shall mean any
outstanding shares of capital stock of the
Corporation entitled to vote generally in the
election of directors.
(g) The term "Entire Board of Directors"
shall mean the total number of directors which the
Corporation would have if there were no vacancies.
(h) The term "Market Value" shall mean the
average of the high and low quoted sales price on the
date in question (or, if there is no reported sale on
such date, on the last preceding date on which any
reported sale occurred) of a share on the Composite
Tape for the New York Stock Exchange--Listed Stocks,
or, if the shares are not listed or admitted to
trading on such Exchange, on the principal United
States securities exchange registered under the
Exchange Act on which the shares are listed or
admitted to trading, or, if the shares are not listed
or admitted to trading on any such exchange, the mean
between the closing high bid and low asked quotations
with respect to a share on such date as quoted on the
National Association of Securities Dealers Automated
Quotations System, or any similar system then in use,
or, if no such quotations are available, the fair
market value on such date of a share as two-thirds of
the Continuing Directors shall determine.
(2) Certain Determinations
(a) A Related Person shall be deemed for
purposes of this Section 10 to have acquired a share
of the Corporation at the time when such Related
Person became the beneficial owner thereof. With
respect to shares owned by affiliates, associates or
other Persons whose ownership is attributed to a
Related Person under the foregoing definition of
Related Person, if the price paid by such Related
Person for such shares is not determinable, the price
so paid shall be deemed to be the higher of (i) the
price paid upon
-10-
<PAGE> 11
acquisition thereof by the affiliate, associate or
other Person or (ii) the Market Value of the shares
in question (as determined by two-thirds of the
Continuing Directors) at the time when the Related
Person became the beneficial owner thereof.
(b) For purposes of Subsection 1(2)(a) of
this Section 10, in the event of a Business
Combination upon consummation of which the
Corporation would be the surviving corporation or
would continue to exist (unless it is provided,
contemplated or intended that as part of such
Business Combination a plan of liquidation or
dissolution of the Corporation will be effected), the
term "other consideration to be received" shall
include (without limitation) common stock or other
capital stock of the Corporation retained by
stockholders of the Corporation (other than Related
Persons who are parties to such Business
Combination).
(3) Fiduciary obligations.
Nothing contained in this Section shall be construed
to relieve any Related Person from any fiduciary obligation
imposed by law.
Subsection 3. Amendment and Repeal.
Notwithstanding any other provision of this
Certification of Incorporation or the bylaws of the
Corporation (and notwithstanding the fact that a lesser
percentage may permitted by law) any amendment, addition,
alteration, change or repeal of this Section 10, or any other
amendment of this Certificate of Incorporation or by-laws of
the Corporation inconsistent with or modifying or permitting
circumvention of this Section 10, must first be proposed by
the board of directors of the Corporation, upon the
affirmative vote of at least two-thirds of the directors then
in office at a duly constituted meeting of the board of
directors called expressly for such purpose, and thereafter
approved by the affirmative vote of the holders of at least 80
percent of the then outstanding Voting Shares of the
Corporation, voting as a single class; provided, however, that
this Subsection 3 shall not apply to, and such 80 percent vote
shall not be required for, any such amendment, addition,
alteration, change or repeal recommended to stockholders of
the
-11-
<PAGE> 12
Corporation by the affirmative vote of not less than 75
percent of the Continuing Directors. For the purposes of this
Subsection 3 only, if at the time when any such amendment,
addition, alteration, change or repeal is under consideration
there is no proposed Business Combination, the term
"Continuing Directors" shall be deemed to mean the Entire
Board of Directors.
Section 11. ANTI-GREENMAIL. Any direct or indirect purchase or other
acquisition by the Corporation of any Voting Shares (as defined in Section 10
hereof) from any Significant Shareholder (as hereinafter defined) who has been
the beneficial owner of such Voting Shares for less then two years prior to the
date of such purchase or other acquisition shall, except as hereinafter
expressly provided, require the affirmative vote of the holders of at least a
majority of the total number of outstanding Voting Shares, excluding in
calculating such affirmative vote and the total number of outstanding shares all
Voting Shares beneficially owned by such Significant Shareholder. Such
affirmative vote shall be required notwithstanding the fact that no vote may be
required, or that a lesser percentage may be specified, by law, but no such
affirmative vote shall be required (i) with respect to any purchase or other
acquisition of Voting Shares made as part of a tender or exchange offer by the
Corporation to purchase Voting Shares on the same terms from all holders of the
same class of Voting Shares and complying with the applicable requirements of
the Exchange Act and the rules and regulations thereunder or (ii) with respect
to any purchase of Voting Shares, where the board of directors has determined
that the purchase price per share of the Voting Shares does not exceed the fair
market value of the Voting Shares. Such fair market value shall be calculated on
the basis of the average closing price or the mean of the bid and ask prices of
a share of Voting Shares for the 20 trading days immediately preceding the
execution of a definitive agreement to purchase the Voting Shares from a
Significant Shareholder.
For the purposes of this Section 11, "Significant Shareholder" shall
mean any person (other than the Corporation or any corporation of which a
majority of any class of Voting Shares is owned, directly or indirectly, by the
Corporation) who or which is the beneficial owner, directly or indirectly, of
five percent or more of the voting power of the outstanding Voting Shares.
-12-
<PAGE> 13
Section 12. Indemnification.
---------------
Subsection 1. Power to Indemnify in Actions, Suits or
Proceedings Other Than Those by or in the Right
of the Corporation.
Subject to Subsection 3 of this Section 12, the
Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an
action by or in the right of the Corporation), by reason of
the fact that he is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request
of the Corporation as a director, officer, employee or agent
of another corporation, partnership, joint venture,
trust or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in
good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the Corporation, and,
with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment,
order, settlement, conviction, or upon a plea of NOLO
CONTENDERE or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to
the best interest of the Corporation, and, with respect of any
criminal action or proceeding, had reasonable cause to believe
that his conduct was unlawful.
Subsection 2. Power to Indemnify in Actions, Suits or
Proceedings by or in the Right of the
Corporation
Subject to Subsection 3 of this Section 12, the
Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending
or completed action or suit by or in the right of the
Corporation to procure a judgment in its favor by reason of
the fact that he is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request
of the Corporation as a director, officer, employee or agent
of another corporation, partnership, joint venture,
-13-
<PAGE> 14
trust or other enterprise, against expenses (including
attorneys' fees), actually and reasonably incurred by him in
connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interest of the
Corporation; except that no indemnification shall be made in
respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Court of Chancery or
the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of
liability but in view of all of the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for
such expenses which the Court of Chancery or such other court
shall deem proper.
Subsection 3. Authorization of Indemnification.
Any indemnification under this Section 12 (unless
ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is
proper in the circumstances because he has met the applicable
standard of conduct set forth in Subsection 1 or Subsection 2
of this Section 12, as the case may be. Such determination
shall be made (i) by the board of directors by a majority vote
of a quorum consisting of directors who were not parties to
such action, suit or proceeding, or (ii) if such a quorum is
not obtainable, or, even if obtainable a quorum of
disinterested directors so directs, by independent legal
counsel in a written opinion, or (iii) by the stockholders. To
the extent, however, that a director, officer, employee or
agent of the Corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding
described above, or in defense of any claim, issue or matter
therein, he shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in
connection therewith, without the necessity of authorization
in the specific case. No director, officer, employee or agent
of the Corporation shall be entitled to indemnification in
connection with any action, suit or proceeding voluntarily
initiated by such person unless the action, suit or proceeding
was authorized by a majority of the entire board of directors.
-14-
<PAGE> 15
Subsection 4. Good Faith Defined:
For purposes of any determination under Subsection 3
of this Section 12, a person shall be deemed to have acted in
good faith and in a manner he reasonably believed to be in or
not opposed to the best interest of the Corporation, or, with
respect to any criminal action or proceeding, to have had no
reasonable cause to believe his conduct was unlawful, if his
action is based on the records or books of account of the
Corporation or another enterprise or on information supplied
to him by the officers of the Corporation or another
enterprise in the course of their duties, or on the advice of
legal counsel for the Corporation or another enterprise or on
information or records given or reports made to the
Corporation or another enterprise by an independent certified
public accountant or by an appraiser or other expert selected
with reasonable care by the Corporation or another enterprise.
The term "another enterprise" as used in this Subsection 4
shall mean any other corporation or any partnership, joint
venture, trust or other enterprise of which such person is or
was serving at the request of the Corporation as a director,
officer, employee or agent. The provisions of this Subsection
4 shall not be deemed to be exclusive or to limit in any way
the circumstances in which a person may be deemed to have met
the applicable standards of conduct set forth in Subsection 1
or 2 of this Section 12, as the case may be.
Subsection 5. Indemnification by a Court.
Notwithstanding any contrary determination in the
specific case under Subsection 3 of this Section l2, and
notwithstanding the absence of any determination thereunder,
any director, officer, employee or agent may apply to any
court of competent jurisdiction in the State of Delaware for
indemnification to the extent otherwise permissible under
Subsections 1 and 2 of this Section 12. The basis of such
indemnification by a court shall be a determination by such
court that indemnification of the director, officer, employee
or agent is proper in the circumstances because he has met the
applicable standards of conduct set forth in Sub-sections 1
and 2 of this Section 12, as the case may be. Notice of any
application for indemnification pursuant to this Subsection 5
shall be given to the Corporation promptly upon the filing of
such application. Notwithstanding any of the foregoing,
-15-
<PAGE> 16
unless otherwise required by law, no director, officer,
employee or agent of the Corporation shall be entitled to
indemnification in connection with any action, suit or
proceeding voluntarily initiated by such person unless the
action, suit or proceeding was authorized by a majority of the
entire board of directors.
Subsection 6. Expenses Payable in Advance.
Expenses incurred in defending or investigating a
threatened or pending action, suit or proceeding may be paid
by the Corporation in advance of the final disposition of such
action, suit or proceeding upon receipt of an undertaking by
or on behalf of the director, officer, employee or agent to
repay such amount if it shall ultimately be determined that he
is not entitled to be indemnified by the Corporation as
authorized in this Section 12.
Subsection 7. Non-exclusivity and Survival of
Indemnification.
The indemnification and advancement of expenses
provided by, or granted pursuant to, the other subsections of
this Section 12 shall not be deemed exclusive of any other
rights to which those seeking indemnification or advancement
of expenses may be entitled under any agreement, contract,
vote of stockholders or disinterested directors or pursuant to
the direction (howsoever embodied) of any court of competent
jurisdiction or otherwise, both as to action in his official
capacity and as to action in another capacity while holding
such office, it being the policy of the Corporation that,
subject to the limitation in Subsection 3 of this Section 12
concerning voluntary initiation of actions, suits or
proceedings, indemnification of the persons specified in
Subsections 1 and 2 of this Section 12 shall be made to the
fullest extent permitted by law. The provisions of this
Section 12 shall not be deemed to preclude the indemnification
of any person who is not specified in Subsections 1 or 2 of
this Section 12 but whom the Corporation has the power or
obligation to indemnify under the provisions of the General
Corporation Law of the State of Delaware, or otherwise. The
indemnification provided by this Section 12 shall continue as
to a person who has ceased to be a director, officer, employee
or agent and shall inure to the benefit of the heirs,
executors and administrators of such person.
-16-
<PAGE> 17
Subsection 8. Insurance.
The Corporation may purchase and maintain insurance
on behalf of any person who is or was a director, officer,
employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against any liability
asserted against him and incurred by him in any such capacity,
or arising out of his status as such, whether or not the
Corporation would have the power or the obligation to
indemnify him against such liability under the provision of
this Section 12.
Subsection 9. Meaning of "Corporation" for Purposes of
Section 12.
For purposes of this Section 12, references to "the
Corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any
constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors,
officers and employees or agents, so that any person who is or
was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such
constituent corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position
under the provisions of this Section 12 with respect to the
resulting or surviving corporation as he would have with
respect to such constituent corporation if its separate
existence had continued.
Section 13. No director shall be personally liable to the Corporation
or its shareholders for monetary damages for any breach of fiduciary duty by
such director as a director. Notwithstanding the foregoing sentence, a director
shall be liable to the extent provided by applicable law (i) for breach of the
director's duty of loyalty to the Corporation or its shareholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) pursuant to Section 174 of the Delaware General
Corporation Law or (iv) for any transaction from which the director derived an
improper personal benefit. No amendment to or repeal of this Section 13 shall
apply to or have any effect on
-17-
<PAGE> 18
the liability or alleged liability of any director of the Corporation for or
with respect to any acts or omissions of such director occurring prior to such
amendment.
Section 14. The name and address of the sole incorporator is as
follows:
M. C Kinnamon
The Corporation Trust Company
1209 Orange Street
Wilmington, Delaware 19801
Section 15. AMENDMENT OF CERTIFICATE OF INCORPORATION. No amendment,
addition, alteration, change, or repeal of any provision of this Certificate of
Incorporation shall be made, unless such is first proposed by the board of
directors of the Corporation, upon the affirmative vote of at least two-thirds
of the directors then in office at a duly constituted meeting of the board of
directors called expressly for such purposes, and thereafter approved by the
stockholders by a majority of the total votes eligible to be cast at a duly
constituted meeting of stockholders called expressly for such purpose, except
that the affirmative vote of the holders of at least two-thirds of the total
votes eligible to be cast at such meeting of stockholders shall be required to
amend, add to, alter, change or repeal Sections 6, 8, 9, 11, 12 and 13, and that
Section 10 of this Certificate of Incorporation may be amended, added to,
altered, changed or repealed only as provided therein. Any amendment, addition,
alteration, change or repeal of any provision of this Certificate of
Incorporation shall be effective on the date it is duly approved by the
stockholders or on such other date as shall be specified in such approval of
stockholders.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be
signed by The Corporation Trust Company, its sole Incorporator, this 23rd day of
September, 1987.
FIRST FRANKLIN CORPORATION
By
M. C. Kinnamon
------------------------------
M. C. Kinnamon
Sole Incorporator
-18-
<PAGE> 19
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
BEFORE PAYMENT OF CAPITAL
OF
FIRST FRANKLIN CORPORATION
First Franklin Corporation, a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
FIRST: That Section 6 of the Certificate of Incorporation be and it
hereby is amended to read as follows:
Section 6. INTERNAL AFFAIRS. The Corporation shall be under the
direction of a board of directors. The board of directors shall consist of not
less than four nor more than fifteen directors. The number of directors shall be
as stated in the Corporation's bylaws, as may be amended from time to time. The
board of directors shall divide the directors into three classes and, when the
number of directors is changed, shall determine the class or classes to which
the increased or decreased number of directors shall be apportioned; provided,
that the directors in each class shall be as nearly equal in number as possible;
and provided, further, that no decrease in the number of directors shall affect
the term of any director then in office.
Vacancies in the board of directors, however caused, shall be filled by
a majority vote of the directors then in office, whether or not a quorum, and
any directors so chosen shall hold office for a term expiring at the annual
meeting of stockholders at which the term of the class to which he has been
chosen expires and when his successor is elected and qualified.
The board of directors or the stockholders may adopt, alter, amend or
repeal the bylaws of the Corporation. Such action by the board of directors
shall require the affirmative vote of at least two-thirds of the directors then
in office at a duly constituted meeting of the board of directors called
expressly for such purpose. Such action by the stockholders shall require the
affirmative vote of at least two-thirds of the total votes
<PAGE> 20
eligible to be cast by stockholders at a duly constituted meeting of
stockholders called expressly for such purpose.
No director shall be removed except for cause and then only by
affirmative vote of at least two-thirds of the total votes eligible to be cast
by the stockholders at a duly constituted meeting of stockholders called
expressly for such purpose. At least 20 days prior to such meeting of
stockholders, written notice shall be sent to the director or directors whose
removal will be considered at such meeting.
All actions required or permitted to be taken by the stockholders shall
be voted upon at an annual or special meeting of the stockholders rather than by
written consent in lieu of a meeting.
SECOND: That Section 8 of the Certificate of Incorporation be and it
hereby is amended to read as follows:
Section 8. CALL OF SPECIAL MEETINGS. Special meetings of the
stockholders for any purpose or purpose may be called at any time by
the president or a majority of the directors then in office.
THIRD: That the corporation has not received any payment for any of its
stock.
THIRD: That the amendment was duly adopted in accordance with the
provisions of Section 241 of the General Corporation Law of the State of
Delaware and shall be executed, acknowledged, filed and recorded in accordance
with Section 103 of such law.
-2-
<PAGE> 21
IN WITNESS WHEREOF, said First Franklin Corporation has caused this
certificate to be signed by Thomas H. Siemers its President, and attested by
Gretchen J. Schmidt, its Secretary this 30TH day of October, 1987.
FIRST FRANKLIN CORPORATION
By Thomas H. Siemers
-------------------------------
Thomas H. Siemers, President
ATTEST:
By Gretchen J. Schmidt
------------------------------
Gretchen J. Schmidt, Secretary
-3-
<PAGE> 22
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
First Franklin corporation, a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware, DOES
HEREBY CERTIFY:
FIRST: That the Board of Directors of said corporation, at a meeting
duly held, adopted a resolution proposing and declaring advisable the following
amendment to the Certificate of Incorporation of said corporation:
FURTHER RESOLVED, that subject to the approval of the Corporation's
stockholders, Paragraph l of Section 4 of the Corporation's Certificate
of Incorporation be revised to reduce the number of common shares from
10,000,000 to 1,500,000 and the number of authorized preferred shares
from 2,000,000 to 500,000; and that the revised Paragraph 1 of Section
4 shall read as follows:
Section 4. CAPITAL STOCK. The total number of shares of
capital stock which the Corporation has authority to issue
shall be two million (2,000,000), of which one million five
hundred thousand (1,500,000) shall be common stock, par value
$.01 per share, and
<PAGE> 23
five hundred thousand (500,000) of which shall be preferred
stock, par value $.01 per share, with rights and preferences
to be determined by the board of directors upon issuance.
SECOND: That, the stockholders have approved said amendment at the
Annual Meeting of First Franklin Corporation held April 27, 1992 by a vote of
79.4% of the votes entitled to be cast at such meeting pursuant to notice given
in accordance with the provisions of section 222 of the General Corporation Law
of the State of Delaware.
THIRD: That the aforesaid amendment was duly adopted in accordance with
the applicable provisions of sections 242 and 222 of the General Corporation Law
of the State of Delaware.
-2-
<PAGE> 24
IN WITNESS WHEREOF, said First Franklin Corporation has caused
this certificate to be signed by Thomas H. Siemers, its President, and attested
by Gretchen Schmidt, its Secretary, this 27th day of April, 1992.
FIRST FRANKLIN CORPORATION
By:Thomas H. Siemers
---------------------------------
Thomas H. Siemers, President
ATTEST:
By:Gretchen J. Schmidt
---------------------------
Gretchen Schmidt, Secretary
-3-
<PAGE> 25
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
FIRST FRANKLIN CORPORATION, a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware, DOES
HEREBY CERTIFY:
FIRST: That at a meeting of the Board of Directors of First Franklin
Corporation (First Franklin"), resolutions were duly adopted setting forth a
proposed amendment to the Certificate of Incorporation of said corporation,
declaring such amendment to be advisable and directing that the amendment be
considered at the next annual meeting of the stockholders. The resolution
setting forth the proposed amendment is as follows:
RESOLVED, that Paragraph 1 of Section 4 of the Certificate of
Incorporation of First Franklin be amended to increase the authorized
number of Common Stock by 1,000,000 to 2,500,000 and to read as
follows:
Section 4. CAPITAL STOCK. The total number of shares of
capital stock which the Corporation has authority to issue
shall be three million (3,000,000), of which two million five
hundred thousand (2,500,000) shall be common stock, par value
$.01 per share, and five hundred thousand (500,000) of which
shall be preferred stock, par value $.01 per share, with
rights and preferences to be determined by the board of
directors upon issuance.
<PAGE> 26
SECOND: That thereafter, pursuant to resolutions of its Board of
Directors, a special meeting of the stockholders of said corporation was duly
called and held, upon notice in accordance with Section 222 of the General
Corporation Law of the State of Delaware, at which meeting the necessary number
of shares as required by statute were voted in favor of the amendment.
-2-
<PAGE> 27
THIRD: That the said amendment was duly adopted in accordance with the
provisions of section 242 of the General Corporation Law of the State of
Delaware.
IN WITNESS WHEREOF, First Franklin Corporation has caused this
certificate to be signed by Thomas H. Siemers, its President, and attested by
Gretchen Schmidt, its Secretary, this 10th day of May, 1995.
FIRST FRANKLIN CORPORATION
By:Thomas H. Siemers
----------------------------
Thomas H. Siemers, President
ATTEST:
By:Gretchen J. Schmidt
------------------------------
Gretchen J. Schmidt, Secretary
-3-
<PAGE> 28
-4-
<PAGE> 1
Exhibit 10c
Exhibit A
THE FIRST FRANKLIN CORPORATION
1997 STOCK OPTION AND INCENTIVE PLAN
1. PURPOSE. The Purpose of The First Franklin Corporation 1997 Stock
Option and Incentive Plan (this "Plan") is to promote the best interests of
First Franklin Corporation (the "Company") and its shareholders by enabling the
Company to attract, retain and reward directors, officers, managerial and other
key employees of the Company and any Subsidiary (hereinafter defined), and to
strengthen the mutuality of interest between such directors, officers and
employees of the Company and the Company's shareholders.
2. DEFINITIONS. For purposes of this Plan, the following terms shall
have the meanings set forth below:
(a) "Board" means the Board of Directors of the Company.
(b) "Code" means the Internal Revenue Code of 1986, as
amended, or any successor thereto, together with rules, regulations and
interpretations promulgated thereunder.
(c) "Committee" means the Committee of the Board constituted
as provided in Section 3 of this Plan.
(d) "Common Shares" means the common shares of the Company or
any security of the Company issued in substitution, in exchange or in lieu
thereof.
(e) "Company" means First Franklin Corporation, a Delaware
corporation, or any successor corporation.
(f) "Employment" means regular employment with the company or
a Subsidiary and does not include service as a director or officer only.
(g) "ERISA" means the Employee Retirement Income Security Act,
as amended, or any successor thereto, together with rules, regulations and
interpretations promulgated thereunder.
(h) "Exchange Act" means the Securities Exchange Act of 1934,
as amended, or any successor statute.
(i) "Fair Market Value" means and shall be determined as
follows:
(i) If the Common Shares are traded on a national
securities exchange at the time of grant of a Stock Option, then the Fair Market
Value shall be the average of the highest and the lowest selling price on such
exchange on the date such Stock Option is granted or,
<PAGE> 2
if there were no sales on such date, then on the next prior business day on
which there was a sale.
(ii) If the Common Shares are quoted on The Nasdaq Stock
Market at the time of the grant of the Stock Option, then the Fair Market Value
shall be the mean between the closing high bid and low asked quotation with
respect to a Common Share on such date on The Nasdaq Stock Market.
(iii) If the Common shares are not traded on a national
securities exchange or quoted on The Nasdaq Stock Market, then the Fair Market
Value shall be as determined by the Committee.
(j) "Incentive Stock Option" means any Stock Option granted
pursuant to the provisions of Section 7 of this Plan that is intended to be and
is specifically designated as an "Incentive Stock Option" within the meaning of
Section 422 of the Code.
(k) "Non-Qualified Stock Option" means any Stock Option
granted pursuant to the provisions of Section 7 of this Plan that is not an
Incentive Stock Option.
(l) "Participant" means an employee, director or officer of
the Company or a Subsidiary who is granted a Stock Option under this Plan.
Notwithstanding the foregoing, for the purposes of the granting of any Incentive
Stock Option under this Plan, the term "Participant" shall include only
employees of the Company or a Subsidiary.
(m) "Plan" means The First Franklin Corporation 1997 Stock
Option and Incentive Plan, as set forth herein and as it may be hereafter
amended from time to time.
(n) "Stock Option" means an award of an option to purchase
Common Shares granted pursuant to the provisions of Section 7 of this Plan.
(o) "Subsidiary" means any corporation or entity in which the
Company directly or indirectly controls 50% or more of the total voting power of
all classes of its stock having voting power.
(p) "Terminated for Cause" means any removal of a director or
officer or discharge of an employee for personal dishonesty, incompetence,
willful misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of a material
provision of any law, rule or regulation (other than traffic violations or
similar offenses), a material violation of a final cease-and-desist order or any
other action of a director, officer or employee which results in a substantial
financial loss to the Company or a Subsidiary.
3. ADMINISTRATION.
(a) This Plan shall be administered by the Committee to be
comprised solely of two or more non-employee directors as defined by Exchange
Act Regulation ss.240.16b-3
-2-
<PAGE> 3
(b)(3)(i). The members of the Committee shall be appointed from time to time by
the Board. Members of the Committee shall serve at the pleasure of the Board,
and the Board may from time to time remove members from, or add members to, the
Committee. A majority of the members of the Committee shall constitute a quorum
for the transaction of business. An action approved in writing by all of the
members of the Committee then serving shall be fully as effective as if the
action had been taken by unanimous vote at a meeting duly called and held.
(b) The Committee is authorized to construe and interpret this
Plan and to make all other determinations necessary or advisable for the
administration of this Plan. The Committee may designate persons other than
members of the Committee to carry out its responsibilities under such conditions
and limitations as it may prescribe. Any determination, decision or action of
the Committee in connection with the construction, interpretation,
administration, or application of this Plan shall be final, conclusive and
binding upon all persons participating in this Plan and any person validly
claiming under or through persons participating in this Plan. The Company shall
effect the granting of Stock Options under this Plan in accordance with the
determinations made by the Committee, by execution of instruments in writing in
such form as approved by the Committee.
4. DURATION OF THIS PLAN. This Plan shall terminate on the date which
is ten (10) years from the date on which this Plan is adopted by the Board or
the date on which this Plan is approved by the shareholders of the Company,
whichever is earlier, except with respect to Stock Options then outstanding. No
Incentive Stock Option may be granted under this Plan after the date which is
ten (10) years from the date on which this Plan is adopted by the Board or the
date on which this Plan is approved by the shareholders of the Company,
whichever is earlier.
5. COMMON SHARES SUBJECT TO THIS PLAN. The maximum number of Common
Shares with respect to which Stock Options may be granted under this Plan,
subject to adjustment as provided in Section 10 of this Plan, shall be 117,323
Common Shares. Common Shares which may be issued under this Plan may be either
authorized and unissued shares or issued shares which have been reacquired by
the Company. No fractional shares shall be issued under this Plan.
6. ELIGIBILITY AND GRANTS. Persons eligible for Stock Options under
this Plan shall consist of directors, officers and managerial and other key
employees of the Company or a Subsidiary who hold positions with significant
responsibilities or whose performance or potential contribution, in the judgment
of the Committee, will benefit the future success of the Company or a
Subsidiary. In selecting the directors, officers and employees to whom Stock
Options will be awarded and the number of shares subject to such Stock Options,
the Committee shall consider the position, duties and responsibilities of the
eligible directors, officers and employees, the value of their services to the
Company and the Subsidiaries and any other factors that the Committee may deem
relevant. No director, officer or employee shall have any right or entitlement
to receive a Stock Option.
7. STOCK OPTIONS. Stock Options granted under this Plan may be in the
form of Incentive Stock Options or Non-Qualified Stock Options, and such Stock
Options shall be subject to the following terms and conditions and in such form
as the Committee may from time to time
-3-
<PAGE> 4
approve and shall contain such additional terms and conditions as the Committee
shall deem desirable, not inconsistent with the express provisions of the Plan:
(a) Stock Option Price. The option exercise price for Common
Shares purchasable under a Stock Option shall be determined by the Committee at
the time of grant; provided, however, that in no event shall the exercise price
of an Incentive Stock Option be less than 100% of the Fair Market Value of the
Common Shares on the date of the grant of such Incentive Stock Option.
Notwithstanding the foregoing, in the case of a Participant who owns Common
Shares representing more than 10% of the outstanding common shares at the time
an Incentive Stock Option is granted, the option exercise price shall in no
event be less than 110% of the Fair Market Value of the Common Shares at the
time the Incentive Stock Option is granted.
(b) Stock Option Terms. Subject to the right of the Company to
provide for earlier termination in the event of any merger, acquisition or
consolidation involving the Company, the term of each Stock Option shall be
fixed by the Committee; provided, however, that the term of Incentive Stock
Options will not exceed ten (10) years after the date the Incentive Stock Option
is granted; provided further, however, that in the case of a Participant who
owns a number of Common Shares representing more than 10% of the Common Shares
outstanding at the time an Incentive Stock Option is granted, the term of the
Incentive Stock Option shall not exceed five years.
(c) Exercisability. Except as set forth in Section 7(f) and
Section 8 of this Plan, Stock Options awarded under this Plan shall become
exercisable commencing on the date or dates and subject to such other terms and
conditions as shall be determined by the Committee at the date of the grant.
(d) Method of Exercise. A Stock Option may be exercised, in
whole or in part, by giving written notice of exercise to the company specifying
the number of Common Shares to be purchased, accompanied by payment in full of
the purchase price in cash or, if acceptable to the Committee in its sole
discretion, in Common Shares already owned by the Participant, or by
surrendering outstanding Stock Options. The Committee may also permit
Participants, either on a selective or aggregate basis, simultaneously to
exercise Stock Options and sell Common Shares thereby acquired, pursuant to a
brokerage or similar arrangement approved in advance by the Committee, and use
the proceeds from such sale as payment of the purchase price of such Common
Shares.
(e) Special Rule for Incentive Stock Options. With respect to
Incentive Stock Options granted under this Plan, to the extent the aggregate
Fair Market Value (determined as of the date the Incentive Stock Option is
granted) of the number of shares with respect to which Incentive Stock Options
are exercisable under all plans of the Company or a Subsidiary for the first
time by a Participant during any calendar year exceeds $100,000.00 or such other
limit as may be required by the Code, such Stock Options shall be Non-Qualified
Stock Options to the extent of such excess.
-4-
<PAGE> 5
8. TERMINATION OF EMPLOYMENT OR DIRECTORSHIP.
(a) Except in the event of the death or disability of a
Participant, whenever a Participant ceases to be a director or employee of the
Company or any Subsidiary of the Company, any Stock Option which has not yet
become exercisable shall thereupon terminate and be of no further force or
effect, and, subject to extension by the Committee, any Stock Option which has
become exercisable shall terminate if it is not exercised within three (3)
months of such designation, removal or retirement.
(b) Unless the Committee shall specifically state otherwise at
the time a Stock Option is granted, in the event of the death or disability of a
Participant all Stock Options granted to such Participant under this Plan shall
become exercisable in full and, subject to extension by the Committee, all
options shall terminate if not exercised within twelve months of the
Participant's death or disability.
(c) Notwithstanding the foregoing, in the event a Participant
is Terminated for Cause (hereinafter defined), any Stock Option which has not
been exercised shall terminate as of the date of such Termination for Cause.
9. NON-TRANSFERABILITY OF STOCK OPTION. No Stock Option under this
Plan, and no rights or interest therein, shall be assignable or transferable by
a Participant except by will or the laws of descent and distribution. During the
lifetime of a Participant, Stock Options are exercisable only by the Participant
or his or her legal representative.
10. ADJUSTMENT UPON CHANGES IN CAPITALIZATION.
(a) The existence of this Plan and the Stock Options granted
hereunder shall not affect or restrict in any way the right or power of the
Board or the shareholders of the Company to make or authorize the following: any
adjustment, recapitalization, reorganization or other change in the Company's
capital structure or its business; any merger, acquisition or consolidation of
the Company; any issuance of bonds, debentures, preferred or prior preference
stocks ahead of or affecting the Company's capital stock or rights thereof; the
dissolution or liquidation of the Company or any sale or transfer of all or any
part of its assets or business; or any other corporate act or proceeding,
including any merger or acquisition which would result in the exchange of cash,
stock of any other company or options to purchase the stock of another company
for any Stock Option outstanding at the time of such corporate transaction or
which would involve the termination of all Stock Options outstanding at the time
of such corporate transaction.
(b) In the event of any change in capitalization affecting the
Common Shares of the Company, such as a stock dividend, stock split,
recapitalization, merger, consolidation, spin-off, split-up, combination or
exchange of shares or other form of reorganization, or any other change
affecting the Common Shares, such proportionate adjustments, if any, as the
Board in its discretion may deem appropriate to reflect such change shall be
made with respect to the
-5-
<PAGE> 6
aggregate number of Common Shares for which Stock Options in respect thereof may
be granted under this Plan, the maximum number of Common Shares which may be
sold or awarded to any Participant, the number of Common Shares covered by each
outstanding Stock Option, and the exercise price per share in respect of
outstanding Stock Options.
11. AMENDMENT AND TERMINATION OF THIS PLAN. Without further approval of
the shareholders, the Board may at any time terminate this Plan, or may amend it
from time to time in such respects as the Board may deem advisable, except that
the Board may not, without approval of the shareholders, make any amendment
which would (a) increase the aggregate number of Common Shares which may be
issued under this Plan (except for adjustments pursuant to Section 10 of this
Plan), (b) materially modify the requirements as to eligibility for
participation in this Plan, or (c) materially increase the benefits accruing to
Participants under this Plan. The above notwithstanding, the Board may amend
this Plan to take into account changes in applicable securities, federal income
tax and other applicable laws.
12. MODIFICATION OF OPTIONS. The Board may authorize the Committee to
direct the execution of an instrument providing for the modification of any
outstanding Stock Option which the Board believes to be in the best interests of
the Company; provided, however, that no such modification, extension or renewal
shall confer on the holder of such Stock Option any right or benefit which could
not be conferred on him by the grant of a new Stock Option at such time and
shall not materially decrease the Participant's benefits under the Stock Option
without the consent of the holder of the Stock Option, except as otherwise
permitted under this Plan.
13. MISCELLANEOUS.
(a) Tax Withholding. The Company shall have the right to
deduct from any settlement, including the delivery or vesting of Common Shares,
made under this Plan any federal, state or local taxes of any kind required by
law to be withheld with respect to such payments or to take such other action as
may be necessary in the opinion of the Company to satisfy all obligation for the
payment of such taxes. If Common Shares are used to satisfy tax withholding,
such shares shall be valued based on the Fair Market Value when the tax
withholding is required to be made.
(b) No Right to Employment. Neither the adoption of this Plan
nor the granting of any Stock Option shall confer upon any employee of the
Company or a Subsidiary any right to continued Employment with the Company or a
Subsidiary, as the case may be, nor shall it interfere in any way with the right
of the Company or a Subsidiary to terminate the Employment of any of its
employees at any time, with or without cause.
(c) Annulment of Stock Options. The grant of any Stock Option
is provisional until the Participant becomes entitled to the certificate in
settlement thereof. In the event a Participant is Terminated for Cause, any
Stock Option which is provisional shall be annulled as of the date of such
termination.
(d) Other Company Benefit and Compensation Programs. Payments
and other benefits received by a Participant under a Stock Option made pursuant
to this Plan shall not
-6-
<PAGE> 7
be deemed a part of a Participant's regular, recurring compensation for purposes
of the termination indemnity or severance pay law of any country and shall not
be included in, nor have any effect on, the determination of benefits under any
other employee benefit plan or similar arrangement provided by the Company or a
Subsidiary unless expressly so provided by such other plan or arrangement, or
except where the Committee expressly determines that a Stock Option or portion
of a Stock Option should be included to accurately reflect competitive
compensation practices or to recognize that a Stock Option has been made in lieu
of a portion of competitive annual cash compensation. Stock Options under this
Plan may be made in combination with or in tandem with, or as alternatives to,
grants, stock options or payments under any other plans of the Company or a
Subsidiary. This Plan notwithstanding, the Company or any Subsidiary may adopt
such other compensation programs and additional compensation arrangements as it
deems necessary to attract, retain and reward directors, officers and employees
for their service with the Company and its Subsidiaries.
(e) Securities Law Restrictions. No Common Shares shall be
issued under this Plan unless counsel for the Company shall be satisfied that
such issuance will be in compliance with applicable federal and state securities
laws. Certificates for Common Shares delivered under this Plan may be subject to
such stop-transfer orders and other restrictions as the Committee may deem
advisable under the rules, regulations and other requirements of the Securities
and Exchange Commission, any stock exchange upon which the Common Shares are
then listed, and any applicable federal or state securities law. The Committee
may cause a legend or legends to be put on any such certificates to make
appropriate reference to such restrictions.
(f) Stock Option Agreement. Each Participant receiving a Stock
Option under this Plan shall enter into an agreement with the Company in a form
specified by the Committee agreeing to the terms and conditions of the Stock
Option and such related matters as the Committee shall, in its sole discretion,
determine.
(g) Cost of Plan. The costs and expenses of administering this
Plan shall be borne by the Company.
(h) Governing Law. This Plan and all actions taken hereunder
shall be governed by and construed in accordance with the laws of the State of
Delaware, except to the extent that federal law shall be deemed applicable.
(i) Effective Date. This Plan shall be effective upon the
later of the adoption by the Board and approval by the Company's shareholders.
This plan shall be submitted to the shareholders of the Company for approval at
an annual or special meeting of shareholders.
-7-
<PAGE> 1
FIRST FRANKLIN CORPORATION
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
President's Letter to
Stockholders ................................. 1
Selected Financial Data ...................... 3
Management's Discussion and Analysis of
Financial Condition and Results of Operations:
General ................................... 4
Asset/Liability Management ................ 4
Asset Quality/Credit Risk ................. 6
Results of Operations ..................... 8
Net Interest Income .................... 8
Rate/Volume Analysis ................... 9
Average Yields and Rates Paid .......... 10
Provision For Loan Losses .............. 10
Noninterest Income ..................... 10
Noninterest Expense .................... 10
Provision for Federal Income Taxes ..... 11
Liquidity ................................. 11
Capital ................................... 12
Impact of Inflation on
Changing Prices ........................ 13
Change in Independent Accountants ......... 13
Recent Accounting Pronouncements .......... 14
Corporate Information:
Market Information ........................ 14
Dividends ................................. 14
Transfer Agent ............................ 14
Special Counsel ........................... 14
Annual Meeting ............................ 14
Form 10-KSB ............................... 14
Report of Independent Accountants ............ 15
Consolidated Financial
Statements ................................ 16
</TABLE>
<TABLE>
<CAPTION>
STOCKHOLDER INFORMATION
<S> <C>
1996 Earnings per share
before SAIF assessment and
pension plan termination ........ $ 1.18
1996 Earnings per share
after SAIF assessment and
pension plan termination ........ $ 0.22
1996 Dividends declared per
share ........................... $ 0.31
Book value per share (1) ........ $ 17.06
Market value per share (2) ...... $ 16.50
Common shares outstanding (1) ... 1,156,434
</TABLE>
(1) At December 31, 1996
(2) Nasdaq Closing Sale Price on
December 31, 1996
FRANKLIN SAVINGS
LOCATIONS
CORPORATE OFFICE
4750 Ashwood Drive
Cincinnati, Ohio 45241
(513) 469-8000
BRANCH OFFICES
DELHI
5015 Delhi Pike, 451-5252
DOWNTOWN
45 East Fourth Street, 721-0809
FOREST PARK
Promenade Shopping Center, 851-0400
O'BRYONVILLE
2000 Madison Road, 321-0235
ROSELAWN
Valley Shopping Center, 761-1101
SHARONVILLE
11186 Reading Road, 563-6060
WESTERN HILLS
5119 Glenway Avenue, 471-7300
DIRECTTELLER(R), (800) 436-5100
[Equal Housing Lender Logo]
[Federal Home Loan Logo]
[FDIC Insured Logo]
DirectTeller (R) is the Trademark
of DirectTeller Systems, Inc.
2
<PAGE> 2
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
AT DECEMBER 31,
-----------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FINANCIAL CONDITION DATA:
Total assets ............. $222,302 $213,595 $192,390 $199,293 $209,724
Cash ..................... 10,009 8,653 2,883 7,358 11,065
Loans receivable, net .... 150,135 139,419 134,170 132,008 146,367
Mortgage-backed
Securities ............
Available-for-sale .... 19,503 18,964 20,742
Held-to-maturity ...... 19,622 22,258 14,583 39,085 36,374
Investments
Available-for-sale .... 17,358 18,762 13,747
Held-to-maturity ...... 881 15,413 10,603
Savings accounts ......... 194,648 184,574 172,502 178,550 189,896
Total borrowings ......... 6,423 7,393 596 1,297 1,806
Stockholders' equity ..... 19,730 20,308 17,852 18,031 16,436
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
OPERATIONS DATA:
Total interest income ............... $ 15,782 $14,547 $13,294 $14,167 $16,230
Total interest expense .............. 9,785 8,965 7,515 8,873 10,545
-------- ------- ------- ------- -------
Net interest income ................. 5,997 5,582 5,779 5,294 5,685
Provision for loan losses ........... 92 30 62 325 410
-------- ------- ------- ------- -------
Net interest income after
provision for loan losses ........ 5,905 5,552 5,717 4,969 5,275
Noninterest income .................. 544 362 439 1,187 1,060
Noninterest expense ................. 4,327 3,982 4,147 4,050 3,772
-------- ------- ------- ------- -------
Income before SAIF assessment,
pension plan termination, and
change in accounting principle ... 2,122 1,932 2,009 2,106 2,563
SAIF assessment ..................... 1,144
Termination of pension plan ......... 571
-------- ------- ------- ------- -------
Income before taxes and change
in accounting principle .......... 407 1,932 2,009 2,106 2,563
Provision for federal income tax .... 133 632 655 703 923
-------- ------- ------- ------- -------
Income before cumulative
effect of change in
accounting principle ............. 274 1,300 1,354 1,403 1,640
Cumulative effect of change
in accounting principle .......... 441
-------- ------- ------- ------- -------
Net income .......................... $ 274 $ 1,300 $ 1,354 $ 1,844 $ 1,640
======== ======= ======= ======= =======
OTHER DATA:
Interest rate spread during period .. 2.48% 2.50% 2.76% 2.42% 2.59%
Interest rate spread at end of
period ........................... 2.35 2.25 2.42 2.31 2.19
Return on average assets ............ 0.13 0.64 0.70 0.90 0.79
Return on average equity ............ 1.35 6.70 7.43 10.58 10.34
Dividend payout ratio ............... 132.03 25.34 26.91 15.73 17.61
Equity to assets .................... 8.88 9.51 9.28 9.05 7.84
Ratio of average interest-
earning assets to average
interest-bearing liabilities ..... 107.95 107.74 108.03 105.93 105.16
Non-performing assets as
a percent of total assets
at end of period ................. 0.54 0.64 1.13 1.81 2.07
Full service offices ................ 7 7 7 7 7
PER SHARE DATA:
Earnings per common share:
Income before SAIF assessment,
pension plan termination and
cumulative effect of change in
accounting principle .......... $ 1.18 $ 1.05 $ 1.11 $ 1.16 $ 1.42
SAIF assessment .................. (0.64)
Pension plan termination ......... (0.32)
Cumulative effect of change
in accounting principle ....... 0.36
-------- ------- ------- ------- -------
Net income per common share ......... $ 0.22 $ 1.05 $ 1.11 $ 1.52 $ 1.42
======== ======= ======= ======= =======
Book value per common share ......... $ 17.06 $ 17.23 $ 15.34 $ 15.55 $ 14.22
======== ======= ======= ======= =======
</TABLE>
3
<PAGE> 3
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 issued in connection with 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 the Delaware General Corporation Law. As a unitary savings
and loan holding company, the Company is subject to examination and supervision
by the Office of Thrift Supervision ("OTS"), 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, Franklin also offers 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.
Legislation has been introduced to restructure the federal banking system. Such
legislation might require Franklin Savings to convert to a state savings bank or
national bank charter. As a result, it could 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-conforming assets. In addition, First
Franklin might to required to 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. The Company cannot evaluate how this
legislation may impact it until it has been enacted.
Franklin has one wholly-owned subsidiary, Madison Service Corporation
("Madison"). Madison was formed in 1972 to allow Franklin to diversify into
certain types of business which, by regulation, savings and loans were unable to
enter. At the present time, Madison's only activity is its contract with a third
party registered broker dealer which offers brokerage services at offices of
Franklin. Madison's assets consist solely of cash and interest-earning deposits.
Its only sources of income are the interest earned on these deposits and the
fees received as a result of the agreement with the third party broker dealer.
First Franklin owns 51% of DirectTeller's outstanding common stock. 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. The
inquiry system is currently in operation at Intrieve Inc., a computer service
bureau which offers the DirectTeller system to the savings and loans it
services. The agreement with Intrieve gives DirectTeller a portion of the
profits generated by the use of the inquiry system by Intrieve's clients.
Since the results of operations of Madison and 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 Company's
asset and liability management policy is to maximize long-term profitability and
return to its investors.
4
<PAGE> 4
The Company's asset/liability management activities are intended 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 product and services which meet the needs of
its customers, and analyzing operating costs and efficiencies in order to
institute changes when necessary to increase profitability. Another objective of
asset/liability management is structuring the balance sheet to assist the
Company in maintaining compliance with its regulatory capital requirements and
maintaining investments in certain asset categories within regulatory limits.
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 changes in interest rates.
Franklin is subject to interest rate risk to the degree that its
interest-bearing liabilities, consisting principally of customer deposits and
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. Conversely, having assets that reprice or mature more rapidly
than liabilities may adversely affect net interest income during periods of
declining interest rates. Franklin actively pursues investment strategies to
reduce the sensitivity of its earnings to interest rate fluctuations. These
strategies take into consideration both the variability of rates and the
maturities of various types of investments and deposits. 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. ARMs constituted 58.2% of
Franklin's loan portfolio at December 31, 1996.
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 maintain an
appropriate level of interest rate sensitivity in its loan portfolio during
times when market conditions are not favorable for originating adjustable-rate
loans. During 1996 interest rates on fixed-rate mortgages decreased slightly
from those experienced during 1995, so consumer demand for fixed-rate mortgages
increased. Franklin originated and sold $4.1 million of fixed-rate one-to four-
family mortgage loans during 1996 compared to $910,000 during 1995. Loans being
serviced for others, mainly the Federal Home Loan Mortgage Corporation, were
$54.3 million at December 31, 1996 compared to $58.5 million at December 31,
1995.
During the current year, the Company signed an agreement with Student Loan
Funding Corporation to sell all student loans which enter repayment. Sales of
$842,000 at a profit of $11,000 occurred during 1996.
Franklin's interest rate risk policy, established by the Board of Directors,
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. 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.
<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 $5,122 $(964) (15.8)% $ 3,935 $(9,826) (71.4)%
+300 5,475 (611) (10.0) 7,424 (6,337) (46.1)
+200 5,816 (270) (4.4) 10,490 (3,271) (23.8)
+100 6,053 (33) (0.5) 12,824 (937) (6.8)
0 6,086 0 0.0 13,761 0 0.0
-100 5,965 (121) (2.0) 13,705 (56) (0.4)
-200 5,679 (407) (6.7) 12,531 (1,230) (8.9)
-300 5,514 (572) (9.4) 11,707 (2,054) (14.9)
-400 5,393 (693) (11.4) 11,548 (2,213) (16.1)
</TABLE>
5
<PAGE> 5
The sensitivity of earnings to interest rate changes is often measured by the
difference, or "gap", between the amount of assets and liabilities scheduled to
reprice within the same period expressed as a percentage of assets, based on
certain assumptions. Generally, the lower the amount of this gap, the less
sensitive are the Company's earnings to interest rate changes. A positive gap
means an excess of assets over liabilities repricing during the same period.
However, this method of measuring interest rate sensitivity does not take into
account the differing repricing characteristics of the various types of assets
and liabilities. Certain assets and liabilities that have similar maturities or
periods to repricing may react differently to changes in market interest rates.
The table below sets forth Franklin's interest rate sensitivity as of December
31, 1996. As shown below, the one year cumulative gap is $4.2 million. This
positive gap indicates that more assets are scheduled to reprice during the next
year than liabilities. Generally, this would indicate that net interest income
would increase as rates rise, but as the table above indicates, due to the
adjustment caps on ARM's the opposite is true.
<TABLE>
<CAPTION>
3 MONTHS 4 TO 6 7 TO 12 1 TO 3 3 TO 5 5 TO 10 10 TO 20 >20
OR LESS MONTHS MONTHS 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 ............. $21,166 $19,060 $16,492 $ 15,807 $ 72,525
Fixed-Rate .................. 2,487 2,145 3,995 12,659 $ 8,624 $11,269 $ 4,520 $ 659 46,358
Construction Loans ............. 3,630 360 687 92 470 37 5,276
Multi-family and Non-residential
Adjustable-Rate ............. 2,439 2,398 4,682 8,986 18,505
Fixed-Rate .................. 149 144 274 925 698 1,065 307 3,562
Consumer Loans .................... 1,941 189 349 1,075 353 3,907
Mortgage-backed Securities ........ 6,323 6,088 7,158 4,253 3,508 6,314 5,084 38,728
Investments ....................... 10,093 500 1,225 10,022 1,050 274 100 146 23,410
------- ------- ------- -------- -------- ------- ------- ------- --------
Total Rate Sensitive Assets .... $48,228 $30,884 $34,862 $ 53,819 $ 14,703 $18,959 $10,011 $ 805 $212,271
LIABILITIES:
Fixed Maturity Deposits ........... $27,577 $31,123 $35,273 $ 45,173 $ 6,430 $145,576
Transaction Accounts .............. 1,340 1,212 2,088 5,191 2,330 $ 1,642 $ 252 $ 5 14,060
Money Market Deposit Accounts ..... 917 830 1,430 3,554 1,595 1,124 172 3 9,625
Passbook Accounts ................. 2,298 2,080 3,584 8,908 3,999 2,818 432 8 24,127
FHLB Advances ..................... 421 6,002 6,423
------- ------- ------- -------- -------- ------- ------- ------- --------
Total Rate Sensitive Liabilities $32,132 $35,245 $42,375 $ 62,826 $ 14,354 $ 6,005 $ 6,858 $ 16 $199,811
GAP INFORMATION:
Cumulative Gap .................... $16,096 $11,735 $ 4,222 ($ 4,785) ($ 4,436) $ 8,518 $11,671 $12,460
Cumulative Gap as a Percentage
of Total Assets ................ 7.42% 5.41% 1.95% (2.21%) (2.05%) 3.93% 5.38% 5.74%
</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 24% (ii) adjustable-rate one-to four-family residential mortgage
loans and mortgage-backed securities with a lagging market index (cost of funds,
national average contract rate) will prepay at an annual rate of 17% (iii)
fixed-rate one-to four-family residential mortgage loans and mortgage-backed
securities will prepay at annual rates of 9% to 20% depending on the stated
interest rate and contractual maturity of the loan; (iv) the decay rate on
deposit accounts is 33% per year; and (v) fixed-rate certificates of deposit
will not be withdrawn prior to maturity.
ASSET QUALITY/CREDIT RISK
Credit risk refers to the potential for losses on assets due to a borrower's
default or to the decline in the value of the collateral supporting that asset.
Franklin has taken various steps to reduce credit risk and to maintain the
quality of its assets. The lending program is focused towards relatively low
risk single-family first mortgage loans which are underwritten using standards
acceptable to the Federal Home Loan Mortgage Corporation. As part of an on-going
independent Quality Control program the underwriting standards used on a sample
of the loans originated are reviewed, on a monthly basis. 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
6
<PAGE> 6
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.
Non-performing assets include loans which have been placed on non-accrual
status, accruing loans which are ninety days or more past due, repossessed
assets and renegotiated loans. 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. 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. Renegotiated loans consist of loans
whose terms have been modified due to the borrowers inability to perform under
the original agreement.
The following table sets forth Franklin's non-performing assets as of the dates
indicated.
<TABLE>
<CAPTION>
AT DECEMBER 31,
1996 1995
-----------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Non-accruing loans $ 368 $ 572
Accruing loans delinquent more
than ninety days 325 445
Repossessed assets 233
Renegotiated loans 321 355
----- ------
Total non-performing assets $1,247 $1,372
====== ======
</TABLE>
As indicated by the table above, a 9.1 % reduction in the level of
non-performing assets was achieved during 1996. The Company will continue to
strive to reduce the level of these assets during 1997.
Repossessed assets, at the end of 1996, consisted of the following four
properties, all of which are located in southwestern Ohio: A single family home
with a estimated fair value of $54,000, a four family property with an estimated
fair value of $42,000, a multi-family property being carried at an estimated
fair value of $85,000 and a vacant lot with an estimated fair value of $1.00.
Franklin maintains an allowance for possible losses on loans and repossessed
assets. The Asset Classification Committee is responsible for maintaining this
allowance at a level sufficient to provide for estimated losses based on known
and inherent risks in the loan portfolio. General 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 recourse 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.
7
<PAGE> 7
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.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1996 1995
- -----------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Beginning balance $947 $1,256
Charge-offs
One-to four-family 31 161
Multi-family 16
Non-residential
Consumer 11 178
---- ------
58 339
---- ------
Recoveries
One-to four-family 0 0
Multi-family 0 0
Non-residential 0 0
Consumer 0 0
---- ------
0 0
---- ------
Net Charge-offs 58 339
Additions Charged to Operations 92 30
---- ------
Ending Balance $981 $ 947
==== ======
Ratio of Net Charge-offs to
Average Loans Outstanding 0.04% 0.25%
==== ======
Ratio of Net Charge-offs to
Average Non-performing Assets 4.52% 19.11%
==== ======
</TABLE>
Included in the 1995 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
During 1996 Franklin experienced two extraordinary non-recurring charges against
operations; a $1.14 million assessment to recapitalize the Savings and Loan
Insurance Fund ("SAIF") and $571,000 charge related to the termination of the
Company's defined benefit pension plan. Excluding these charges, net income for
the year ended December 31, 1996 was $1.43 million, which represents a return on
average assets of 0.66% and a return on average stockholders' equity of 7.04%.
Net income, after the non-recurring charges, for the year ended December 31,1996
was $274,000, which represents a return on average assets of 0.13% and a return
on average stockholders' equity of 1.35%. Book value per share at December 31,
1996 was $17.06 and dividends of $0.31 per share were declared and paid during
the year. Net income for the years ended December 31,1995 and 1994 was $1.30
million and $1.35 million, respectively. The returns on average assets and
average equity were 0.64% and 6.70%, and 0.70% and 7.43% for 1995 and 1994,
respectively.
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, non-accruing loans have been included as loans carrying a zero yield,
and 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 the increase in net interest income to $6.0 million in 1996 from
$5.6 million in 1995 was due to an increase in net earning assets from $14.0
million for 1995 to $15.5 million for 1996.
8
<PAGE> 8
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1996 1995 1994
--------------------------------------------------------------------------------------------
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) $146,122 $11,747 8.04% $134,910 $10,886 8.07% $130,839 $10,223 7.81%
Mortgage-backed securities(2) 39,976 2,648 6.62 36,664 2,270 6.19 37,947 2,065 5.44
Investments (2) 23,060 1,269 5.50 22,019 1,282 5.82 17,403 912 5.24
FHLB stock 1,689 118 6.99 1,608 109 6.78 1,643 94 5.72
-------- ------- -------- ------- -------- -------
Total interest-earning
assets $210,847 $15,782 7.49 $195,201 $14,547 7.45 $187,832 $13,294 7.08
======== ======= ======== ======= ======== =======
INTEREST-BEARING LIABILITIES:
Demand and NOW deposits $ 23,709 $ 528 2.23 $ 23,950 $ 586 2.45 $ 28,446 $ 707 2.49
Savings deposits 24,721 683 2.76 25,758 716 2.78 34,155 953 2.79
Certificate accounts 139,800 8,115 5.80 128,988 7,510 5.82 110,426 5,783 5.24
FHLB Advances 7,090 459 6.47 2,483 153 6.16 830 72 8.67
Other borrowings (3) 17
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities $195,320 $ 9,785 5.01 $181,179 $ 8,965 4.95 $173,874 $ 7,515 4.32
======== ======= ======== ======= ======== =======
Net interest income $ 5,997 $ 5,582 $ 5,779
======= ======= =======
Net interest rate spread 2.84% 2.50% 2.76%
==== ==== ====
Net earning assets $ 15,527 $ 14,022 $ 13,958
======== ======== ========
Net yield on average
interest-earning assets 2.84% 2.86% 3.08%
==== ==== ====
Average interest-earning
assets to average
interest-bearing liabilities 1.08% 1.08% 1.08%
======= ======= =======
</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 relates to 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 1996, net interest income increased $415,000 compared to a $197,000
decrease during 1995. The income earned on assets increased $1.24 million, due
to an increase in the average amount of interest-earning assets of $15.7 million
and an increase in the rates earned on total interest-earning assets from 7.45%
to 7.49%. During the same period, interest expense increased $820,000 due to an
slight increase in the average cost of funds from 4.95% to 5.01% and an increase
in average interest-bearing liabilities of $14.1 million. During 1996, consumers
continued to increase their investment in certificates of deposit because of the
higher rates available from most financial institutions. Franklin's certificates
increased $10.2 million during the current year with the average cost declining
from 5.82% to 5.80%.
<TABLE>
<CAPTION>
1996 VS 1995 1995 VS 1994 1994 VS 1993
-------------- ------------- ------------
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) $ 901 $ (40) $ 861 $ 323 $ 340 $ 663 $(510) $(577) $(1,087)
Mortgage-backed Securities 213 165 378 (67) 272 205 (52) 175 123
Investments 81 (94) (13) 261 109 370 (57) 130 73
FHLB Stock 6 3 9 (2) 17 15 (2) 20 18
------- ----- ------- ------- ----- ------- ----- ----- -------
Total Interest-earning Assets $ 1,201 $ 34 $ 1,235 $ 515 $ 738 $ 1,253 $(621) $(252) $ (873)
======= ===== ======= ======= ===== ======= ===== ===== =======
INTEREST EXPENSE ATTRIBUTABLE TO:
Demand and NOW Accounts $ (6) $ (52) $ (58) $ (110) $ (11) $ (121) $ (5) $ 171 $ 166
Savings Accounts (29) (4) (33) (233) (4) (237) (184) (115) (299)
Certificate Accounts 627 (22) 605 1,037 690 1,727 (282) (907) (1,189)
FHLB Advances 298 8 306 95 (14) 81 (40) 4 (36)
Other Borrowings
------- ----- ------- ------- ----- ------- ----- ----- -------
Total Interest-bearing Liabilities $ 890 $ (70) $ 820 $ 789 $ 661 $ 1,450 $(511) $(847) $(1,358)
======= ===== ======= ======= ===== ======= ===== ===== =======
Increase (Decrease) in
Net Interest Income $ 311 $ 104 $ 415 $ (274) $ 77 $ (197) $(110) $ 595 $ 485
======= ===== ======= ======= ===== ======= ===== ===== =======
</TABLE>
(1) Includes non-accruing loans.
9
<PAGE> 9
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 interest rate spread at the end of each of the
past three years.
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------
Weighted Average Yield on: 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Loans Receivable (1) 7.72% 7.78% 7.45%
Mortgage-backed Securities 6.72 6.68 5.86
Investments (2) 5.55 5.37 5.34
FHLB Stock 7.00 7.00 6.38
---- ---- ----
Combined Weighted Average Yield on
Interest-earning Assets 7.28 7.27 6.95
---- ---- ----
Weighted Average Rate Paid on:
Demand and NOW Deposits 2.25 2.51 2.58
Savings Deposits 2.75 2.75 2.75
Certificates 5.68 5.80 5.42
Borrowings 6.46 6.45 8.15
---- ---- ----
Combined Weighted Average Rate Paid
on Interest-bearing Liabilities 4.93 5.02 4.53
---- ---- ----
Interest Rate Spread 2.35% 2.25% 2.42%
==== ==== ====
</TABLE>
(1) Includes impact 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
1996, 1995 and 1994 for loan loss reserves were $91,900, $29,600 and $61,800,
respectively. During 1996 assets classified as substandard and loss increased
41.7% to $1.7 million and non-performing assets were reduced by 9.1% to $1.2
million. Since this increase in classified assets could be an indication of a
possible increase in future losses, the charges against current operations
during 1996 were increased as compared to previous years. Management believes
that the level of reserves at December 31, 1996 is adequate to protect Franklin
against reasonably foreseeable losses.
NONINTEREST INCOME. Noninterest income was $544,000 for 1996, compared to
$362,000 for 1995 and $439,000 for 1994. Current year income included profits of
$73,000 on the sale of fixed-rate mortgage loans, a $51,000 profit realized on
an investment in an insurance company which was part of a leveraged buyout
during 1996, service fees earned on checking and money market accounts of
$209,000, $12,000 income from Madison and $15,000 income from DirectTeller.
Profits on the sale of fixed-rate loans were $10,000 in 1995 and $23,000 in
1994. Noninterest income during 1995 and 1994 included service fees on checking
and money market accounts of $207,000 and $205,000, respectively.
NONINTEREST EXPENSE. Noninterest expense was $6.04 million, $3.98 million and
$4.15 million for the years ended December 31, 1996, 1995, and 1994,
respectively. As previously discussed, 1996 expenses included one-time
extraordinary charges of $1.14 million to recapitalize the SAIF insurance fund
and $571,000 related to the termination of the Company's defined benefit pension
plan. As a percentage of average assets, total noninterest expenses were 2.78%,
1.97%, and 2.14% for the three years. Noninterest expense, excluding the two
extraordinary charges, as a percentage of average assets for 1996 was 1.99%. The
following table shows the major noninterest expense items and their percent of
change during 1996 and 1995.
<TABLE>
<CAPTION>
PERCENT PERCENT
INCREASE INCREASE
1996 (DECREASE) 1995 (DECREASE) 1994
------- -------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Compensation $ 1,423 6.8% $ 1,333 (6.3)% $ 1,422
Employee Benefits 322 8.8 296 (1.3) 300
Termination of Pension Plan 571
Office Occupancy 611 6.4 574 0.3 572
FDIC Insurance 430 6.7 403 (0.7) 406
SAIF Assessment 1,144
Data Processing 255 (3.0) 263 4.0 253
Marketing 99 (4.8) 104 (14.0) 121
Professional Fees 228 28.8 177 13.5 156
Supervisory Expense 97 7.8 90 (10.9) 101
Taxes, other than income 212 35.0 157 (20.3) 197
Other 650 11.3 584 (5.7) 619
------- ---- ------- ---- --------
TOTAL $ 6,042 51.8% $ 3,981 (4.0)% $ 4,147
======= ==== ======= ==== ========
</TABLE>
10
<PAGE> 10
Under SFAS No. 91 certain loan origination costs can be capitalized against
specific loans thus reducing compensation expense. These capitalized costs were
$152,000, $150,000 and $156,000 during 1996, 1995 and 1994, respectively. Costs
associated with acquiring and moving to the new corporate office resulted in an
increase in occupancy expense. It is anticipated that rental of the unoccupied
space at the corporate office will substantially reduce occupancy expense in the
future. As a result of the recapitalization of the SAIF insurance fund, 1997
FDIC insurance premiums will be reduced to approximately $125,000. During 1996
Franklin entered into a new five year data processing contract which will
decrease future expense. The increase in professional fees during 1996 reflects
an increase in legal, audit and consulting fees. In an effort to reduce audit
fees, during 1996 the Company engaged a new audit firm. The increase in 1996
taxes, other than income, reflects refunds of state franchise taxes paid in
previous years received during 1995.
In 1995 the Board of Directors decided to terminate the Company's defined
benefit pension plan effective February 15, 1996. During the fourth quarter of
1996, the Internal Revenue Service approved the termination of the plan so that
the settlement of the vested benefit obligation, by lump sum payments to all
covered employees, should be completed during early 1997. The Company recognized
a settlement loss of approximately $571,000 during 1996. The terminated plan has
been replaced with a defined contribution plan requiring the Company to annually
contribute ten percent of compensation for all covered participants. It is
anticipated that the Company's annual contribution to the new defined
contribution plan will be approximately equal to the annual contribution which
was made to the terminated defined benefit plan.
PROVISION FOR FEDERAL INCOME TAXES. Provisions for federal income taxes were
$133,342, $632,035, and $654,575 in fiscal 1996, 1995 and 1994, respectively.
The effective federal income tax rates for the years ended December 31, 1996,
1995, and 1994 were 32.8%, 32.7% and 32.6%, respectively. A reconciliation of
statutory federal income tax rates to the effective federal income tax rates is
shown in Note 11 of the Notes to Consolidated Financial Statements.
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, and have 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
available for sale.
Upon adoption of Statement of Financial Accounting Standard (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" in 1994, 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 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 $1.1 million from
held-to-maturity to available-to-sale. All new investments purchased are
evaluated at the time of purchase to determine how they should be classified. At
December 31,1996 the Company had a $ 330,000 unrealized gain on investments and
mortgage-backed securities classified as available-for-sale.
Liquid assets declined $100,000 to $27.4 million at December 31,1996. 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 31,1996 and 1995.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Operating Activities:
Net Income $ 274 $ 1,300
Adjustments to reconcile net income
to net cash provided by operating activities 15 (160)
-------- --------
Net cash provided by operating activities 289 1,140
Net cash used in investing activities (6,763) (14,077)
Net cash provided by financing activities 7,830 18,707
-------- --------
Net increase in cash and cash equivalents 1,356 5,770
Cash and cash equivalents at beginning of year 8,653 2,883
-------- --------
Cash and cash equivalents at end of year $ 10,009 $ 8,653
======== ========
</TABLE>
Operating activities include the sale of fixed-rate single family mortgage loans
of $4.1 million during 1996 and $910,000 during 1995. 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.
11
<PAGE> 11
Loan receipts and disbursements are a major component of the Company's investing
activities. Repayments on loans and mortgage-backed securities during the year
ended December 31,1996 totaled $29.6 million compared to $30.8 million during
fiscal 1995. Loan disbursements during 1996 were $39.1 million compared to $32.0
million during 1995. The Company also purchased $4.0 million of mortgage-backed
securities during 1996 and $10.1 million during 1995.
Financing activities include deposit account flows, the use of borrowed funds
and the payment of dividends. Deposits increased $10.1 million to $194.6 million
at December 31,1996 from $184.6 million at December 31, 1995. During the current
year Franklin assumed $5.3 million in deposits from the downtown location of
Suburban Federal Savings Bank in exchange for $5.1 million in cash. These
deposits were moved to Franklin's downtown location. Net of interest credited
and the deposits assumed from Suburban Federal, deposits decreased by $3.6
million during 1996 as compared to a $4.2 million increase during 1995. The
table below sets forth the deposit flows by type of account, including interest
credited, during 1996 and 1995.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Passbook Savings $ (177) $ (5,049)
NOW / Super NOW Accounts (228) 390
MMDA Accounts 296 (2,204)
-------- --------
Total (109) (6,863)
-------- --------
Certificates:
7-31 Day 37 (224)
91 Day 34 (168)
Six month 4,927 18,111
One year 3,309 (1,040)
Eighteen month 7,767 11,800
Two year 3,029 (409)
Thirty-two month (4,289) (9,336)
Three year (573) 6,564
Five year (4,632) (5,973)
Jumbo certificates 309 (175)
Other 265 (215)
-------- --------
Total 10,183 18,935
-------- --------
Total deposit increase $ 10,074 $ 12,072
======== ========
</TABLE>
At December 31,1996 Franklin had outstanding Federal Home Loan Bank ("FHLB")
advances of $6.4 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% $ 421
10/01/10 6.35 4,283
12/01/10 6.30 1,719
-------
$ 6,423
=======
</TABLE>
Subject to certain limitations, based on its current investment in FHLB stock,
Franklin is eligible to borrow an additional $28.6 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 borrowings payable in one year
or less. At December 31,1996, Franklin's regulatory liquidity was 12.93%.
At December 31, 1996 Franklin had outstanding commitments to originate or
purchase $2.9 million of mortgage loans or mortgage-backed securities, as
compared to $1.6 million at December 31, 1995. During the next twelve months
approximately $94.1 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
12
<PAGE> 12
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 declined approximately $600,000 during 1996
from $20.3 million at December 31,1995 to $19.7 million at the end of 1996. Book
value per share decreased to $17.06 at December 31,1996 from $17.23 at the end
of 1995. This decrease in stockholders' equity and book value is primarily the
result of an increase in treasury stock of $699,000, resulting from stock
repurchases, and dividends declared of $361,000 which exceeded the net income
for the year of $274,000 and an the increase in unrealized gains on
available-for-sale securities of $95,000. As a percentage of total assets, the
Company's stockholders' equity equaled 8.9% and 9.5% at December 31,1996 and
1995, respectively.
Dividends per share of $0.31 and $0.28 were declared in 1996 and 1995,
respectively, resulting in payments of $361,000 in 1996 and $329,000 in 1995.
See Note 8 of the Notes to Consolidated Financial Statements for 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 $13,734 $ 3,248 $10,486 6.34% 1.50% 4.84%
Core 13,734 6,495 7,239 6.34 3.00 3.34
Risk-based 14,371 7,830 6,541 14.68 8.00 6.68
</TABLE>
IMPACT OF INFLATION ON CHANGING PRICES
The consolidated financial statements and related data presented herein have
been prepared in accordance with generally accepted accounting principles, which
require measurement of financial position and operating results in terms of
historical dollars, without considering changes in relative purchasing power
over time due to inflation.
Unlike most industrial companies, virtually all of the assets and liabilities of
the Company are monetary in nature. As a result, interest rates generally have a
more significant impact on the Company's performance than does the effect of
inflation.
CHANGE IN INDEPENDENT ACCOUNTANTS
The Board of Directors approved the selection of Clark, Schaefer, Hackett & Co.
("Clark Schaefer") to replace Coopers & Lybrand L.L.P. ("Coopers") as the
Company's independent accountants effective September 30, 1996. Coopers served
as the Company's independent accountants for all fiscal years since its
inception in 1987. This change in accountants has resulted in a significant
decrease in the amount of annual fees paid by the Company.
Coopers' reports on the consolidated financial statements of the Company for the
two fiscal years ended December 31, 1995, did not contain any adverse opinion or
disclaimer of opinion, nor were such reports qualified or modified as to
uncertainty, audit scope or accounting principles. There were no disagreements
between the Company and Coopers on any matter of accounting principles or
practices, consolidated financial statement disclosure or audit scope or
procedure during the two most recent fiscal years and any subsequent interim
period through September 27, 1996.
The Board of Directors' decision to engage Clark Schaefer as its independent
accountant is based on that firm's experience with community-based financial
institutions. Prior to selecting and engaging Clark Schaefer as its independent
accountant, the Company did not request or obtain any advice from Clark Schaefer
concerning any material accounting, auditing or financial reporting issue
regarding the application of accounting principles to a specified transaction or
the type of audit opinion that might be rendered on the Company's consolidated
financial statements.
Clark Schaefer conducted the independent audit of the Company for the fiscal
year ended December 31, 1996 and the Board of Directors has selected Clark
Schaefer as the auditors of the Company for the fiscal year ended December 31,
1997.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued SFAS No.
125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" which established accounting and reporting
standards for transfers and servicing of financial assets and extinguishments of
liabilities. The standards are based on a consistant application of a financial
components approach that focuses on control. Under that approach, after a
transfer of financial assets, an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred, derecognizes financial
assets when control has been surrendered, and derecognizes liabilities when
extinguished. SFAS No. 125 provides consistent standards for distinguishing
transfers of financial assets that are sales from transfers that are secured
borrowings. SFAS No. 125 supercedes SFAS No. 122 and is effective for
transactions occurring after December 31, 1996. Management is currently
assessing the impact of this standard.
13
<PAGE> 13
On March 3, 1997, the FASB issued SFAS No. 128, "Earnings per Share" which will
replace the current presentation of "primary" and "fully diluted" earnings per
share with newly defined "basic" and "diluted" earnings per share. "Basic"
earnings per share will not include dilutive effect on earnings. Diluted
earnings per share will reflect the potential dilution of securities that could
share in an enterprises earnings. The statement will require dual presentation
of basic and diluted earnings per share on the income statement for all entities
having complex capital structures and will be effective for financial statements
issued for periods ending after December 15, 1997. Management is currently
assessing the impact of this statement 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 on the National Association of Securities Dealers Automated Quotations
("Nasdaq") National Market System under the trading symbol "FFHS". As of
February 28,1997 there were approximately 456 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 during the quarters
indicated. At February 28,1997 First Franklin's closing sale price as reported
on the Nasdaq National Market was $16.75.
<TABLE>
<CAPTION>
STOCK PRICES
QUARTER ENDED: LOW HIGH
--- ----
<S> <C> <C>
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
March 31,1996 13.50 17.25
June 30,1996 13.50 15.50
September 30,1996 14.25 15.50
December 31,1996 14.25 17.25
</TABLE>
DIVIDENDS
Dividends are paid upon the determination of the Board of Directors that such
payment is consistent with the short-term and long-term interests of the
Company. The factors affecting this determination include the Company's current
and projected earnings, operating results, financial condition, regulatory
restrictions, future growth plans and other relevant factors. The Company paid
dividends of $0.31 per share during 1996 and $0.28 per share during 1995.
The principal source of earnings for the Company on an unconsolidated basis is
dividends paid by Franklin. 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 1996 and 1995 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 4750 Ashwood Drive, Cincinnati, Ohio, on April
28, 1997 at 3:00 P.M.
FORM 10-KSB: The Company's 1996 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
4750 Ashwood Drive
P.O. Box 415739
Cincinnati, Ohio 45241.
14
<PAGE> 14
[CLARK, SCHAEFER, HACKETT & CO. LETTERHEAD]
To the Board of Directors
of First Franklin Corporation and Subsidiary
We have audited the consolidated balance sheet of First Franklin Corporation and
Subsidiary as of December 31, 1996, and the related consolidated statements of
income, changes in stockholders' equity and cash flows for the year then ended.
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 audit. The financial statements of First Franklin Corporation and
Subsidiary as of December 31, 1995 and 1994, were audited by other auditors
whose report dated February 2, 1996, expressed an unqualified opinion on those
statements.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1996 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Franklin Corporation and Subsidiary as of December 31, 1996, and the results of
its operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ CLARK, SCHAEFER, HACKETT & CO.
Cincinnati, Ohio
February 14, 1997
15
<PAGE> 15
FIRST FRANKLIN CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1996 1995
---- ----
<S> <C> <C>
Cash, including certificates of deposit and other
interest-earning deposits of $7,624,649 and $5,895,185
at December 31, 1996 and 1995, respectively $ 10,009,454 $ 8,652,503
Investment securities:
Securities available-for-sale, at market value (amortized
cost of $17,424,351 and $18,839,227 at December 31, 1996
and 1995 respectively) 17,357,925 18,761,867
Mortgage-backed securities:
Securities available-for-sale, at market value (amortized
cost of $19,107,254 and $18,701,025 at December 31, 1996
and 1995 respectively) 19,503,306 18,963,734
Securities held-to-maturity, at amortized cost (market value
of $19,248,796 and $22,051,386 at December 31, 1996
and 1995, respectively) 19,621,590 22,257,816
Loans receivable, net 150,135,346 139,419,304
Real estate owned, net 180,877 1
Investment in Federal Home Loan Bank
of Cincinnati stock, at cost 1,750,100 1,649,700
Accrued interest receivable:
Investment securities 206,005 229,388
Mortgage-backed securities 227,200 249,850
Loans receivable 807,237 772,366
Property and equipment, net 1,899,686 908,662
Other assets 603,066 1,729,447
------------- -------------
$ 222,301,792 $ 213,594,638
============= =============
LIABILITIES
Savings accounts $ 194,647,772 $ 184,574,316
Federal Home Loan Bank advances 6,422,653 7,393,172
Advances by borrowers for taxes and insurance 1,066,314 1,206,649
Other liabilities 434,847 112,875
------------- -------------
Total liabilities 202,571,586 193,287,012
------------- -------------
Commitments (Notes 13 and 15)
STOCKHOLDERS' EQUITY
Preferred stock - $.01 par value, 500,000 shares
authorized, none issued and outstanding
Common stock - $.01 par value, 2,500,000 shares
authorized, 1,293,012 and 1,270,164 shares
issued in 1996 and 1995, respectively 12,930 12,702
Additional paid-in capital 5,952,130 5,838,118
Treasury stock, at cost - 136,578 and 91,878 shares
in 1996 and 1995, respectively (1,141,195) (442,045)
Retained earnings, substantially restricted 14,688,826 14,776,527
Unrealized gain on available-for-sale securities,
net of taxes of $112,100 and $63,025 at
December 31,1996 and 1995, respectively 217,515 122,324
------------- -------------
Total stockholders' equity 19,730,206 20,307,626
------------- -------------
$ 222,301,792 $ 213,594,638
============= =============
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
16
<PAGE> 16
FIRST FRANKLIN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Interest income:
Loans receivable $11,746,620 $10,885,905 $10,222,323
Investment securities 1,167,095 1,007,724 899,092
Mortgage-backed securities 2,648,299 2,269,746 2,065,108
Other interest income 219,458 383,198 107,294
----------- ----------- -----------
15,781,472 14,546,573 13,293,817
----------- ----------- -----------
Interest expense:
Savings accounts 9,325,910 8,812,389 7,442,314
Borrowed funds 458,867 152,988 73,013
----------- ----------- -----------
9,784,777 8,965,377 7,515,327
----------- ----------- -----------
NET INTEREST INCOME 5,996,695 5,581,196 5,778,490
Provision for loan losses 91,900 29,600 61,800
----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 5,904,795 5,551,596 5,716,690
----------- ----------- -----------
Noninterest income:
Service fees on NOW accounts 208,912 206,546 204,770
Gain on loans sold 73,446 10,142 22,526
Gain on sale of investments 51,376 22
Other income 210,408 145,088 211,736
----------- ----------- -----------
544,142 361,776 439,054
----------- ----------- -----------
Noninterest expense:
Salaries and employee benefits 1,744,725 1,628,664 1,722,326
Occupancy 611,303 573,663 572,238
Federal insurance premiums 1,574,041 402,815 406,047
Service bureau 255,613 263,109 253,349
Taxes other than income taxes 212,012 158,572 196,799
Other 1,073,399 954,628 995,939
Termination of pension plan 570,732
----------- ----------- -----------
6,041,825 3,981,451 4,146,698
----------- ----------- -----------
INCOME BEFORE FEDERAL INCOME TAXES 407,112 1,931,921 2,009,046
Provision for federal income taxes 133,342 632,035 654,575
----------- ----------- -----------
NET INCOME $ 273,770 $ 1,299,886 $ 1,354,471
=========== =========== ===========
NET INCOME PER COMMON SHARE $ 0.22 $ 1.05 $ 1.11
=========== =========== ===========
Weighted Average Number of Shares Outstanding 1,169,680 1,175,994 1,160,920
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
17
<PAGE> 17
FIRST FRANKLIN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'EQUITY
<TABLE>
<CAPTION>
EMPLOYEE NET UNREALIZED
ADDITIONAL STOCK GAIN(LOSS) ON
COMMON PAID-IN TREASURY OWNERSHIP AVAILABLE-FOR-SALE RETAINED
STOCK CAPITAL STOCK PLAN DEBT SECURITIES EARNINGS
-------- ----------- ---------- --------- ------------------ --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
JANUARY 1, 1994 $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, 1995 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
available-for-sale, 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
Issuance of 22,848 shares
of common stock 228 114,012
Dividends declared ($0.31)
per common share (361,471)
Change in net unrealized
gains on securities
available-for-sale, net of
deferred tax of $49,076 95,191
Purchase of treasury stock (699,150)
Net Income for the year
ended December 31, 1996 273,770
------- ---------- --------- --------- ----------- -----------
BALANCE,
DECEMBER 31, 1996 $12,930 $5,952,130 $(1,141,195) $ 217,515 $14,688,826
======= ========== =========== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part
of the consolidated financial statements.
18
<PAGE> 18
FIRST FRANKLIN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 273,770 $ 1,299,886 $ 1,354,471
Adjustments to reconcile net income to
net cash provided by operating activities:
Provision for loan losses 91,900 29,600 61,800
Depreciation and amortization 200,645 206,721 231,904
Deferred income taxes (120,970) 173,000 163,292
Gain on sale of assets (135,932) (22)
FHLB stock dividends (117,400) (109,000) (93,800)
(Increase) decrease in
accrued interest receivable 11,162 (230,973) (127,897)
(Increase) decrease in other assets 547,603 (42,534) (476,543)
(Decrease) increase in other liabilities 321,972 (213,816) 36,377
Other, net (371,748) 26,987 (179,164)
Proceeds from sale of loans originated for sale 3,461,645 910,340 3,892,766
Disbursements on loans originated for sale (3,873,604) (910,340) (1,954,576)
------------ ------------ ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 289,043 1,139,871 2,908,608
------------ ------------ ------------
Cash flows from investing activities:
Principal reductions on loans
and mortgage-backed securities 29,642,973 30,793,729 33,037,862
Disbursements on mortgage and
other loans originated for investment (34,171,188) (31,099,611) (31,385,312)
Proceeds from sale of student loans 853,274
Proceeds from sale of loan participations 608,000
Purchase of loans (1,057,779)
Purchase of investment securities:
Available-for-sale (4,198,996) (5,585,113) (1,497,500)
Proceeds from maturities of investment
securities:
Available-for-sale 5,625,000 2,525,000 1,000,000
Held-to-maturity 125,000
Purchase of mortgage-backed
securities:
Available-for-sale (4,004,727) (1,050,313) (2,634,750)
Held-to-maturity (9,092,938)
Proceeds from sale of other assets 101,376
Sale of FHLB stock 17,000 108,500 187,100
Proceeds from sale of real estate owned 149,127 218,816 855,976
Capital expenditures (327,434) (907,722) (83,117)
Proceeds from sale of fixed asset 12,500 16,000
------------ ------------ ------------
NET CASH USED IN
INVESTING ACTIVITIES (6,763,374) (14,077,152) (378,741)
------------ ------------ ------------
</TABLE>
Continued
The accompanying notes are an integral part
of the consolidated financial statements.
19
<PAGE> 19
FIRST FRANKLIN CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Net decrease in passbook accounts
and demand deposits (1,598,413) (6,863,091) (12,471,822)
Proceeds from certificates of deposit 71,441,483 74,551,719 38,021,004
Purchase of deposits 5,087,993
Payments for maturing certificates of deposit (65,042,542) (55,616,205) (31,596,862)
Proceeds from sale of common stock 114,240 73,500 20,000
Purchase of treasury stock (699,150)
Payment of dividends (361,475) (329,395) (364,497)
Proceeds from (repayment of) Federal
Home Loan Bank advances, net (970,519) 6,797,156 (601,266)
Increase (decrease) in advances by borrowers
for taxes and insurance (140,335) 93,111 (11,407)
------------ ------------ ------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 7,831,282 18,706,795 (7,004,850)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH 1,356,951 5,769,514 (4,474,983)
Cash at beginning of year 8,652,503 2,882,989 7,357,972
------------ ------------ ------------
CASH AT END OF YEAR $ 10,009,454 $ 8,652,503 $ 2,882,989
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest, including interest credited
to savings accounts $ 9,798,837 $ 8,976,346 $ 7,510,509
============ ============ ============
Income taxes $ 253,000 $ 480,000 $ 537,627
============ ============ ============
Supplemental disclosure of noncash activities:
Real estate acquired in settlement of loans $ 406,042 $ 275,735 $ 359,271
============ ============ ============
Unrealized gain (loss) on available-for-sale securities $ 144,267 $ 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> 20
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
Investment and mortgage-backed 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,
1996 and 1995, 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 and 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
21
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. ORGANIZATION AND ACCOUNTING POLICIES, CONTINUED:
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.
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 non-accrual 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 $3,443,704 during
1996. The amount of loans held for sale at December 31, 1996 and 1995 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, and, when applicable, those
stock options that are dilutive. Weighted average common shares and common
stock equivalents deemed outstanding totaled 1,218,067, 1,233,110 and
1,219,117 shares for 1996, 1995 and 1994 respectively.
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.
22
<PAGE> 22
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, 1996
------------------------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. Treasury securities and
obligations of U.S. Government
Corporations and agencies $16,394,096 $ 18,998 $ 128,616 $16,284,478
Obligations of states and
municipalities 1,030,255 51,642 8,450 1,073,447
----------- ----------- ----------- -----------
$17,424,351 $ 70,640 $ 137,066 $17,357,925
=========== =========== =========== ===========
</TABLE>
<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
Corporations 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
=========== =========== =========== ===========
</TABLE>
The amortized cost and estimated market value of investment securities at
December 31, 1996, 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 $ 4,185,211 $ 4,184,973
Due after one year through five years 12,719,805 12,633,020
Due after five years through ten years 273,610 290,218
Due after ten years 245,725 249,714
----------- -----------
$17,424,351 $17,357,925
=========== ===========
</TABLE>
The detail of interest and dividends on investment securities (including
dividends on FHLB stock) is as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Taxable interest income $ 982,075 $ 835,895 $ 738,431
Nontaxable interest income 67,453 62,648 66,600
Dividends 117,567 109,181 94,061
----------- ----------- -----------
$ 1,167,095 $ 1,007,724 $ 899,092
=========== =========== ===========
</TABLE>
23
<PAGE> 23
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, 1996
------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- -------- ----------- -----------
<S> <C> <C> <C> <C>
Available-for-sale:
FHLMC certificates $ 3,627,920 $ 91,580 $ 3,719,500
FNMA certificates 5,908,866 113,338 $ 8,065 6,014,139
GNMA certificates 9,570,478 199,189 9,769,667
----------- -------- ----------- -----------
$19,107,264 $404,107 $ 8,065 $19,503,306
=========== ======== =========== ===========
Held-to-maturity:
FHLMC certificates $11,197,698 $ 112,594 $11,085,104
FNMA certificates 7,946,192 260,200 7,685,992
Collateralized mortgage
obligations 477,700 477,700
----------- ----------- -----------
$19,621,590 $ 372,794 $19,248,796
=========== =========== ===========
</TABLE>
<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
=========== ======== =========== ===========
</TABLE>
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> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. LOANS RECEIVABLE:
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,
----------------------------------
1996 1995
---- ----
<S> <C> <C>
First mortgage loans:
Principal balances:
Collateralized by one-to-four
family residences $ 118,742,863 $ 112,038,326
Collateralized by multi-family properties 8,302,806 7,883,071
Collateralized by other properties 15,126,444 12,453,311
Construction loans 7,718,552 8,041,840
------------- -------------
149,890,665 140,416,548
Less:
Undisbursed portion of construction loans (2,708,474) (4,170,902)
Net deferred loan origination fees (241,303) (447,177)
Unearned premiums (discounts) 3,026 (169,981)
------------- -------------
TOTAL FIRST MORTGAGE LOANS 146,943,914 135,628,488
------------- -------------
Consumer and other loans:
Principal balances:
Consumer loans 2,730,108 2,877,456
Loans on savings accounts 857,695 650,224
Student loans 532,525 1,210,320
------------- -------------
TOTAL CONSUMER AND OTHER LOANS 4,120,328 4,738,000
------------- -------------
Less allowance for loan losses (928,896) (947,184)
------------- -------------
$ 150,135,346 $ 139,419,304
============= =============
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $ 947,184 $ 1,255,998 $ 1,248,383
Provision for loan losses 91,900 29,600 61,800
Charge-offs and recoveries, net (56,797) (338,414) (1,875)
Other changes (53,391) -- (52,310)
--------- ----------- -----------
BALANCE, END OF YEAR $ 928,896 $ 947,184 $ 1,255,998
========= =========== ===========
</TABLE>
It is the opinion of management that adequate provisions have been made for
anticipated losses in the loan portfolio. At December 31, 1996 the recorded
investment in loans for which impairment has been recognized 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 $54,269,000, $58,477,000 and $65,095,000 at December 31, 1996,
1995 and 1994, 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 was adopted
as of January 1, 1996.
Mortgage servicing rights of $55,505 were capitalized in 1996. The fair value of
mortgage servicing rights equals the current book value as of December 31, 1996.
Amortization of mortgage-servicing rights was $1,741 for the year 1996.
25
<PAGE> 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. REAL ESTATE OWNED:
Real estate owned consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995
<S> <C> <C>
Real estate owned $ 233,252 $ 1
Less allowance for losses (52,375) --
--------- ------
$ 180,877 $ 1
========= ======
</TABLE>
Activity in the allowance for losses on real estate owned is summarized as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $ -- - $ 30,700
Reserve utilized in sale of real estate owned (13,900) - (83,010)
Other changes 66,275 - 52,310
-------- --- --------
Balance, end of year $ 52,375 - --
======== === ========
</TABLE>
5. PROPERTY AND EQUIPMENT:
Property and equipment, net consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1995
---- ----
<S> <C> <C>
Buildings and improvements $ 1,388,585 $ 665,457
Leasehold improvements 968,578 963,063
Furniture, fixtures and equipment 1,532,251 1,443,238
----------- -----------
3,889,414 3,071,758
Accumulated depreciation and amortization (2,419,159) (2,317,027)
----------- -----------
1,470,255 754,731
Land 429,431 153,931
----------- -----------
$ 1,899,686 $ 908,662
=========== ===========
</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. The adoption of this statement did not have an impact on the
Company's financial statements.
26
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. SAVINGS ACCOUNTS:
Savings accounts consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------------------------- -----------------------------------------
WEIGHTED PERCENT WEIGHTED PERCENT
AVERAGE OF AVERAGE OF
RATE AMOUNT DEPOSITS RATE AMOUNT DEPOSITS
--------------- ------------ -------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C>
Passbooks 2.75% $ 24,126,764 12.4% 2.75% $ 24,304,471 13.2%
NOW accounts
and variable rate
money market
savings and
checking accounts
2.25 24,945,483 12.8 2.52 24,876,768 13.4
------------ ----- ------------ -----
49,072,247 25.2 49,181,239 26.6
------------ ----- ------------ -----
Certificates:
1-6 month 5.40 34,392,048 17.7 5.35 29,160,961 15.8
1 year 5.26 26,216,946 13.5 5.63 22,906,323 12.4
18 month 5.89 23,407,105 12.0 6.00 15,640,081 8.5
18 month - 5 years 6.13 34,301,079 17.6 5.97 36,087,067 19.6
5-8 years 5.77 24,070,636 12.4 6.34 28,719,553 15.5
Jumbos 5.17 3,187,711 1.6 3.18 2,879,092 1.6
------------ ----- ------------ -----
145,575,525 74.8 135,393,077 73.4
------------ ----- ------------ -----
TOTAL SAVINGS
ACCOUNTS $194,647,772 100.0% $184,574,316 100.0%
============ ===== ============ =====
</TABLE>
At December 31, 1996, scheduled maturities of certificate accounts are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 94,127,113
1998 41,855,041
1999 3,273,958
2000 2,335,733
2001 3,929,950
Thereafter 53,730
--------------
$ 145,575,525
==============
</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,
-------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Passbooks $ 683,238 $ 716,039 $ 952,438
NOW and money market accounts 528,380 586,222 707,922
Certificates 8,114,292 7,510,128 5,781,954
---------- ---------- ----------
$9,325,910 $8,812,389 $7,442,314
========== ========== ==========
</TABLE>
27
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. FEDERAL HOME LOAN BANK ADVANCES:
FHLB advances at December 31, 1996 consist of the following:
<TABLE>
<CAPTION>
INTEREST OUTSTANDING
MATURITY DATE RATE BALANCE
------------- -------- -----------
<S> <C> <C> <C>
05/01/06 8.15% $ 421,225
10/01/10 6.35 4,282,372
12/01/10 6.30 1,719,056
----------
$6,422,653
==========
The advances require principal payments as follows:
1997 $ 883,590
1998 791,835
1999 708,918
2000 635,237
2001 569,900
Thereafter 2,833,173
----------
$6,422,653
==========
</TABLE>
As collateral for the advances, the Company has pledged mortgage-backed
securities equal to or greater than 110% of the outstanding balance.
8. 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 9). At December 31, 1996, the most restrictive
required level of capital to satisfy regulatory requirements was
approximately $7,830,000.
Franklin Savings and Loan Company was allowed a special bad debt deduction,
generally limited to 8% of otherwise taxable income, and subject to certain
limitations based on aggregate loans and deposit account balances at the
end of the year. If the amounts that qualify as deductions for federal
income taxes are later used for purposes other than bad debt losses,
including distributions in liquidation, such distributions will be subject
to federal income taxes at the then current corporate income tax rate.
Retained earnings at December 31, 1996, include approximately $3,180,000
for which federal income taxes have not been provided. The approximate
amount of unrecognized deferred tax liability relating to the cumulative
bad debt deduction was approximately 1,081,000 at December 31, 1996.
A bill repealing the thrift bad debt reserve has been signed into law and
is effective for taxable years beginning after December 31, 1995. All
savings banks and thrifts will be required to account for tax reserves for
bad debts in the same manner as banks. Such entities with assets less than
$500 million will be required to maintain a moving average experience based
reserve and no longer will be able to calculate a deduction based on a
percentage of taxable income.
Tax reserves accumulated after 1987 will automatically be subject to
recapture. The recapture will occur in equal amounts over six years
beginning in 1997 and can be deferred up to two years, depending on the
level of loans originated.
The tax law change will have no effect as the Company has had no increase
in tax reserves accumulated after 1987. Pre-1988 tax reserves will not have
to be recaptured unless the thrift or successor institution liquidates,
redeems shares or pays a dividend in excess of earnings and profits.
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, 1996, the
Company may make capital distributions during a year up to the greater of
100% of its net earnings current year to date, plus 50% of the amount by
which the lesser of the Company's tangible,
28
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. STOCKHOLDERS' EQUITY, CONTINUED:
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. 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 the 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>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Options outstanding at beginning of year 72,036 86,736 90,736
Cancelled (1,616) -- --
Exercised (22,848) (14,700) (4,000)
------- ------- ------
OPTIONS OUTSTANDING AT END OF YEAR 47,572 72,036 86,736
======= ======= ======
</TABLE>
All options outstanding and exercised have an option price of $5.00.
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.
SFAS No. 123 is effective for transactions entered into in fiscal years
that begin after December 31, 1995, for employee stock options granted in
fiscal years beginning after December 31, 1994. All of the Company's
employee stock options were granted in 1987 and therefore the adoption of
this standard has no effect on the Company's financial statements. The
Company will continue to measure compensation cost related to employee
stock options using APB 25 and will provide pro forma disclosures as
required.
9. 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, 1996, 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, 1996,
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 $3,248,000 $13,734,000 6.34%
Core capital 6,495,000 13,734,000 6.34
Risk-based capital 7,830,000 14,371,000 14.68
</TABLE>
29
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. FAIR VALUES OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments", requires that the Company disclose
estimated fair values for its financial instruments. The following methods
and assumptions were used to estimate the fair value of the Company's
financial instruments.
CASH AND CASH EQUIVALENTS AND INVESTMENT IN FHLB STOCK
The carrying value of cash and cash equivalents and the investment in FHLB
stock approximates those assets' fair value.
INVESTMENT AND MORTGAGE-BACKED SECURITIES
For investment securities (debt instruments) and mortgage-backed
securities, fair values are based on quoted market prices, where available.
If a quoted market price is not available, fair value is estimated using
quoted market prices of comparable instruments.
LOANS RECEIVABLE
The fair value of the loan portfolio is estimated by evaluating homogeneous
categories of loans with similar financial characteristics. Loans are
segregated by types, such as residential mortgage, commercial real estate,
and consumer. Each loan category is further segmented into fixed and
adjustable rate interest terms, and by performing and nonperforming
categories.
The fair value of performing loans, except residential mortgage loans, is
calculated by discounting contractual cash flows using estimated market
discount rates which reflect the credit and interest rate risk inherent in
the loan. For performing residential mortgage loans, fair value is
estimated by discounting contractual cash flows adjusted for prepayment
estimates using discount rates based on secondary market sources. The fair
value for significant nonperforming loans is based on recent internal or
external appraisals. Assumptions regarding credit risk, cash flow, and
discount rates are judgmentally determined by using available market
information.
SAVINGS ACCOUNTS
The fair values of passbook accounts, NOW accounts, and the 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.
FHLB ADVANCES
Rates currently available to the Company for advances with similar terms
and remaining maturities are used to estimate the fair value of existing
advances.
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, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------ --------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 10,009,454 $ 10,009,454 $ 8,652,503 $ 8,652,503
Investment securities 17,357,925 17,357,925 18,761.867 18,761,867
Mortgage-backed securities 39,124,896 38,752,102 41,221,550 41,015,120
Loans receivable 150,135,346 151,558,000 140,983,647 142,140,000
Investment in FHLB stock 1,750,100 1,750,100 1,649,700 1,649,700
Financial liabilities:
Savings accounts 194,647,772 194,414,000 184,574,316 185,225,000
FHLB advances 6,422,653 6,422,653 7,393,172 7,393,172
CONTRACTUAL FAIR CONTRACTUAL FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------
Unrecognized financial instruments:
Commitments to extend credit $ 2,865,000 $ 2,865,000 $ 1,565,000 $ 1,565,000
Unfunded construction loans 2,708,000 2,708,000 4,170,902 4,170,902
</TABLE>
30
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. FEDERAL INCOME TAXES:
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Federal:
Current $ 254,312 $459,035 $491,283
Deferred (120,970) 173,000 163,292
--------- -------- --------
TOTAL $ 133,342 $632,035 $654,575
========= ======== ========
</TABLE>
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,
--------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Tax at statutory rates $ 138,419 $ 656,853 $ 683,667
Benefit of tax exempt interest (16,364) (14,978) (18,034)
Other 11,287 (9,840) (11,058)
--------- --------- ---------
$ 133,342 $ 632,035 $ 654,575
========= ========= =========
</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,
------------------------------
1996 1995
<S> <C> <C>
Deferred tax asset arising from:
Loan loss reserve $ 333,632 $ 322,042
Deferred loan fees and costs 98,346 144,542
Depreciation 39,336 38,527
Other, net 4,677 6,276
--------- ---------
TOTAL DEFERRED TAX ASSETS 475,991 511,387
--------- ---------
Deferred tax liability arising from:
FHLB stock (320,725) (283,733)
Prepaid pension expense (194,049)
Unrealized gain on securities (112,066) (63,025)
TOTAL DEFERRED TAX LIABILITIES (432,791) (540,807)
--------- ---------
NET DEFERRED TAX ASSET (LIABILITY) $ 43,200 $ (29,420)
========= =========
</TABLE>
Net deferred tax assets (liabilities) and federal income tax expense in
future years can be significantly affected by changes in enacted tax rates.
31
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
12. BENEFIT PLANS
The Company has a noncontributory defined contribution, employee stock
ownership, and a defined benefit pension plan which covers substantially
all full-time employees after attaining age twenty-one and completing one
year of service.
In November of 1995, the Board of Directors made a decision to terminate
the defined benefit pension plan, effective February 15, 1996. All
participants became 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 1997. The Company incurred a settlement loss in the 1996
financial statements of $570,732. The Company has no obligation for
additional funding of the terminated plan.
The following table sets forth the defined benefit plan's funded status and
amounts recognized in the Company's consolidated balance sheet at the
plan's October 15, 1995 measurement date, as applied to the Company's year
end of December 31, 1995:
Actuarial present value of benefit obligations:
<TABLE>
<CAPTION>
1995
----
<S> <C>
Accumulated benefit obligation,
including vested benefits of $1,802,987 $ 1,819,853
===========
Projected benefit obligation for service rendered to date $ 2,051,806
-----------
Plan assets at fair value, primarily certificates of
deposit and net cash surrender values of life insurance policies 2,050,320
Plan assets (less than) in excess of projected benefit obligation (1,486)
Unrecognized net loss from past experience
different from that assumed 734,874
Unrecognized net asset being recognized over fifteen years (162,656)
-----------
Prepaid pension cost included in other assets $ 570,732
===========
</TABLE>
Net pension cost for the years ending December 31, 1995 and 1994 included
the following components:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
Service cost $ 80,921 $ 127,744
Interest cost 119,237 112,320
Actual return on plan assets (122,298) (95,070)
Net amortization and deferral 9,589 (59,428)
--------- ---------
NET PENSION COST $ 87,449 $ 85,566
========= =========
</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.
The Company implemented, during 1996, a non-contributory defined
contribution plan. The Company makes an annual contribution to the plan
equal to 10% of the eligible employees' compensation. Total expense under
this defined contribution plan was $115,000 for the year ended December 31,
1996. The plan was not in effect in 1995.
The Company also has an employee stock ownership plan ("ESOP"). 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 1996, 1995
and 1994. At December 31, 1996, 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 1996, 1995,
and 1994. The Company's policy is to charge to expense the amount
contributed to the ESOP. At December 31, 1996, the ESOP held 97,515
allocated shares and 11,616 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.
32
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
13. 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 noncancelable portion
of the lease terms:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1997 $145,868
1998 131,956
1999 85,660
2000 15,488
2001 15,972
Thereafter 133,100
</TABLE>
Rent expense was $194,632, $207,796 and $205,379 in 1996, 1995 and 1994,
respectively.
14. 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, 1996. The following is an analysis of the
activity of such loans for the years indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $ 717,079 $ 557,121 $ 577,438
Loans originated 456,113 1,425,000 14,000
Retirement of Director (205,000)
Repayments (137,405) (118,307) (34,317)
Commitment to lend (1,146,735)
----------- ----------- ---------
BALANCE, END OF YEAR $ 830,787 $ 717,079 $ 557,121
=========== =========== =========
</TABLE>
15. LOAN COMMITMENTS:
In the ordinary course of business, the Company has various outstanding
commitments to extend credit that are not reflected in the accompanying
consolidated financial statements. These commitments involve elements of
credit risk in excess of the amount recognized in the balance sheet.
The Company uses the same credit policies in making commitments for loans
as it does for loans that have been disbursed and recorded in the
consolidated balance sheet. The Company generally requires collateral when
it makes loan commitments, which generally consists of the right to receive
first mortgages on improved or unimproved real estate when performance
under the contract occurs.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since some portion of the
commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Certain of these commitments are for fixed rate loans, and, therefore,
their value is subject to market risk as well as credit risk.
At December 31, 1996, the Company's total commitment to extend credit was
approximately $2,865,000, and the Company had commitments to disburse
construction loans of approximately $2,708,000.
16. SUBURBAN FEDERAL DEPOSIT ACQUISITION:
On June 1, 1996, the Company purchased approximately $5.3 million of
deposits from Suburban Federal Savings Bank. After paying a deposit premium
of approximately $212,000 the Company received in cash from Suburban
approximately $5.1 million as consideration for the deposits assumed.
33
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
17. SAIF SPECIAL ASSESSMENT:
The deposits of the Company are presently insured by the SAIF, which
together with the BIF, are the two insurance funds administered by the
FDIC. On November 8, 1995, the FDIC revised the premium schedule for
BIF-insured banks to provide a range of 0 to 31 cents per $100 of deposits
(as compared to the current range of 23 to 31 cents per $100 of deposits
for SAIF-insured institutions) due to the BIF achieving its statutory
reserve ratio. As a result, BIF members generally would pay substantially
lower premiums than SAIF members. It was previously anticipated that the
SAIF will not be adequately recapitalized until 2002, absent a substantial
increase in premium rates or the imposition of special assessments or other
significant developments.
On September 30, 1996, the President signed an omnibus appropriations
package which included the recapitalization of the SAIF. All SAIF members
were required to pay a one-time assessment of 65.7 cents per $100 in
deposits held on March 31, 1995. The Company's special assessment was
$1,144,780. The assessment was charged against earnings during 1996.
Beginning January 1, 1997, SAIF members will be assessed a premium of 6.4
cents per $100 of deposits to cover the FICO obligation plus a regular
insurance premium. At the present time the regular insurance premium which
applies to the Company is the lowest risk category of $2,000 per year.
Other provisions of the appropriations package require the Treasury
Department to provide Congress, by March 31, 1997, with a report on merging
of the bank and thrift charters and merging the SAIF and Bank Insurance
Fund ("BIF") by January 1, 1999, provided that the bank and thrift charters
have been merged by that date. It also required BIF and SAIF members to
begin sharing the FICO obligation on a pro-rata basis at the earlier of
January 1, 2000, or when the BIF and SAIF funds are merged.
18. FIRST FRANKLIN CORPORATION - PARENT COMPANY ONLY FINANCIAL INFORMATION:
The following condensed balance sheets as of December 31, 1996 and 1995 and
condensed statements of income and cash flows for each of the three years
in the period ended December 31, 1996 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,
--------------------------------
1996 1995
---- ----
<S> <C> <C>
Cash $ 1,544,349 $ 1,573,065
Investment securities:
Available-for-sale 3,117,183 3,561,560
Investment in Franklin Savings 14,126,524 14,059,173
Dividend receivable 324,000
Other assets 1,050,640 884,206
------------ ------------
$ 19,838,696 $ 20,402,004
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities $ 108,490 $ 94,378
Preferred stock - $.01 par value,
500,000 shares authorized,
none issued and outstanding
Common stock - $.01 par value, 2,500,000
shares authorized, 1,293,012 and
1,270,164 shares issued in 1996 and
1995, respectively 12,930 12,702
Additional paid-in capital 5,952,130 5,838,118
Treasury stock, at cost - 136,578 and 91,878
shares in 1996 and 1995, respectively (1,141,195) (442,045)
Retained earnings 14,688,826 14,776,527
Net unrealized gain on available-for-sale
securities of parent and subsidiary 217,515 122,324
------------ ------------
$ 19,838,696 $ 20,402,004
============ ============
</TABLE>
34
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
18. FIRST FRANKLIN CORPORATION - PARENT COMPANY ONLY FINANCIAL INFORMATION,
CONTINUED:
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Equity in earnings of Franklin Savings $ 146,741 $ 1,137,999 $ 1,249,495
Interest income 272,045 287,968 204,050
Operating expenses (113,337) (55,813) (42,361)
Other Income (loss) 26,296 8,632 (1,738)
Federal income tax expense (57,975) (78,900) (54,975)
----------- ----------- -----------
$ 273,770 $ 1,299,886 $ 1,354,471
=========== =========== ===========
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 273,770 $ 1,299,886 $ 1,354,471
Equity in earnings of Franklin Savings (146,741) (1,137,999) (1,249,495)
Dividends received from Franklin Savings 464,000 1,137,000 2,735,000
Change in other assets and liabilities 4,730 (90,801) 58,056
----------- ----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 595,759 1,208,086 2,898,032
----------- ----------- -----------
Cash flows from investing activities:
Loan to Franklin Savings 1,000,000 (1,000,000)
Maturity (Purchase) of investment securities 500,000 (2,147,065)
Capital expenditures (188,129) (810,000)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES 311,871 190,000 (3,147,065)
----------- ----------- -----------
Cash flows from financing activities:
Payment of dividends (351,436) (329,395) (364,497)
Proceeds from sale of common stock 114,240 73,500 20,000
Purchase of treasury stock (699,150)
----------- ----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (936,346) (255,895) (344,497)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH (28,716) 1,142,191 (593,530)
Cash at beginning of year 1,573,065 430,874 1,024,404
----------- ----------- -----------
CASH AT END OF YEAR $ 1,544,349 $ 1,573,065 $ 430,874
=========== =========== ===========
</TABLE>
35
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
19. MADISON SERVICE CORPORATION:
In accordance with OTS requirements, the following summary of financial
information of Madison Service Corporation for the year ended December 31,
1996, is presented:
<TABLE>
<CAPTION>
BALANCE SHEET
ASSETS
<S> <C>
Cash $ 200,394
Other assets 15,054
---------
$ 215,448
=========
LIABILITIES AND STOCKHOLDER'S EQUITY
Accrued expenses
Equity $ 215,448
---------
$ 215,448
=========
STATEMENT OF INCOME
Revenues:
Interest income $ 5,687
Service fees and other 17,168
Operating expenses (3,904)
---------
INCOME BEFORE FEDERAL INCOME TAX 18,951
Federal income tax 6,450
---------
NET INCOME $ 12,501
=========
</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 105,448
----------
$ 215,448
==========
</TABLE>
36
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
20. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
All adjustments necessary for a fair statement of operations for each
period have been included.
<TABLE>
<CAPTION>
1996
(DOLLARS IN THOUSANDS)
-------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------ ------ ------- ------
<S> <C> <C> <C> <C>
Interest income $3,839 $3,865 $ 3,960 $4,118
Interest expense 2,428 2,403 2,465 2,489
------ ------ ------- ------
NET INTEREST INCOME 1,411 1,462 1,495 1,629
Provision for loan losses 21 20 31 20
------ ------ ------- ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,390 1,442 1,464 1,609
Noninterest income 126 98 132 188
Noninterest expense 1,060 1,047 2,221 1,714
------ ------ ------- ------
INCOME (LOSS) BEFORE FEDERAL
INCOME TAXES 456 493 (625) 83
Federal income taxes 151 163 (215) 34
------ ------ ------- ------
NET INCOME (LOSS) $ 305 $ 330 $ (410) $ 49
====== ====== ======= ======
EARNINGS (LOSS)
PER COMMON SHARE $ 0.25 $ 0.27 $ (0.34) $ 0.04
====== ====== ======= ======
</TABLE>
37
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
20. QUARTERLY FINANCIAL INFORMATION (UNAUDITED), CONTINUED:
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>
38
<PAGE> 1
Exhibit 20
FIRST FRANKLIN CORPORATION
4750 ASHWOOD DRIVE
CINCINNATI, OHIO 45241
(513) 469-5352
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To be Held on April 28, 1997
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 4750 Ashwood Drive,
Cincinnati, Ohio 45241 on April 28, 1997, 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 reelection of two directors of the Company;
2. The approval of the First Franklin Corporation 1997
Stock Option and Incentive Plan, a copy of which is
attached to the enclosed Proxy Statement;
3. The ratification of the selection of Clark, Schaefer,
Hackett & Co. as the independent accountants of the
Company for the current fiscal year; and
4. Such other matters as may properly come before the
Meeting or any adjournments thereof.
The Board of Directors is not aware of any other business to come
before the Meeting.
Any action may be taken on the foregoing proposals at the Meeting on
the date specified above, or on any date or dates to which the Meeting may be
adjourned. Stockholders of record at the close of business on March 12, 1997,
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 submit a later-dated proxy
or written revocation to the Company before the commencement of voting at the
Meeting or if you attend and vote at the Meeting in person by written ballot.
Cincinnati, Ohio
March 27, 1997
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
4750 ASHWOOD DRIVE
CINCINNATI, OHIO 45241
(513) 469-5352
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
APRIL 28, 1997
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 4750 Ashwood Drive, Cincinnati, Ohio 45241, on
April 28, 1997, 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 27, 1997.
Stockholders who execute proxies retain the right to revoke them at any
time prior to the votes being taken at the Meeting. 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 or written revocation prior to a vote being taken on a particular proposal
at the Meeting or by attending the Meeting and voting in person by written
ballot. Proxies solicited on behalf of the Board of Directors of the Company
will be voted in accordance with the directions given therein and, in the
absence of specific instructions to the contrary, will be voted:
FOR the reelection of Richard H. Finan and James E. Cross as
--- directors of the Company for terms expiring in 2000;
FOR the approval of the First Franklin Corporation 1997 Stock
--- Option and Incentive Plan (the "1997 Option Plan"), a copy of
which is attached hereto as Exhibit A; and
FOR the ratification of Clark, Schaefer, Hackett & Co. ("Clark
--- Schaefer") as the independent accountants of First Franklin
for the current fiscal year.
A majority of the shares of the Company's issued and outstanding common
stock (the "Common Stock"), present in person or represented by proxy at the
Meeting, shall constitute a quorum for purposes of the Meeting. Abstentions and
broker Non-votes (defined below) are counted for purposes of determining a
quorum.
VOTE REQUIRED
Two directors shall be elected by a plurality of the shares present in
person or represented by proxy at the Meeting and validly voted in the election
of directors. Shares as to which the authority to vote is withheld and shares
held by a nominee for a beneficial owner which are present in person or by proxy
but are not voted with respect to the election of directors ("Non-votes") are
not counted toward the election of directors. If the enclosed Proxy is signed,
dated and returned by the stockholder but no vote is specified thereon, the
shares held by such stockholder will be voted FOR the reelection of the nominees
named thereon.
The affirmative vote of the holders of a majority of the shares present
in person or by proxy is necessary to approve the 1997 Option Plan. The effect
of an abstention or Non-vote is the same as a vote against the 1997 Option Plan.
If the enclosed Proxy is signed, dated and returned by the stockholder, but no
vote is specified thereon, the shares held by such stockholder will be voted FOR
the approval of the 1997 Option Plan.
The affirmative vote of the holders of a majority of the shares
represented in person or by proxy at the Annual Meeting is necessary to ratify
the selection of Clark, Schaefer, Hackett & Co. ("Clark Schaefer") as the
independent
-1-
<PAGE> 3
accountants of the Company for the current fiscal year. The effect of an
abstention or a Non-vote is the same as a vote against ratification. If the
enclosed Proxy is signed and dated by the shareholder, but no vote is specified
thereon, the shares held by such shareholder will be voted FOR the ratification
of the selection of Clark Schaefer as independent accountants.
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Stockholders of record as of the close of business on March 12, 1997,
will be entitled to one vote for each share then held. As of that date, the
Company had 1,173,234 shares of Common Stock issued and outstanding.
The following table sets forth, as of March 12, 1997, share ownership
information regarding (i) those persons or entities who were known by management
to beneficially own more than five percent of the outstanding shares of Common
Stock; and (ii) all directors and executive officers of the Company and its most
significant subsidiary, The Franklin Savings and Loan Company ("Franklin"), as a
group.
<TABLE>
<CAPTION>
Shares Beneficially Percent of
Name and Address of Beneficial Owner Owned Class
------------------------------------ ----- -----
<S> <C> <C>
Thomas H. Siemers(1) 158,115 13.3%
First Franklin Corporation
4750 Ashwood Drive
Cincinnati, Ohio 45241
All directors and executive officers of Franklin 363,466 30.4
and the Company as a group (11 persons)(2)
- -----------------------------
<FN>
(1) Mr. Siemers, the President and Chief Executive Officer of the Company,
has sole voting and investment power with respect to 59,580 shares,
shared voting and investment power for 18,600 shares, and options to
purchase 13,972 shares granted under the First Franklin Corporation
1987 Stock Option and Incentive Plan (the "1987 Option Plan"). Mr.
Siemers has sole voting and/or investment power with respect to 24,488
shares allocated to his account in The Franklin Savings and Loan
Company Employee Stock Ownership Plan ("ESOP"). Finally, as the ESOP
trustee, Mr. Siemers may be deemed to have voting and/or investment
power with respect to another 41,470 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 and which may still be sold by the trustee.
(2) Includes shares held directly, shares allocated to executive officers'
accounts in the ESOP, shares subject to options granted under the 1987
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 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.
The full Board of Directors appoints a nominating committee for the
annual selection of its nominees as 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.
-2-
<PAGE> 4
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 a nominee) will be voted
at this Meeting for the reelection of the nominees indicated below. If either of
the nominees 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 either of
the nominees might be unable to serve if elected. Except as disclosed herein,
there are no arrangements or understandings between either of the nominees and
any other person pursuant to which either of the nominees were selected.
<TABLE>
<CAPTION>
Positions held with Year first Shares
the Company elected director of Term to beneficially owned Percent
Name Age(1) and Franklin the Company/Franklin expire at March 12, 1997(2) of class
---- --- ------------ -------------------- ---------- -------------------- --------
NOMINEES
<S> <C> <C> <C> <C> <C> <C>
Richard H. Finan 62 Director 1987/1968 2000(3) 51,616(4) 4.4%
James E. Cross 61 Director 1996/1978 2000(3) 21,136 1.8
DIRECTORS REMAINING IN OFFICE
Thomas H. Siemers 63 President, Chief 1987/1953 1998 158,115(5) 13.3
Executive Officer
and Director
James E. Hoff, 64 Director 1993/1993 1998 - -
S.J.
John L. Nolting 64 Director 1987/1981 1999 1,000 .1
- -------------------------------
<FN>
(1) As of March 12, 1997.
(2) Unless otherwise indicated by footnote, the individual has sole voting
and investment power with respect to all shares reported as owned.
(3) Year new term will expire, if nominee is elected at the Meeting.
(4) Mr. Finan has shared voting and investment power over all 51,616 shares
of Common Stock.
(5) See footnote 1 to table under "VOTING SECURITIES AND PRINCIPAL HOLDERS
THEREOF."
</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. He also serves as the President and Chief Executive Officer of Queen City
Leasing, an automobile leasing company located in Cincinnati, and a Director and
the President of DirectTeller Systems, Inc.
RICHARD H. FINAN is the President of the Ohio State Senate. He has been
a member of the State legislature since 1973 and has had a legal practice since
1959. Director Finan also serves as legal counsel for Madison Service
Corporation, Franklin's wholly-owned subsidiary, and DirectTeller Systems, Inc.,
a joint venture between the Company and DataTech
-3-
<PAGE> 5
Services, Inc. Mr. Finan is also a director of Carillon Funds, Inc., a company,
which has a class of securities registered under Section 12 of the Securities
Exchange Act of 1934 (the "Exchange Act").
JAMES E. CROSS is a partner in the Dayton, Ohio law firm of Allbery
Cross Fogarty and has practiced with that firm for 12 years. 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.
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
Regular meetings of the Company's Board of Directors are held
quarterly. During the year ended December 31, 1996, the Board of Directors held
a total of seven 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.
The Company has an audit committee, which is composed of the four
outside directors. The Audit Committee met once during 1996. The Company has no
standing 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. During 1996, the Board of Directors met once acting as a
nominating 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, Donald E. Newberry, Sr.
and Mary W. Sullivan. Regular meetings of Franklin's Board of Directors are
generally held on a monthly basis. The Board of Directors held a total of 13
regular and special meetings during 1996. 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 and Compensation 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 1996.
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,
Cross and Nolting. One meeting was held by this committee during 1996.
COMPENSATION OF THE BOARD OF DIRECTORS
Directors of the Company and Franklin receive directors' fees of $1,000
for each meeting of those Boards of Directors held during the year, except for
Mr. Siemers, who receives fees only as a director of the Company. No fees are
currently paid by the Company or Franklin for committee membership.
-4-
<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 each
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 Executive 1996 $208,512 - $13,454
Officer and Director of the Company, Franklin 1995 204,922 - 14,365
and Madison Service Corporation; Chairman of 1994 197,047 $10,000 13,359
the Board of DirectTeller Systems, Inc.
DANIEL T. VOELPEL - Vice President 1996 $105,120 $ 2,000 $ 9,260
and Chief Financial Officer of the 1995 97,957 - 9,398
Company and Franklin and Treasurer 1994 94,263 $ 7,000 9,018
of Madison Service Corporation and
DirectTeller Systems, Inc.
- -----------------------------
<FN>
(1) Represents the Company's contributions to the ESOP on behalf of Messrs.
Siemers and Voelpel.
</TABLE>
No stock options were awarded under the 1987 Option Plan during 1996.
The following table sets forth certain information concerning the number and
value of stock options at December 31, 1996, held by the individuals named in
the Summary Compensation Table. No stock appreciation rights or limited stock
appreciation rights have been granted to any director or executive officer under
the 1987 Option Plan.
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION> 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 15,000 13,972 - $160,678 -
$157,500
Daniel T. Voelpel - - 12,200 - 140,300 -
- ----------------------------------
<FN>
(1) Value is based upon the sales prices of $13.50 and $16.50 per share of
the Common Stock as reported on The Nasdaq National Market at the time
of the trade closest in time to the exercise of the 5,000 and 10,000
options, respectively, exercised by Mr. Siemers, less the option
exercise price of $5.00 per share.
(2) Value is based upon the sales price of $16.50 per share of the Common
Stock as reported on The Nasdaq National Market on December 31, 1996,
less the option exercise price of $5.00 per share.
</TABLE>
-5-
<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 Mr. Siemers gives written notice to the contrary. The
contract provides for termination upon the employee's death, for cause or in
certain events required 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, among other things, for participation in an equitable manner in
employee benefits applicable to executive personnel.
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, 1996, at
which date the unexpired term of the contract was 52 months, Mr. Siemers could
have received a cash payment of up to approximately $777,400 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.
TRANSACTIONS WITH MANAGEMENT AND INDEBTEDNESS OF MANAGEMENT
Franklin, like many financial institutions, has followed a 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, 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 loans to the employees, directors and officers of the Company or
Franklin and their family members, 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. If the employment relationship
is terminated, the rate will revert to the contract rate and the modification
will be canceled. Loan fees on mortgage loans are generally waived except to the
extent of direct loan origination expenses incurred by Franklin. 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.
Set forth below is certain information at December 31, 1996, as to all
loans made by Franklin to each of its or the Company's current directors or
executive officers which were granted 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, 1995:
<TABLE>
<CAPTION>
Largest amount Balance as of Market interest
Nature of outstanding since December 31, Current interest rate at the time of
Name Date of loan indebtedness January 1, 1995 1996 rate origination
---- ------------ ------------ ---------------- -------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Richard H. Finan 6/15/84 First mortgage - $86,131 $78,276 6.625% 10.500%
personal residence
Gretchen J. 12/24/96 First mortgage - 146,700 146,700 5.875 7.875
Schmidt 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
-6-
<PAGE> 8
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, 1996.
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, 1996, 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 Securities and Exchange
Commission initial reports of ownership and reports of changes of ownership in
the Company by the tenth day of the month following a change. Officers,
directors and greater than 10% stockholders are required by 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, 1996, all Section 16(a)
filing requirements applicable to its officers, directors and greater than 10%
beneficial owners were complied with.
1997 STOCK OPTION PLAN
GENERAL
On March 24, 1997, the Board of Directors of the Company adopted the
1997 Option Plan. The 1997 Option Plan must be approved by the affirmative vote
of the holders of a majority of the shares of the Company represented in person
or by proxy at the Meeting. THE BOARD OF DIRECTORS OF THE COMPANY RECOMMENDS
THAT THE STOCKHOLDERS OF THE COMPANY APPROVE THE 1997 OPTION PLAN.
The following is a summary of the terms of the 1997 Option Plan and is
qualified in its entirety by reference to the full text of the 1997 Option Plan,
a copy of which is attached hereto as Exhibit A.
PURPOSE, ADMINISTRATION AND ELIGIBILITY
The purposes of the 1997 Option Plan include attracting, retaining and
providing incentives to the directors, officers and employees of the Company,
Franklin or any other subsidiary of the Company by facilitating their purchase
of a stock interest in the Company.
The 1997 Option Plan will be administered by a committee of directors
composed of at least two non-employee directors of the Company, as defined in
the regulations of the Securities and Exchange Commission pursuant to Section
16(b) of the Exchange Act (the "Stock Option Committee"). The Stock Option
Committee may grant options under the 1997 Option Plan at such times as it deems
most beneficial to the Company on the basis of an individual participant's
position, duties and responsibilities, the value of the individual's services to
the Company and any other factor the Stock Option Committee deems relevant. The
Company has approximately 50 employees, officers and directors who may be
eligible to receive options under the 1997 Option Plan, subject to the
determination of the Stock Option Committee. Options granted under the 1997
Option Plan to employees of the Company or Franklin may be "incentive stock
options" ("ISOs") within the meaning of Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code").
The 1997 Option Plan will terminate on April 28, 2007. Without further
approval of the stockholders, the Board of Directors may terminate the 1997
Option Plan prior to that date or may amend it from time to time in such
respects as the Board of Directors may deem advisable, except that the Board of
Directors may not, without the approval of the stockholders, make any amendment
which would: (a) increase the aggregate number of shares of Common Stock which
may be issued under the 1997 Option Plan (except for adjustments to reflect
certain changes in the capitalization of the Company); (b) materially modify the
requirements as to eligibility for participation in the 1997 Option Plan; or (c)
materially increase the benefits accruing to participants under the 1997 Option
Plan. Notwithstanding the foregoing, the
-7-
<PAGE> 9
Board of Directors may amend the 1997 Option Plan to take into account changes
in applicable securities, federal income tax and other applicable laws.
EFFECT ON EXISTING STOCKHOLDERS
Pursuant to the 1997 Option Plan, a maximum of 117,323 shares of Common
Stock will be reserved for issuance by the Company upon the granting of options
to certain directors, officers and employees of the Company or any of its
subsidiaries from time to time under the 1997 Option Plan. Any shares of Common
Stock issued under the 1997 Option Plan will be authorized but unissued shares
or issued shares which have been reacquired by the Company.
As of March 12, 1997, there were 1,173,234 shares of Common Stock
outstanding. As shares of Common Stock are issued to directors and officers of
the Company who receive and exercise options under the 1997 Option Plan, the
voting power of the directors and officers of the Company over the outcome of
the vote on any matters submitted to the Company's stockholders, including
changes of control, will increase.
OPTION TERMS
The exercise price for options granted under the 1997 Option Plan will
be determined by the Stock Option Committee at the time of the grant; provided,
however, that the exercise price for an ISO must not be less than 100% of the
fair market value of the shares of Common Stock on the date of the grant. No
stock option will be exercisable after the expiration of ten years from the date
of grant. If an ISO is granted to a participant who owns more than 10% of the
Company's outstanding shares of Common Stock at the time the ISO is granted, the
exercise price of the ISO may not be less than 110% of the fair market value of
the shares on the date of the grant and the ISO shall not be exercisable after
the expiration of five years from the date of the grant.
An option may not be transferred or assigned other than by will or in
accordance with the laws of descent and distribution. If a participant is
"terminated for cause," as defined in the 1997 Option Plan, any option which has
not been exercised shall terminate as of the date of such termination for cause.
The Company will receive no monetary consideration for the granting of
options under the 1997 Option Plan. Upon the exercise of options, the Company
will receive payment in cash or, if acceptable to the Stock Option Committee,
shares of Common Stock of the Company or surrendered outstanding stock options.
As of March 12, 1997, the market value of the Common Stock underlying the
maximum number of options that could be awarded under the 1997 Option Plan is
$2.1 million, which is calculated by multiplying 117,323 (the maximum number of
options that can be granted under the 1997 Option Plan) by $17.875, the per
share sales price as reported on The Nasdaq National Market on that date.
TAX TREATMENT OF INCENTIVE STOCK OPTIONS
A participant who is granted an ISO will not recognize taxable income
either on the date of the grant or on the date of exercise, although the
alternative minimum tax may apply. Upon disposition of shares of Common Stock
acquired from the exercise of an ISO, long-term capital gain or loss is
generally recognized in an amount equal to the difference between the amount
realized on the sale or disposition and the exercise price. If the participant
disposes of the shares of Common Stock within two years of the date of the grant
or within one year from the date of the transfer of the shares of Common Stock
to the participant (a "Disqualifying Disposition"), then the participant will
recognize ordinary income, as opposed to capital gain, at the time of
disposition in an amount generally equal to the lesser of (i) the amount of gain
realized on the disposition, or (ii) the difference between the fair market
value of the shares received on the date of exercise and the exercise price. Any
remaining gain or loss is treated as a short-term or long-term capital gain or
loss, depending upon the period of time the shares of Common Stock have been
held.
The Company is not entitled to a tax deduction upon either the exercise
of an ISO or the disposition of shares of Common Stock acquired pursuant to such
exercise, except to the extent that the participant recognizes ordinary income
in a Disqualifying Disposition. Ordinary income from a Disqualifying Disposition
will constitute compensation but will not be subject to tax withholding, nor
will it be considered wages for payroll tax purposes.
-8-
<PAGE> 10
If the holder of an ISO pays the exercise price, in whole or in part,
with previously acquired shares of Common Stock, the exchange should not affect
the ISO tax treatment of the exercise. Upon such exchange, and except as
otherwise described herein, no gain or loss is recognized by the participant
upon delivering previously acquired shares of Common Stock to the Company, and
shares of Common Stock received by the participant equal in number to previously
acquired shares of Common Stock exchanged therefor will have the same basis and
holding period for long-term capital gain purposes as the previously acquired
shares of Common Stock. (The participant, however, will not be able to utilize
the prior holding period for the purpose of satisfying the ISO statutory holding
period requirements for avoidance of a Disqualifying Disposition.) Shares of
Common Stock received by the participant in excess of the number of shares
previously acquired will have a basis of zero and a holding period which
commences as of the date the shares are transferred to the participant upon the
exercise of the ISO. If the exercise of an ISO is effected using shares of
Common Stock previously acquired through the exercise of an ISO, the exchange of
such previously acquired shares will be considered a disposition of such shares
for the purpose of determining whether a Disqualifying Disposition has occurred.
TAX TREATMENT OF NON-QUALIFIED OPTIONS
A participant receiving an option which does not qualify as an ISO (a
"Non-qualified Option") does not recognize taxable income on the date of the
grant of the option, provided that the option does not have a readily
ascertainable fair market value at the time it is granted. The participant must
recognize ordinary income generally at the time of exercise of a Non-qualified
Option in the amount of the difference between the fair market value of the
shares on the date of exercise and the option price. The ordinary income
received will constitute compensation for which tax withholding by the Company
generally will be required. The amount of ordinary income recognized by a
participant will be deductible by the Company in the year that the participant
recognizes the income if the Company complies with the applicable withholding
requirement.
If, at the time of exercise, the sale of the shares of Common Stock
could subject the participant to short-swing profit liability under Section
16(b) of the Exchange Act, such person generally will not recognize ordinary
income until the date that the participant is no longer subject to such Section
16(b) liability. Upon such date, the participant will recognize ordinary income
in an amount equal to the fair market value of the shares of Common Stock on
such date less the option exercise price. Nevertheless, the participant may
elect under Section 83(b) of the Code within 30 days of the date of exercise to
recognize ordinary income as of the date of exercise, without regard to the
restriction of Section 16(b).
Shares of Common Stock acquired upon the exercise of a Non-qualified
Option will have a tax basis equal to their fair market value on the exercise
date or other relevant date on which ordinary income is recognized, and the
holding period for the shares generally will begin on the date of exercise or
such other relevant date. Upon subsequent disposition of the shares of Common
Stock, the participant will recognize long-term capital gain or loss if the
participant has held the shares for more than one year prior to disposition, or
short-term capital gain or loss if the participant has held the shares for one
year or less.
If a holder of a Non-qualified Option pays the exercise price, in whole
or in part, with previously acquired shares of Common Stock, the participant
will recognize ordinary income in the amount by which the fair market value of
the shares received exceeds the exercise price. The participant will not
recognize gain or loss upon delivering such previously acquired shares of Common
Stock to the Company. Shares of Common Stock received by a participant equal in
number to the previously acquired shares exchanged therefor will have the same
basis and holding period as such previously acquired shares. Shares of Common
Stock received by a participant in excess of the number of such previously
acquired shares will have a basis equal to the fair market value of such
additional shares as of the date ordinary income is recognized. The holding
period for such additional shares of Common Stock will commence as of the date
of exercise or such other relevant date.
PROPOSED AWARDS
The Board of Directors of the Company adopted the 1997 Option Plan on
March 24, 1997. The Board of Directors has made no determination regarding the
granting of options under the 1997 Option Plan, if it is adopted by the
stockholders.
-9-
<PAGE> 11
The Stock Option Committee may grant options under the 1997 Option Plan
to the directors, officers and employees of the Company and its subsidiaries in
the future at such times as they deem most beneficial to the Company on the
basis of the individual participant's position, duties and responsibilities, the
value of the participant's services and any other relevant factor.
THE BOARD OF DIRECTORS OF RECOMMENDS A VOTE FOR THE APPROVAL OF THE 1997 OPTION
PLAN.
CHANGE IN AND SELECTION OF INDEPENDENT ACCOUNTANTS
The Board of Directors approved the selection of Clark
Schaefer to replace Coopers & Lybrand L.L.P. ("Coopers") as the Company's
independent accountants effective September 30, 1996. Coopers had served as the
Company's independent accountants for all fiscal years since its inception in
1987. This change in accountants has resulted in a significant decrease in the
amount of accounting fees paid by the Company.
Coopers' reports on the consolidated financial statements of
the Company for the two years ended December 31, 1995, did not contain any
adverse opinion or disclaimer of opinion, nor were such reports qualified or
modified as to uncertainty, audit scope or accounting principles. There were no
disagreements between the Company and Coopers on any matter of accounting
principles or practices, consolidated financial statement disclosure or audit
scope or procedure during the two years ended December 31, 1995, and any
subsequent interim period through September 27, 1996.
The Board of Directors' decision to engage Clark Schaefer as
its independent accountant is based on that firm's experience with
community-based financial institutions. Prior to selecting and engaging Clark
Schaefer as its independent accountant, the Company did not request or obtain
any advice from Clark Schaefer concerning any material accounting, auditing or
financial reporting issue regarding the application of accounting principles to
a specified transaction or the type of audit opinion that might be rendered on
the Company's consolidated financial statements.
Clark Schaefer conducted the independent audit of the Company
for the year ended December 31, 1996 and the Board of Directors has selected
Clark Schaefer as the independent accountants of the Company for the fiscal year
ended December 31, 1997.
The Board of Director is requesting and recommends that the
stockholders of the Company ratify the selection of Clark Schaefer as the
independent accountants of the Company for the current fiscal year. Management
of the Company expects that a representative of Clark Schaefer will be present
at the Annual Meeting, and that such representative will have an opportunity, if
desired, to make a statement and will be available to respond to appropriate
questions.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RATIFICATION OF THE SELECTION
OF CLARK SCHAEFER AS INDEPENDENT ACCOUNTANTS OF THE COMPANY FOR THE CURRENT
FISCAL YEAR.
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, 4750
Ashwood Drive, Cincinnati, Ohio 45241, no later than November 27, 1997. Any such
proposal shall be subject to the requirements of the proxy rules adopted under
the Securities Exchange Act of 1934, as amended.
-10-
<PAGE> 12
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, as
provided for in the Bylaws of the Company, 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 27, 1997
-11-
<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
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONSOLIDATED
BALANCE SHEET OF FIRST FRANKLIN CORPORATION AND SUBSIDIARY AS OF DECEMBER 31,
1996 AND THE RELATED CONSOLIDATED STATEMENTS OF INCOME, CHANGES IN STOCKHOLDERS'
EQUITY AND CASH FLOWS FOR THE YEAR THEN ENDED, WHICH ARE INCLUDED IN THE ANNUAL
REPORT TO STOCKHOLDERS AND FORM 10-KSB, AND IS QUALIFIED IN ITS ENTIRETY TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,384,805
<INT-BEARING-DEPOSITS> 7,624,649
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 36,861,231
<INVESTMENTS-CARRYING> 19,621,590
<INVESTMENTS-MARKET> 19,248,796
<LOANS> 151,064,242
<ALLOWANCE> 928,896
<TOTAL-ASSETS> 222,301,792
<DEPOSITS> 194,647,772
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,501,161
<LONG-TERM> 6,422,653
<COMMON> 12,930
0
0
<OTHER-SE> 19,717,276
<TOTAL-LIABILITIES-AND-EQUITY> 222,301,792
<INTEREST-LOAN> 11,746,620
<INTEREST-INVEST> 3,815,394
<INTEREST-OTHER> 219,458
<INTEREST-TOTAL> 15,781,472
<INTEREST-DEPOSIT> 9,325,910
<INTEREST-EXPENSE> 9,784,777
<INTEREST-INCOME-NET> 5,996,695
<LOAN-LOSSES> 91,900
<SECURITIES-GAINS> 51,376
<EXPENSE-OTHER> 6,041,825
<INCOME-PRETAX> 407,112
<INCOME-PRE-EXTRAORDINARY> 273,770
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 273,770
<EPS-PRIMARY> .23
<EPS-DILUTED> .22
<YIELD-ACTUAL> 2.84
<LOANS-NON> 368,000
<LOANS-PAST> 325,000
<LOANS-TROUBLED> 321,000
<LOANS-PROBLEM> 581,000
<ALLOWANCE-OPEN> 947,000
<CHARGE-OFFS> 58,000
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 981,000
<ALLOWANCE-DOMESTIC> 424,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 557,000
</TABLE>
<PAGE> 1
EXHIBIT 99
COOPERS COOPERS & LYBRAND L.L.P.
&LYBRAND
A PROFESSIONAL SERVICES FIRM
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
First Franklin Corporation and Subsidiary
Cincinnati, Ohio
We have audited the accompanying consolidated balance sheet 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 the years then ended. 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, 995 and 1994, and the
consolidated results of their operations and their cash flows for the years
then ended, in conformity with generally accepted accounting principles.
As discussed in Notes 1 and 2 to the financial statements, the Company
changed its method of accounting for certain investment securities in 1994.
/s/Coopers & Lybrand L.L.P.
Cincinnati, Ohio
February 2, 1996, except for Note 10, for which
the date is February 20, 1996
