At December 31,
		2009				2008				2007				2006				2005
		(dollars in thousands)
Financial Condition Data:
Total assets		$	301,720			$	318,781			$	318,918			$	332,039			$	296,682
Cash			6,875				7,438				6,897				7,828				5,116
Loans receivable, net			243,638				270,049				273,310				278,253				243,059
Mortgage-backed securities
Available-for-sale			2,809				3,236				3,184				4,900				7,098
Held-to-maturity			3,989				5,058				322				473				680
Investments
Available-for-sale			19,949				13,408				17,030				21,725				23,665
Deposit accounts			244,010				223,108				226,521				231,179				219,364
Borrowings			32,419				68,477				63,353				72,217				50,011
Stockholders’ equity			22,206				23,850				25,706				25,746				24,574

		For the year ended December 31,
		2009				2008				2007				2006				2005
		(dollars in thousands)
Operations data:
Total interest income		$	15,263			$	16,970			$	18,285			$	17,412			$	14,227
Total interest expense			9,292				10,869				12,098				10,897				7,837
Net interest income			5,971				6,101				6,187				6,515				6,390
Provision for loan losses			2,832				2,703				300				452				271
Net interest income after provision for loan losses			3,139				3,398				5,887				6,063				6,119
Noninterest income			4,409				1,858				1,723				2,522				1,790
Noninterest expense			10,063				7,577				7,029				6,636				6,133
Income (loss) before taxes			(2,515	)			(2,321	)			581				1,949				1,776
Provision (benefit) for federal income taxes			(975	)			(915	)			125				592				536
Net income (loss)		$	(1,540	)		$	(1,406	)		$	456			$	1,357			$	1,240
Other data:
Interest rate spread during period			2.01	%			1.90	%			1.88	%			2.00	%			2.30	%
Interest rate spread at end of period			2.54				2.32				2.01				1.96				2.35
Return on assets			(0.49	)			(0.44	)			0.14				0.43				0.45
Return on equity			(6.69	)			(5.65	)			1.77				5.40				5.08
Dividend payout ratio			—				(32.28	)			132.59				44.74				44.07
Equity to assets ratio			7.36				7.48				8.06				7.75				8.28
Ratio of average interest-earning assets to average interest-bearing liabilities			101.55				103.53				103.72				104.49				104.48
Non-performing assets as a percent of total assets at end of period			4.00				2.61				1.98				1.35				1.47
Full service offices			7				7				7				7				7
Per share data:
Net income (loss) per common share
Basic		$	(0.92	)		$	(0.84	)		$	0.27			$	0.81			$	0.75
Diluted		$	(0.92	)		$	(0.84	)		$	0.27			$	0.80			$	0.73
Book value per common share		$	13.21			$	14.19			$	15.30			$	15.27			$	14.84

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

GENERAL

First Franklin Corporation (“First Franklin” the “Company” “we’ or “us”) is a savings and loan holding company that was incorporated under the laws of the State of Delaware in September 1987. The Company owns all of the outstanding common stock of The Franklin Savings and Loan Company (“Franklin”).

As a Delaware corporation, the Company 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”). The Company’s assets consist of cash, interest-earning deposits, the building in which the Company’s corporate offices are located and investments in Franklin and DirectTeller Systems Inc. (“DirectTeller”).

Franklin is an Ohio chartered stock savings and loan association headquartered in Cincinnati, Ohio. It was originally chartered in 1883 as the Green Street Number 2 Loan and Building Company. Franklin’s business consists primarily of attracting deposits from the general public and using those deposits, together with borrowings and other funds, to originate real estate loans and purchase investments. Franklin operates seven full-service banking offices and three loan origination offices through which it offers a full range of consumer banking services, including mortgage loans, home equity and commercial lines of credit, credit and debit cards, checking accounts, auto loans, savings accounts, automated teller machines, a voice response telephone inquiry system and an internet-based banking 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 broker dealer.

Franklin has one wholly-owned subsidiary, Madison Service Corporation (“Madison”). At the present time, Madison has no operations. Its only assets are cash and interest-earning deposits and its only source of income is the interest earned on its deposits.

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. The inquiry system is currently in operation at Harland Financial Solutions, Inc. (“Harland”), a computer service bureau which offers the DirectTeller system to the financial institutions it services. It is anticipated that sometime in the future, Harland will no longer offer the DirectTeller system. There are no assets on the consolidated balance sheet that are determined to be impaired as a result of the Company’s ownership of DirectTeller.

At the beginning of 2009, Franklin made a significant change to the residential mortgage lending operation, launching a profitable new program that focuses on originating conventional and FHA/VA loans for sale in the secondary market. In the majority of the sales, the servicing rights to those loans are also sold. Previously, Franklin’s residential mortgage lending program emphasized the origination of conventional fixed-rate loans for sale in the secondary market, with servicing retained by Franklin, and the origination of adjustable-rate loans to be held in the portfolio. The new program is built around a larger loan origination staff which is compensated primarily through commissions on loans closed. Income from this new program from loan processing fees and the profit on the sale of mortgages was $2.78 million in 2009 compared to $139,000 in 2008. As a result of this new program, loan originations of $210.70 million occurred in 2009 versus $56.44 million in 2008.

In the second half of 2005, Franklin implemented a program to increase low cost checking deposits. The program has resulted in a 41% increase in the number of open checking accounts, a 35% increase in checking account balances and a 73% increase in fee income from checking accounts from $513,000 in 2005 to $886,000 in 2009.

The Company has made numerous leadership changes during the past year. Thomas H. Siemers, the President and Chief Executive Officer of the Company since its inception and John L. Nolting, a director since the Company was formed in 1987, both retired in March, 2010. Mr. Siemers will continue to serve as a director of both the Company and Franklin Savings and will remain employed in a limited capacity as special advisor to the board of Franklin.  Mr. Nolting will continue to serve as a director of Franklin Savings.  We appreciate their past service and take comfort in the fact that we will still have access to their advice and counsel. J. Craig Rambo joined the board of Franklin Savings and Steven R. Sutermeister became a director of both the Company and Franklin Savings. The Board of Directors of the Company appointed John J. Kuntz to replace Mr. Siemers as Chairman, President and Chief Executive of the Company and Chairman of Franklin Savings. We are very fortunate to have these capable individuals as part of our leadership group.

Mr. Kuntz has over 35 years of company management experience. He is the Founder, President, and CEO of Butler Consulting Enterprises, LLC, a consulting firm that provides management advisory services to small and mid-size companies in addition to owning and operating various start-up companies. Mr. Kuntz was formerly President and CEO of Intrieve, Inc. a financial institution data processing service provider located in Cincinnati, Ohio. Under his leadership as President and CEO of Intrieve, Mr. Kuntz crafted and executed a plan to increase revenue and reduce expenses which yielded significant increases in profits. Through organic growth and expense reduction initiative and several strategic acquisitions, revenues were increased by 300% and net income was enhanced by 700%. He served as President and CEO from 2000 until Intrieve’s acquisition by Harland Financial Solutions, Inc. in April 2005, which resulted in a 25 times return to the original shareholders. Prior to his appointment as President and CEO of Intrieve, Mr. Kuntz held various positions with Intrieve since his employment there began in 1983. Mr. Kuntz also serves on the Advisory Board of the Xavier University Williams College of Business and serves as a member of the Board of Trustees of Goshen Township, Ohio. Mr. Kuntz earned his Bachelor of Science in Business Administration in Accounting from Xavier University and is a Certified Public Accountant (inactive).

Mr. Rambo has over 39 years of company management, architectural design, project management, strategic planning, and business development experience. He has managed and is currently the Chairman of the Board and a primary owner of McGill Smith Punshon, Inc., an architectural and engineering design firm located in Cincinnati, Ohio. Mr. Rambo is also a Board member for St. Joseph Home and Miami University, Hamilton, Citizen’s Advisory Council. He also volunteers his time with numerous charitable and community organizations. Mr. Rambo earned his Bachelor’s Degree in Architecture from Miami University.

Mr. Sutermeister currently is a private investor with Vadar Capital, LLC. He spent the last 18 years in senior leadership positions with the Union Central Life Insurance Company. Most recently, Mr. Sutermeister served as Senior Vice President and President of Summit Investment Partners, Inc., a wholly-owned investment advisory subsidiary of Union Central, both of which are located in Cincinnati, Ohio. Prior to coming to Cincinnati, Mr. Sutermeister spent 12 years in Senior Management positions with Washington Square Capital and Salomon Brothers, Inc. in Chicago. Mr. Sutermeister is involved in numerous charitable activities including the Board and Finance Committee of the Cincinnati Arts Association, the Investment Committee of the United Way of Greater Cincinnati, and Miami University’s Farmer School of Business Advisory Board. He earned his Bachelor of Science in Business Administration from Miami University and an MBA from Northwestern University Kellogg School of Management.

On October 14, 2008, the Federal Deposit Insurance Corporation (“FDIC”) established the Transaction Account Guarantee Program (“TAGP”). Franklin participates in the TAGP, which provides unlimited deposit insurance coverage through June 30, 2010 for non-interest bearing transaction accounts (typically business checking accounts) and certain funds swept into non-interest bearing savings accounts. For the extra deposit insurance, Franklin pays a 10 basis point fee (annualized) on the balance of each covered account in excess of $250,000. After June 30, 2010, unless extended, the TAGP will expire and deposit insurance coverage will revert back to $250,000 per account.

In May 2009, the FDIC imposed a special assessment on all insured depository institutions of five basis points on the amount of the institution’s assets. In the second quarter of 2009, Franklin recognized a $150,000 expense for the special assessment. On November 12, 2009, the FDIC approved a final rule requiring banks to prepay their estimated quarterly assessments for the fourth quarter of 2009, as well as all of 2010, 2011, and 2012 on December 30, 2009. The resulting $2.19 million payment was based on Franklin’s regular assessment base on September 30, 2009.

  The Emergency Economic Stabilization Act of 2008 (“EESA”) temporarily increased the limit on FDIC insurance coverage for deposits to $250,000 through December 31, 2013, and the FDIC took action to provide coverage for newly-issued senior unsecured debt and non-interest bearing transaction accounts in excess of the $250,000 limit, for which institutions will be assessed additional premiums.

Management’s discussion and analysis highlights selected information in the financial results of the Company and may not contain all the information important to the reader. For a more complete understanding of trends, risks, events, uncertainties, and accounting policies that may impact the Company, the entire document should be read carefully. Because the results of operations of Madison and DirectTeller were not material to the Company’s operations and financial condition, the following discussion focuses primarily on Franklin.

FORWARD LOOKING STATEMENTS

Statements included in this document, which are not historical or current facts are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and are subject to certain risks and uncertainties that could cause actual results to differ materially from the Company’s historical results. Such statements may be identified by use of the words “may”, “anticipates”, “expects”, “hopes”, “believes”, “plans”, “intends” and similar expressions. Factors that could cause financial performance to differ materially from that expressed in any forward-looking statement include, but are not limited to, credit risk, interest rate risk, competition, changes in the regulatory environment and changes in general and local business and economic trends.

CRITICAL ACCOUNTING POLICIES

We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. We consider the accounting method used for the allowance for loan losses and fair value disclosures to be our critical accounting policies.

The allowance for loan losses is the estimated amount considered necessary to cover inherent, but unconfirmed, credit losses in the loan portfolio at the balance sheet date. The allowance is established through the provision for losses on loans which is charged against income. In determining the allowance for loan losses, management makes significant estimates and has identified this policy as one of the most critical accounting policies for First Franklin Corporation.

Management performs a quarterly evaluation of the allowance for loan losses. Consideration is given to a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant change.

The analysis has two components, specific and general allocations. Specific percentage allocations can be made for losses related to loans that are determined to be impaired. Impairment is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral adjusted for market conditions and selling expenses. If the fair value of the loan is less than the loan’s carrying value, a charge-off is recorded for the difference. The general allocation is determined by segregating the remaining loans by type of loan. We also analyze our historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations. This analysis establishes factors that are applied to the loan groups to determine the amount of the general reserve. Actual loan losses may be significantly more than the allowances we have established which could result in a material negative effect on our financial results.

We classify our investments in debt and equity securities as either held-to-maturity or available-for-sale. Securities classified as held-to maturity are recorded at cost or amortized cost. Available-for-sale securities are carried at fair value. We obtain our fair values from a third party service. This service’s fair value calculations are based on quoted market prices when such prices are available. If quoted market prices are not available, estimates of fair value are computed using a variety of techniques, including extrapolation from the quoted prices of similar instruments or recent trades for thinly traded securities, fundamental analysis, or through obtaining purchase quotes. Due to the subjective nature of the valuation process, it is possible that the actual fair values of these investments could differ from the estimated amounts, thereby affecting our financial position, results of operations and cash flows. If the estimated value of investments is less than the cost or amortized cost, we evaluate whether an event or change in circumstances has occurred that may have a significant adverse effect on the fair value of the investment. If such an event or change has occurred and we determine that the impairment is other-than-temporary, we expense the impairment of the investment in the period in which the event or change occurred. We also consider how long a security has been in a loss position in determining if it is other than temporarily impaired. Management also assesses the nature of the unrealized losses taking into consideration factors such as changes in risk –free interest rates; general credit spread widening, market supply and demand, creditworthiness of the issuer, and quality of the underlying collateral.

RISK MANAGEMENT

Risk identification and management are key elements in the overall management of a financial institution. The risk management function needs to be designed to identify, monitor, measure, control and mitigate those risks faced by the Company. Management believes that the primary risks faced by the Company are (i) interest rate risk — the risk to net interest income caused by the impact of changes in interest rates; (ii) asset quality/credit risk- the possibility that borrowers will not be able to repay their debts; (iii) liquidity risk- the possibility that the Company will not be able to fund present and future obligations; and (iv) operating risk- the potential for loss resulting from events involving people, processes, technology, external events, legal, compliance and regulatory matters and reputation.

INTEREST RATE RISK

Interest rate risk management is the process of balancing the risk and return 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.

Managing interest rate risk is fundamental to banking. Franklin must manage the inherently different maturity and repricing characteristics of its lending and deposit products to achieve a desired level of earnings and to limit its exposure to changes in interest rates. Franklin is subject to interest rate risk to the degree that its interest-bearing liabilities, consisting primarily of customer deposits and borrowings, mature or reprice more or less frequently, or on a different basis, than its interest-earning assets, which consist of mortgage loans, mortgage-backed securities, consumer and commercial lines of credit, consumer loans (auto, student and personal) and investment securities.

To mitigate the impact of changes in market interest rates on our interest-earning assets and interest-bearing liabilities, we originate and hold short-term and adjustable-rate loans and originate and sell the majority of the fixed-rate mortgage loans that we originate. We retain short-term and adjustable-rate loans because they have repricing characteristics that more closely match the repricing characteristics of our liabilities.

To further mitigate the risk of timing differences in the repricing of assets and liabilities, our interest-earning assets are matched with interest-bearing liabilities that have similar repricing characteristics. For example, the risk of holding ARMs is managed with short-term deposits and borrowings. Periodically, mismatches are identified and addressed by adjusting the repricing characteristics of our interest-bearing liabilities.

The degree of interest rate risk an instrument is subject to is determined by several factors. These factors include: lag, repricing, basis, prepayment, and lifetime cap risk. These risks are described in further detail in the following paragraphs. While having assets that mature or reprice more rapidly than liabilities may be beneficial in times of rising interest rates, such an asset/liability structure may have the opposite effect during periods of declining interest rates.

Lag risk results from the inherent timing difference between the repricing of adjustable-rate assets and liabilities, this can produce short-term volatility in net interest income during periods of interest rate movements although the effects of this lag generally balance out over time. This risk is most prevalent in indexes based on average rates, which may reflect sharp rate changes at a later time, resulting in a lag in the repricing of loans and securities based on this index. Borrowings, however, generally reprice monthly, based on current market interest rates. The majority of the adjustable-rate mortgage loans Franklin originates use the Treasury constant maturity (“CMT”).

Repricing risk is caused by the mismatch in the maturities and/or repricing periods between interest-earning assets and interest-bearing liabilities.

Basis risk results from assets and liabilities reacting differently to interest rate movements because they are based on different indices. For example, most of Franklin’s adjustable-rate loans are indexed to the CMT or the prime rate, while the rates on Franklin’s borrowings are normally derived from the London Interbank Offered Rates (“LIBOR”). Deposit rates are normally determined by local competition.

Prepayment risk results from the ability of customers to pay off their loans prior to maturity. Generally, prepayments increase in falling interest rate environments and decrease in rising interest rate environments. Falling interest rate environments normally result in the prepayment and refinancing of existing fixed- and adjustable-rate loans to fixed-rate mortgage loans with lower interest rates. When combined with selling the majority of fixed-rate mortgage loans originated, it may be difficult to increase or even maintain the size of our loan portfolio during these periods, although additional sales may generate gains on sale to offset some of the reduced net interest margin. When rates rise, the decline in prepayments would normally result in an increase in the size of the loan portfolio due to an increase in the percentage of adjustable-rate loans that are originated.

A lifetime interest rate cap on adjustable-rate loans held in the portfolio introduces another element of interest rate risk to earnings. In periods of rising interest rates, it is possible for the fully indexed interest rate (index rate plus the margin) on some loans to exceed the lifetime interest rate cap. This feature prevents the loan from repricing to a market rate, thus adversely impacting net interest income in periods of relatively high interest rates. Typically, the lifetime cap is 600 basis points above the initial rate. The lifetime caps on our existing loans would not have a material adverse effect on our net interest income unless interest rates increased substantially from current levels.

The following table utilizes the net portfolio value (“NPV”) methodology to illustrate the impact on Franklin’s net interest income of specified interest rate scenarios at December 31, 2009. Because adjustable-rate loans are subject to caps on the allowable interest rate changes and lag, repricing and basis risk, instantaneous interest rate increases or decreases can negatively impact net interest income. NPV represents the market value of portfolio equity and is equal to the market value of assets less the market value of liabilities. Management and the Board of Directors monitor the level of NPV on a quarterly basis and consider changes in the methods used to manage the rate sensitivity and repricing characteristics of balance sheet components and to maintain acceptable levels of change in NPV and net interest income in the event of changes in interest rates.

In its Interest Rate Risk Policy, Franklin has established what it believes are minimum acceptable NPV levels under various hypothetical instantaneous changes in market interest rates. As of December 31, 2009, the Company was within its policy limits. Franklin remains rated in the most favorable interest rate risk category under OTS guidelines.

Change in						Net interest income												Net portfolio value
Interest rates						Estimated				$ change				% change				Estimated				NPV				Policy
(basis points)						$ value				from constant				from constant				$ value				ratio				guidelines
						(Dollars in thousands)
	+300					$	6,326			$	(80	)			(1.25	)%		$	29,123				9.59	%			4.00	%
	+200						6,413				7				0.11				30,506				9.88				5.00
	+100						6,455				49				0.76				30,508				9.76				6.00
	0						6,406				—				—				27,954				8.90				6.75
	-100						6,364				(42	)			(0.66	)			25,386				8.05				6.00
	-200						5,895				(511	)			(7.98	)			—								5.00
	-300						5,410				(996	)			(15.55	)			—				—				4.00

The above table shows the change in net interest income that would result from a change in Franklin’s net portfolio value upon an instantaneous shift in the Treasury yield curve of plus or minus 100, 200 or 300 basis points. The changes in the NPV and net interest income shown in the table were calculated using a simulation program. This simulation uses various 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, but are indicators of sensitivity to changes in rates.

An objective of interest rate risk management is to maintain an appropriate balance between the stable growth of income and the risks associated with maximizing income through interest sensitivity imbalances. No single method can accurately measure the impact of changes in interest rates on net interest income, so in addition to the NPV method, the Company also measures the difference, or “gap,” between the amount of assets and liabilities scheduled to mature or reprice within the same period. The gap is expressed as a percentage of assets, and is based on certain assumptions. Generally, the lower the percentage, the less sensitive the Company’s earnings are to interest rate changes. A positive gap means an excess of assets over liabilities repricing during the same period, however the size of the gap is important because either a negative or positive gap may be advantageous depending on whether interest rates are rising or falling. The smaller the gap, the lesser impact a change in interest rates will have on interest income.

Although the “gap” method of analysis presented below is helpful, it remains subject to basis, prepayment and lag risk which may cause it to react in different degrees to changes in market interest rates. The table below reflects estimates as to the periods to repricing or maturity at a particular point in time. Among the factors considered are current trends and historical repricing experience with respect to particular or similar products.

The following table sets forth Franklin’s interest rate sensitivity gap as of December 31, 2009. As shown below, the one year cumulative gap is $(160,000). This negative gap indicates that more liabilities are scheduled to reprice during the next year than assets. Generally, this would indicate that net interest income would decrease as rates rise and increase as rates decline. But, as the NPV table above indicates, due to the caps placed on a loan’s ability to reprice, and the lag effect associated with rate changes, an instantaneous decline in interest rates of 200 or more basis points could be expected to adversely affect Franklin’s net interest income and interest rate risk position.

		3 months				4 to 6				7 to 12				1 to 2				2 to 3				3 to 5				>5
		or less				months				months				years				years				years				years				Total
Assets:
Real estate loans:
One- to four-family
Adjustable-rate		$	36,509				26,558				34,014				5,160				536				6				—				102,783
Fixed-rate			5,168				4,296				6,588				7,961				4,086				3,231				1,135				32,465
Multi-family and nonresidential
Adjustable-rate			3,149				3,108				6,089				11,640				10,863				19,071				—				53,920
Fixed-rate			307				311				637				1,337				1,423				3,129				2,925				10,069
Consumer loans			32,298				127				244				450				404				685				865				35,073
Commercial loans			1,885				14				28				59				62				136				3,004				5,188
Mortgage-backed securities			1,564				1,101				1,635				1,158				583				476				203				6,720
Investments			9,447				—				—				—				—				2,096				17,092				28,635
Total rate sensitive assets		$	90,327				35,515				49,235				27,765				17,957				28,830				25,224				274,853
Liabilities:
Fixed maturity deposits		$	42,858				24,561				23,614				23,693				23,693				26,964				—				165,383
Transaction accounts (1)			21,704				344				618				999				749				983				1,264				26,661
Money market deposit accounts (1)			14,859				—				—				—				—				—				—				14,859
Savings accounts (1)			37,211				—				—				—				—				—				—				37,211
Borrowings			1,333				5,829				2,306				5,973				5,973				874				10,131				32,419
Total rate sensitive liabilities		$	117,965				30,734				26,538				30,665				30,415				28,821				11,395				276,533
Cumulative Gap		$	(27,638	)			(22,857	)			(160	)			(3,060	)			(15,518	)			(15,509	)			(1,680	)
Cumulative gap as a percentage of total assets			(9.15	)%			(7.57	)			(0.05	)			(1.01	)			(5.14	)			(5.14	)			(0.56	)

ASSET QUALITY/CREDIT RISK

Credit risk refers to the potential for losses due to loan defaults or to declines in the value of the collateral. Franklin has taken various steps to reduce credit risk and to maintain the quality of its assets. As discussed previously, Franklin changed its one- to four-family mortgage origination operation in 2009 to focus on the sale of those loans originated. Multifamily and commercial real estate mortgage loans, home equity and commercial lines of credit originated are retained in the portfolio. Generally, those types of loans have higher risk characteristics than one- to four-family mortgage loans. As part of an on-going quality control program, a sample of the loans originated is reviewed monthly by Franklin’s Compliance Officer to confirm that underwriting standards have been followed. The results of these reviews are reported to Franklin’s Chief Executive Officer. In 2010, Franklin engaged a third party to review the classification and grading of its loan portfolio. Results of that engagement were reported to the Board of Directors, but did not significantly change the level of Franklin’s classified assets.

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 15 days after a payment is due. All borrowers whose loans are more than 30 days past due, are contacted by the Collection Manager, in an effort to correct the problem. If the problem persists, legal action is normally considered when the loan becomes 90 days past due.

The Asset Classification Committee meets at least quarterly to determine if all assets are being valued fairly and properly classified for regulatory purposes. All mortgage loans in excess of $500,000, loans to borrowers with aggregate loans outstanding exceeding $1 million, consumer loans in excess of $100,000, home equity and commercial lines of credit with a credit limit in excess of $250,000 and repossessed assets are reviewed annually. In addition, any loan delinquent more than 90 days is reviewed at each meeting. Other assets are reviewed at the discretion of the committee members.

Non-performing assets include loans that have been placed on non-accrual status, accruing loans which are 90 days or more past due and repossessed assets. 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 90 days past due. One-to four-family residential mortgage loans are placed on non-accrual status if the collection of principal and/or interest becomes doubtful or legal action to foreclose commences. Consumer loans more than 120 days delinquent are charged against the consumer loan allowance for loan losses unless payments are currently being received and it appears likely that the debt will be collected.

The following table sets forth Franklin’s non-performing assets as of the dates indicated.

		At December 31,
		2009				2008
		(Dollars in thousands)
Non-accruing loans		$	9,228			$	6,130
Accruing loans 90 days or more past due			16				339
Repossessed assets			2,817				1,849
Total non-performing assets		$	12,061			$	8,318

As indicated by the table above, non-performing assets increased $3.74 million during 2009. The increase in non-accruing loans consists of the following: (i) one- to four-family loans increased $2.24 million, (ii) multifamily and nonresidential real estate loans increased $65,000 (iii) commercial lines of credit decreased $246,000 and (iv) consumer loans increased $711,000. During the current year, real estate owned increased to $2.82 million from $1.85 million at December 31, 2008. The increase in one- to four-family and consumer non-accruing loans is due to the high unemployment rate and delinquencies of non-owner occupied, investor-owned, properties. The increase in real estate owned reflects the acquisition of 30 properties with a book value of $2.15 million as a result of the foreclosure process. During the same period of time, 12 parcels of real estate owned with a book value of $945,000 were sold. Franklin hired an experienced Collection Manager in November 2007, and placed additional emphasis on reducing non-performing assets by forming a collection team and real estate owned committee consisting of senior officers and other management personnel to resolve these problems on a timely basis. Because of the current state of the real estate market, and economy in general, Franklin believes that resolving these problem assets is a long-term process and that in the interim, non-performing assets, have, and probably will continue to increase.

In the past, Franklin originated a number of its ARMs with initial interest rates below those which would be indicated by reference to the repricing index and also some ARMs which require a monthly payment equal to the interest due (an “interest only” loan). 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. Franklin believes that the current decline in market interest rates should reduce the number of borrowers effected, but may also have a negative impact on interest income.

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 portfolio ARM loans on one- to four-family residential property in amounts of 80% or less of the appraised value. When loans are made in amounts that 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. Franklin does not originate loans that exceed 100% of the appraised value, or negative amortization loans where the required monthly payment is less than the interest due.

Franklin maintains an allowance for losses on loans. The allowance for loan losses consists of allocated and unallocated components. Management’s analysis of the allocated portion of the allowance is based on the Asset Classification Committee’s review of specific loans. Factors included in the Committee’s evaluation are past history with the customer, value of the property or other collateral securing the loan, the general financial condition of the borrower, and the payment history.

The unallocated portion of the allowance for loan losses is determined based on management’s assessment of historical loss experience, general economic conditions, delinquency and non-accrual trends, credit administration, portfolio growth, possible concentrations of credit and regulatory guidance. This determination considers current trends that may not yet have manifested themselves in the historical loss experience and recognizes that the assumptions used may prove to be inaccurate.

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 loan is uncollectible and a loss may be incurred: (i) the loan is significantly delinquent and the borrower has not evidenced the ability or intent to bring the loan current; (ii) the Company has no recourse to the borrower, or if it does, the borrower has insufficient assets to pay the debt; or (iii) the fair market value of the loan collateral is significantly below the current loan balance and there is no near-term prospect for improvement.

The following table is an analysis of the loss reserve activity during the past two years on loans and repossessed assets. The 2009 charge-offs included 12 non-owner occupied investor owned one- to four-family properties totaling $703,000, three multi-family property totaling $561,000, one commercial real estate property totaling $100,000, three commercial lines of credit totaling $245,000 and two consumer loans totaling $33,000. The 2008 charge-offs included 13 non-owner occupied investor owned one- to four-family properties totaling $291,000, four owner occupied one- to four-family properties totaling $104,000, one multi-family property totaling $134,000 and two commercial real estate properties totaling $98,000. At the end of 2009, management is working with the borrowers to resolve the problems as quickly as possible.

		Years ended December 31,
		2009				2008
Beginning balance		$	3,667			$	1,219
Charge-offs
One- to four-family			703				395
Multifamily			561				134
Nonresidential			100				98
Consumer and lines of credit			278				—
			1,642				627
Recoveries
One- to four-family			6				1
Multifamily			5				—
Nonresidential			38				—
Consumer and lines of credit			9				—
			58				1
Net charge-offs			1,584				626
Provision charged to operations			2,832				3,074
Ending balance		$	4,915			$	3,667
Ratio of net charge-offs to average loans outstanding			0.62	%			0.23	%
Ratio of net charge-offs to average non-performing assets			15.54	%			8.55	%
Ratio of non-performing assets to total assets at end of period			4.00	%			2.61	%

LIQUIDITY RISK

Liquidity risk is the risk of loss due to the possibility that funds may not be available to satisfy current or future commitments, ie: the Company’s ability to efficiently meet normal cash flow requirements of both borrowers and depositors. In the ordinary course of business, funds are generated from deposits and the maturity or repayment of earning assets, such as loans and investment securities. 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.

The Company’s liquid assets consist of cash, cash equivalents and investment securities available for sale. Liquid assets increased by $5.98 million to $26.82 million at December 31, 2009.

Changes in cash and cash equivalents may be caused by any one of three activities: operations, investing or financing. These activities are summarized below for the years ended December 31, 2009 and 2008.

		Years ended December 31,
		2009				2008
		(dollars in thousands)
Operating activities:
Net income (loss)		$	(1,540	)		$	(1,406	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities			(6,445	)			2,573
Net cash provided by operating activities			(7,985	)			1,167
Net cash provided (used) by investing activities			22,732				(1,883	)
Net cash provided (used) by financing activities			(15,310	)			1,257
Net increase (decrease) in cash and cash equivalents			(563	)			541
Cash and cash equivalents at beginning of year			7,438				6,897
Cash and cash equivalents at end of year		$	6,875			$	7,438

Franklin sold fixed-rate single-family mortgage loans totaling $173.33 million, at a profit of $2.24 million, during 2009 and $10.93 million, at a profit of $139,000, during 2008. The increase in loan sales and profits on sales reflect the changes in Franklin’s loan origination operation. At the beginning of 2009, Franklin changed its residential mortgage lending operation, launching a program that focused on originating loans for sale with servicing released. Previously, Franklin’s residential mortgage lending program emphasized the origination of fixed-rate loans for sale in the secondary market, with servicing retained by Franklin, and the origination of adjustable-rate loans to be held in the portfolio. The new program is built around a larger loan origination staff which is compensated primarily through commissions on loans closed. As a result of this new program, outstanding loan balances and interest earned on loans have declined, but origination fees and profit on the sale of loans have increased. Loans receivable were $236.09 million at December 31, 2009 compared to $270.05 million at December 31, 2008. Loan disbursements of $210.70 million during the current year were more than offset by loan sales of $173.33 million and loan repayments and maturities of $64.56 million. The $154.26 million increase in loan disbursements and $162.40 million increase in loan sales during 2009 compared to 2008, reflects the increase in the loan origination staff and lower interest rates which caused many borrowers to refinance their existing loans. Franklin also purchased $333,000 in loan participations during 2009 and $4.09 million in 2008. The sale of fixed-rate loans helps Franklin maintain an appropriate level of interest rate sensitivity in its loan portfolio. Franklin also sells student loans it originates. Student loan sales were $89,000, at a profit of $1,500, during 2009, compared to sales of $451,000, at a profit of $7,700, during 2008.

Loan receipts and disbursements are a major component of the Company’s investing activities. Repayments on loans and mortgage-backed securities during 2009 totaled $66.15 million, compared to $44.88 million during 2008. Loan disbursements during 2009 were $210.70 million, compared to $56.44 million during 2008. Franklin also purchased $333,000 in loan participations during 2009 and $4.09 million in 2008.

During 2009 the Company purchased $18.61 million of investment securities compared to $6.01 million of mortgage-backed securities and $12.20 million of investment securities in 2008. No mortgage-backed securities were purchased in 2009. Proceeds from the sale of available-for-sale investment securities were $256,000 in 2009 and $2.0 million in 2008, resulting in profits of $73,000 in 2008. The sales in 2009 did not result in a profit. Investment securities maturities/calls in 2009 were $11.55 million and $13.89 million in 2008. During 2009 and 2008, the Company realized gains of approximately $11,000 and $86,300, respectively, on investment securities that were either sold or called prior to maturity.

Franklin holds $5.98 million of bank-owned life insurance. The face value of the policies as of December 31, 2009 was approximately $14.57 million.

Deposits increased $20.90 million to $244.01 million at December 31, 2009 from $223.11 million at December 31, 2008. Net of interest credited, deposits increased by $14.37 million during 2009, compared to a $10.44 million decrease during 2008. During 2009, core deposits (savings, money market deposit accounts (“MMDA”) and checking accounts) increased $20.49 million and certificates of deposits increased $411,000 as consumers opted to maintain future flexibility by holding their funds in liquid core deposit accounts during the current low rate environment. We anticipate that when deposit rates begin to rise, consumers will move funds to certificates of deposits which usually have higher yields than core deposits, although they may move the funds to other non-banking investments.

Franklin has a program to increase low-cost checking accounts. The program involves direct mail to the households surrounding the Franklin branches, a free gift to anyone opening a new account, payments to offset the cost of check supplies from the customer’s previous financial institution and a gift to any current customer who gets a friend or family member to open a checking account. The program features four types of accounts that range from free with no interest to accounts that pay a higher interest rate on higher balances. During 2009, the program was expanded to include commercial checking accounts. At December 31, 2009, Franklin had approximately 1,500 (an increase of 41%) more open checking accounts than it had when the program started in late 2005. Fee income generated by checking accounts has risen from $513,000 in 2005 to $886,000 in 2009, primarily due to an increase in overdraft fees. Regulatory changes concerning overdraft fees scheduled to be implemented in 2010, will likely have a negative impact on checking account fee income.

The table below sets forth the deposit flows by type of account, including interest credited, during 2009 and 2008.

		Years ended December 31,
		2009				2008
		(dollars in thousands)
Increase (decrease) in :
Savings deposits		$	8,967			$	(727	)
Checking deposits			4,393				(752	)
MMDA deposits			7,131				(990	)
Total			20,491				(2,469	)
Certificates of deposit:
7-31 day			(39	)			1
91 day			664				(24	)
Six Month			(2,169	)			3,283
One year			(812	)			(15,824	)
Eighteen month			937				10,562
Two year			3,660				5,634
Three year			(1,726	)			453
Thirty-nine month			(3,371	)			(1,933	)
Five year			3,267				(3,097	)
Other			—				1
Total			411				(944	)

Borrowings, totally comprised of FHLB advances, decreased $36.06 million to $32.42 million at December 31, 2009. Borrowings were reduced with funds from new deposits and the reduction in loans outstanding. See Note 9 of the Notes to the Consolidated Financial Statements for additional information on outstanding borrowings.

At December 31, 2009, Franklin had outstanding commitments to originate or purchase $1.44 million of mortgage loans or mortgage-backed securities, as compared to $4.09 million at December 31, 2008. Additionally, Franklin had undisbursed home equity loans and commercial lines of credit of approximately $18.86 million at December 31, 2009, compared to $18.71 million at December 31, 2008. During 2010, approximately $91.03 million of certificates of deposit are scheduled to mature. Franklin currently anticipates that, because of the declining balance of loans outstanding, it will reduce certificates $10.00 million in 2010. Also during 2010, $9.47 million of borrowings mature or have required repayments. Management believes that Franklin has sufficient cash flow and borrowing capacity to meet these commitments and maintain desired liquidity levels. Subject to certain limitations, based on its current assets, Franklin is eligible to borrow an additional $53.47 million from the Federal Home Loan Bank (“FHLB”).

OPERATING RISK

Operating risk is the risk of loss resulting from inadequate or failed internal processes, people, systems and external events. This definition includes legal risk and reputational risk. The Company recognizes the significance of operating risk, which is inherent in all areas of our business. Operating risk is managed within acceptable levels through an appropriate level of management focus and resources.

RESULTS OF OPERATIONS

The Company had a net loss of $1.54 million for the year ended December 31, 2009. This represents a (0.49%) return on average assets and a (6.69%) return on average stockholders’ equity. Book value per share at December 31, 2009 was $13.21. The net loss for the year ended December 31, 2008 was $1.41 million and returns on average assets and average equity for 2008 were (0.44%) and (5.65%), respectively. The $194,000 increase in the 2009 net loss before taxes when compared to 2008 is the result of a $130,000 decrease in net interest income before loan loss provisions and increases of $129,000 in loan loss provisions, $265,000 in losses on the sale of repossessed assets and $403,000 in deposit insurance premiums. As a result of the change in the mortgage origination program, gains on the sale of loans increased $2.10 million and compensation and benefits increased $1.74 million. Net income for the year ended December 31, 2007 was $456,000 for a 0.14% return on average assets and a 1.77% return on average stockholders’ equity.

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. Net interest income decreased $130,000 (2.13%) during 2009 to $5.97 million from $6.10 million in 2008, interest rate spread increased from 1.90% for 2008 to 2.01% for 2009 and net earning assets decreased to $4.42 million from $10.25 million at the end of 2008. The amount of net interest income depends on the volume of interest-earning assets and interest-bearing liabilities and the 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.

		2009												2008												2007
		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)
Interest-earning assets:
Loans receivable (1)		$	260,417				14,061				5.40	%		$	273,604				15,541				5.68	%		$	274,492				16,454				5.99	%
Mortgage-backed securities (2)			7,418				369				4.97				7,212				346				4.80				4,318				239				5.54
Investments (2)			16,085				602				3.74				15,194				827				5.44				22,896				1,276				5.57
FHLB stock			4,991				231				4.63				4,909				256				5.21				4,797				316				6.59
Total interest-earning assets		$	288,911				15,263				5.28	%		$	300,919				16,970				5.64	%		$	306,503				18,285				5.97	%
Interest-bearing liabilities:
Checking deposits		$	34,530				170				0.49	%		$	29,999				207				0.69	%		$	31,257				361				1.15	%
Savings deposits			31,913				264				0.83				28,640				302				1.05				29,385				521				1.77
Certificates of deposit			174,001				6,844				3.93				164,838				7,330				4.45				168,056				7,836				4.66
Borrowings			44,049				2,014				4.57				67,193				3,030				4.51				66,806				3,380				5.06
Total interest-bearing liabilities		$	284,493				9,292				3.27	%		$	290,670				10,869				3.74	%		$	295,504				12,098				4.09	%
Net interest income						$	5,971											$	6,101											$	6,187
Interest rate spread											2.01	%											1.90	%											1.88	%
Net average earning assets		$	4,418											$	10,249											$	10,999
Net yield on average interest-earning assets											2.07	%											2.03	%											2.02	%
Average interest-earning assets to average interest-bearing liabilities											1.02	%											1.04	%											1.04	%

Rate/Volume Analysis. The most significant impact on the Company’s net interest income between periods is 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. The income earned on assets decreased $1.71 million in 2009, mainly due to the decline in the yield on loans receivable from 5.68% to 5.40% and a reduction in the loans outstanding. Interest expense declined $1.58 million due to the low level of market interest rates during the year.

		2009 vs 2008												2008 vs 2007
		Increase												Increase
		(decrease)								Total				(decrease)								Total
		due to								increase				due to								increase
		Volume				Rate				(decrease)				Volume				Rate				(decrease)
Interest income attributable to:
Loans receivable (1)		$	(730	)			(749	)			(1,479	)		$	(53	)			(860	)			(913	)
Mortgage-backed securities			10				13				23				134				(27	)			107
Investments			51				(277	)			(226	)			(420	)			(29	)			(449	)
FHLB stock			4				(29	)			(25	)			8				(68	)			(60	)
Total interest income		$	(665	)			(1,042	)			(1,707	)		$	(331	)			(984	)			(1,315	)
Interest expense attributable to:
Checking deposits		$	41				(78	)			(37	)		$	(14	)			(140	)			(154	)
Savings deposits			43				(81	)			(38	)			(13	)			(206	)			(219	)
Certificates of deposit			451				(937	)			(486	)			(148	)			(358	)			(506	)
Borrowings			(1,059	)			43				(1,016	)			20				(370	)			(350	)
Total interest expense		$	(524	)			(1,053	)			(1,577	)		$	(155	)			(1,074	)			(1,229	)
Increase (decrease) in net interest income		$	(141	)			11				(130	)		$	(176	)			90				(86	)

Average Yields and Rates Paid. The following table sets forth the average rates on loans and other investments, the average rate paid on deposit accounts and borrowings and the interest rate spread at the end of each of the past three years.

		At December 31,
		2009				2008				2007
Weighted average yield on:
Loans receivable (1)			5.43	%			5.76	%			6.06	%
Mortgage-backed securities			4.84				5.05				5.70
Investments (2)			3.76				4.92				4.62
FHLB stock			5.00				5.00				7.00
Combined weighted average yield on interest-earning assets			5.29				5.69				5.98
Weighted average rate paid on:
Checking deposits			0.28				0.50				0.92
Savings deposits			0.44				0.78				1.65
Certificates of deposit			3.52				4.16				4.59
Borrowings			4.63				3.78				4.95
Combined weighted average rate paid on interest-bearing liabilities			2.75				3.37				3.97
Interest rate spread			2.54	%			2.32	%			2.01	%

Provision for Loan Losses. Franklin maintains an allowance to absorb probable losses inherent in the loan portfolio. The allowance changes based on quarterly assessments and evaluations of the collectability of the loans and their historical loss experience. The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries). Management’s quarterly evaluation of the adequacy of the allowance is based on Franklin’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, and current economic conditions. Changes in the overall local economy in which Franklin operates may impact the allowance for loan losses. Loss reserves have two components, reserves allocated to specific loans and general reserves not allocated to a specific loan. Generally, Franklin establishes a specific reserve, instead of a charge-off, on a loan if the market value of the underlying collateral is less than the book value. This allows some flexibility in the future if the market value of the collateral value increases. Specific reserves may be reduced if the value increases in the future but charge-offs can only be recovered upon the disposition of the property/loan. Any decline in the market value of real estate owned is recognized by a write-down of the book value.

Unallocated general loss reserves increased $1.13 million from $1.43 million at the end of 2008 to $2.56 million at the end of 2009. This increase reflects the current state of the economy with high unemployment and declining real estate values. These unallocated reserves are established as a cushion against future losses in the loan portfolio that have not been specifically identified at this time. It is management’s opinion that the level of general reserves at December 31, 2009 is adequate to protect Franklin against reasonably foreseeable losses.

The foregoing statement is a “forward looking” statement within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Act of 1934, as amended. Factors that could affect the adequacy of the allowance for loan losses include, but are not limited to, the following: (i) changes in the local and national economy which may negatively impact the ability of borrowers to repay their loans and which may cause the value of real estate and other properties that secure outstanding loans to decline; (ii) unforeseen adverse changes in circumstances with respect to certain large borrowers; (iii) decreases in the value of collateral securing loans to amounts equal to or less than the outstanding balances of the loans; and (iv) determinations by various regulatory agencies that Franklin must recognize additions to its provision for loan losses based on such regulators’ judgment of information available to them at the time of their examinations.

Charges against current operations for loan loss reserves were $2.83 million in 2009, $2.70 million in 2008 and $300,000 in 2007. The $2.83 million charged to operations in 2009 consisted of a $1.67 million increase in general reserves and specific reserves or charge-offs of $141,000 on non-owner occupied one- to four-family properties, $80,000 on owner occupied one- to four-family properties, $520,000 on multi-family properties, $57,000 on commercial real estate loans, $294,000 on commercial lines of credit and $73,000 on consumer loans. The $2.70 million charged to operations in 2008 consisted of a $786,000 increase in general reserves and specific reserves or charge-offs of $883,000 on non-owner occupied one- to four-family properties, $84,000 on owner occupied one- to four-family properties, $431,000 on multi-family properties, $83,000 on commercial real estate loans, $278,000 on commercial lines of credit and $158,000 on consumer loans. Total loan loss reserves were $4.92 million at December 31, 2009 compared to $3.67 million at the end of 2008.

Classified assets at December 31, 2009 increased to $13.88 million from $9.70 million at December 31, 2008. During 2009, non-performing assets increased by 45.00% to $12.06 million from $8.32 million at the end of 2008 and real estate owned increased 52.35% from $1.85 million to $2.82 million at December 31, 2009. The increase in the classified assets, non-accruing loans and real estate owned is due to the current state of the real estate market and general economy which is having a negative impact on all financial institutions. At December 31, 2009, classified assets included $603,000 of non-owner occupied single-family mortgages, $6.35 million of owner occupied single-family mortgages, $3.04 million of non-residential and multi-family loans, real estate owned of $2.82 million and $1.07 million of consumer loans and lines of credit.

Franklin believes that resolving these problem assets is a long-term process and that in the interim non-performing assets, classified assets and loan loss reserves may increase.

Noninterest Income. Noninterest income was $4.41 million for 2009, compared to $1.86 million for 2008 and $1.72 million for 2007. Current year income includes service fees of $886,000 earned on checking and money market accounts, profits of $2.24 million on the sale of loans, $11,000 gains on the sale/maturity of other investments and $543,000 in fees earned from loan originations. The increase in the gains on the sale of loans from $139,000 in 2008 to $2.24 million in 2009 and $543,000 fees earned on the origination of loans reflect the changes in the loan origination operation which resulted in a $154.26 million increase in loan originations and a $162.40 million increase in loan sales. Noninterest income in 2008 included service fees of $881,000 on checking and money market accounts and profits of $245,000 on the sale of loans and other investments. Noninterest income in 2007 included service fees of $841,000 on checking and money market accounts and profits of $138,000 on the sale of loans and other investments

Noninterest Expense. Noninterest expense was $10.06 million, $7.58 million and $7.03 million for the years ended December 31, 2009, 2008 and 2007, respectively. As a percentage of average assets, total noninterest expenses were 3.23%, 2.37%, and 2.17% for 2009, 2008 and 2007, respectively. The following table shows changes in the major noninterest expense items during 2009 and 2008.

						Percent								Percent
						increase								increase
		2009				(decrease)				2008				(decrease)				2007
														(Dollars in thousands)
Compensation		$	4,007				64.49	%		$	2,436				1.33	%		$	2,404
Employee benefits			673				33.27				505				(18.81	)			622
Office occupancy			1,074				6.87				1,005				(1.66	)			1,022
FDIC insurance			437				1,185.29				34				21.43				28
Data processing			827				3.63				798				14.66				696
Marketing			145				(32.24	)			214				(8.55	)			234
Professional fees			277				(15.29	)			327				60.29				204
Deposit account expenses			261				7.41				243				(53.36	)			521
Loss on sale of real estate owned			635				71.62				370				740.91				44
Supervisory expense			202				48.53				136				(1.45	)			138
Taxes, other than income			229				(15.81	)			272				4.21				261
Real estate owned expenses			258				101.56				128				93.94				66
Other			1,038				(6.40	)			1,109				40.56				789
Total		$	10,063				32.81	%		$	7,577				7.80	%		$	7,029

The increase in compensation and employee benefits reflects the addition of commissioned loan officers and support personnel in connection with the loan origination function. Data processing expenses increased as a result of increased ATM/debit card charges. The increased FDIC insurance reflects a special assessment of $150,000 and higher rates to recapitalize the insurance fund. The reduction in professional fees reflects a decrease in legal fees incurred. Marketing expense declined due to a reduction in advertising for deposits. The increase in deposit account expenses is due to an increase in the cost of the checking account acquisition program, due to addition of commercial checking accounts to the program. The increase in supervisory expense reflects the cost of increasing supervision being experienced by many financial institutions in the current environment. The increase in real estate owned expenses reflects an increase in the number of properties held.

Provision for Federal Income Taxes. Provisions (benefit) for federal income taxes were $(975,000), $(915,000), and $125,000 in 2009, 2008 and 2007, respectively. The effective federal income tax rates for 2009, 2008, and 2007 were (38.8) %, (39.4) % and 21.5%, respectively. The reduction in the effective tax rate for 2007 reflects the effect of nontaxable income being a higher percentage of total income. A reconciliation of statutory federal income tax rates to the effective federal income tax rates is shown in Note 13 of the Notes to Consolidated Financial Statements.

CAPITAL

The evaluation of capital adequacy depends on a variety of factors, including asset quality, liquidity, earnings, internal controls and management capabilities. The Company’s capital provides protection to depositors, and represents the investment of stockholders. The capital adequacy objectives of the Company have been developed to maintain a capital base reasonably commensurate with the overall risk profile of the Company, to maintain strong capital ratios, and to meet all regulatory guidelines. Management believes that a strong capital base is instrumental in achieving enhanced stockholder returns over the long term.

The Company’s stockholders’ equity decreased approximately $1.64 million during 2009 from $23.85 million at December 31, 2008 to $22.21 million at the end of 2009. Book value per share decreased to $13.21 at December 31, 2009 from $14.19 at the end of 2008. The decreases in stockholders’ equity and book value per share are primarily the result of a $1.54 million net loss for the year. As a percentage of total assets, the Company’s stockholders’ equity was 7.36% and 7.48% at December 31, 2009 and 2008, respectively.

To conserve capital, dividends were reduced 50% in the third quarter of 2008 and suspended entirely during the first quarter of 2009. In addition, the Company has entered into an agreement with the OTS not to pay dividends, make capital distributions or repurchase shares without OTS approval. Dividends per share of $0.27 were declared by the Company in 2008, resulting in payments of $454,000. See Note 10 of the Notes to Consolidated Financial Statements for information regarding regulatory restrictions on dividend payments from Franklin to the Company.

For regulatory purposes, Franklin is subject to a leverage ratio (core capital) and a risk-based capital requirement. The table below sets forth the capital levels required under OTS regulations and Franklin’s actual capital levels at December 31, 2009.

Core capital is net worth adjusted for unrealized gains or losses on available-for-sale securities and certain intangible assets (goodwill, servicing rights, residual interest, and deferred tax assets). The risk-based capital standards are designed to make regulatory capital standards more sensitive to an institution’s risk profile, to account for off-balance sheet exposure and to minimize the negative impact of holding liquid assets. Assets and off-balance sheet items are assigned to risk categories, each with a specific risk-weighting factor. The resulting capital ratio represents core capital plus general loan loss reserves, as a percentage of total risk-weighted assets and off-balance sheet items. The OTS may require higher capital levels, if warranted by its assessment of the level and nature of risk to which Franklin is exposed.

						Minimum												Minimum
Capital standard		Actual				required				Excess				Actual				required				Excess
Core		$	21,548				12,050				9,498				7.15	%			4.00				3.15
Risk-based		$	24,107				17,107				7,000				11.27	%			8.00				3.27

RECENT ACCOUNTING PRONOUNCEMENTS

We adopted the following accounting guidance in 2009, none of which had a material effect, if any, on our year-end consolidated financial position or results of operations.

In April 2009, the Financial Accounting Standards Board (“FASB”) issued guidance that requires entities to separate an other-than-temporary impairment of a debt security into two components when there are credit related losses associated with the impaired debt security for which management asserts that it does not have the intent to sell the security and it is more likely than not that it will not be required to sell the security before recovery of its cost basis. The amount of the other-than-temporary impairment related to a credit loss is recognized in earnings and the amount of the other-than-temporary impairment related to other factors is recorded in other comprehensive income (loss). This guidance was effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We adopted this guidance effective January 1, 2009. There were no impairments previously recognized on debt securities we owned at December 31, 2008; therefore, there was no cumulative effect adjustment to retained earnings or other comprehensive loss as a result of adopting this guidance.

In April 2009, the FASB issued guidance on “Determining Fair Value When Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions that are Not Orderly.” Under this guidance, if an entity determines that there has been a significant decrease in the volume and level of activity for the asset or the liability in relation to the normal market activity for the asset or liability (or similar assets or liabilities), and then transactions or quoted prices may not accurately reflect fair value. In addition, if there is evidence that the transaction for the asset or liability is not orderly, the entity shall place little, if any, weight on that transaction price as an indicator of fair value. This guidance was effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We adopted this guidance effective January 1, 2009.

In April 2009, the FASB issued guidance that requires disclosures about fair value of financial instruments in interim and annual financial statements which was effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We adopted this guidance effective January 1, 2009.

In June 2008, the FASB issued guidance that clarifies whether instruments, such as restricted stock, granted in share-based payments are participating securities prior to vesting. Such participating securities must be included in the computation of earnings per share under the two-class method. It also requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents as a separate class of securities in calculating earnings per share. This guidance was effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008, and required a company to retrospectively adjust its earnings per share data. The adoption of this standard did not have a material effect on the Corporation’s financial statements.

In May 2009, the FASB issued guidance that is consistent with existing auditing standards in defining subsequent events as events or transactions that occur after the balance sheet date but before the financial statements are issued or are available to be issued. This guidance was effective for periods ending after June 15, 2009.

In June 2009, the FASB issued guidance that established the FASB Accounting Standards Codification as the single source of authoritative accounting principles in the preparation of financial statements in conformity with GAAP. This guidance also explicitly recognized rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under federal securities laws as authoritative GAAP for SEC registrants. This guidance was effective for financial statements issued for periods ending after September 15, 2009.

In September 2009, the FASB issued updated guidance for the fair value measurement of alternative investments such as hedge funds, private equity funds, and venture capital funds. This guidance allows companies to determine the fair value of such investments using net asset value (“NAV”) as a practical expedient if the fair value of the investment is not readily determinable and the investee entity issues financial statements in accordance with measurement principles for investment companies. Use of this practical expedient is prohibited if it is probable the investment will be sold at something other than NAV. This guidance also requires new disclosures for each major category of alternative investments and was effective for financial statements issued in the period ending after December 15, 2009. The adoption of this standard had no effect on the Corporation’s financial statements.

The following accounting guidance will be adopted in 2010, and is not expected to have a material impact, if any, on our consolidated financial position or results of operations.

In June 2009, the FASB issued guidance which 1) replaces the quantitative-based risks and rewards calculation for determining whether an enterprise is the primary beneficiary in a variable interest entity with an approach that is primarily qualitative; 2) requires ongoing assessments of whether an enterprise is the primary beneficiary of a variable interest entity; and 3) requires additional disclosures about an enterprise’s involvement in variable interest entities. This guidance is effective for financial statements issued for fiscal years beginning after November 15, 2009. Management does not expect the adoption of this standard to have a material effect on the financial statements.

In January 2010 the FASB issued a new standard on Accounting for Distributions to Shareholders with Components of Stock and Cash which amends the Codification to clarify that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in earnings per share prospectively and is not a stock dividend. The standard is effective for the first interim annual period ending after December 31, 2009, and should be applied on a retrospective basis. The Corporation is currently evaluating the impact this standard will have on its financial statements.

In January 2010, the FASB issued new standards on Fair Value Measurements and Disclosures. These standards require new disclosures on the amount and reason for transfers in and out of Level 1 and 2 fair value measurements. The standards also require disclosure of activities, including purchases, sales, issuances, and settlements within the Level 3 fair value measurements, The standards also clarifies existing disclosure requirements on levels of disaggregation and disclosures about inputs and valuation techniques. The new disclosures regarding Level 1 and 2 fair value measurements and clarification of existing disclosures are effective for the Corporation beginning with its first interim filing in 2010. The disclosures about the rollforward of information in Level 3 are required for the Corporation with its first interim filing in 2011. The Corporation is currently evaluating the impact these standards will have on its financial statements.

The FASB issued an accounting standard related to the accounting for transfers of financial assets, which is effective for fiscal years beginning after November 15, 2009, and interim periods within those fiscal years. This standard enhances reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. This standard eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. This standard also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. This accounting standard was subsequently codified into ASC Topic 860, Transfers and Servicing. The adoption of this standard is not expected to have a material effect on the Corporation’s results of operations or financial position.

CORPORATE INFORMATION

MARKET INFORMATION

The Company’s common stock is listed on the NASDAQ Global Market under the trading symbol “FFHS”. As of December 31, 2009, there were 323 stockholders of record. The following table sets forth the high and low closing sale prices of the Company’s common stock as reported on the NASDAQ Global Market during the quarters indicated. At March 23, 2010, First Franklin’s closing sale price as reported on the NASDAQ Global Market was $7.00.

Stock prices for the quarter ended:

		Low				High
March 31, 2008			6.33				10.20
June 30, 2008			7.10				9.74
September 30, 2008			4.51				10.49
December 31, 2008			3.00				11.50
March 31, 2009			1.50				5.96
June 30, 2009			3.06				6.50
September 30, 2009			4.50				6.50
December 31, 2009			5.55				8.43

DIVIDENDS

Dividends are paid upon the determination of the Company’s 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, financial condition, regulatory restrictions, future growth plans and other relevant factors. Due to current economic conditions and to conserve capital, the Company reduced its quarterly dividend 50% in September 2008 and in March 2009 suspended dividend payments. In addition, the Company has entered into an agreement with the OTS not to pay dividends, make capital distributions or repurchase shares without OTS approval. The Company declared dividends of $0.27 per share during 2008; this represents a dividend payout ratio of (32.28%). The Board of Directors will continue to monitor the state of the economy and the Company’s financial position, along with the OTS restrictions, in determining when to reinstate dividend payments.

The principal source of earnings for the Company on an unconsolidated basis is dividends paid to the Company by Franklin. The OTS imposes various restrictions on the ability of savings institutions, such as Franklin, to make capital distributions. Capital distributions include, without limitation, payments of cash dividends, repurchases and certain other acquisitions by an institution of its shares and payments to stockholders of another institution in an acquisition of such other institution. An application must be submitted and approval obtained (i) if the proposed distribution would cause total distributions for the calendar year to exceed net income for that year to date plus the institution’s retained net income for the preceding two years; (ii) if the institution will not be at least adequately capitalized following the capital distribution; or (iii) if the proposed distribution will violate a prohibition contained in any applicable statute, regulation or agreement between the institution and the OTS (or FDIC), or violate a condition imposed in an OTS approved application or notice. If the subsidiary of a holding company is not required to file an application, it must file a notice of the distribution with the OTS. Franklin did not pay dividends to the Company during 2009 or 2008. Franklin is a party to the aforementioned agreement with the OTS regarding dividend payments.

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:

Computershare Investor Services, Canton, Massachusetts

SPECIAL COUNSEL:

Vorys, Sater, Seymour and Pease LLP, 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 June 14, 2010 at 3:00 p.m.

FORM 10-K:

The Company’s Annual Report on Form 10-K for the year ended December 31, 2009, as filed with the Securities and Exchange Commission will be furnished without charge to any stockholder who contacts:

Investor Relations Department
First Franklin Corporation
4750 Ashwood Drive
P.O. Box 415739
Cincinnati, Ohio 45241
Or E-mail: dvoelpel@firstfranklin.com

Visit our Websites:
www.firstfranklin.com
www.franklinsavings.com

Management’s Report on Internal Control over Financial Reporting

Our Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) for our Company. Our Company’s internal control over financial reporting is designed to provide reasonable assurance, although, not absolute assurance, regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America. Internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our Company’s assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States of America, and that our Company’s receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As required by Rule 13a-15(c) promulgated under the Exchange Act, our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of our internal control over financial reporting as of December 31, 2009. Management’s assessment took into consideration the size and complexity of the company and was based on criteria set forth by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission in Internal Control over Financial Reporting — Guidance for Smaller Public Companies. In performing the assessment, management concluded that our internal control over financial reporting was not effective based on criteria set forth by the COSO. The following material weakness was identified in our internal control over financial reporting at December 31, 2009: As a result of personnel issues, during the fourth quarter of 2009, we did not perform timely reconciliations of our bank account with the Federal Home Loan Bank. We remediated this material weakness early in fiscal year 2010 and completed the reconciliation of the account through December 31, 2009 by February 28, 2010.

Notwithstanding this material weakness, we believe that our financial condition, results of operations and cash flows presented in this annual report are fairly presented in all material respects. We base our conclusion on our ability to substantiate, with a high degree of confidence, all of our significant accounts were reconciled prior to the issuance of our earnings release, annual report and 10-K.

This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

/s/ Thomas H. Siemers				/s/ Daniel T. Voelpel
Thomas H. Siemers				Daniel T. Voelpel
President and Chief Executive Officer				Vice President and Chief Financial Officer

March 31, 2010

Report of Independent Registered Public Accounting Firm

To the Board of Directors
of First Franklin Corporation and Subsidiary:

We have audited the consolidated balance sheets of First Franklin Corporation and Subsidiary as of December 31, 2009 and 2008 and the related consolidated statements of income (loss), comprehensive income (loss), changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2009. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. 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 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, 2009 and 2008 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.

/s/ Clark, Schaefer, Hackett & Co.

Cincinnati, Ohio
March 31, 2010

105 east fourth street, ste. 1500
cincinnati, oh 45202

www.cshco.com
p. 513.241.3111
f. 513.241.1212

cincinnati | columbus | dayton | middletown | springfield

FIRST FRANKLIN CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

		December 31,
		2009				2008
ASSETS
Cash, including certificates of deposit and other interest- earning deposits of $100,000 and $1,100,000 at December 31, 2009 and 2008, respectively		$	6,875,177				7,438,268
Investment securities:
Securities available-for-sale, at market value (amortized cost of $20,185,010 and $13,356,093 at December 31, 2009 and 2008, respectively)			19,949,225				13,408,420
Mortgage-backed securities:
Securities available-for-sale, at market value (amortized cost of $2,731,092 and $3,254,285 at December 31, 2009 and 2008, respectively)			2,809,463				3,235,951
Securities held-to-maturity, at amortized cost (market value of $4,154,889 and $5,180,606 at December 31, 2009 and 2008, respectively)			3,988,852				5,058,109
Loans held for sale			7,552,314				—
Loans receivable, net			236,085,388				270,049,453
Real estate owned, net			2,791,688				1,848,823
Investment in Federal Home Loan Bank of Cincinnati stock, at cost			4,991,000				4,991,000
Accrued interest receivable:
Investment securities			162,102				254,922
Mortgage-backed securities			27,100				35,000
Loans receivable			945,697				814,351
Property and equipment, net			3,448,367				3,510,957
Bank owned life insurance			5,982,426				5,744,727
Other assets			6,111,680				2,391,159
		$	301,720,479				318,781,140
LIABILITIES
Deposits		$	244,010,350				223,108,146
Borrowings			32,419,160				68,476,927
Advances by borrowers for taxes and insurance			2,159,661				2,314,506
Other liabilities			786,040				891,958
Total liabilities			279,375,211				294,791,537
Minority interest in consolidated subsidiary			139,522				139,979
Commitments (Notes 15 and 17)
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, 2,010,867 shares issued in 2009 and 2008			13,406				13,406
Additional paid-in capital			6,189,237				6,189,237
Treasury stock, at cost — 330,183 shares in 2009 and 2008			(3,270,399	)			(3,270,399	)
Retained earnings, substantially restricted			19,378,551				20,918,379
Accumulated other comprehensive income:
Unrealized loss on available-for-sale securities, net of taxes of $(48,200) and $(550) at December 31, 2009 and 2008, respectively			(105,049	)			(999	)
Total stockholders’ equity			22,205,746				23,849,624
		$	301,720,479				318,781,140