Item  405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

The issuer’s revenues for its most recent fiscal year were $20.01 million.

The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the last sale price quoted on The NASDAQ Global Market as of March 7, 2008, was $9.45 million.

1,680,684 of the issuer’s common shares were issued and outstanding on March 7, 2008.

Documents Incorporated by Reference and Included as Exhibits:
Part II of Form 10-KSB — Portions of 2007 Annual Report to Stockholders
Part III of Form 10-KSB — Portions of Proxy Statement for 2008 Annual Meeting of Stockholders

Transitional Small Business Disclosure Format (check one): Yes o No þ

 

 

PART I

Item 1. Description of Business

First Franklin Corporation

     First Franklin Corporation (the “Company”), the holding company for The Franklin Savings and Loan Company (“Franklin”), was incorporated under the laws of the State of Delaware in September 1987. 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 regulation and examination by the Office of Thrift Supervision (the “OTS”). The Company’s assets, on an unconsolidated basis, consist primarily of cash, interest-earning deposits, the office building in which the Company’s corporate offices are located and the stock of Franklin and DirectTeller Systems, Inc.

     The Company’s executive offices are located at 4750 Ashwood Drive, Cincinnati, Ohio 45241, and its telephone number is (513) 469-5352.

The Franklin Savings and Loan Company

     Franklin, an Ohio stock savings and loan association, conducts business from its main office in Cincinnati, Ohio, and seven full service branches in Hamilton County, Ohio. Franklin was originally chartered in 1883 under the name Green Street Number 2 Loan and Building Company. At December 31, 2007, Franklin had approximately $318.08 million of assets, deposits of approximately $227.52 million and stockholders’ equity of approximately $24.17 million.

     Franklin’s principal business is accepting deposits from the general public and originating mortgage loans for the purpose of financing, refinancing or constructing one- to four-family residential real estate. Franklin also makes loans secured by multi-family residential and nonresidential real estate, consumer loans and occasional business loans.

     Franklin’s income is derived primarily from interest and fees earned in connection with its lending and investment activities, and its principal expenses are interest paid on deposits, interest paid on borrowings and operating expenses. The primary component of Franklin’s net income is net interest income, which is the difference between interest income from loans and investments and interest expense on deposits and borrowings. Franklin’s interest income and interest expense change as the interest rates change on mortgages, securities and other assets and on deposits and other liabilities. Interest rates may change because of general economic conditions, the policies of various regulatory authorities and other factors beyond Franklin’s control. See “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Interest Rate Risk” in the Company’s 2007 Annual Report to Stockholders (the “Annual Report”) for additional information regarding maturity or repricing timing differences and the impact of interest rates on Franklin’s operating results.

     Franklin’s deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”) up to maximum permitted levels. Franklin is subject to examination and regulation by the Ohio Department of Commerce, Division of Financial Institutions (the “Division”), the OTS and the FDIC. Franklin is also subject to certain regulations of the Federal Reserve Board (the “FRB”). See “Regulation.”

     Franklin’s executive offices are located at 4750 Ashwood Drive, Cincinnati, Ohio 45241, and its telephone number is (513) 469-8000.

Lending Activities

     General. Franklin’s primary revenue source is interest and fee income from lending activities. Franklin’s principal lending activity is originating conventional first mortgage real estate loans to enable borrowers to purchase, refinance or construct one- to four-family residential real property. Franklin also makes multi-family residential and nonresidential real estate loans and consumer loans, invests in mortgage-backed securities, occasionally purchases whole loans or participation interests in one- to four-family, multi-family and nonresidential real estate loans originated by other lenders, and originates reverse mortgages which are sold to a third party.

     Franklin’s current mortgage lending strategy is to originate fixed-rate loans for sale in the secondary market and to originate adjustable-rate mortgage loans (“ARMs”) for retention in its own portfolio. When consumer demand for ARMs declines in Franklin’s market area, Franklin may purchase ARMs originated by other lenders or adjustable-rate mortgage-backed securities to offset the lack of demand. Franklin’s current lending strategy for commercial and consumer loans also emphasizes the origination of adjustable rate loans. Commercial and consumer adjustable rate loans are generally originated at higher interest rates and with shorter repricing periods than one- to four-family ARMs.

     Franklin has an agreement with the Student Loan Marketing Association to sell the student loans that it originates. Loans totaling $443,000 were sold under that agreement in 2007 at a profit of $6,800, compared to $338,000 of loans sold at a profit of $5,000 in 2006.

     The following table sets forth information concerning the composition of Franklin’s loan portfolio, including mortgage-backed securities, in dollar amounts and in percentages, by type of loan and by type of security, before net items:

																		At December 31,
		2007								2006								2005								2004								2003
		Amount				Percent				Amount				Percent				Amount				Percent				Amount				Percent				Amount				Percent
		(Dollars in thousands)
Type of loan
Loans secured by real estate:
Residential		$	198,891				70.86	%		$	202,295				70.71	%		$	169,660				66.88	%		$	128,978				58.60	%		$	126,659				57.93	%
Nonresidential			37,907				13.51				41,170				14.39				40,960				16.15				35,434				16.10				33,354				15.26
Construction			5,986				2.14				2,555				0.89				3,083				1.22				8,723				3.96				8,841				4.04
Consumer and other loans:
Commercial lines of credit			5,404				1.92				6,679				2.33				7,447				2.94				11,101				5.04				13,705				6.27
Consumer and other			28,943				10.31				28,058				9.81				24,729				9.75				22,493				10.22				21,173				9.68
			277,131				98.74				280,757				98.13				245,879				96.94				206,729				93.92				203,732				93.18
Mortgage-backed securities:
Held to maturity			322				0.12				473				0.16				680				0.26				1,159				0.53				1,957				0.90
Available for sale			3,193				1.14				4,888				1.71				7,093				2.80				12,229				5.55				12,950				5.92
			3,515				1.26				5,361				1.87				7,773				3.06				13,388				6.08				14,907				6.82
Total loans receivable (before net items)		$	280,646				100.00	%		$	286,118				100.00	%		$	253,652				100.00	%		$	220,117				100.00	%		$	218,639				100.00	%
Type of rate
Fixed rate		$	47,835				17.05	%		$	47,162				16.48	%		$	47,968				18.91	%		$	48,935				22.23	%		$	54,718				25.03	%
Adjustable rate			232,811				82.95				238,956				83.52				205,684				81.09				171,182				77.77				163,921				74.97
Total loans receivable (before net items)		$	280,646				100.00	%		$	286,118				100.00	%		$	253,652				100.00	%		$	220,117				100.00	%		$	218,639				100.00	%
Type of security
Residential:
Single-family		$	180,296				64.24	%		$	183,292				64.06	%		$	153,838				60.64	%		$	127,659				58.00	%		$	122,037				55.82	%
2-4 family			8,545				3.05				9,797				3.42				9,435				3.72				8,526				3.87				8,193				3.75
Multi-family			18,026				6.43				16,272				5.69				17,063				6.73				12,375				5.62				14,537				6.65
Nonresidential real estate			39,432				14.05				42,020				14.69				41,140				16.22				37,963				17.25				38,994				17.83
Commercial lines of credit			5,404				1.92				6,679				2.33				7,447				2.94				11,101				5.04				13,705				6.27
Student loans			977				0.35				808				0.28				660				0.26				391				0.18				554				0.25
Consumer and other loans:			27,966				9.96				27,250				9.53				24,069				9.49				22,102				10.04				20,619				9.43
Total loans receivable (before net items)		$	280,646				100.00	%		$	286,118				100.00	%		$	253,652				100.00	%		$	220,117				100.00	%		$	218,639				100.00	%

     The following table presents a reconciliation of Franklin’s loans receivable and mortgage-backed securities after net items:

		At December 31,
		2007				2006				2005
		(In thousands)
Gross loans receivable and mortgage-backed securities (before net items)		$	280,646			$	286,118			$	253,652
Less:
Loans in process			2,511				631				1,361
Deferred loan fees			209				261				182
Allowance for possible loan losses			1,101				1,612				1,277
Unrealized gain on available for sale mortgage-backed securities			9				(11	)			(5	)
Total			3,830				2,493				2,815
Loans receivable and mortgage-backed securities — net		$	276,816			$	283,625			$	250,837

     The following schedule presents the contractual maturity of Franklin’s loan and mortgage-backed securities portfolio at December 31, 2007. Mortgages which have adjustable or renegotiable interest rates are shown as maturing in the period during which the interest rates are subject to change.

		One- to four-family
		real estate								Other real estate								Mortgage-backed								Consumer and
		mortgage loans								mortgage loans								securities								other loans								Total
						Weighted								Weighted								Weighted								Weighted								Weighted
						average								average								average								average								average
		Amount				rate				Amount				rate				Amount				rate				Amount				rate				Amount				rate
		(Dollars in thousands)
Due during years ending December 31:
2008		$	31,810				5.71	%		$	18,611				7.43	%		$	3,217				5.55	%		$	29,599				6.96	%		$	83,237				6.53	%
2009 and 2010			43,777				5.42				21,167				6.55				—				—				811				7.48				65,755				5.81
2011 and 2012			36,350				5.79				11,936				6.86				—				—				1,139				7.18				49,425				6.08
2013 to 2017			43,867				5.69				4,923				6.35				18				7.01				861				6.77				49,669				5.77
2018 to 2027			6,172				5.66				199				3.37				181				7.21				1,893				7.56				8,445				6.07
2028 and following			23,350				5.25				622				6.62				99				7.64				44				7.12				24,115				5.30
Total		$	185,326				5.59	%		$	57,458				6.87	%		$	3,515				5.70	%		$	34,347				7.01	%		$	280,646				6.03	%

     As of December 31, 2007, the total amount of loans and mortgage-backed securities maturing or repricing after December 31, 2008, consisted of $156.97 million of adjustable-rate loans and $40.94 million of fixed-rate loans.

     The following table shows Franklin’s loan origination, purchase and sale activity, including mortgage-backed securities, during the periods indicated:

		Year ended December 31,
		2007				2006				2005
Loans originated:
One- to four-family		$	29,216			$	69,471			$	61,515
Multi-family			4,732				1,951				4,247
Nonresidential			3,220				8,057				8,851
Land			487				120				75
Consumer and other			17,236				21,651				17,942
Total loans originated			54,891				101,250				92,630
Mortgage-backed securities purchased			—				—				—
Loans purchased			—				—				7,103
Total loans originated and mortgage-backed securities and loans purchased			54,891				101,250				99,733
Loans sold:
One- to four-family			9,428				6,415				8,332
Other			642				338				477
Mortgage-backed securities sold							—				1,884
Principal reductions and payoffs			50,293				62,031				55,505
Increase in loans receivable			(5,472	)			32,466				33,535
Decrease (increase) in net items			(1,337	)			322				882
Net increase in loans receivable and mortgage-backed securities		$	(6,809	)		$	32,788			$	34,417

     In addition to interest earned on loans, Franklin receives fees for loan originations, modifications, late payments and other miscellaneous services. The amount of these fees varies from time to time, generally depending on the supply of funds and other competitive conditions in the mortgage market and the time and costs incurred by Franklin in processing the request. Depending on market conditions when loans are sold, Franklin may retain the responsibility for servicing the loans or sell them with servicing released. During 2007, Franklin sold approximately $9.43 million in fixed-rate residential loans, an increase of 47.0% from 2006. At December 31, 2007, Franklin serviced $64.09 million in loans previously sold to others. Other loan fees and charges representing servicing costs are recorded as income when collected. Loan originations during 2007 were $54.89 million, a decrease of 45.8% from 2006 levels. This decrease in loan originations is primarily the result of higher interest rates in the mortgage market and the decline in the housing market. See “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Interest Rate Risk, and — Liquidity Risk” in the Annual Report.

     Loans are originated primarily in, and within 100 miles of, Hamilton County, Ohio and come from various sources, including existing customers, customer referrals, loan solicitors employed by Franklin, real estate agents, loan brokers and builders. Loan applications are reviewed by salaried employees. The Chief Lending Officer may approve loans up to $750,000, and any individual to whom the Chief Lending Officer has delegated such authority, may approve real estate loans up to $350,000. The President has the authority to approve loans in amounts of up to $1.5 million, and Franklin’s loan committee, which is comprised of the President, the Chief Lending Officer and other loan personnel, may approve loans up to $2.0 million. All other loans must be approved by Franklin’s Board of Directors or Executive Committee. Real estate pledged to secure a loan is appraised by a designated appraiser.

     All mortgage loans originated by Franklin contain a “due-on-sale” clause providing that Franklin may declare the unpaid principal balance due and payable upon the sale or other transfer of the mortgaged property. After taking other business factors into consideration, Franklin determines whether to enforce these due-on-sale clauses; however, Franklin generally enforces such clauses to the extent permitted by law.

     Federal Lending Limit. OTS regulations impose a lending limit on the aggregate amount that a savings association can lend to one borrower (the “Lending Limit”) to an amount equal to 15% of the association’s total capital for risk-based capital purposes plus any loan loss reserves not already included in total capital (“Lending Limit Capital”). A savings association may loan to one borrower an additional amount not to exceed 10% of the association’s Lending Limit Capital, if the additional amount is fully secured by certain forms of “readily marketable collateral.” Real estate is not considered “readily marketable collateral.” The OTS, under certain circumstances, may permit case-by-case exceptions to the Lending Limit. In applying the Lending Limit, loans to certain related or affiliated borrowers are aggregated.

     Based on the 15% Lending Limit, Franklin was able to lend approximately $3.73 million to any individual borrower or group of borrowers at December 31, 2007. Franklin had no outstanding loans in excess of such limit at December 31, 2007.

     One- to Four-family Residential Real Estate Lending. The cornerstone of Franklin’s lending program has been the origination of loans secured by one- to four-family residences. At December 31, 2007, $188.84 million, or 67.29 %, of Franklin’s real estate loan and mortgage-backed securities portfolio consisted of loans on one- to four-family residences, the great majority of which are located in, or within 100 miles of, Hamilton County, Ohio. Non-owner occupied one- to four-family residences represented $23.01 million of Franklin’s loan portfolio at December 31, 2007.

     In order to reduce its exposure to changes in interest rates, Franklin has attempted to limit the origination of long-term, fixed-rate loans for its own portfolio and to increase its originations of ARMs when market conditions are favorable. See “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Interest Rate Risk” in the Annual Report. ARMs tend to decrease Franklin’s exposure to changes in interest rates, but tend to decrease interest income because of the lower yields on adjustable-rate loans.

     Franklin currently offers one- to four-family residential ARMs with initial adjustment periods ranging from one to ten years and interest rate indices based on U.S. Treasury securities with a comparable term. Interest rate increases are generally limited to 2% per adjustment period and 6% over the life of the loan. At December 31, 2007, one- to four-family ARMs totaled $150.42 million.

     Franklin originates 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). Franklin could experience an increased rate of delinquencies as such loans adjust to the fully-indexed rates. At December 31, 2007, $6.68 million, or 4.44%, of Franklin’s one-to four-family ARMs were delinquent thirty days or more, an increase of $4.78 million, or 251.58% from 2006.

     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 adjustable-rate loans on one- to four-family residential property to be held in its portfolio in amounts of 85% or less of the appraised value. When loans are made in amounts that exceed 85% 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 loans where the required monthly payment is less than the interest due.

     Multi-Family Residential and Nonresidential Real Estate Lending. As of December 31, 2007, approximately $57.46 million, or 20.48%, of Franklin’s total loan and mortgage-backed securities portfolio consisted of loans secured by multi-family residential and nonresidential properties. Franklin’s multi-family residential and nonresidential real estate loans include permanent and construction loans secured by liens on apartments, condominiums, office buildings, churches, warehouses and other commercial properties.

     While Franklin’s multi-family residential and nonresidential real estate loans have been originated with a variety of terms, most of such loans mature or reprice in five years or less. Loan fees on originated loans have generally been ¹/2% to 1% of the original loan amount (plus expenses). At December 31, 2007, the majority of Franklin’s multi-family residential or nonresidential real estate loans were secured by properties located either within the State of Ohio or within 100 miles of Hamilton County, Ohio.

     Properties securing multi-family residential and nonresidential real estate loans originated by Franklin are appraised at the time of the loan by appraisers designated by Franklin (or the lead lender in the case of a loan participation).

     Franklin currently invests in multi-family and nonresidential loans in amounts of 80% or less of the appraised value of the property securing the loan. Almost all of the time Franklin obtains personal guarantees of the borrower or, if an entity, its principals or owners, to secure the loan. In some cases, Franklin’s collateral includes junior liens on additional properties owned by the borrower. In underwriting multi-family residential and nonresidential real estate loans (or evaluating the purchase of a loan participation), Franklin considers, among other things, the terms of the loan, the creditworthiness and experience of the borrower, the location and quality of the collateral, the debt service coverage ratio and, if applicable, the past performance of the project.

     Multi-family residential and nonresidential real estate loans typically involve large loan balances to single borrowers or groups of borrowers. Of Franklin’s multi-family residential and nonresidential real estate loans and participations at December 31, 2007, 14 had a principal balance of more than $1.0 million and 20 others had principal balances in excess of $500,000. At December 31, 2007, Franklin had 31 borrowers, or groups of borrowers, with loans in excess of $1.0 million, for a total of $47.43 million. The largest amount outstanding to any borrower or group of borrowers was approximately $2.96 million.

     Multi-family residential and nonresidential real estate loans are generally made at higher rates and for shorter terms than one- to four-family residential mortgage loans. Multi-family residential and nonresidential real estate lending, however, entails additional credit risk as compared to one- to four-family residential mortgage lending, and the borrower typically depends upon income generated by the collateral real estate project to cover operating expenses and debt service. Therefore, the payment experience on loans secured by income producing properties typically is dependent on the successful operation of the related project and thus may be subject to a greater extent to adverse conditions in the real estate market or in the economy generally. Finally, because of the complexity of many multi-family residential and nonresidential real estate projects, it may be difficult to accurately assess the value of the underlying projects. See “Non-Performing Assets, Classified Assets, Loan Delinquencies and Defaults.”

     Federal regulations limit the amount of nonresidential mortgage loans which Franklin may make to 400% of total capital, unless otherwise permitted by the FDIC. At December 31, 2007, Franklin’s nonresidential mortgage loan portfolio was $39.43 million, or 163.14% of its total capital.

     Consumer and Other Lending. Franklin originates consumer loans for personal, family or household purposes, such as the financing of home improvements, automobiles, boats, recreational vehicles and education. Consumer loans are either unsecured or secured by the collateral being purchased with loan proceeds, such as a car. Franklin also offers variable rate secured commercial and home equity line of credit loans. All home equity lines of credit are secured by mortgages on real estate and almost all commercial lines are secured by mortgages on real estate. At December 31, 2007, Franklin had $45.67 million of lines of credit, with total outstanding balances of $27.91 million, of which $5.40 million were commercial lines of credit and $22.51 million were home equity lines of credit. Consumer and commercial loans generally involve a higher level of risk, carry higher yields and have shorter terms to maturity than one- to four-family residential mortgage loans. At December 31, 2007, $34.35 million, or 12.23%, of Franklin’s total loan and mortgage-backed securities portfolio consisted of consumer and other loans.

     Mortgage-Backed Securities and CMOs. Franklin purchases mortgage-backed securities insured or guaranteed by government agencies when conditions favor such a portfolio investment. At December 31, 2007, mortgage-backed securities totaled approximately $2.88 million, or 1.03% of total loans and mortgage-backed securities, of which $322,000 were designated as being held to maturity. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, mortgage-backed securities designated as being held to maturity are carried on Franklin’s balance sheet at cost. The market value of the $322,000 in mortgage-backed securities designated as being held to maturity as of December 31, 2007, was $340,000. The remaining $2.56 million in mortgage-backed securities held at December 31, 2007, was designated as available for sale. In accordance with SFAS No. 115, the mortgage-backed securities available for sale are carried on Franklin’s balance sheet at market value, with unrealized gains or losses carried as an adjustment to stockholders’ equity, net of applicable taxes. At December 31, 2007, the market value of Franklin’s mortgage-backed securities designated available for sale was $2.56 million.

     Most of the mortgage-backed securities held by Franklin are Freddie Mac, Fannie Mae and Ginnie Mae participation certificates. These mortgage-backed pass-through securities generally entitle Franklin to a portion of the cash flows from an identified pool of mortgages and give Franklin an interest in that pool of mortgages. Freddie Mae, Fannie Mae and Ginnie Mae securities are each guaranteed by the applicable entity as to principal and interest.

     Franklin also has $631,000 in collateralized mortgage obligations (“CMOs”), which are secured by one- to four-family mortgage loans. Although they can be useful for hedging and investment, CMOs can expose the investor to higher risk of loss than direct investments in mortgage-backed pass-through securities, particularly with respect to price volatility and the lack of a broad secondary market. The OTS has deemed certain CMOs and other mortgage derivative products to be “high-risk,” but Franklin has no CMOs in the “high-risk” category. Franklin’s CMOs are designated as available for sale and, in accordance with SFAS No. 115, are carried on its balance sheet at market value, with unrealized gains or losses carried as an adjustment to stockholders’ equity, net of applicable taxes. At December 31, 2007, the market value of Franklin’s CMOs designated available for sale was $621,000.

     CMOs and mortgage-backed securities generally yield less than loans directly originated by Franklin. However, these securities present less credit risk, because they are guaranteed as to principal repayment by the issuing corporation or agency or by the underlying collateral. Although CMOs and mortgage-backed securities designated as available for sale are a potential source of liquid funds for loan originations and deposit withdrawals, the prospect of a loss on sale and possible difficulty of finding a buyer limit the usefulness of these investments for liquidity purposes. Further, in a period of declining interest rates, Franklin is subject to prepayment risk on its mortgage-backed securities. Franklin attempts to mitigate this prepayment risk by purchasing mortgage-backed securities at or near par.

     At December 31, 2007, $339,000, or 9.65%, of Franklin’s CMOs and mortgage-backed securities had fixed rates. Because they do not adjust relative to current interest rates, retention of these fixed-rate mortga