FRANKLIN FINANCIAL CORP /TN/ - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934


For Quarterly Period Ended		Commission File Number:




June 30, 2002		0-24133

FRANKLIN FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)


Tennessee (State or other jurisdiction of incorporation or organization)		62-1376024 (I.R.S. Employer Identification No.)


230 Public Square, Franklin, Tennessee (Address of principal executive offices)		37064 (Zip Code)


Registrant’s telephone number, including area code		(615)790-2265

Not applicable
(Former name, former address and formal fiscal year, if changed since last report)

Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes (XBOX) No (BOX)

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date:


Common Stock, No Par Value Class		7,907,231 Outstanding at August 13, 2002

TABLE OF CONTENTS


PART I. — FINANCIAL INFORMATION
	Item I. Financial Statements
		Notes to Unaudited Consolidated Financial Statements
	ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
Section 906 Certification of the CEO and CFO

PART I. — FINANCIAL INFORMATION

Item I. Financial Statements

FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)


					(In thousands)
					June 30,			December 31,
					2002			2001
			Assets
Cash and cash equivalents					$	22,811			23,665




Federal funds sold						1,386			—




Investment securities available-for-sale, at fair value						57,081			59,964




Mortgage-backed securities available-for-sale, at fair value						175,595			176,340




Investment securities held-to-maturity, fair value $13,190 at June 30, 2002 and $9,894 December 31, 2001						13,759			9,916




Mortgage-backed securities held-to-maturity, fair value $221 at June 30, 2002 and $282 at December 31, 2001						210			270




Federal Home Loan and Federal Reserve Bank stock, restricted						4,030			3,951




Loans held for sale						9,281			20,530




Loans						484,340			422,058




Allowance for loan losses						(4,972	)		(4,269	)

				Loans, net		479,368			417,789

Premises and equipment, net						10,100			10,545




Accrued interest receivable						3,759			3,620




Mortgage servicing rights						2,736			2,254




Foreclosed assets, net						1,899			3,037




Other assets						3,484			3,970

					$	785,499			735,851

			Liabilities and Stockholders’ Equity




Liabilities:




	Deposits:




		Noninterest-bearing			$	61,552			52,852




		Interest-bearing				590,978			564,399

				Total deposits		652,530			617,251




	Repurchase agreements					2,138			3,200




	Long-term debt and other borrowings					86,301			76,568




	Accrued interest payable					1,178			1,661




	Other liabilities					1,856			1,761

				Total liabilities		744,003			700,441

Stockholders’ equity:




	Common stock, No par value. Authorized 500,000,000 shares; issued 7,906,731 and 7,843,241 at June 30, 2002 and December 31, 2001, respectively					12,089			11,597




	Accumulated other comprehensive gain (loss), net of tax					1,458			(94	)




	Unearned compensation related to outstanding restricted stock awards					(206	)		—




	Retained earnings					28,155			23,907

				Total stockholders’ equity		41,496			35,410

					$	785,499			735,851

See Notes to Consolidated Financial Statements

FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
(Unaudited and in thousands except for per share data)


					Three Months Ended				Six Months Ended
					June 30,				June 30,

					2002		2001		2002		2001
Interest income:
		Interest and fees on loans			$	8,768		8,482		17,133		16,788




		Taxable securities				3,693		3,855		7,562		7,479




		Tax-exempt securities				254		157		481		383




		Federal funds sold				4		67		21		199

			Total interest income			12,729		12,561		25,197		24,849

Interest expense:




		Certificates of deposit over $100,000				1,381		2,795		2,960		5,640




		Other deposits				1,930		3,132		3,835		6,641




		Federal Home Loan Bank advances				853		891		1,693		1,793




		Other borrowed funds				321		424		602		875

			Total interest expense			4,485		7,242		9,090		14,949

			Net interest income			8,234		5,319		16,107		9,900




Provision for loan losses						800		310		1,450		590

			Net interest income after provision for loan losses			7,434		5,009		14,657		9,310




Other income:




		Service charges on deposit accounts				698		628		1,388		1,200




		Mortgage banking activities				814		816		1,636		1,528




		Other service charges, commissions and fees				166		146		339		417




		Commissions on sale of annuities and brokerage activity				130		99		261		189




		Gain on sale of mortgage loans				74		—		126		—




		Gain on sale of investment securities				82		302		163		804

				Total other income		1,964		1,991		3,913		4,138

Other expenses:




		Salaries and employee benefits				2,943		2,569		5,812		5,043




		Occupancy expense				525		513		1,048		1,036




		Mortgage banking				335		285		688		487




		Furniture and equipment				347		366		688		692




		Communications and supplies				163		169		314		342




		Advertising and marketing				99		91		205		195




		FDIC and regulatory assessments				68		56		133		111




		Loss on sale of mortgage loans				—		124		—		158




		Foreclosed assets, net				577		5		803		5




		Other				535		572		1,079		1,034

				Total other expenses		5,592		4,750		10,770		9,103

				Income before income taxes		3,805		2,250		7,800		4,345




Income taxes						1,299		819		2,684		1,555

				Net income	$	2,506		1,431		5,116		2,790

	Net income per share – basic				$	0.32		0.18		0.65		0.36

	Net income per share — diluted				$	0.28		0.17		0.58		0.34

Dividends declared per share						0.055		0.0525		0.11		0.105




Weighted average shares outstanding:




Basic						7,906		7,818		7,883		7,809




Diluted						8,858		8,272		8,754		8,262

See Notes to Consolidated Financial Statements

FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY


													Accumulated			Unamortized
			Common Stock										Other			Cost of
							Comprehensive			Retained			Comprehensive			Restricted
			Shares		Amount		Income (Loss)			Earnings			Income (Loss)			Stock Awards			Total

BALANCE — JANUARY 1, 2001				7,800	$	11,479				$	18,663		$	588			—		$	30,730




Comprehensive income:




	Net Income							2,790			2,790									2,790




	Other comprehensive income, net of tax:




		Unrealized holding loss on securities arising (net of tax of $264)						(430	)




		Less: Reclassification adjustment for gains included in net income (net of $306 tax)						498




	Other comprehensive income							68						68						68





Comprehensive income								2,858




Exercise of stock options and issuance of common stock				19		28														28




Tax benefit of stock options exercised




Cash dividend declared; $.105 per share											(820	)								(820	)





BALANCE — JUNE 30, 2001				7,819	$	11,507				$	20,633		$	656			—		$	32,796









BALANCE — JANUARY 1, 2002				7,843	$	11,597				$	23,907		$	(94	)		—		$	35,410




Comprehensive income:




	Net Income							5,116			5,116									5,116




	Other comprehensive income, net of tax:




		Unrealized holding gains on securities arising (net of tax of $889)						1,451




		Less: Reclassification adjustment for gains included in net income (net of $62 tax)						101




	Other comprehensive income							1,552						1,552						1,552





Comprehensive income								6,668




Issuance of restricted stock				14		236											(236	)		0




Exercise of stock options and issuance of common stock				50		256														286




Amortization of unearned restricted stock compensation																	30




Tax benefit of stock options exercised




Cash dividend declared; $.11 per share											(868	)								(868	)





BALANCE — JUNE 30, 2002				7,907	$	12,089				$	28,155		$	1,458		$	(206	)	$	41,496

FRANKLIN FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)


					(In thousands)
					Six Months Ended
					June 30,

					2002			2001

Cash flows from operating activities:




	Net income				$	5,116			2,790




	Adjustments to reconcile net income to net cash provided by (used in) operating activities:




		Depreciation, amortization and accretion				(89	)		302




		Provision for loan losses				1,450			590




		Loans originated for sale				(70,871	)		(57,647	)




		Proceeds from sale of loans				82,681			54,466




		Gain on sale of investment securities				(163	)		(804	)




		(Gain) loss on sale of loans				(147	)		158




		Loss on foreclosed assets				803			5




		Loss (gain) on sale of premises and equipment				16			(8	)




		(Increase) decrease in accrued interest receivable				(139	)		322




		Decrease in accrued interest payable				(483	)		(939	)




		Decrease in other liabilities				(881	)		(94	)




		Increase in other assets				(2,873	)		(1,545	)

			Net cash provided by (used in) operating activities			14,420			(2,404	)

Cash flows from investing activities:




	(Increase) decrease in federal funds sold					(1,386	)		614




	Proceeds from maturities of securities available-for-sale					29,415			87,669




	Proceeds from sale of securities available-for-sale					27,404			29,554




	Proceeds from maturities of securities held-to-maturity					653			43




	Purchases of securities available-for-sale					(49,676	)		(134,209	)




	Purchase of securities held-to-maturity					(4,113	)		—




	Purchase of Federal Home Loan and Federal Reserve stock					(79	)		(117	)




	Net increase in loans					(63,443	)		(39,324	)




	Proceeds from sale of foreclosed assets					2,772			40




	Purchases of premises and equipment, net					(192	)		(809	)

				Net cash used in investing activities		(58,645	)		(56,539	)

Cash flows from financing activities




	Net proceeds from issuance of common stock					286			28




	Dividends paid					(865	)		(820	)




	Increase in deposits					35,279			57,591




	Decrease in repurchase agreements					(1,062	)		(1,321	)




	Increase (decrease) in other borrowings					9,733			(19	)

				Net cash provided by financing activities		43,371			55,459

				Net (decrease) increase in cash and cash equivalents		(854	)		(3,484	)




Cash and cash equivalents at beginning of period						23,665			18,976

Cash and cash equivalents at end of period					$	22,811			15,492

Cash payments for interest					$	15,432			15,888




Cash payments for income taxes					$	3,424			1,943

See Notes to Consolidated Financial Statements

FRANKLIN FINANCIAL CORPORATION
Notes to Unaudited Consolidated Financial Statements

NOTE A — BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Franklin Financial Corporation and Subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month period ended June 30, 2002 are not necessarily indicative of the results that may be expected for the year ending December 31, 2002. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.

NOTE B – SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies of the Company are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001. During the six months ended June 30, 2002, there were no significant changes to those accounting policies except as they relate to the Company’s stock-based compensation plans.

During the six months ended June 30, 2002, the Company issued stock under its Key Employee Restricted Stock Plan for the first time since its inception. The Company accounts for restricted stock grants in accordance with Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees. Under APB No. 25, the Company calculates compensation expense as the difference between the market price of the underlying stock on the date of the grant and the purchase price, if any, and recognizes such amount on a straight-line basis over the restriction period in which the restricted stock is earned by the recipient.

Certain reclassifications have been made in the 2001 financial statements to conform to the 2002 classification.

NOTE C — DIVIDENDS

In May 2002, the Company’s Board of Directors declared a $.055 per share cash dividend payable on July 5, 2002.

NOTE D – SEGMENTS

The Company’s reportable segments are determined based on management’s internal reporting approach, which is by operating subsidiaries. The reportable segments of the Company are comprised of the Franklin National Bank (the “Bank”) segment, excluding its subsidiaries, and the Mortgage Banking segment, Franklin Financial Mortgage.

The Bank segment provides a variety of banking services to individuals and businesses through its branches in Brentwood, Franklin, Fairview, Nashville and Spring Hill, Tennessee. Its primary deposit products are demand deposits, savings deposits, and certificates of deposit, and its primary lending products are commercial business, construction, real estate mortgage and consumer loans. The Bank segment primarily earns interest income from loans and investments in securities. It earns other income primarily from deposit and loan fees.

The Mortgage Banking segment originates, purchases and sells residential mortgage loans. It sells loan originations into the secondary market, but retains much of the applicable servicing. As a result of the retained servicing, the Mortgage Banking segment capitalizes mortgage servicing rights into income and amortizes these

rights over the estimated lives of the associated loans. Its primary revenue is other income, but it also reports interest income earned on warehouse balances waiting for funding. The segment originates retail mortgage loans in the Nashville and Chattanooga, Tennessee metropolitan areas. It also purchases wholesale mortgage loans through correspondent relationships with other banks.

The “All Other” segment consists of the Company’s insurance and securities subsidiaries and the bank holding company operations which do not meet the quantitative threshold for separate disclosure. The revenue earned by the insurance and securities subsidiaries is reported in other income in the consolidated financial statements and the revenue earned by the bank holding company consists of intercompany transactions that are eliminated in consolidation.

No transactions with a single customer contributed 10% or more of the Company’s total revenue. The accounting policies for each segment are the same as those used by the Company. The segments include overhead allocations and intercompany transactions that were recorded at estimated market prices. All intercompany transactions have been eliminated to determine the consolidated balances. The results of the two reportable segments of the Company are included in the following table.


			Six Months Ended June 30, 2002

						Mortgage
(In thousands)			Bank			Banking		All Other			Eliminations			Consolidated

Total interest income			$	24,852		$	428	$	1,354		$	(1,437	)	$	25,197




Total interest expense				8,671			80		997			(658	)		9,090

Net interest income				16,181			348		357			(779	)		16,107




Provision for loan losses				1,450			—		—			—			1,450

Net interest income after provision				14,731			348		357			(779	)		14,657

Total other income				1,709			1,762		5,955			(5,513	)		3,913




Total other expense				8,419			1,925		1,071			(645	)		10,770

Income before taxes				8,021			185		5,241			(5,647	)		7,800




Provision for income taxes				2,783			67		(166	)		—			2,684

Net income			$	5,238		$	118	$	5,407		$	(5,647	)	$	5,116

Other significant items




	Total assets		$	769,366		$	13,921	$	81,452		$	(79,271	)	$	785,468




	Depreciation, amortization and accretion			(516	)		359		68			—			(89	)




Revenues from external customers




	Total interest income		$	24,769		$	428		—			—		$	25,197




	Total other income			1,709			1,762		442			—			3,913

		Total income	$	26,478		$	2,190	$	442			—		$	29,110

Revenues from affiliates




	Total interest income		$	83			—	$	1,354		$	(1,437	)		—




	Total other income			—			—		5,513			(5,513	)		—

		Total income	$	83			—	$	6,867		$	(6,950	)		—


			Six Months Ended June 30, 2001

					Mortgage
(In thousands)			Bank		Banking		All Other			Eliminations			Consolidated

Total interest income			$	24,434	$	531	$	1,633		$	(1,749	)	$	24,849




Total interest expense				14,261		280		1,627			(1,219	)		14,949

Net interest income				10,173		251		6			(530	)		9,900




Provision for loan losses				590		—		—			—			590

Net interest income after provision				9,583		251		6			(530	)		9,310

Total other income				2,275		1,528		3,402			(3,067	)		4,138




Total other expense				7,022		1,654		995			(568	)		9,103

Income before taxes				4,836		125		2,413			(3,029	)		4,345




Provision for income taxes				1,816		44		(305	)		—			1,555

Net income (loss)			$	3,020	$	81	$	2,718		$	(3,029	)	$	2,790

Other significant items




	Total assets		$	644,491	$	15,981	$	72,241		$	(70,473	)	$	662,240




	Depreciation, amortization and accretion			9		236		57			—			302




Revenues from external customers




	Total interest income		$	24,318	$	531		—			—		$	24,849




	Total other income			2,275		1,528		335			—			4,138

		Total income	$	26,593	$	2,059	$	335			—		$	28,987

Revenues from affiliates




	Total interest income		$	116		—	$	1,633		$	(1,749	)		—




	Total other income			—		—		3,067			(3,067	)		—

		Total income	$	116		—	$	4,700		$	(4,816	)		—

NOTE E – TRUST PREFERRED SECURITIES

During 2000, the Company issued $16 million of trust preferred securities through Franklin Capital Trust I, a Delaware business trust and wholly owned subsidiary of the Company. These securities pay cumulative cash distributions at a quarterly variable rate of three-month LIBOR plus 3.50% of the liquidation amount of $1,000 per preferred security on a quarterly basis beginning October 15, 2000. These securities have a thirty-year maturity and may be redeemed by the Company upon the earlier of five years or the occurrence of certain other events. The Company received net proceeds of $15.2 million from the offering, which it used to repay approximately $5.0 million of indebtedness under its line of credit, purchase investment securities as part of a leverage program to offset the interest expense associated with the Trust Preferred Securities, and for general corporate purposes, including capital investments in the Bank. Subject to certain limitations, the Trust Preferred Securities qualify as Tier 1 capital and are carried in Long-term Debt and Other Borrowings on the Company’s Consolidated Balance Sheet. As a result of the Trust Preferred Securities offering, the Company initiated a leverage program to enhance margins and offset the interest expense associated with the Trust Preferred Securities. During the third quarter of 2000, the Company purchased approximately $81.3 million in investment securities as part of the leverage program. The leverage program was funded by $52.0 million in Federal Home Loan Bank advances, $10.5 million received in the Trust Preferred Securities offering and $18.8 million in

deposit growth. The Company plans to utilize cashflow from the investment securities to assist with future loan growth.

NOTE F – LOANS

In addition to the disclosures included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001, related to loans and allowance for loan losses, the following represents information regarding non-accrual loans and loans past due 90 days or more still accruing interest as required by the adoption of Statement of Position (“SOP”) 01-6, Accounting by Certain Entities (Including Entities with Trade Receivables) That Lend to or Finance the Activities of Others during the quarter ended June 30, 2002.


	June 30, 2002		June 30, 2001

	(in thousands)
Loans accounted for on a non-accrual basis	$	413	$	585




Accruing loans which are contractually past due 90 days or more as to principal and interest payments		754		391

NOTE G – MORTGAGE BANKING

The Company’s mortgage banking subsidiary has net worth requirements with the U.S. Department of Housing and Urban Development and Federal Home Loan Mortgage Corporation of $250,000. The Company exceeds this requirement.

NOTE H – SUBSEQUENT EVENTS

On July 23, 2002, the Company signed a definitive Affiliation Agreement which provides for the acquisition of the Company by Fifth Third Bancorp, an Ohio corporation (“Fifth Third”) through the merger of the Company with and into a wholly owned subsidiary of Fifth Third. The Board of Directors of the Company approved the Affiliation Agreement and the transactions contemplated thereby.

As a result of the merger, each shareholder of the Company will receive, on a tax-free basis, between 0.3832 and 0.4039 shares of common stock of Fifth Third for each share of Company common stock owned, with the exact ratio to be determined based on the average closing price of the common stock of Fifth Third for the ten consecutive trading days ending on the fifth trading day preceding the closing of the merger. The transaction is expected to close in the fourth quarter of 2002 and is subject to the approval of the Company's shareholders and normal regulatory approvals. The terms of the Affiliation Agreement are more fully described the Company’s Current Report on Form 8-K as filed with the Securities and Exchange Commission on July 25, 2002, which report also contains a copy of the Affiliation Agreement.

ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Bank represents virtually all of the assets of the Company. The Bank, located in Franklin, Tennessee, opened in December of 1989 and continues to experience substantial growth. The Bank has nine full service branches. In August 1996, the Bank opened an insurance subsidiary, Franklin Financial Insurance. In October 1997, the Bank opened a financial services subsidiary, Franklin Financial Securities. The financial services subsidiary offers financial planning and securities brokerage services through Legg Mason Financial Partners. In December 1997, the Bank began operating its mortgage division as a separate subsidiary, Franklin Financial Mortgage. In August 1998, the mortgage subsidiary opened a retail mortgage origination office in Chattanooga, Tennessee. Franklin Financial Mortgage originates, sells and services wholesale and retail mortgage loans. In June 2000, the Company formed Franklin Capital Trust I, a Delaware business trust and wholly owned subsidiary of the Company, for the purpose of issuing Trust Preferred Securities to the public. In December 2000, the Company received approval from the Federal Reserve Bank to convert from a bank holding company to a financial holding company to allow the Company additional avenues for growth opportunities. In May 2001, the Company’s stock began trading on the NASDAQ National Market under the symbol “FNFN”.

Recent Developments

Critical Accounting Policies

Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, we have identified two policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of our consolidated financial statements. These policies relate the methodology for the determination of our allowance for loan losses and to the valuation of our mortgage servicing rights.

The allowance for loan losses is maintained at a level which, in management’s judgment, is adequate to absorb credit losses inherent in the loan portfolio. The amount of the allowance is based on management’s evaluation of the collectibility of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, and economic conditions. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. A loan is considered impaired when management has determined it is possible that all amounts due according to the contractual terms of the loan agreement will not be collected. The allowance is increased by a provision for loan losses, which is charged to expense and reduced by charge-offs, net of recoveries.

Servicing assets on loans sold are measured by allocating the previous carrying amount between the assets sold and the retained interests based on their relative fair values at the date of transfer. Our mortgage servicing rights are related to in-house originations serviced for others. The initial amount recorded as mortgage servicing rights is essentially the difference between the amount that can be realized when loans are sold, servicing released, as compared to loans sold, servicing retained. Mortgage servicing rights are amortized in proportion to, and over the period of, estimated net servicing revenues. Impairment of mortgage servicing rights is assessed based on the fair value of those rights.

These policies and the judgments, estimates and assumptions are described in greater detail in subsequent sections of Management’s Discussion and Analysis and in Note 1 to the Consolidated Financial Statements included in the Company’s 2001 Annual Report on Form 10-K. We believe that the judgments, estimates and assumptions used in the preparation of our consolidated financial statements are appropriate given the factual circumstances at the time. However, given the sensitivity of our consolidated financial statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in actual results differing from those estimates.

Financial Condition

Total assets have increased $49.6 million, or 6.7%, since December 31, 2001, to a total of $785.5 million at June 30, 2002. The growth in assets has been funded primarily by a $35.3 million increase in deposits and net income of $5.1 million. Total deposits were $652.5 million at June 30, 2002.

The Bank continues to experience excellent loan demand as demonstrated by the growth in net loans of $61.6 million, or 14.7%, since December 31, 2001. Loans held for sale decreased $11.2 million, or 54.8%, since

December 31, 2001. The decrease is predominately due to a decrease in mortgage loan originations in the mortgage banking segment as a result of a stabilizing interest rate environment in the first half of 2002. The allowance for loan losses increased $703,000, or 16.5%, since December 31, 2001, to $5.0 million or approximately 1.01% of total loans at June 30, 2002. The increase is primarily the result of growth in the loan portfolio and does not reflect a decline in asset quality. The Company has seen significant growth in construction and commercial real estate loans, which carry a higher reserve factor. Management believes that the level of the allowance for loan losses is adequate at June 30, 2002. Management reviews in detail the level of the allowance for loan losses on a quarterly basis. The allowance is below the Bank’s peer group average as a percentage of loans. However, the current level of allowance for loan losses is primarily based on the fact that the Bank’s past due loans, at 1.25% of total loans at June 30, 2002, are below the peer group average. At June 30, 2002, the Bank had non-accrual loans of $413,000 compared to non-accrual loans of $1.0 million at December 31, 2001. At June 30, 2002, the Bank had loans that were specifically classified as impaired of approximately $13.1 million compared to $7.0 million at December 31, 2001. The allowance for loan losses related to impaired loans was $488,000 at June 30, 2002. The average carrying value of impaired loans was approximately $6.8 million for the six-month period ended June 30, 2002. Interest income of approximately $258,000 was recognized on these impaired loans during the six-month period ended June 30, 2002.

At June 30, 2002 the fair value of securities classified as available-for-sale exceeded the cost of the securities by $2.4 million. At December 31, 2001 the cost of securities classified as available-for-sale exceeded the fair value of the securities by $157,000. As a result, an unrealized gain net of taxes of $1.5 million and an unrealized loss net of taxes of $94,000 at June 30, 2002 and December 31, 2001, respectively, is included in “Accumulated Other Comprehensive Income” in the stockholders’ equity section of the balance sheet. The unrealized gain is primarily due to economic market conditions for the six months ended June 30, 2002.

Securities available-for-sale decreased $3.6 million, or 1.5%, during the six months ended June 30, 2002. The decrease was due to cashflow from the investment portfolio being reinvested in loan growth and more securities placed in held-to-maturity than in the past. Securities held-to-maturity increased $3.8 million, or 37.1%, due to the purchase of zero coupon agencies during the first six months of 2002 which were classified as held-to-maturity instead of available-for-sale as such securities have been historically classified. Net premises and equipment decreased by $445,000, or 4.2%, since December 31, 2001 primarily due to depreciation expense offset slightly by increases in equipment. Accrued interest receivable increased $139,000, or 3.8%, since December 31, 2001. This increase is due to the combined increase of $50.6 million in loans and securities since December 31, 2001, offset partially by lower interest rates. Foreclosed assets decreased $1.1 million, or 37.5%, since December 31, 2001. The decrease is the result of a foreclosed property sale of $393,000 and a valuation allowance of $746,000 established on another property.

Accrued interest payable decreased $483,000, or 29.1%, since December 31, 2001. The decrease is due to a significant decrease in interest rates during late 2001, offset partially by an increase in deposits. Long-term debt and other borrowings increased $9.7 million, or 12.7%, since December 31, 2001 due to temporary federal funds purchased of $10.4 million, offset partially by the Company’s repayment of a note to a correspondent bank on a branch facility. Stockholders’ equity increased $6.1 million, or 17.2%, from December 31, 2001 to June 30, 2002. The increase is primarily attributable to $5.1 million in net income and a $1.5 million increase in other accumulated comprehensive income, offset partially by $868,000 in dividends declared. Unearned compensation of $206,000 was also recorded due to the issuance of restricted stock. The restricted stock was issued as part of the Key Employee Restricted Stock Plan and vests over a period of four years. The unearned compensation will be amortized on a straight-line basis over the four year vesting period of the restricted stock.

Liquidity and Capital Resources

Management continuously monitors the Bank’s liquidity, and strives to maintain an asset/liability mix that provides the highest possible net interest margin without taking undue risk with regard to asset quality or liquidity. Liquidity management involves meeting the funds flow requirements of customers who may withdraw funds on deposit or have need to obtain funds to meet their credit needs. Banks in general must maintain adequate cash balances to meet daily cash flow requirements as well as satisfy the reserves required by applicable regulations. The cash balances held are one source of liquidity. Other sources of liquidity are provided by the investment portfolio, federal funds purchased, Federal Home Loan Bank advances, sales of loan participations, loan payments, brokered and public funds deposits and the Company’s ability to borrow funds, as well as issue new capital.

Management believes that liquidity is at an adequate level with cash and due from banks of $22.8 million at June 30, 2002. Loans and securities scheduled to mature within one year exceeded $241.8 million at June 30, 2002, which should provide further liquidity. In addition, approximately $232.7 million of securities are classified as available-for-sale to help meet liquidity needs should they arise. The Company has a line of credit of $10.0 million with a lending institutions and the Bank is approved to borrow up to $10.0 million in funds from the Federal Home Loan Bank through overnight advances and $65.0 million in federal funds lines to assist with capital and liquidity needs. The Company had $1.9 million in borrowings against its line of credit and the Bank had $10.4 million in federal funds purchased at June 30, 2002. In February and August, 1998 the Bank entered into long term convertible Federal Home Loan Bank advances with a ten year maturity and one year call option totaling $6.0 million. During the fourth quarter of 1999, these advances converted to variable rate advances, which reprice quarterly based on 90-day LIBOR. As part of the leverage program, during the third quarter of 2000 the Bank entered into three long-term convertible Federal Home Loan Bank advances. One advance of $25.0 million has a ten year maturity with a three year call option. The other two advances totaling $27.0 million have a five year maturity with a one year call option. After the three and one year call options, these advances may be converted by the Federal Home Loan Bank from a fixed to a variable rate. The Bank has the right to repay the advances on the date of conversion to a variable rate without penalty. The Bank has $2.1 million outstanding in repurchase agreements to further develop its relationship with customers. The Bank has approximately $118.6 million in brokered deposits at June 30, 2002 to help fund strong loan demand. The majority of these brokered deposits are $100,000 or less, but they are generally considered to be more volatile than the Bank’s core deposit base.

Approximately $53.5 million in loan commitments are expected to be funded within the next six months. Furthermore, the Bank has approximately $80.0 million of other loan commitments, primarily unused lines and letters of credit, which may or may not be funded. Commitments may be funded by core or brokered deposits, cashflow from the securities portfolio or other funding sources which the Bank maintains.

As discussed in Note E to the Consolidated Financial Statements included herein, in August 2000, the Company completed the sale of $16.0 million of Trust Preferred Securities. The Company received net proceeds of $15.2 million which it used to repay approximately $5.0 million of indebtedness on its line of credit, purchase investment securities as part of a leverage program to offset the interest expense associated with the Trust Preferred Securities and for general corporate purposes.

Contingencies:

The Company is involved in various legal proceedings in the normal course of business. On August 24, 2000, the Company was served with a suit alleging breach of contract, tortuous interference with contract, fraud and civil conspiracy in connection with the denial of a loan to a potential borrower involved in a real estate transaction. The plaintiff seeks compensatory damages not to exceed $20 million and punitive damages not to exceed $40 million. The Company made an offer of settlement in the amount of $75,000 calculated on a cost-of-defense basis. The plaintiff responded by offering to settle for $10 million. The Company denied the plaintiff’s offer and increased its settlement offer to $76,500. The case is scheduled for trial on September 10, 2002. Management and legal counsel believe the claims are frivolous and without merit and the Company has meritorious defenses against these actions. No provision has been made in the accompanying financial statements for the ultimate resolution of this matter.

Management monitors the Company’s asset and liability positions in order to maintain a balance between rate- sensitive assets and rate-sensitive liabilities and at the same time maintain sufficient liquid assets to meet expected liquidity needs. Management believes that the Company’s liquidity is adequate at June 30, 2002. Other than as set forth above, there are no known trends, commitments, events or uncertainties that will result in or are reasonably likely to result in the Company’s liquidity increasing or decreasing in any material way. The Company is not aware of any current recommendations by the regulatory authorities, which if they were to be implemented, would have a material adverse effect on the Company’s liquidity, capital resources or results of operations.

Net cash flow provided by operating activities was $14.4 million for the first six months of 2002. The sale of loans exceeded loans originated for sale by $11.8 million for the six months ended June 30, 2002. The majority of this change in cash flow is due to the decrease of loan originations as compared to the sale of loans in the mortgage banking segment during the six months ended June 30, 2002. The increase in cash flow was partially offset by an increase in other assets of $2.9 million and a decrease in other liabilities of $881,000 for the six months ended June 30, 2002.

Net cash used in investing activities was $58.6 million for the six months ended June 30, 2002, which was largely due to the banking segment. The increase in the change in net loans was $63.4 million for the first six months of 2002. The cash used in investing activities was offset partially by a decrease in the net investment portfolio of $3.7 million and proceeds from the sale of foreclosed assets of $2.8 million for the six months ended June 30, 2002.

Net cash provided by financing activities was $43.4 million for the first six months of 2002. The increase in cash flow is primarily due to an increase in deposits of $35.3 million in the first six months of 2002 and an increase of $9.7 million in other borrowings offset partially by a decrease in repurchase agreements of $1.1 million and $865,000 of dividends paid.

Equity capital exceeded regulatory requirements at June 30, 2002, at 6.9% of average assets. The Company and the Bank’s minimum capital requirements and compliance with the same are shown in the following table.


	Leverage Capital						Tier 1 Capital						Total Risk-Based Capital

	Regulatory						Regulatory						Regulatory
	Minimum			Actual			Minimum			Actual			Minimum			Actual

Company		3.0	%		6.9	%		4.0	%		10.0	%		8.0	%		11.5	%




Bank		3.0	%		6.8	%		4.0	%		10.0	%		8.0	%		11.3	%

Results of Operations

The Company had net income of $2.5 million in the second quarter and $5.1 million for the first six months of 2002 compared to net income of $1.4 million and $2.8 million for the same periods in 2001. Net income for the second quarter and six months ended June 30, 2002 increased $1.1 million, or 75.1%, and $2.3 million, or 83.4%, respectively.

Total interest income increased $159,000, or 1.3%, in the three months ended June 30, 2002 and $348,000, or 1.4%, for the six months ended June 30, 2002 compared to the same periods in 2001. Total interest expense decreased $2.8 million, or 38.1%, for the three months ended June 30, 2002 and $5.9 million, or 39.2% for the six months ended June 30, 2002 compared to the same periods in 2001. The increase in total interest income is primarily attributable to the increase in average earning assets of $132.3 million, or 22.4%, for the first six months of 2002 compared to 2001, offset by a significant decrease in interest rates. The increase in total interest income is primarily due to the banking segment. The decrease in total interest expense is primarily due to the significant decrease in interest rates during late 2001 offset by an increase in average interest-bearing liabilities of $119.3 million, or 21.8%, at June 30, 2002 as compared to the same period in 2001. The banking segment continues to experience strong deposit rate competition. The Company had a net interest margin of 4.49% for the second quarter of 2002 and 4.46% for the six months ended June 30, 2002 compared to 3.50% and 3.36%, respectively, for the same periods in 2001. The increase in net interest margin is due to significant decreases in

short-term interest rates. As short-term interest rates decrease, a significant portion of the Bank’s loan portfolio reprices immediately. The Bank currently has a relatively short-term certificate of deposit portfolio which has supported the net interest margin in the declining rate environment.

The provision for loan losses was $800,000 and $310,000 for the three months ended June 30, 2002 and 2001, respectively. The year-to-date provision is $1.5 million for the six months ended June 30, 2002 as compared to $590,000 for the same period in 2001. While the Bank’s asset quality remains good, increases in the provision for loan losses continue to be needed as a result of growth in the Bank’s loan portfolio. Net charge-offs were $747,000, or .17%, of average loans outstanding at June 30, 2002 compared to net charge-offs of $38,000, or ..01%, of average loans outstanding at June 30, 2001. The Bank had $905,000 of problem loan relationships which resulted in a portion of the increase in the provision for loan losses. The Bank charged-off $590,000 for two of the problem loans during the first half of 2002. The problem loans were fully reserved at June 30, 2002.

Total other income was $1.96 million in the second quarter of 2002, a decrease of $28,000, or 1.4%, from $1.99 million for the same period in 2001. The decrease was largely attributable to a decrease of $220,000, or 72.8%, in the gain on the sale of investment securities offset partially by an increase of $20,000, or 13.7%, in other service charges, commissions and fees and an increase of $31,000, or 31.3%, in commissions on sale of annuities and brokerage activity. Total other income of $3.9 million for the six months ended June 30, 2002 decreased $225,000, or 5.4%, from $4.1 million from the same period in 2001. The decrease is primarily due to decreases of $641,000, or 79.7%, in the gain on sale of investment securities and $78,000, or 18.9%, in other service charges commissions and fees. The decrease in other service charges, commissions and fees is due to a $131,000 decrease in call option fees related to covered calls written on Treasury Notes. These decreases are partially offset by an increase of $108,000, or 7.1%, in loan origination fees related to the mortgage banking segment, an increase of $188,000, or 15.7%, in service charges on deposit accounts and an increase of $72,000, or 38.1%, in commissions on the sale of annuities and brokerage activity. Mortgage servicing rights income contributed $333,000 and $326,000 for the six months ended June 30, 2002 and 2001, respectively, to the total income for the mortgage banking segment. While mortgage loan origination volume has decreased from its significant fourth quarter 2001 levels, first six months of 2002 volumes exceeded volumes in the same period in 2001.

Total other expenses increased $842,000, or 17.7%, during the second quarter of 2002 as compared to the same period in 2001. Total other expenses increased $1.7 million, or 18.3%, for the six months ended June 30, 2002 as compared to the same period in 2001. Salaries and employee benefits increased $769,000, or 15.2%, primarily due to the hiring of additional lending personnel in the banking segment. Salaries and employee benefits expense for the mortgage banking segment was $951,000 for the six months ended June 30, 2002 compared to $747,000 for the same period in 2001. The increase is attributable to an increase in commission expense from $286,000 in the first half of 2001 to $342,000 in the first half of 2002 due to the increase in mortgage loan originations and an increase in support staff areas. Mortgage banking expenses increased $201,000, or 41.3%, from the first six months of 2001 to the first six months of 2002 primarily due to an increase in mortgage correspondent pricing related to the increase in loan originations. Foreclosed asset expense increased $798,000, or 15960%, for the six months ended June 30, 2002 as compared to the same period in 2001. The increase is due to a $746,000 valuation allowance on a piece of foreclosed property and a $52,000 loss on the sale of other foreclosed property. Other expenses have increased as a result of the overall growth of the banking segment.

Accounting Pronouncements

In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting. It also specifies the types of acquired intangible assets that are

required to be recognized and reported separately from goodwill. SFAS No. 142 requires that goodwill and certain other intangibles no longer be amortized, but instead be tested for impairment at least annually. SFAS No. 142 is required to be applied starting with fiscal years beginning after December 15, 2001, with early application permitted in certain circumstances. The adoption of SFAS Nos. 141 and 142 did not have a significant effect on the financial position or results of operations of the Company.

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and requires that the amount recorded as a liability be capitalized by increasing the carrying amount of the related long-lived asset. Subsequent to initial measurement, the liability is accreted to the ultimate amount anticipated to be paid, and is also adjusted for revisions to the timing or amount of estimated cash flows. The capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss on settlement. SFAS No. 143 is required to be adopted for fiscal years beginning after June 15, 2002, with earlier application encouraged. The Company has not yet determined the impact, if any, the adoption of SFAS No. 143 will have on its financial position and results of operations.

In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This statement supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. SFAS No. 144 retains the fundamental provisions of SFAS No. 121 for (i) recognition and measurement of the impairment of long-lived assets to be held and used; and (ii) measurement of the impairment of long-lived assets to be disposed of by sale. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The adoption of SFAS No. 144 did not have a significant effect on the financial position or results of operations of the Company.

In December 2001, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position (“SOP”) 01-6, Accounting by Certain Entities (Including Entities With Trade Receivables) That Lend to or Finance the Activities of Others. SOP 01-6 clarifies accounting and financial reporting practices for lending and finance activities, eliminates distinctions between what constitutes a finance company and financing activities and conforms differences among the accounting and financial reporting guidance provided in various AICPA Audit and Accounting Guides. The objective of SOP 01-6 is to improve the consistency in accounting and reporting by banks, savings institutions, credit unions, finance companies, mortgage companies and certain activities of insurance companies. SOP 01-6 is effective for annual and interim financial statements issued for fiscal years beginning after December 15, 2001. The Company adopted SOP 01-6 on January 1, 2002. The adoption of SOP 01-6 did not change any of the Company’s accounting policies, however certain additional financial statement disclosures were required. Such disclosures have been included in the notes to the consolidated financial statements as of and for the six months ended June 30, 2002.

In July, 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 requires entities to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 replaces previous accounting guidance provided by Emerging Issues Task Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring), which required entities to recognize costs associated with exit or disposal activities at the date of a commitment to an exit or disposal plan. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. The Company has not yet determined the impact, if any, the adoption of SFAS No. 146 will have on its financial position and results of operations.

In April, 2002, the FASB issued implementation guidance related to Derivatives Implementation Group (DIG) Issue No. C13, When a Loan Commitment Is Included in the Scope of Statement 133. DIG Issue No. C13 requires loan commitments that relate to the origination or acquisition of mortgage loans that will be held for resale be accounted for as derivative financial instruments in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. DIG Issue No. C13 was effective for the Company on July 1, 2002. The adoption of DIG Issue No. C13 on July 1, 2002 will be a gain which will be reflected as a cumulative effect of a change in accounting principle of approximately $103,000, net of tax.

Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995

Certain statements in this Form 10-Q contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, which statements generally can be identified by the use of forward-looking terminology, such as “may,” “will,” “expect,” “estimate,” “anticipate,” believe,” “target,” “plan,” “project,” or “continue” or the negatives thereof or other variations thereon or similar terminology, and are made on the basis of management’s plans and current analyses of the Company, its business and the industry as a whole. These forward looking statements are subject to risks and uncertainties, including, but not limited to, economic conditions, competition, interest rate sensitivity and exposure to regulatory and legislative changes. The above factors, in some cases, have affected, and in the future could affect, the Company’s financial performance and could cause actual results for fiscal 2002 and beyond to differ materially from those expressed or implied in such forward-looking statements. The Company does not undertake to publicly update or revise its

forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied therein will not be realized.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company’s financial performance is subject to risk from interest rate fluctuations. This interest rate risk arises due to differences between the amount of interest-earning assets and the amount of interest-bearing liabilities subject to repricing over a specified period and the amount of change in individual interest rates. The liquidity and maturity structure of the Company’s assets and liabilities are important to the maintenance of acceptable net interest income levels. An increasing interest rate environment negatively impacts earnings as the Company’s rate sensitive liabilities generally reprice faster than its rate sensitive assets. Conversely, in a decreasing interest rate environment, earnings are positively impacted. This potential asset/liability mismatch in pricing is referred to as “gap” and is measured as rate sensitive assets divided by rate sensitive liabilities for a defined time period. A gap of 1.0 means that assets and liabilities are perfectly matched as to repricing within a specific time period and interest rate movements will not affect net interest margin, assuming all other factors hold constant. Management has specified gap guidelines for a one-year time horizon between .7 and 1.3. At June 30, 2002, the Company had a gap ratio of .7 for the one-year period ending June 30, 2003. Thus, over the next twelve months, slightly more rate sensitive liabilities will reprice than rate sensitive assets.

A 200 basis point decrease in interest rates spread evenly during the next twelve months is estimated to cause an increase in net interest income of $186,000 as compared to net interest income if interest rates were unchanged during the next twelve months. In comparison, a 200 basis point increase in interest rates spread evenly during the next twelve months is estimated to cause a decrease in net interest income of $186,000, as compared to net interest income if rates were unchanged during the next twelve months.

As discussed above, this level of variation is within the Company’s acceptable limits. This simulation analysis assumed that savings and checking interest rates had a low correlation to changes in market rates of interest and that certain asset prepayments changed as refinancing incentives evolved. Further, in the event of a change in such magnitude in interest rates, the Company’s asset and liability management committee would likely take actions to further mitigate its exposure to the change. However, given the uncertainty of specific conditions and corresponding actions which would be required, the analysis assumed no change in the Company’s asset/liability composition.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

On August 24, 2000, Jerrold S. Pressman filed a complaint in the U.S. District Court for the Middle District of Tennessee, against Franklin National Bank and Gordon E. Inman, Chairman of the Board of the Company and the Bank, alleging breach of contract, tortious interference with contract, fraud, and civil conspiracy in connection with the denial of a loan to a potential borrower involved in a real estate transaction. The Bank and Mr. Inman filed their answers in this matter on September 18, 2000, and a motion for Summary Judgment on October 10, 2000. The Court denied the Bank’s motion for Summary Judgment on February 15, 2001. On July 27, 2001, the Bank and Mr. Inman filed a second motion for Summary Judgment. The Court granted in part and denied in part the Bank and Mr. Inman’s motion for Summary Judgment on October 5, 2001. The case was set for trial to begin on March 5, 2002; however, on February 22, 2002, the Court, on it’s own Motion, continued the trial until September 10, 2002. Mr. Pressman’s amended complaint seeks compensatory damages in an amount not to exceed $20 million and punitive damages in an amount not to exceed $40 million from each defendant. On August 5, 2002, the Bank filed a Notice of Supplemental Authority and Request for Reconsideration of Judicial Estoppel Ruling. The Bank and Mr. Inman deny all of the allegations and will vigorously defend the action. Management further believes that the claims alleged by Mr. Pressman are frivolous and without merit, the Company has meritorious defenses against these actions, and the chances for recovery by Mr. Pressman are remote.

On September 1, 2000, Highland Capital, Inc. filed a complaint in the U.S. District Court for the Middle District of Tennessee, against Franklin National Bank alleging that the Bank required Highland Capital, Inc. to purchase stock in Franklin Financial Corporation, the Bank’s parent holding company, in conjunction with Highland Capital, Inc.’s efforts to obtain a loan from the Bank in violation of 12 U.S.C. § 1972, which prohibits certain tying arrangements. Highland Capital, Inc. is seeking an unspecified amount of damages in an amount not to exceed $2 million, plus attorney’s fees and costs. The bank filed an answer in the matter on September 19, 2000. On July 20, 2001, the Bank filed a motion for Summary Judgment. On November 19, 2001, the Magistrate Judge to whom the case has been assigned, issued a report regarding the Bank’s motion for Summary Judgment recommending that the Motion be granted and the complaint be dismissed. On March 21, 2002, the Court granted the Bank’s motion for Summary Judgment and dismissed Highland Capital, Inc.’s case with prejudice. On April 12, 2002, Highland Capital, Inc. filed a Notice of Appeal to the United States Court of Appeals for the Sixth Circuit. On July 10, 2002, the Bank responded with the filing of Proof Brief of Appellee Franklin National Bank.

Except as set forth above, there are no material pending legal proceedings to which the Company or the Bank is a party or of which any of their properties are subject; nor are there material proceedings known to the Company to be contemplated by any governmental authority; nor are there material proceedings known to the Company, pending or contemplated, in which any director, officer, or affiliate or any principle security holder of the Company, or any associate of any of the foregoing is a party or has an interest adverse to the Company or the Bank.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits.

Exhibit No. Description of Exhibit

2.1 Affiliation Agreement, dated as of July 23, 2002, by and among Fifth Third Bancorp, Fifth Third Financial Corporation and Franklin Financial Corporation (incorporated by reference to the Company’s Current Report on Form 8-K as filed with the Commission on July 25, 2002)

99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended June 30, 2002.

SIGNATURES

Pursuant to the requirements 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.


		FRANKLIN FINANCIAL CORPORATION









Dated:	August 14, 2002	By:	/s/ Richard E. Herrington

			Richard E. Herrington, President and Chief Executive Officer (principal executive officer)





Dated:	August 14, 2002	By:	/s/ Lisa L. Musgrove

			Lisa L. Musgrove, Senior Vice President and Chief Financial Officer (principal financial officer)

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	(a)	Exhibits.

Exhibit No.		Description of Exhibit

2.1		Affiliation Agreement, dated as of July 23, 2002, by and among Fifth Third Bancorp, Fifth Third Financial Corporation and Franklin Financial Corporation (incorporated by reference to the Company’s Current Report on Form 8-K as filed with the Commission on July 25, 2002)

99.1		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

	(b)	Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended June 30, 2002.